How to spot fraudulent activity when you trade?

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How to spot fraudulent activity when you trade?

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It is crucial to recognize that there is a distinction between typical investment losses and online broker fraud. Losing money on your investments does not imply you have been a victim of fraud. Additionally, there are occasions when a clerical error may have been made. Again, that is not fraudulent, but if it becomes a consistent or regular error then a thorough investigation will be necessary. The critical focus for concern will be when your broker places its interests before yours. Or at the very least the lines are blurred between the two. That is where ethical standards can lead to crossed wires, and a red flag should be raised that fraudulent activity might be taking place.

There are several types of online broker fraud that will help you to identify whether you are at risk of becoming a financial victim.

  • Has your online broker executed a trade that you had not approved in advance, outside of granting discretionary authority? This type of activity is illegal and could be disguising in-house trading activity.
  • Is your online broker failing to execute your investment orders in a timely way? If that is the case, then there is potentially front running of your instruction or in house trading execution happening around your order.
  • Has a broker ever asked you to use an address other than your home or business, or perhaps used information about you for purposes other than for the setting up of your account? Setting up erroneous or illegal accounts is another example of fraud.
  • Has your broker promoted unsuitable investments to you at any time? Unsuitable investments would be ones that do not fit your investment profile. Your online broker should have a map of your investment preferences and any recommending of trades outside that framework could be deemed as fraudulent.
  • Has your broker provided you with misleading information or trading techniques that may have impacted your investment decision? If your online broker is offering trading advice, it has to be based upon factual information or transparent modeling. Any broker claiming to have ‘inside information‘, unverifiable investment recommendations or misleading information regarding the potential risks or rewards of investment, could be acting fraudulently.
  • For those clients who have a discretionary relationship with their broker, it is essential to monitor that over-concentration within the portfolio could lead to excessive losses with one investment. It is also worth keeping tabs on whether there is a consistent pattern around over trading or churning. Both activities could determine if you are a fraud victim.
  • Clients of online brokers need to be able to keep tabs on the depositing and withdrawal of their funds. Any persistent delays with withdrawals, in particular, over and above standard practice should be reported. A transparent process of money flows is a key remit for a regulated online broker.
  • All online brokers need to be formally regulated in their local jurisdiction to enable them to execute investment trades or make investment recommendations. Any falsifying or expiry of the broker’s regulatory position by the underlying entity could indicate fraudulent activity.
  • Indications of money laundering activity is a clear red flag to any purported online broker, and a report of any suspicious activity must be made immediately. To this end, no funds may be withdrawn from a client’s account without prior and written, authorisation.

Reprinted from Forexfraud, the copyright all reserved by the original author.

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