‘Fringe’ FX brokers claiming to be regulated when they are not, illegally accepting US customers, and displaying false certificates

We take a look at how certain companies in offshore jurisdictions claim to be regulated, when they are not, and how they manage to transfer their tactics to bona fide regions, this being an important point to note for both retail clients and liquidity providers alike.


When is ‘regulation’ not regulation?

For FX brokerages, there are often different categorizations that apply to their business than for companies which form other more traditional, offline financial services sectors around the world.

The only really developed regulatory frameworks for the entire institutional and retail FX industry exist in Britain, North America, Australia, Hong Kong, Singapore, Japan and Cyprus. Elsewhere in the world, despite each developed country having its own national financial markets regulatory authority that concentrates on non-bank business, electronic trading’s globalized nature can be localized in terms of these specific regions play host to the best and most sophisticated companies that provide the world with the most comprehensive, quality trading environment.

Since Cyprus has elevated itself to become the world’s largest retail FX hub that serves international clients with over 150 FX brokerages on the island, and the entire support ecosystem including platform developers, integration specialists, liquidity management firms, prime brokerages, advertising specialists, and even dedicated corporate lawyers meaning that its status as the retail FX destination will continue to be bolstered, smaller brokers not wishing to concern themselves with the adherences to MiFID, EMIR or answerable to regulators from outside their jurisdiction are continuing to operate from offshore jurisdictions and cliam to have regulation.

This is most certainly a practice that is full of caveats, and indeed in most cases has been allowed to prevail under the radar, with very little to protect customers or suppliers should something go awry.

Ever since the rise to prominence of retail FX on a global basis in the wake of MetaTrader 4 having become a global phenomenon ten years ago, reducing the cost of operating an online brokerage to as little as $5,000 for a white label license plus a small fee each month for hosting and brokerage commissions, there has been a fraternity of what could be considered ‘fringe’ brokerages operating from particular offshore jurisdictions such as the British Virgin Islands and St Vincent and the Grenadines, both small Central American islands surrounded by the Caribbean sea that have small populations and a very friendly tax regime, as well as an almost no-questions-asked approach to registering companies.

Both islands do have financial markets regulators, and as long ago as 2005, small brokerages (mostly operating on a warehouse basis from other nations outside Europe or America, with no roots in any Caribbean island except for a registration number from the government) had been approaching retail traders across the world, purporting to be regulated by the respective financial services regulators in these regions, and even presenting a certificate to that effect on their websites.

Whilst regulatory authorities globally get tougher on the firms that operate quite legitimately under their bona fide jurisdiction and the level of the FX brokerage’s integrity is continually honing itself, improving via what has now become known as ‘regtech’ – literally regulatory technology, meaning that customers of the best firms in the business have never had such good quality, the bar not only being raised continually by the sophistication of regulators, but by the companies themselves with their specialist senior executives continually drawing upon their extensive knowledge and professional experience to drive the business forward.

Yet still there are firms which do not reside in the lands of the mainstream, yet get away with all sorts of smoke and mirror tactics.

One particular practice which has been a relatively common occurrence in St Vincent & The Grenadines, a popular destination for fringe brokers and non-household name white label brokerages, is for said brokers to misleadingly state on their website that they are regulated in that region, and to make reference on their material and website to a certificate showing regulatory oversight.

It is imperative that potential retail clients as well as liquidity providers with compliance departments that rely on supplying liquidity feeds or white label solutions solely to regulated brokerages – that meaning that in order to satisfy compliance, a broker taking a white label solution or liquidity must be able to submit a certificate to show the regulatory jurisdiction and license number – are very careful that many of these claims of being regulated are indeed bogus.

In June 2014, the Financial Services Authority of St Vincent and the Grenadines made an official announcement that it does not in any way cover FX brokerages at all.

The statement said “The Financial Services Authority wishes to advise that it does not ‘Regulate, Monitor or Supervise” International Business Companies (IBCs) which engage in FOREX Trading or Brokerage. Statements of this nature are a misrepresentation of the Authority’s supervisory powers with respect to IBCs.

“The Authority does not approve or sanction the business activities of IBCs upon their incorporation. The extent of supervision of IBCs goes no further than to ensure that IBCs comply with their obligations under the International Business Companies Act. The Authority also does not license the activity of FOREX Trading or Brokerage and any IBC purporting to be licensed by the Authority to conduct this business activity is making a false statement” said the statement from the regulator.

Despite this, companies continue to purport to be regulated in that jurisdiction, including a bold claim by www.tradewisefx.com that it offers managed accounts with no fees, with order execution times ‘made for scalpers’ with only a minimum deposit of $25.

On the site is a bold claim that the firm is an STP/ECN forex broker serving retail clients worldwide in over 50 countries. There is of course no way of checking whether this is a warehouse brokerage or not, thus it is not possible to completely refute the claim by the firm that it is operating an a-book model, but looking at the criteria, it is very unlikely indeed to be doing so.

The company’s website states:

Source: tradewisefx.com

If the FSA of St Vincent and the Grenadines’ announcement in 2014 is there in black and white, then this claim by any broker cannot be ratified as true.

Illegally accepting US customers

Perhaps even more alarmingly, the company states in its Frequently Asked Questions (FAQ) section that it accepts customers from the United States, which is a federal felony. Companies offering services to US citizens have to be based in the US, and must be regulated by the NFA or CFTC, and have a minimum capital adequacy requirement of $20 million. To state this on the company’s website is to invite business on a completely illegal basis.

Source: tradewisefx.com

Indeed, astute customers or compliance departments of liquidity providers would likely be able to deduce from a few quick searches that this is the case, however there are also several cases of firms which operate on this basis having made some money, which they then use to open a new brokerage in a regulated jurisdiction with common ownership to the British Virgin Islands company. This usually ends up with both firms disappearing when things go wrong.

A case in point is Dealserv, the common service provider which operated now-defunct 4XP, as well as FXTG in Australia and SkyFX in Cyprus. 4XP claimed to be regulated by the financial markets regulator in British Virgin Islands, having during its existence had a certificate of regulation on its site, however at the time of the demise of the company three years ago, the British Virgin Islands authorities stated that the firm had never been registered or regulated in the jurisdiction.

The senior executives of 4XP, along with 15 other directors of offshore registered FX firms are now wanted by the Israeli and French police for investigation.

Subsequent to the demise of Dealserv/4XP, the Australian and Cypriot entities were sold to Aviv Talmor, who was arrested earlier this year at Ben Gurion Airport in Israel when he tried to enter the country, on suspicion of recruiting 600 clients between 2012 and 2015 and managing their money for investment on the stock exchange, choosing those investments using algorithms – an automatic system that requires no involvement by the client and no decisions. These activities took place even though Utrade had no license for managing investment portfolios.

Mr. Talmor is also suspected of making false presentations to motivate and persuade clients to invest money in the company, as well as providing access to a virtual account for investors that falsely presented the amount of the investment available to the investor when in practice the investor’s money had been deposited in another account controlled solely by Talmor and the company. In this way a difference of $12 million accrued between the false presentation of financial balances in the virtual accounts and the cash held in the company’s bank account.

Mr. Talmor conducted this alleged activity via Utrade, his primary business interest, another unregulated retail firm.

During the course of its ownership by both the common shareholders of Dealserv/4XP and subsequently Aviv Talmor, SkyFX was constantly the subject of warnings by CySec as to its conduct, and gained various negative press on popular retail forums.

The parent company, Trademarker (Cyprus) Ltd was established by the management of Dealserv/4XP during its ownership of SkyFX, and transfered to Aviv Talmor thereafter.

This month, Trademarker went bankrupt, meaning that SkyFX is now no longer and clients are left high and dry.

The current owner of the firm made a statement to a well known FX industry portal recently, placing the blame on the previous owner of the firm ““The ownership of SkyFX and Trademarker would like to acknowledge the following, in regards to the fine issued by CySEC to our company on 20 May 2015, the investigation stems from poor practices which were reported by clients in August of 2013, prior to our purchase of the SkyFX/Trademarker brand and company” said the official statement.

On this basis, whilst it is clear that firms operating in offshore jurisdictions which pretend to be regulated via false documentation can be identified by a few clicks of a mouse, those which have ownership in others do not.

CySec is to be commended in this case for having been able to identify nefarious practices by SkyFX, and mitigate damage when the firm finally went West, however it should certainly be about time that the bona fide regulators worked with the authorities abroad to prevent firms that make blatant attempts to dupe both clients and suppliers alike are unable to establish in regulated jurisdictions under different names.

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