There has been a surge in online forex trading locally as investors look for new income streams, as well as a means of diversifying their investments.
The platforms give investors easy access to global markets. Investors can conduct online forex trading as a side hustle to complement their jobs with the only requirement being a stable internet connection.
However, the popularity of online forex trading has come with heightened risks of fraud. There has been a proliferation of unlicensed brokers in these online spaces duping gullible investors and traders.
Before you part with your hard-earned money, it is important to satisfy yourself that you are dealing with a legitimate and licensed broker to avoid becoming a victim of scammers.
The first step, before undertaking any transaction, is to do due diligence and confirm the authenticity of the company offering online forex trading. It is simply not enough to accept the claims of a broker. A trader should ask for proof of their legitimacy.
It is advisable to only deal with brokers licensed by the Capital Markets Authority (CMA) because, in case of wrongful practices, an investor has legal redress through the CMA. If a trader is not licensed by the CMA, this is the first red flag.
Licences for online trading brokers are issued according to the Capital Markets Act, Cap 485A, and the Capital Markets (Online Foreign Exchange Trading) Regulations, 2017.
Secondly, licensed and legit brokers normally follow a robust customer onboarding process known as KYC (Know Your Customer). In this process, potential clients are expected to complete a full application and upload documents for verification before they fund their accounts and commence trading.
This requirement is aligned with the Proceeds of Crime and Anti-Money Laundering Act as clients must disclose their source of funds.
Unlicensed brokers will not insist on KYC as they know that one of the key strategies in curbing money laundering is through assessment of clients at the point of onboarding and continuous reviews.
Thirdly, fraudulent forex brokers normally promise high and exaggerated returns on investments that are way above the market returns. They lure the unsuspecting investor with emotional testimonials of investors who have hit the jackpot after investing with them.
They will also offer traders great bonuses, and promise rewards to attract them to deposit funds with them.
Fourthly, scammers also use phishing (the practice of sending fraudulent communications that appear to come from a reputable source) to create a sense of security for innocent investors who are made to believe that they are investing through legitimate websites and licensed brokers.
Recently, a scammer cloned the Scope Markets Kenya website through phishing, intending to defraud unsuspecting investors. Luckily, the defrauding was noticed immediately and investors were warned in time. It is therefore important for traders to authenticate websites and only deal with licensed traders.
Fifthly, online forex scammers use unsolicited advertisements. If you start receiving unsolicited e-mail messages; and in most cases requesting your personal information such as your name, phone number, and home addresses, this is another red flag.
Rule of thumb
Scammers will also try to build their credibility by claiming to have worked with reputable organisations or to have unique credentials or user experience to lure the unsuspecting trader.
As a trader, the rule of thumb is to take your time to understand as much as possible about online forex trading before committing to investing. Information is key.
Do not rush to trade or invest your money because of glossy advertising, promises of high returns and bonuses, and unregulated products, otherwise, you might soon end up as one of the statistics of online forex scams in the country.
Mr Karanja is the CEO, Scopes Markets Kenya, licensed as a non-dealing online foreign exchange broker by the Capital Markets Authority