How to spot a scam?

Spotting scam operations when looking for brokers can be complicated. There is a lot of information out there and it is difficult to decipher what is fake and what is legit. Below, we outline some basic warning signs that can help you spot possible scammers and keep your investments safe. 

Before discussing some tools that can help you safeguard your money, first, here is a checklist of some basic points you should keep in mind when looking for brokers in order to spot a scam in time.

What are investment strategies?

The essence

There is a higher likelihood that a broker might be a scam if:

  • it is not regulated at all
  • it is regulated under a jurisdiction widely seen as an offshore haven (e.g. Vanuatu or St. Lucia)
  • it is featured on a warning list of a top-tier regulator (e.g. the UK’s FCA, or the SEC in the US)
  • it is not listed on an exchange and does not provide public financial reports
  • it does not have a banking license
  • there is no investor protection 
What are investment strategies?

How to identify a scammer?

Here are some common tactics of scammers that you should be aware of.

  • One is to promise unusually large profits with little or no financial risk, so claims of huge earnings on your investments should be a red flag.
  • Scammers will also likely create false urgencies and pressure their victims to “recover their losses,” basically by investing again. 
  • Another trick is making it impossible for traders to withdraw their funds after an investment. It is also a common trick to have platforms conveniently malfunctioning in such cases.
What are investment strategies?

What can you do to avoid being scammed?

Investing always carries risks, but there are some basic health checks you can do to spot red flags. Here are a few tips: 

  • Don’t get pushed around. Check who it is you are going to do business with! Does the company behind the website appear to have a government-affiliated regulator?

  • What about the broker’s license? Is it an offshore license? It is recommended that you only work with brokers registered in reliable jurisdictions. The best option is for the company to be registered in your country.

  • Check the broker’s background information on their website. How much can you find out about their details? The broker must provide information about the name of the company, date and place of registration, and legal address. Does the website look dodgy or professional? The low quality of the trading platform is also a red flag; check it by opening a demo account first. 

  • Check if others flagged the broker! Does the company or the broker appear on the warning lists of the regulator of the country it is registered in? Check with more prominent regulators too, such as the UK’s FCA, for instance, which has an extensive up-to-date warning list.  

  • Don’t let promises of quick bucks fool you! Does the broker offer unusually large profits at an unreasonably low risk? Anyone who promises “guaranteed” profits should arouse your suspicion!

  • Talk to them! Does the website give you detailed and easy-to-use contact information to the company or customer service? Few ways of contacting customer support, and slow responses could be red flags. Before registering with the broker, contact customer support and ask a few questions to check how quickly and satisfactorily customer support responds. You have to feel comfortable with the people that you will be trusting your money with. 

  • No reviews of the broker or many negative reviews are a big red flag. Check the reviews only on independent platforms, like BrokerChooser, not on the broker’s website. Check with other users on customer-focused sites, such as Traders Union (which for instance focuses on forex traders), or relevant reddit pages. What are other people saying?

  • Check the terms and conditions (sometimes called client agreement)! Does, for example, the broker reserve the right to deny a trade or a payout without providing a reason for doing so?

  • Don’t rush, don’t let FOMO lead you. There can be huge pressure, especially for instance in the crypto community, to jump on opportunities as quickly as possible, but you should always take your time to do research. Never feel obligated to invest in something just because it’s what everyone else is doing. If all of a sudden an influential person starts hyping up a new token, caution is advised as there is a good chance it might be a scam.

What are investment strategies?

What to do when you get scammed?

Traders who have been scammed can report the scam to the appropriate authority, which is the financial regulatory body in each country. 

You can also file a claim to the law enforcement agencies and the courts.

What are investment strategies?

How to get your money back?

After thoroughly checking the broker before depositing any money, also make sure you save all documents and correspondence. Document everything, make screenshots and save emails and chats, so you have as much proof as possible in case you need to go to the authorities.

If you get scammed by a broker you have a few options you can try to get your money back:

  • You can initiate a chargeback, which is a feature offered by banks and payments systems for client protection. ​​This entails the issuer bank or provider writing off the funds from the account of the seller of the service (i.e. in this case, the broker) if the service was not provided.
  • You can take legal action and get a Mareva (or freezing) injunction issued against the company. This injunction is useful to prevent the company from transferring its assets out of the jurisdiction of the court.
  • If the broker has a financial regulatory body, you can also report the scam to them.
What are investment strategies?

Useful tools to check if a broker is safe

  • BrokerCheck is administered by the Financial Industry Regulatory Authority (FINRA), the largest non-governmental securities firm regulator in the US.
  • List of brokers barred by FINRA.
  • The warning list of the FCA, the UK regulator.
  • Check if a firm is regulated in the EU. 
  • Check if the broker is reviewed by BrokerChooser. We only recommend safe brokers.

Here at BrokerChooser we have also put together a list of non-recommended brokers, with additional tips on how to avoid being scammed. 

If you want to trade and invest with legit and safe brokers, find out which one fits you best in our best online brokers for 2022 guide. 

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