Exclusive: Chinese IBs Blackmail Forex Brokers and Mislead Investors

Thorough investigation of counterparts with whom brokers are dealing is key to success in China.

With the ongoing deliberations about the regulatory crackdown on the retail brokerage industry in Europe, brokers are looking for ways to diversify their exposure to the key EU market. While the deliberations by regulatory authorities are still ongoing, many brokerages are actively taking steps to onboard clients from other jurisdictions.

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In one of the hottest markets globally, China, the process of onboarding clients has been largely outsourced to introducing brokers (IBs). To the detriment of the forex and CFDs brokerages, however, finding reliable partners has become very difficult.

Sources with knowledge of the practices to which some so-called IBs are using shared some worrying stories with Finance Magnates.

Two Types of Fraud

Brokers that are operating in China should be wary about picking the right partners that present themselves as introducing brokers. Firms should apply proper due diligence before they start doing business with any party in China, as two types of fraud prevail.

Finance Magnates spoke with three parties with knowledge of the practice, and discovered that the main issues that brokers are facing are two – outright extortion for money, and threats of regulatory complaints. The fraudulent IBs are using as leverage the fact that forex trading is a grey area in China.

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We have seen protests on the part of alleged clients of a given brokerage on multiple occasions. This is the point where it is worth mentioning that no court cases that have been filed at European courts by Chinese IBs have been awarded a verdict against forex brokers.

Chinese Authorities Could be Ignorant to Complaints

It gets worse, as brokers cannot proactively complain to Chinese authorities due to the lack of regulation of their businesses. On their part, fake IBs, which are local residents and or perhaps even government officials on some level, are documented to have been mishandling the funds that they collect from other individuals.

On the side of the end-customers, IBs are claiming that the capital which they were entrusted to manage has been misappropriated by brokers. In a game of ‘he said, she said’, brokers and end clients are almost certain losers as the reputation of a given brand gets tarnished and as clients get scammed out of their money.

One source with knowledge of the Chinese industry explained that most of the time it is IBs that are cheating and not brokers. However, due to the difficulty in complaining and proving the guilt of a given individual, end-clients choose to go after the broker.

Due Diligence and Face to Face Meetings are a Must

The Chinese market retains its potential for becoming one of the biggest locations for the forex industry. For the time being, the best option that brokers have is to meet their clients face to face and exchange due diligence in order to take all measures to prevent potential fraud.

Until the Chinese authorities regulate brokers or IBs in some way, both forex and CFDs providers and their clients are going to remain exposed. Managing to overcome the dangers of an unregulated market is typically the difference between being exposed to great opportunities and overwhelming risks.

While we are at it, perhaps the best way to find reliable partners in the region is by visiting the Asia Trading Summit in Shanghai, co-hosted by FX168, Finance Magnates and Conversion Pros. After all, brokers that wish to visit the new land of unlimited opportunities (at least when it comes to onboarding forex clients) are almost forced to onboard clients only from IB partnerships.

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