The Payments Purge – Unregulated Forex Companies Risk Full Refund of Client Money

With international financial institutions and regulators becoming increasingly concerned with matters surrounding due diligence in relation to the handling of

With international financial institutions and regulators becoming increasingly concerned with matters surrounding due diligence in relation to the handling of client funds, there has been a recent increase in stringency within merchant services companies which handle online transactions for forex companies. As a result of this, a trend is becoming prevalent in which merchants services companies are blocking unregulated forex companies from accepting credit card deposits and refunding the deposits to the originator.

As this is currently a very sensitive subject, Forex Magnates has researched the onset of this trend with several industry sources, the clear majority of which insisted on anonymity, with further firms adamantly requesting to be excluded from discussion on the subject.

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The Third Party Catch

At present, a very popular means of conducting online transactions in the forex industry is for companies to provide an online deposit facility which accepts major credit cards, usually Visa and MasterCard, along with e-wallet solutions such as Moneybookers or Neteller, whereby a payment solutions provider (PSP) provides a gateway to a merchant account which is often held with a third party. Some e-wallet companies, like PayPal, do not accept any payments to or from forex companies.

When a transaction is made to deposit via a forex company website using any of these means, the client monies arrive in the third party merchant account, and are subsequently withdrawn by the forex company to the forex company’s client money account.


Although the means of payment can differ, the transaction is processed in a similar fashion via a third party merchant account.

This method of accepting funds is in widespread use in the forex industry, largely due to the relative ease with which it can be set up. E-wallet providers such as Moneybookers or Neteller, along with the majority of third party merchant account providers, often conduct no due diligence at the outset, nor do they get involved in compliance procedures.

As a result, a broker can have a system up and running very quickly, regardless of its location, regulatory status, or track record, and similarly, clients can deposit very quickly by spending just a few minutes registering with an e-wallet provider or simply putting their credit card details into the broker’s front end on the website. Marketing campagins of many e-wallet companies major on ease of opening an account, therefore due diligence cannot be conducted in advance.

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Credit Cards as White Elephants?

This may all appear very convenient and practical, however for unregulated forex and binary options companies, a whole host of difficulties lies ahead as a result of what is quickly becoming a widespread practice in recent times in the payment provision sector, whereby far stricter checks and balances are being enforced by the merchant services companies. These checks and balances are done after the money has already been deposited by the client, and is being held in the third party merchant account, but is not at this point held in the broker’s account.

For unregulated companies, it is becoming very hard, and in some cases impossible to withdraw from the merchant account to the broker account, and if there is an item which displays risk, or something which does not meet criteria expected by banks and merchants, then the entire account is frozen until due diligence has been done, an often time consuming task. As the majority of unregulated brokers’ business is conducted by credit card, this could signal the end of these entities as viable businesses and render them white elephants within a short period of time.

At this point, the broker will be asked for proof of regulation and have to present the company’s license issued by the regulator. If this cannot be presented, the money is sent back to the originator’s e-wallet account or credit card account.

This is a double-edged sword, as the majority of such forex companies consider the client as an acquisition once a deposit has been made via credit card, therefore base their sales statistics on it, and run their business accordingly. The freezing and refunding of the entire balance of a merchant account is therefore more damaging than if no client acquisitions had been made at all.

Tim Thompson, CEO of NoirePay, a provider of online payment services and risk managment technologies in London, explained: “If an unregulated forex company with no license from any national regulator goes out, sets up business, connects to a PSP which uses a third party merchant account and starts attracting clients, payments will usually go through as normal. At the point when the company wants to withdraw funds to its own account, then the e-wallet company or the third party merchant carries out due diligence and if they find that there is no license, they will cancel the entire account and then go right through the records and refund all clients.”

Some companies provide a straight-through processing model, in which the funds are not held in a third party merchant account, but go directly to the forex broker’s bank account via the payment processing provider’s own merchant account. This facility however, is not available to unregulated forex companies at all, as NoirePay conducts its due diligence in advance of accepting corporate customers as part of internal risk management as it provides its own merchant account and does not use a third party. Therefore the company has its own team of compliance officers who are responsible for checking KYC/AML procedures and regulation of companies before they are accepted, and if a forex company cannot provide proof of regulation at the outset, NoirePay will not provide payment services.

Banks Brace Themselves

It is a matter of time before all unregulated forex companies will not be able to conduct business via credit card or e-wallet providers, as they risk not only having their accounts frozen by the merchant services provider or refunded to clients before the funds hit the broker’s account, but also if a broker did not make its first withdrawal request for a period of time after commencing business, and clients have traded and made a profit, then the profit will not be able to be paid, or if traders have made a loss on their accounts, the deficit will not be able to be paid resulting in the broker having to settle with its own funds.

It has also been confirmed to Forex Magnates that banks are starting to review this situation and adjust their criteria accordingly. One particular bank which is a main acquiring source for at least two large payment solutions providers to the forex industry has introduced a blanket block on all unregulated forex business. It is a matter of how long before all banking institutions follow suit as a precedent has been set.

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