What Fraudulent “Forex Trading” Companies In Uganda Don’t Want You to Know

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A few weeks ago, I interfaced with quite a number of Youthful Ugandans that lost money to fraudulent forex brokerage companies.

There are more youth within my circle that do forex trading, in this country, than those who invest in mainstream capital markets securities such as shares, bonds, ETFs or even Unit trusts that are approved by Capital Markets Authority.

The advent of the internet, Web 2.0 and global interconnectivity has made forex trading more accessible to youth than any other approved capital markets product.

When these brokerages fail to get reputable liquidity providers, they always proceed to operate with their companies’ operational money or their clients’ money, which is against global brokerage certification standards.

Louis Namwanja Kizito

This, inadvertently or not, will make them trade against clients to keep in the market.

Unlike the Capital Markets Authority of Kenya that enacted regulations for Forex dealing and non-dealing brokers, in Uganda, our regulator the Capital Markets Authority has no such regulations on its books.

They don’t have this license category. However, the absence of these regulations in Uganda doesn’t mean that there are no Global certification standards that these online Forex brokerages should follow.

As you read this write up, kindly make a distinction between the business of a Forex bureau regulated by Bank of Uganda and Forex trading.

In forex trading, you are taking positions in the market for “investment purposes” either through spot contracts or derivatives. Most of these dealing/non-dealing Forex brokerages utilize something called “A Contract for Difference (CFD),” which is an agreement between a buyer and a seller in which the buyer agrees to pay the seller the difference between the current value of an asset and its value at the time the contract is entered into.

CFDs provide traders and investors with a chance to make gains from price fluctuations without having to possess the actual assets.

The CFD’s worth is solely based on the difference in price between when the trade begins and when it concludes, without taking into account the fundamental value of the asset.


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Its Capital Markets Authority and not Bank of Uganda that should regulate trading activities where people take positions in a market. The business of a forex bureau doesn’t invite the public to take positions in the market but forex trading does.

I thought I should make this pre-emptive disclaimer to dispel any regulatory confusion that might arise from this write up.

The word “brokerage” in the business of forex trading means that the company is supposed to broker business between the trader and the institution trader with access to the market.

In this case, the institution maybe a bank that files a trades. The brokerage company is paid commission on every trade the institution files.

Most online brokerages that target Ugandans don’t have access to the real market. Some of these companies may buy servers and access the real market.

However, their accounts don’t have genuine clients on the normal market system. This usually helps these companies manipulate price movements in their favor.

They also play around with the system that sets the amounts they cash out to their clients. They pay back less than what they receive.

Most Forex companies operating here don’t even have a “liquidity provider.” The liquidity provider acts at both ends of currency transactions. He sells and buys a particular asset at certain prices. It means that he is making the market. These are normally companies independent of the online forex brokers.

Liquidity providers are fundamental for the success of electronic trading in today’s financial market, since they ensure a steady supply of liquidity. This indicator reflects how quickly an instrument can be turned into cash without fluctuating its current price.

Global forex trading certification standards require a liquidity provider. However, most forex brokerages targeting Ugandans online don’t have them.

This is how most fraudulent online forex brokerages operate; They start with opening up an offshore account in a country where they can setup strong IT systems. They obtain these servers at just $20,000. Then they collect a lump sum amount of money from new traders that they use to pay subsisting clients by giving them some of the winning trades.

They always keep their financial books updated every midnight. With each new trading day, they just decide how much to profit and loss to disburse to their clients.

For example, if the platform earns $100,000, the proprietors can decide to distribute just $5000 to clients. They keep manipulating the market. It’s those people with accounts with small deposits of about $200 up to $1000 that lose out the most.

Because these forex brokerages decide what to give back to their clients, regardless of price movements in the markets.

These fraudulent brokerages always create demo servers that gives them access to market to do price manipulation. We have seen this with certain online brokerages at open prices and the New York session. They usually don’t have a bank to file their trades.

Forex companies targeting Ugandans use their own money to operate without the backing of a liquidity provider.

Recently a youthful Ugandan attempted to sue a company that had failed to pay his hard earned $20,000. But unfortunately, the company is an offshore entity with no office in Uganda. This creates jurisdiction issues in law, especially if you are going to institute civil proceedings in Ugandan courts.

Globally, in the forex markets, there are “A- Book” brokerage companies and “B-book” companies. In Africa it’s hard to find A-book servers that majorly operate in strict countries such as South Africa with serious financial regulators.

B book companies always run to fertile ground like Uganda where people have little understanding of such business and governments don’t ask for “liquidity providers” and large sums of money to act as capital buffers.

I was recently involved in a legal transaction on behalf a reputable company that declined to be a liquidity provider of several forex brokerage companies operating in Uganda. Most brokerages don’t meet the necessary global certifications requirements.

When these brokerages fail to get reputable liquidity providers, they always proceed to operate with their companies’ operational money or their clients’ money, which is against global brokerage certification standards.

This, inadvertently or not, will make them trade against clients to keep in the market.

Conclusion

This is how you can spot a fraudulent Forex Brokerage Company

  1. They have no registered office within Uganda. They are normally domiciled offshore in a tax haven like in the Caribbean islands
  2. They will never declare their bank statements including filed trades and payups.
  3. They Usually have no liquidity providers (bank with security) since all operating costs are on them.
  4. There market movements are never the same with the normal currency markets since they manipulate through their servers.

Louis is a lawyer in general Commercial law with expertise in Capital Markets, Securities law, structured financing, Fintech, venture capital and data protection


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