The FBI’s Internet Crime Complaint Center (IC3) said binary options fraud is a growing problem. In 2011, the IC3 received just four complaints—with reported losses of just more than $20,000—from binary options fraud victims. In 2016, IC3 received hundreds of complaints with millions of dollars in reported losses. In addition to complaints in the United States, some European countries have reported that binary options fraud reports constitute 25 percent of all the fraud complaints received.
A binary option is a type of options contract in which the payout depends entirely on the outcome of a yes/no proposition, typically related to whether the price of an asset—like a stock or a commodity—will rise above or fall below a specified amount. Unlike regular stock options, with binary options the investor is not given the opportunity to buy a stock or a commodity—they are just betting on whether its price will be above or below a certain amount by a certain time of the day.
While some binary options are listed on exchanges or traded on a designated contract market and are subject to oversight by U.S. regulators like the Commodity Futures Trading Commission (CFTC), much of the binary options market operates through websites that do not comply with U.S. regulations. Many of those unregulated websites are being used by criminals outside the United States as vehicles to commit fraud.
The perpetrators behind binary options scams typically try to take investors’ money in one of three ways.
They refuse to credit customer accounts or reimburse funds to customers. This is usually done by cancelling customers’ withdrawal requests, ignoring customer phone calls and e-mails, and sometimes even freezing accounts and accusing the customers themselves of fraud.
Another method is when representatives of binary options websites may falsely claim that the government requires photocopies of an investor’s credit card, passport, driver’s license, utility bills, or other personal data. This information could potentially be used to steal one’s identity.
Some of these Internet trading platforms may be reconfiguring the algorithms they use to purposely generate losing trades, often by distorting prices and payouts. For example, if a customer has a winning trade, the expiration time is extended until the trade becomes a loss.
The IC3 said binary options scammers aggressively recruit investors. They advertise on social networking sites, various trading websites, message boards, and spam e-mail—with promises of easy money, low risk, and superior customer service. Potential investors are also cold-called by high-pressure salespeople who offer “once-in-a-lifetime” opportunities.
The FBI is working with the CFTC and the Securities and Exchange Commission (SEC) to combat this fraud. In January, the FBI organized the 2017 Binary Options Fraud Summit held at Europol in The Hague, bringing together law enforcement and regulators from throughout North America and Europe to discuss the growing binary options fraud problem.
“The summit gave all of us the chance to sit down and talk about what we’ve discovered through our respective binary options fraud investigations, where the challenges are, and how we can all work together,” FBI Special Agent Milan Kosanovich said. “The key to addressing this type of fraud is national and international coordination between regulatory agencies, law enforcement, and the financial industry.”
Investors need to do their due diligence, he said. They should check the SEC’s EDGAR database to make sure the trading platform is registered with the SEC. The Financial Industry Regulatory Agency’s BrokerCheck website and the National Futures Association Background Affiliation Status Information Center also have registration information.
The CFTC’s website also lists if the platform is a designated contract market. It also lists unregistered foreign entities that the CFTC believes are soliciting and accepting funds for binary options.