On an almost weekly basis, the BC Securities Commission (BCSC) issues investor caution alerts about offshore binary trading schemes, many of which are considered to be outright scams that have been banned in some countries.
Of the 27 investor caution alerts issued so far this year by BCSC, 23 were for binary options traders – many operating out of the U.K. – accused of illegally targeting British Columbians.
One of PacNet’s affiliates, Counting House, based in Vancouver, has been one of the players in the electronic gambling space, including binary options, according to Andrew Saks-McLeod, an Israel-based financial-sector analyst and CEO of FinanceFeeds.
“The firm conducts a vast amount of business in Israel and has a highly active connection with binary options firms,” he recently wrote.
Playing binary options involves betting whether a stock, commodity or market will go up or down by a specific time and date. Guess right, and there is supposed to be a payout. Guess wrong, and the customer loses his or her money. The problem is that players often don’t get paid.
“Even when investors see virtual gains, they often cannot access these profits, as the profits are not real,” writes BCSC communications co-ordinator Malka Aujla.
While none of the binary options traders red-flagged by the BCSC lists Counting House as a payment processor, Belgium’s securities regulator, the Financial Services and Markets Authority (FSMA), designates Counting House Services Ltd. as a “recovery room” that has been operating unlawfully in Belgium.
Recovery rooms are considered a type of fraud that targets people who have already been burned in previous scams. After victims have lost money to a binary options scheme or some boiler-room scam, they are contacted by affiliated companies – recovery rooms – which then offer to help recover their losses, for a fee.
However, according to the FSMA, “the fees charged do not result in the victims recovering the lost funds, and the sums paid in the process by the client are thus also lost.”
In other words, recovery rooms add insult to injury for victims of fraud.
Counting House is “owned or controlled” by Paul Davis, a U.K. resident, according to the U.S. Office of Foreign Assets Control, but it is headquartered in Vancouver and is considered an affiliate of PacNet.
Davis is a popular figure in the electronic gambling industry. He has written how-to guides for the industry and is a frequent guest speaker at electronic gambling conferences.
Stuart Ballan, who is or was Counting House’s head of sales for the Middle East, has a background in electronic gambling. According to one online profile, while at Counting House “he’s built a large client base spanning binary option, Forex, Lottery Messenger, gaming and more.”
While binary options are marketed as a kind of securities trading, it’s actually a form of gambling. Investigations have found that lead lists sold to binary options companies come mostly from online gambling affiliates. In other words, they target gamblers, not stock market players.
“The whole concept of OTC [over the counter] binary options, run by firms that offer specific and dedicated platforms for this purpose and create an impression of trading the market when actually no live market exists, is a complete scam,” Saks-McLeod told Business in Vancouver.
He said third-party payment processors use algorithmic technology designed to obscure the nature – and prevent the detection – of such schemes.
Typically, he said scammers will mail fraudulent solicitations to victims and then arrange to have payments from victims, both cheques and cash, sent directly or through a partner company to PacNet’s processing operations.
This is how Israeli OTC binary options firms solicit and extract funds from Americans, even though it’s an illegal activity in the U.S., he said.
There are numerous such payment processors and they are “vital” to binary options and other forms of electronic gambling because they “disguise” payments so people can use credit cards to play these games in countries where they are banned.
Without those middlemen, credit card companies would automatically block any payments used to play binary options.
“This process aims to minimize the chance that financial institutions will detect the scammers and determine their activity to be suspicious,” Saks-McLeod said.
Electronic gambling is legal in some countries, and players might actually get paid when they win. That appears not to be the case with many binary options schemes.
Binary options trading requires the player to open an account and deposit a sum of money, in order to play the binary options game. Third-party payment companies play a key role.
One of the big players in the space is Neteller, a payment processing company founded in Vancouver in 1999 and relocated in 2004 to the Isle of Man, which has become a global electronic gambling hub.
Binary options trading is banned in the U.S., but that hasn’t stopped binary options companies from targeting Americans.
The Securities Exchange Commission (SEC) in the U.S. receives frequent reports of binary options fraud. A common complaint is that binary options sites simply don’t credit players’ accounts when they win. Another complaint is that the software used is designed to generate losing trades.
“For example, when a customer’s trade is ‘winning,’ the countdown to expiration is extended arbitrarily until the trade becomes a loss,” the SEC writes in an investor alert.
Although the binary options platforms were developed in Israel by people in the electronic gambling industry, they operate out of countries like the Seychelles, Belize and Cyprus, where regulations are more lax.
They could not continue to operate without third-party processors as middlemen, which is why Saks-McLeod thinks regulators need to crack down, not just on the binary options companies themselves, but also on the payment processors they use.
Despite U.S. sanctions against PacNet and its affiliates, the Financial Conduct Authority (FCA) in the U.K. recently confirmed that both PacNet and Counting House continue to be considered properly authorized payment institutions – something Saks-McLeod finds astonishing.
“By continuing to allow companies that operate on this basis to work from London with FCA payment services regulation, the FCA is standing by e-commerce scams and binary options fraud by default,” he recently wrote.
