Twenty years ago, only 180 million people worldwide had access to the Internet. Today, amazingly, that number is 3 billion, yet in many nations, including Scotland, people are worried about growing inequality and whether the digital economy will rob them of their job. To add insult to injury, the Internet has become the source of scams for the too trusting or too unlucky, with an estimated one in ten Britons falling victim to online fraud.
Indeed, Action Fraud UK, the national cybercrime reporting centre run by the London police, lists dozens of scams to be wary of, including advance-fee fraud, malware, miracle health scams and romance scams.
But the worst scam currently affecting Britons, according to UK police, is binary options, a con in which customers are led to believe they are successfully trading assets online, but usually lose most or all of their money.
As a reporter at The Times of Israel, I have been covering binary options and forex trading scams since February of this year, when a whistleblower approached me and said he had worked in an online trading firm where his job was to call hundreds of people around the world and persuade then to invest in a financial product called “binary options.” He was told to pass himself off as a professional broker who had worked at the Bank of Scotland, and to say he was calling from London, when in fact he was sitting in an office in Herzliya, Israel.
He was not supposed to tell customers that the company made money when they lost, that the trading platform was rigged to make them lose, and that even if they won money on the computer screen, they would be unlikely to ever see it again. Once a fraudulent binary options company feels it can no longer get money out of a client, it will typically cut off all contact. When the victim tries to track down the people he spoke to, he discovers that the names, address on the website and nationality they gave are all fake.
After some investigation, The Times of Israel discovered that fraudulent binary options is a vast criminal enterprise, employing thousands of people in over 100 companies, many of them in Israel, but also in countries like Romania, Bulgaria, Ukraine and the Philippines. The industry is thought to earn hundreds of millions, if not billions of pounds a year and victims worldwide are believed to number in the millions.
I have spoken to a number of British victims of the fraud. One lost £400,000 and has hired an Israeli lawyer to track down the real identities of the company’s owners and sue them. Another woman, a widow from Shropshire, lost£190,000 pounds, most of her life’s savings and was forced to sell her house.
“Some days I think I would like to walk into the river and not come out,” she told me.
After ten years of inexplicable inaction, the Israeli government is slowly waking up to the scale of the fraud. As a direct consequence of our reporting at the Times of Israel, the Prime Minister’s Office last month condemned the industry’s “unscrupulous practices” and called for it to be outlawed worldwide.
Two weeks ago, Israel Securities Authority chairman Shmuel Hauser told us that consultations had begun on the framing of legislation to bar all Israel-based binary options operations from targeting anybody, anywhere. (Israeli firms are already banned from targeting Israelis.) The consultations have extended to Attorney General Avichai Mandelblit and to the government, he said.
Nevertheless, only a handful of companies in Israel have been shut down, while the rest continue to operate as usual.
And while this scam does not originate in Scotland, a loophole in Scottish law is being exploited by criminals to process payments and launder money for the crime.
Fraudulent binary options and other cyber scams only work because the scammers are able to process credit card payments. Thus, if a binary options company in Bulgaria can pass itself off as a company that sells electronic equipment in Scotland, the transaction is much more likely to be approved by Visa and Mastercard.
All of this happens algorithmically, with no humans involved. At the human level, victims are more likely to “trust” a company with a Scottish address than one in, say, the British Virgin Islands.
In addition, merchants outside of Europe pay higher transaction fees to process major credit cards. Having a company anywhere in the EU lowers these costs. The news agency Reuters recently published an article about a British town whose unemployed residents made money acting as nominee directors for dodgy offshore companies. One man looked himself up one day to learn the company he represented specialized in hardcore porn.
One observer of the binary options industry recently explained to me that it is modular, meaning its component parts are easily replaceable. “If a government or too many lawsuits shut down one brokerage, say, XYZOptions, it will simply pop up elsewhere with a different name. If Israel outlaws binary options, the companies will migrate to Cyprus or eastern Europe. Even the companies that franchise the trading platforms are replaceable. But if you cut off their ability to process credit cards and launder money, the industry is finished.”
In that respect, Scotland has a major role to play.