Cryptocurrencies, the next big Israeli scam, top regulator warns

TIMES OF ISRAEL – Two weeks after the passage of a law that outlawed Israel’s entire binary options industry, Israel Securities Authority chairman Shmuel Hauser told The Times of Israel that he was “very troubled” by the possibility that binary options fraudsters are now entering the field of cryptocurrencies, where they may be seeking to perpetrate the next big scam.

“We’re very concerned about initial coin offerings and cryptocurrencies,” Hauser said. “We don’t want this to become the next mutation of binary options or a haven for fraudsters.”

In an hour-long interview at the Israel Securities Authority offices in Tel Aviv, Hauser told The Times of Israel that the international response to the passage of the law on October 23 was “very positive” and that “we got responses from all over the world, from Canada, the United States and Europe. They all said they were very pleased by what we did and by our commitment.” International law enforcement authorities had been urging Israel to shut down the widely fraudulent industry, which had been scamming victims worldwide.

On October 23, the Knesset unanimously voted to ban the entire Israeli binary options industry, a vast, multi-billion dollar scam that has defrauded millions of people.

The law, which takes effect in late January, came about as a direct result of The Times of Israel’s investigative reporting on the fraud, which began with a March 2016 article entitled “The wolves of Tel Aviv: Israel’s vast, amoral binary options scam exposed.” The law gives all binary options firms the intervening three months to cease operations. After that, anyone involved in binary options — where fraudsters promised lucrative short-term investments but fleeced their victims through rigged trading platforms, refusal to pay out, and a multitude of other ruses — faces up to two years in jail.

Hauser said he plans to enforce the law diligently. As soon as it goes into effect in January, anyone caught offering binary options will face arrest and prosecution, he vowed.

“The law is worded in such a way that as soon as someone acts he is breaking the law. He cannot act without receiving a license, and he will not get a license if he asks for one. So any binary options activity is breaking the law. You can’t offer it, period.”

He added, “I don’t think that will be an issue. I think problems might arise if someone invents something that is not called binary options but is the same thing in disguise. That’s what we’ll have to keep an eye on. But the moment we find out about it, we have the ability to investigate and stop it.”

Asked if the thousands of Israeli binary options fraudsters who stole billions of dollars will go unpunished and be allowed to keep the proceeds of their crimes, Hauser replied that the new law does not give him the authority to act against people who committed binary options fraud in the past.

“If, going forward, someone tries to offer binary options, we will address it. But if someone was fraudulently selling binary options in the past, that is not under our jurisdiction; it is the responsibility of the police.”

Even then, he added, such crimes may not be easy for the police to prosecute.

“The police have to have concrete evidence. Without it, they won’t be able to arrest anyone. We can’t just arrest people because we think they might be thieves. Look at organized crime, the police are always pursuing the [criminals] but can only catch them when they have concrete evidence. Al Capone was never prosecuted for murder or accused of murder. In the end he was prosecuted for tax evasion.”

Asked if the police have any plans to arrest binary options fraudsters who operated in the past, Hauser replied, “I don’t know. I assume if people file complaints and the police have concrete evidence, they will do what is expected of them.”

Can victims get their money back?

The Times of Israel has received countless emails from victims of binary options asking how they can get their money back. We have also heard from victims who were scammed a second time by false saviors promising to help them recover their lost funds, demanding an up-front fee, and then disappearing with the money.

Pressed on the issue of the stolen billions, Hauser said emphatically, “We cannot return victims’ money.” He did indicate, however, that the Israel Securities Authority might be able to offer limited assistance to victims by helping to pay for class action lawsuits brought by victims in Israeli courts.

“We don’t have civil authority like the Securities and Exchange Commission in the United States. Even with other types of securities fraud we’ve prosecuted, when the perpetrator goes to jail, the money does not go back to the victim. A victim who wants his money back has to file a class action lawsuit. We sometimes financially support the class action lawsuit if we think it has a chance. That is something that can happen, but someone has to take the initiative.”

‘It is up to the police to act’

While he is alarmed at the prospect of thousands of binary options fraudsters using their skills and resources to plot the next scam, Hauser was adamant that the ISA’s authority to act against them is limited. He only has the authority to investigate the next scam if it constitutes a violation of securities laws, he said.

He too has heard reports, he said, that some Israeli companies offer to help binary options victims get their money back, take a fee and then fail to follow through, but, he said, to the extent that this is happening, it is not a securities violation.

“That sounds like it could be fraud, but it’s something the police have to address; it’s not our jurisdiction. The police have tens of thousands of employees; we’re a very small government agency,” Hauser noted. “And that’s why our authority is limited to one specific area.”

To emphasize how limited his authority is, Hauser described a media campaign a few years ago in which people opposed to what they considered his strong regulatory hand made ad hominem attacks against him in newspapers, referring to his ex-romantic partners and how unhappy they were with him.

“Someone had written the article falsely using the name of a doctoral student at the University of Haifa. There was nothing I could do about it. I had to go to the police myself.”

Hauser said he is aware of other scams being perpetrated by binary options fraudsters, like “diamond investments” offered by French-speaking salespeople sitting in call centers in Israel, and possible cryptocurrency scams. But in each case, he said, he needs to determine what the ISA’s jurisdiction is and what is the police’s.

Initial coin offerings have components that are similar to public offerings, but in most cases they’re not a security, so to the extent that someone is committing fraud in connection with initial coin offerings, it may not be our jurisdiction.”

Asked if the Israel Securities Authority has considered instituting a whistleblower program, like those in the United States and Canada, where citizens can come forward with evidence of wrongdoing and receive a financial reward, Hauser said he had considered and rejected the idea.

You can sit in a classroom in Israel with people copying on a test and no one will say anything

“We have spoken about whistleblower programs many times. It’s very problematic. There are people who blow the whistle out of moral conviction and not for money. The issue of money complicates things and we don’t think it would be viable from a legal point of view,” he said.

In any case, added Hauser, he does not think Israel has a “whistleblowing culture.”

“You can sit in a classroom in Israel with people copying on a test and no one will say anything. In the United States, I think if people see a student copying on a test they will say something.”

Despite ten years of metastasizing fraud, the Israeli police have arrested fewer than 20 binary options fraudsters, and not a single one has been convicted.

The Times of Israel asked the Israel Police if it is investigating large-scale binary options fraud and other types of scams perpetrated by Israelis against victims abroad. Spokesman Micky Rosenfeld said: “I can neither confirm nor deny that there are investigations taking place. If victims file complaints, then it stands to reason that the police are investigating them.”

Why was the law watered down?

The law that passed on October 23 was a constrained version of a law drafted by Hauser that was introduced earlier this year. The original bill would not only have banned the entire binary options industry, but also forex and CFD companies that operate from Israel without a license.

It was subsequently watered down to apply narrowly to binary options. Critics have charged that this creates a loophole and that, with the new law in place, fraudulent binary options companies can simply tweak the product they offer and continue to operate.

Asked why it was so difficult to pass the binary options law in its original form, Hauser replied, “I think in general there was consensus. But there was a fear that the tech companies — I don’t know if it was a real fear or if something was hiding behind it — would not be able to continue with their activity of tech development, and also that we did not express enough concern for the people who would be losing their jobs.”

(At a Knesset Reforms Committee meeting on August 7 where the bill was being finalized, representatives of the binary options platform provider SpotOption argued that the law to ban binary options would prevent them from selling their technology, which they argued should be separate from the product itself.)

Hauser rejected the notion that the curtailed law reduces the Israel Securities Authority’s powers.

“The original law was general. Our thinking was that if someone comes along and offers binary options but calls it something else, say, ‘pink flower,’ we wanted to make sure they could not do it. But then legal advisers said the law was too broad, because forex trading platforms are permitted by Israeli law.”

Hauser said the law was changed in an effort to be more precise and that it does not detract from the ISA’s authority to stop similar scams.

“If we think there is an instrument that is a binary option dressed up as something else, we have the option to go to the finance minister and ask for the authority to stop it. We don’t need the expanded [earlier] version of the law that referenced forex as well.”

With the binary options ban going into effect in January, most binary options firms have already left Israel, Hauser told The Times of Israel.

“I hope they are not moving to other countries where they will let them do this. If Israelis are operating scams in other countries it will blow back against us,” he lamented. “But you can’t say the Israeli Securities Authority did not do everything possible to stop this.”