In a bombshell speech, a senior Israel Police officer told a Knesset panel on Wednesday that Israeli crime kingpins are behind the binary options industry and that organized crime in the country has been massively enriched and strengthened as a result of law enforcement’s failure for many years to grasp the vastness of the problem.
“Our eyes have been opened,” said Superintendent Gabi Biton, who investigates financial fraud and money laundering. “What we’re seeing here is a massive organized criminal enterprise. We are talking about criminals at various levels of crime organizations, up to the very top.”
The widely fraudulent binary options industry is estimated to generate between $5 billion and $10 billion a year and to largely emanate from Israel. It has been estimated to number well over 100 companies, and to employ between 5,000 and tens of thousands of employees.
The Times of Israel began exposing the industry in a March 2016 article entitled “The wolves of Tel Aviv: Israel’s vast, amoral binary options scam exposed.” The fraudulent firms ostensibly offer customers worldwide a potentially profitable short-term investment. But in reality — through rigged trading platforms, refusal to pay out, and other ruses — these companies fleece the vast majority of customers of most or all of their money. The fraudulent salespeople routinely conceal where they are located, misrepresent what they are selling and use false identities.
Because binary options is such a lucrative scam, established organized crime groups gravitated toward it, said Biton. “They saw the huge economic potential in binary options,” he added, explaining that these organized crime bosses then hired professionals, foreign language speakers and payments experts to help them carry out their fraud.
“It has grown to monstrous proportions,” he added. “I can say that we are discovering new paths of money laundering through this crime that we were not aware of.”
Biton was speaking at the second of three meetings of the Knesset Reforms Committee devoted to deliberating a proposed law to ban the Israeli binary options industry. At the previous meeting, held Monday, several of those in attendance were shocked to discover that the draft legislation unveiled in February had been substantively weakened. The original text, which was drafted by the Israel Securities Authority together with the Justice Ministry and the attorney general’s office, banned the entire binary options industry, but also, significantly, would have prohibited Israeli forex, CFD (Contracts for Differences) and other online trading companies from offering their wares to customers abroad without a license. The February draft law stipulated that online trading companies operating from Israel and targeting customers abroad must do so with a license from the country where they operate.
But in the ensuing months the text was changed, and in its current version — which was approved by the cabinet last month — the ban on binary options stands but the additional clauses, covering other financial instruments, have been deleted. This new version of the proposed law was formally published by the Knesset on June 20 but not publicized, and many critics of the industry only discovered the change in recent days or at Monday’s session.
During Wednesday’s committee meeting, some of those in attendance argued that the watered-down bill would allow binary options fraudsters to re-brand their product, offering forex or CFDs instead, and continue to defraud customers abroad with impunity.
A source involved in the legislation told The Times of Israel, “The expanded bill would have been ideal but I do not think it would be able to pass a final Knesset vote, even if the committee approved it. You cannot imagine the amount of pressure being exerted on Knesset members to weaken this bill. The industry has vast amounts of money and is exerting massive pressure.”
The committee is set to vote on the bill next Monday. If it passes, it will then go to the Knesset for its second and third (final) readings.
Biton, the police superintendent, assured those in attendance Wednesday that the bill in its current state is sufficient because it allows the finance minister to extend the ban to other financial products in the future in consultation with the Israel Securities Authority and the Knesset Finance Committee. Biton added that police are now aware of the severity of Israel’s fraud problem and are conducting multiple investigations into key figures in the industry.
Staring directly across the room at several lobbyists and representatives of the binary options industry, Biton said pointedly, “We have names: We have names of companies, we have names of people, we have names of crime organizations and we have the names of soldiers in crime organizations.”
He told the panel that binary options fraudsters are part of a sophisticated network of criminals that has been carrying out internet scams over the past decade. Some of these criminals, he said, carried out the carbon-VAT scam, which was dubbed the “crime of the century” in France. Later, some moved on to other types of internet fraud, including the CEO scam, while others made their way into binary options.
“Binary options caused Israel’s crime organizations to become significantly stronger,” said Biton. “We have received reports from various enforcement agencies in Israel outlining the meteoric enrichment of the perpetrators.”
He said Israeli police have begun to follow the binary options money trail and to identify the true owners of the websites registered to shell companies in places like Belize and the British Virgin Islands.
Biton said that as North American and European regulators and law enforcement have caught on to binary options fraud, companies are shifting their activity to Arab countries and the Far East.
At the committee meeting, several representatives from the industry argued against banning binary options technology providers from Israel. Speakers appearing on behalf of platform provider SpotOption, for instance, firmly rejected any notion that the firm was involved in fraudulent behavior and said it ought not to be impacted by the law, as it will be if the current draft is approved.
David Ripstein, the former CEO of SpotOption, told the committee, “At SpotOption I developed a program that was fair and had 50 percent wins/losses.”
But Biton, speaking of binary options trading platforms in general, argued, “I have no problem with companies that merely provide technology. But when you ask for a commission of over 10 percent, that’s weird for a company that merely provides a platform and payment processing systems.” (SpotOption did not specify in the meeting whether it took a commission on each transaction.)
Ordinarily, “when you transfer money you pay a 0.5% commission,” continued Biton. “I know from the money laundering world that when you transfer money of criminal organizations it costs 14%. That gives us an indication that something here is not right.”
Biton added that in many binary options companies, clients’ money never even reaches the investment platform. “It stays with the payment processor for 30 days. So what [money] are you investing?” he asked, looking toward the binary options representatives. “What are you working with?”
Binary options companies make heavy use of high-tech systems for processing payments, he added.
“There is a very robust system of payment processors, secondary payment processors and aggregators whose purpose is to hide the nature of their activity from the acquiring banks.” (The Times of Israel has written in detail about these payment processing systems here.)
Biton said he is currently investigating several cases of binary options fraud and that victims around the world were welcome to submit their complaints.
“We’re focusing on the big cases. But we received a directive from the head of the [police] intelligence and investigations division that every complaint that reaches us will be investigated.”
Former employees of the industry, he added, are increasingly willing to speak to police: “We’ve spoken to programmers of trading platforms, salespeople, even team leaders.”
Still, he said, it is difficult to gather enough evidence to bring indictments against the fraudsters.
“We are talking about companies that are registered in countries where their shareholders are two other companies. The servers are not in Israel. We have to ask other countries for help. It takes time.”
But in the end, Biton vowed to stop the fraud.
“Like drugs, gambling and prostitution, it won’t go away entirely. But we will use all the tools at our disposal to uproot this phenomenon.”