Following Facebook’s announcement last week that it was banning all advertising for binary options, cryptocurrencies and initial coin offerings, a Canadian regulator has called on Google to do the same.
Jason Roy, a senior investigator at the Manitoba Securities Commission and chairman of Canada’s Binary Options Task Force, told The Times of Israel that “we’re very pleased with Facebook’s decision. My hope is that Google will enact a similar policy, where they specifically name products like binary options, ICOs and cryptocurrencies.”
On January 30, Facebook announced it was banning all advertising for binary options, cryptocurrencies and initial coin offerings, following many months of pressure from the FBI and Canadian securities regulators who have been investigating online investment fraud.
Binary options is a recently outlawed Israel-based fraud that was estimated to bring in $5-$10 billion a year at its peak.
“We’ve created a new policy that prohibits ads that promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency,” Facebook product management director Rob Leathern wrote in a January 30 blog post announcing the advertising ban.
But Google, which according to industry insiders generates much of the paid traffic for fraudulent binary options, cryptocurrency and ICO companies, has yet to ban the ads.
Asked by The Times of Israel whether it was going to enact a similar ban, Google spokeswoman Roni Levin replied by email that “we already ban and enforce against misleading ads and misrepresentation (across all categories). Here are the policies — Misrepresentation and Misleading Ads.”
A quick search for “binary options” or “cryptocurrencies” in the Google search bar reveals that the company is still selling ads for these products.
Roy said that Canadian and other law enforcement agencies are waiting for Google to follow Facebook and enact a specific ban. “What happened is that Canada’s Binary Options Task Force as well as the FBI explained to Facebook what the concerns were and that these types of ads are leading to people becoming victims. We’ve been talking to Google and had similar discussions and are waiting for them to take similar action.”
Roy and the FBI have for months been discussing with Google and Facebook the prevalence of advertising for the widely fraudulent binary options industry. The industry, through which victims worldwide have been fleeced out of billions for the past decade, was finally outlawed by the Knesset in October, in the wake of investigative reporting by The Times of Israel since March 2016, with the ban talking effect on January 26.
According to a source familiar with the binary options industry, some Israeli binary options companies have simply changed the product they are selling to cryptocurrency and ICOs, and continued to defraud customers using similar scripts and techniques.
“They just took a sticker down from a door and put up a new sticker and said now we’re doing ICOs,” the source said of one company. “Nothing about the company changed. Maybe some of the legal filings.”
Are all cryptocurrencies fraudulent?
While binary options was a largely Israel-based fraud, the situation with cryptocurrencies and ICOs is murkier. Experts have told The Times of Israel that some cryptocurrency startups are legitimate, or at least not intentionally fraudulent, while others are outright scams. Fraudulent cryptocurrency companies appear on the surface to originate from all over the world, and not just Israel.
“I think everybody is trying to figure out what’s going on,” said Roy. “There’s just been an explosion of different ICOs and new tokens and crazy offerings. You’re seeing ICOs that are raising large amounts of money and there’s nothing behind them in certain cases, but members of the public are so hyped they’re throwing money at them.”
When Roy looks at the cryptocurrencies being advertised on the internet he sees several patterns.
“You have the former binary options firms that have made the switch to offering cryptocurrencies, and it’s basically the binary options scam 2.0. Then you have fraudulent and unregistered ICOs that are targeting people. And then you have cryptocurrency Ponzi schemes or multi-level-marketing schemes. We recently put out an investor alert about a company called UTI-Tech. There is an Israel aspect to all this fraud with the former binary options firms, but that’s not the entirety of it. It appears to be all over the world.”
Asked how one can differentiate the legitimate cryptocurrency firms from the illegitimate ones, Roy replied, “We would look at what they were doing and determine if this is an activity that can be registered and if they had in fact registered. We would look to see if they were violating our rules, because any legitimate company that’s going to be offering a type of investment should be following the rules in whatever jurisdiction they’re offering those securities in. That’s our first test in terms of the legitimacy of a company.”
How Google AdWords helps fraudsters find customers
Several weeks ago, the Times of Israel was contacted by a former PPC (pay-per-click) expert for the online gambling industry who worked briefly in binary options. Joshua, who asked that we not reveal his real name, said that most of the paid traffic for binary options websites comes from Google AdWords.
“I think Facebook represented about 15 to 20% of the paid-click traffic, but these companies’ largest budget goes to Google AdWords.”
He said that lately he keeps seeing ads for initial coin offerings (ICOs) everywhere on the internet, and that he recently had a flash of insight that compelled him to contact The Times of Israel.
“When I worked in binary options, one of the things that made me realize it was fraudulent is that they would give investors bonuses. If someone invests $100, and then you give them $100 in equity, well then it’s obvious you’re not planning to return any of their money. A few weeks ago I was going through my Facebook and I see these ICOs. And I see they’re starting to offer ICOs with bonuses. I put two and two together and I said, these ICO people are binary options people!”
When The Times of Israel pointed out that the “team members” listed on the websites of many Google-advertised ICOs appear to be from all over the world and not just Israel, Joshua suggested that some of these people may be former binary options affiliates whom the Israeli owners are using to obscure their involvement.
“They have affiliates everywhere — in Canada, Cyprus, Belize — you name it.”
Joshua said he can’t know for sure that every ICO that advertises on Google is a scam, but that a legitimate cryptocurrency would be more likely to raise money “through public relations, through people actually being interested in it and through serving some need.”
According to Joshua, binary options companies used to bid more than $100 per click to occupy the advertising spot at the top of a page of Google search results. He believes that the going rate for cryptocurrencies may be similarly high.
In other words, if you click on a Google ad for binary options, the company may have to pay Google $100 or more, depending on what other companies are bidding.
“Usually a legitimate company that advertises on Google will pay 50 cents a click, or maybe a dollar or two, because they’re just trying to get normal people to come in. But you’re bidding against your competitors. If your competitor started bidding $20, they would show up above you. If you wanted to show up above them, you would have to bid $21.”
Joshua said that this explains why scammers are willing to bid $100 or more.
“These fraudulent companies, they want to take people’s money and they want to take it fast. They’ll bid at $100 to make sure they get that top position.”
This works out economically for binary options companies because they carefully track customer behavior and know exactly what percentage of people who click on a Google ad will deposit money. Joshua said that the lifetime customer value (the average amount of money earned per customer) in the gambling companies he worked for was $1,200 and in some binary options companies he believes it may have been between $1,500 and $2,000.
“That’s their strategy. If they have to pay $400 to Google to get five clicks and then one of them converts (makes an initial deposit), that’s a money-making venture.”
According to Joshua, reliance on Google AdWords is the Achilles heel of fraudulent forex, CFD, binary options and cryptocurrency companies. If a whole bunch of angry, defrauded investors were to start clicking on the ads without actually depositing money, their business model would fall apart, he said.
“Even a few thousand people doing this would be detrimental to them,” he said.
The Times of Israel contacted Google to ask what it thought of this suggestion. Google spokeswoman Roni Levin replied that such a scheme would not work.
“Our Ad Traffic Quality team is dedicated to stopping all types of invalid traffic,” she wrote in an email, “including clicks that don’t represent genuine user interest, so that advertisers don’t have to pay for it and the people who cause it don’t profit from it. Please see: https://www.google.com/ads/adtrafficquality/invalid-activity.html”
The origins of binary options
Joshua said that in an ideal scenario, Google would just ban ads for companies offering forex, CFDs, binary options and cryptocurrencies.
“Overall, the revenue from clicks for forex, CFDs, binary options and and online gambling could be hundreds of millions or a billion dollars,” he said, stressing that this was only an educated guess and that he did not have a specific figure. If so, he said, “that’s not a lot of money for Google. I doubt Google is in it for the money in some corrupt way. They just follow the law really strictly and until something is banned by law, they don’t censor it.”
Joshua said that that binary options was invented by gambling industry operatives after the United States banned online gambling in 2006 and Google placed restrictions on the advertising.
“Between 2000 and 2006, Israel was a hub of the online gambling industry,” he said. “The casinos were allowed to operate in Israel as long as they didn’t take any players from Israel. And they were swimming in money. There was no reason to enter any other field because they were making so much money. They had the US market and all these other markets worldwide.”
But in 2006, the United States passed the Unlawful Internet Gambling Enforcement Act, making it illegal for a company to accept payments from online gamblers from the United States.
Online gambling companies still wanted to find a way to get money from US customers. Some accomplished this by using payment processors that falsified credit card transaction codes so that they did not reflect gambling activity.
But once advertising to the US market was restricted by Google, “most casino operations downsized, and operations then shifted to forex and binary options, which you could advertise freely on Google AdWords.”