It is not unheard of for people to lose their money to money changers. An Israeli money changer that went out of business several years ago was suspected of misappropriating about $2,000,000 in clients’ funds. This unfortunately is not the first case of its kind. Caveat Emptor. Some may wonder how that is possible if a customer just walks into a money changer with cash of one currency in exchange for the cash of another currency. Truth be told, there is really no risk to the customer if a customer merely changes cash for cash, absent counterfeit money and/or unfair rates. However, this is not always the case. Usually, when a transaction is larger, individuals and organizations transfer money to their money changer via wire transfers and with checks, and their monies remain in the safekeeping of their money changer for some period of time while the transaction is being processed. During that time period their money is assumed safe with their money changer, a sometimes erroneous and naive assumption.
As an attorney and specialist in foreign exchange hedging techniques, I have been approached by people in desperation about what to do about dishonest money changers who have mishandled or stolen their money.
According to the Ministry of Finance of The State of Israel (as of 2011), there are 1,919 registered money changers in Israel. There is obviously a big demand for foreign currency exchange in Israel but is it safe to change your money using a money changer?
The short and simple answer is that provided that a money changer is both prudent with keeping funds segregated and honest no one’s principal should be at risk when using a money changer no matter what.
A money changer’s job is merely to change YOUR money which is denominated in currency X into currency Y. A money changer is not a bank or an investment advisor and the Ministry of Finance of Israel does not authorize money changers to act in that capacity.
Money changers being specialists in the field of foreign exchange can definitely help you access your overseas money and exchange one currency to the next at better rates than banks can, but safety should be your first and foremost concern, because if you save money on transaction fees but your money is lost what good are your lower transaction costs?
It is therefore imperative that foreign currency consumers take the safety of their hard earned money into their own hands to assure that the money changer they are using satisfy the following 3 requirements before doing business with them:
a) Make sure that they are licensed either in Israel or overseas (if you converting money from overseas) as a money changer or as some other legal entity that entitles them to change your money for you. ( For a list of all the licensed money changers in Israel go to http://mof.gov.il/hon/Currency-service-providers/Pages/Stock-exchange-service-providers.aspx (Note: this link gets changed and updated periodically) you can also see what specific part of money changing they are licensed to perform, because just because they are a licensed money changer they aren’t necessarily allowed to e.g. cash you checks etc). If you do not see them on the list or if you see them on the list but are performing some other element of money changing that they are not licensed to perform find out why. Perhaps they have an overseas license but a prudent consumer should always know what regulatory agency they can turn to in the event they have any issues with their money changer.
b) Make sure that your money is segregated and not commingled with the personal money of the money changer. THIS IS EXTREMELY IMPORTANT AND THE BIGGEST CAUSE OF LOSS OF CAPITAL. A money changer is changing YOUR money not someone else’s. It is imperative that your money being entrusted with the money changer be kept separate and segregated from their own money and from the money of other customers. Provided that your money is properly segregated, your money will not be at risk of any loss (absent fraud to be discussed below) nor can it be used to cover the liabilities of the money changer. Your money should be held in trust by the money changer on your behalf in the same way that clients entrust monies with their attorneys.
c) No matter how organized a money changer is with keeping his books (note: it is always advisable for you to keep your own records as well and not rely solely on the money changer’s records) and no matter how many licenses they hold, nothing is more important than the honesty and integrity of a money changer. A money changer is a fiduciary, entrusted to hold your funds and has complete power over your money while in the money changer’s possession. The best way to confirm that a money changer is honest is by asking around, however you do not want to be the money changer’s first victim of fraud either. There are other ways to investigate the integrity of a money changer before it is too late:
(i) Find out if they are promising you things that are impossible to justify e.g. are they offering you other perks such as high interest on deposits that are not justified by the market? Are they promising you a turnaround time on your transaction that no one else can match etc.?
(ii) Are they actually converting your money right when you ask them to. It has recently been unveiled that some money changers who see a market of a currency changing tell a client that they are changing their money right away at a certain rate but in fact they wait to do so because the money changer wants to profit personally on the market move. The money changer ends up getting a better rate than they quoted the client but still pays the client the lesser rate quoted. The client never knows this because the money changer would theoretically take the loss if they read the market wrong, but such an act is putting the client’s money at risk and not forthright. If a money changer does this sort of market speculation on a large scale they may not be able to make good on the currency quote they gave you putting you at a loss if you really needed to convert your money. Ask your money changer what their policy is with respect to market speculation on their part.
(iii) Compare the pricing they give you as compared to others. It is not by itself dishonest for a money changer to charge you more than other money changers (e.g. either in the form of a higher rate or a higher check cashing fee). Perhaps they focus on service or have less volume, or simply prefer higher mark-ups, however it is important to compare rates and ask your money changer why their rate is different than other money changers around. If they acknowledge your question and can explain to you their policies behind their pricing all the better, however if they pretend that their rates are the best out there when that clearly isn’t so or if they can’t reasonably substantiate themselves, you may want to start thinking if they will be the best money changer for you.
Gershon Kayman, Esq. is a seasoned real estate lawyer both in NY and in Israel. He can be reached at firstname.lastname@example.org