How do sketchy offshore shops collect on negative cash balances?

500:1 leverage sounds so crazy I wouldn't be surprised if it's used as a money laundering vector.

They don't, or shouldn't have to. Brokers that offer generous margins do something typical brokers do not - they auto-liquidate when you fall below minimum maintenance margin. Most retail brokers would give you a friendly phone call and let you liquidate the next day or so.

Next, forex markets are so heavily traded they have a virtual guaranteed stop. That is, if you set the order you will get it filled no worse than that price.

The only way a broker gets hit is a sudden currency drop, like the Swiss franc did a few years back.

I think most of these x500 Forex shops are bucket shops. They are not even derivatives. More known as CDF which means you are buying/selling against them.

Holy shit you weren't kidding. A search for 500x forex brings up all sorts of day traders doing this stuff. Scary.