Is Mirror Trading an Elusive Approach to Money Laundering?

Imagine being able to replicate the seasoned expert’s trading strategies without having to spend years sharpening your own skills. Sounds too good to be true, right?

Welcome to the world of mirror trading, where a trader’s successful market expertise is automatically mirrored through digital platforms.

Mirror trading takes place within the forex or stock markets. Through mirror trading, investors aim to profit from trading fluctuations in the financial markets.

Mirror trading has significantly revolutionized investment activities by making the expert’s strategies accessible to everyone. But beneath the surface of forex enhancement lies a mechanism optimum for money laundering and financial manipulation.

Due to the emergence of this paradigm, MTI Proprietary Limited was charged with a fine of $1.7 billion in 2023 as it facilitated fraudulent mirror trades for years.

Interested in understanding what exactly is mirror trading? How does an institution manipulate legal financial flow via mirror trading?

Give this blog a thorough read to understand the mechanics of this unique approach that seamlessly blurs the line between financial innovation and exploitation.

What is Mirror Trading in AML?

In reality, mirror trading is a subset of wash trading, a well-known manipulation technique that may be used to deceive the market about the supply, volume, and liquidity of a financial instrument. Two distinct legal entities trade with one another.

One of the entities creates the appearance that two distinct parties are involved in the transaction, by simultaneously purchasing and selling an identical quantity of financial instruments.

The beneficial owner of the two legs of the transaction is actually the same. The whole purpose of the transaction is to deceive.

Mirror trading further obfuscates the true ownership of the financial instruments by conducting the wash trade across two jurisdictions and two legal entities of a financial institution.

Complex intra-group booking arrangements, including remote booking or regional booking models, are exploited by those looking to launder money to increase their chances of moving money out of a country undetected.

How Is Mirror Trading Used For Money Laundering?

While mirror trading offers financial automation and accessibility, criminals exploit this mechanism to evade regulatory scrutiny, which increases the overall money laundering risks.

Here are some of the potential money laundering risks associated with mirror trading practices:

• Mirror trades encompass forex exchanges in jurisdictions with varying AML laws. The money launderers often misuse the complexity of regulatory protocols to conceal the fund’s original source, making it challenging to identify ML threats.
• Cross-jurisdictional trading operations and the wide use of third-party proxies create hurdles during the authentication of illicit transactional concerns.
• Money launderers exploit mirror trading platforms to manipulate the financial market by artificially influencing the asset’s value and prices. This price differential creates opportunities for imposters to launder funds and disguise the origins in real time.

The FinCEN files released by the Internal Consortium of Investigative Journalists (ICIJ) revealed that more than $10 billion of illicit funds were laundered out of Russia through mirror trading strategies.

Let’s understand the concept with the most famous mirror trading case in the banking history of money laundering.

Deutsche Bank’s Mirror Trading Scandal

The most prominent mirror trading in AML example is associated with a German multinational investment bank, Deutsche Bank AG.

The most famous bank in Germany, Deutsche Bank, was involved in a dubious financial activity involving mirror trading from 2011 to 2014.

Perhaps ignoring the situation, the bank’s traders unintentionally helped Russian billionaires transfer their money secretly outside of financial norms and controls during this time of comparatively poor profitability.

The influential Deutsche Bank on Wall Street apologized for its role in the scam and claimed to have fixed any errors it had made thereafter.

It has agreed to pay fines totaling over $630 million to the banking regulators in the UK and New York.

What Was the Deutsche Bank’s Mirror Trading Strategy?

In light of the Financial Conduct Authority’s (FCA’s) investigation, this bank exposed the UK’s financial structure to exponential money laundering risks due to its illicit mirror trading practices.

Let’s evaluate the working mechanism of how mirror trading Deutsche Bank successfully transferred $10 billion worth of unauthorized funds.

• The initiation of this mirror trading activity began with the trader requesting two simultaneous transactions. The Russian clients established shell accounts in Moscow to purchase stock and deposited the illicit funds in them as rubbles.
• Once the query was locked, the bank’s London office received an order for the same amount of stocks as selling. Later, these stocks were sold as Dollars, which complicates the detection of market risks.
• The proceeds were credited to an offshore account in order to transfer funds out of Russia to facilitate a money laundering scheme.
• In this way, the illicit funds were successfully withdrawn from the offshore accounts, making it appear as though they were acquired from legitimate trading operations.

What Were The Findings Of FCA?

The FCA found several discrepancies in the bank’s AML controls, including illicit transaction oversight and inadequate due diligence measures.

As a result, FCA emphasized all banks to follow strict AML guidelines, including:

• Real-time transaction monitoring
• Reporting of Suspicious transactional activities
• Regulatory reporting as per AML directives

Let’s now assess the different forms of mirror trading and understand how each category is connected to money laundering provisions.

What are the Different Forms of Mirror Trading?

Mirror trading can take various forms, with each category being exposed to different opportunities or money laundering vulnerabilities. These are:

Algorithmic Mirror Trading

Mirror trades, when executed through automated channels, ensure credible replication of successful trades but are opaque and lack regulatory oversight.

The automated mirror trading strategies promote anonymity that complicates the detection of the fund’s legitimate origins.

Mirror Trading Via Crypto Platforms

Mirror trading is often executed through crypto platforms. On non-regulated crypto platforms, money launderers can hide the source and destination of the securities due to higher asset obscurity.

Shell Firm Mirror Trading

Traders establish shell companies to facilitate complex security exchanges without having to reveal the trader’s actual identity and financial credentials.

These anonymous trading operations open new and approachable doors for imposters to conduct long-term money laundering operations.

As per the pre-trade guidelines of the Markets in Financial Instruments Directive (MiFID II), traders must pass the pre-trade liquidity test to authenticate the financial operation.

Once the asset is deemed liquid, compliance officers execute the trade size test to further investigate the trade’s original purpose.

What is the Dual Role of Mirror Trading Crypto in Finance?

The implementation of mirror trading in the crypto world has introduced both financial opportunities for investors as well as money laundering risk simultaneously.

Every trade conducted through the crypto platform is automatically mirrored, allowing instant and profitable trades to take place.

However, pseudo-anonymous transactions conducted through crypto platforms make it difficult to trace the fund’s original source.

This makes it the most attractive platform for money launderers to exploit the financial framework for their illicit activities.

Understanding the MTI Proprietary Limited Fraud Case

Over the recent few years, automated mirror trading platforms have been exploited by the imposters, posing a severe threat to the country’s AML compliance protocols. Some of the prominent cases are briefly discussed below:

In 2023, Mirror Trading International (MTI) Proprietary Limited, a South African company, was found to be involved in operating a fraudulent crypto scheme through mirror trading. The company misled the investors regarding the security’s use.

This scheme was initiated by the company’s CEO, Cornelius Johannes Steynberg. The court penalized the bank with a fine of $1.7 billion in restitution due to its involvement in illicit forex transactions, registration violations, and non-compliance with the Commodity Pool Operator (CPO).

“The settlement with MTI and default judgment against Steynberg represents the latest stage in our bottle against fraudsters who victimized over 23,000 individuals from the US.”

Ian McGinley, Director of Enforcement

Here, the company promised that its advanced intelligence software would create untold wealth for investors. Once this scam was recognized by the regulatory body, strict action was taken in response to the non-compliance practices.

What are Strategies for Overcoming Money Laundering Scams in Mirror Trading?

Mirror trading seems like an ideal measure for wealth creation, but without proper protection and non-regulatory checks, it becomes a central hub for the imposter’s money laundering tactics.

Here’s the breakdown of the critical and effective strategies outlined by regulators  to outsmart the money laundering activities conducted through the mirror trading channels:

Compliance with Global Regulatory Standards

Trading platforms are required to prioritize compliance with AML/CFT regulations. The FATF recommendations on trade-based money laundering mandate the trading channels to carefully examine the over-invoicing and under-invoicing of transactions.

Integration of Automated Monitoring Tools

All trading channels and institutions must implement real-time transaction monitoring and client screening checks to seamlessly flag unauthorized and illicit trades. Additionally, the trading systems must be backed by blockchain forensic tools to trace the flow of crypto trading.

Regular Due Diligence Audits

The stock and equity market operators must ensure strict KYC and AML protocols while frequently conducting enhanced due diligence checks to identify high-risk activities and financial discrepancies.

Are your AML Strategies Smart Enough to Counter Mirror Trading’s Risks?

Mirror trading involves some financial threats, which calls for effective anti-money laundering strategies to timely counter the negative impact.

Entrust AML Watcher’s data-driven solutions to detect obscure mirror trading activities to seamlessly counter money laundering activities.

AML Watcher ensures that suspicious mirror transactions are promptly detected and reported, lowering the possibility of illegal activity.

Wondering how?

Through the following measures:

Due Diligence Checks

AML Watcher matches transactions and organizations with PEP databases and international sanctions lists to enable thorough AML screening. This flags any illegal conduct and helps identify high-risk parties engaged in mirror trading.

Cross-Border Transaction Monitoring

AML Watcher monitors transactions across borders, making sure that international mirror trading deals involving high-risk nations or jurisdictions are detected right away.

Customized Risk Scoring

AML Watcher rates each transaction according to risk variables such as client profiles, transaction size, and origin. High-risk transactions that are frequently connected to mirror trading are identified with the aid of this feature.

Crypto Wallet Screening

AML Watcher uses worldwide watchlists and wallet addresses to filter transactions involving cryptocurrency. These concealed illegal transactions are avoided, and mirror trading schemes utilizing cryptocurrency assets are identified early.

Adverse Media Screening

Using negative press coverage, AML Watcher searches more than 50,000 news outlets to find mirror traders who could be connected to illegal activities like money laundering or terrorism funding.

Real-Time Monitoring

AML Watcher continually tracks transactions in real-time, giving insight to spot suspected mirror trading activity like concurrent buy and sell orders issued in various markets—instantaneously.

Automated Alert generation

AML Watcher helps compliance teams promptly evaluate and look into possible money laundering schemes by producing automated alerts and notifications as soon as suspicious activities are found.

Global PEP and Sanction Screening

AML Watcher checks all transactions against databases of Politically Exposed Persons and comprehensive sanction lists.

In cross-border mirror trading, where buyers and sellers are frequently high-risk parties, this helps in identifying people or organizations engaged in illegal financial activity.