Financial crime is a concerning issue in the Forex industry which is vulnerable to a wide range of criminal activities such as fraud and money laundering. According to recent studies, the financial industry loses billions of dollars each year due to these illicit activities.
In this section, we will explore some of the specific types of financial crime risks in the Forex industry and the challenges they pose for preventing and detecting criminal activity.
1. Market Abuse Practices
Insider trading
Insider trading in the Forex industry is a serious financial crime that can lead to significant profits for the trader at the expense of other market participants. The practice can also be used by money launderers to convert their illicit gains into apparently legitimate profits by using privileged information about a particular currency. Combining insider trading with money laundering can make it even more challenging for companies and regulators to detect and track these transactions, as they can appear to be legitimate trades.
To mitigate the risk of insider trading, Forex industry participants must:
- implement robust surveillance and monitoring systems that can detect suspicious trading behavior and prevent illegal activities. This can include data analytics, transaction monitoring, and employee training.
- policies and procedures to detect and prevent insider trading activities and ensure that all their employees are aware of the risks and consequences of engaging in such behavior.
Within the European Union, under the Markets in Financial Instruments Directive II (MiFID II), financial institutions, including forex companies, are required to implement effective systems and controls to prevent insider trading, including monitoring and surveillance systems, employee training, and pre-trade and post-trade monitoring. It also requires financial institutions to report suspicious transactions to the relevant regulatory authorities and maintain records of their monitoring and surveillance activities.
Market manipulation
Market manipulation is a deliberate attempt by individuals or entities to distort the market in their favor, often by spreading false information or creating artificial price movements.
Market manipulation in the Forex industry can also be a means for money launderers to profit from their illegal activities. Manipulating the market can create artificial price movements that can be used to disguise the source of illicit funds or to create an appearance of legitimate trading activity.
Money launderers may use various methods of market manipulation, such as spoofing or front running, to influence currency prices and make profitable trades. These activities can be challenging to detect, as they often involve multiple parties and complex transactions that are difficult to trace.
MiFID II prohibits any behavior that manipulates the market, including spreading false or misleading information, engaging in wash trades or other forms of market manipulation. Under MiFID II, financial institutions are required to report any suspicious transactions or behaviors to the relevant regulatory authorities. This includes orders and trades that appear to be manipulative or abusive, such as those that attempt to artificially influence prices or volumes.
2. Other fraudulent activities
Account takeover
Account takeover in the forex industry refers to a situation where a fraudster gains unauthorized access to a forex trader’s account. The fraudsters get the personal information of the client with the use of phishing attacks, malware attacks or social engineering and gets access to the customer’s account.
Forex companies need to be aware of the signs of an account takeover. Some red flags are unusual trading activity, change in account information (often followed by a withdrawal), login attempts from unfamiliar locations or unusual communications.
Identity theft
Identity theft is another significant fraud risk that forex companies may face. Identity theft involves the unauthorized use of someone’s personal information, such as their name, address, date of birth, and financial information, to open a forex trading account or conduct fraudulent transactions.
Fraudsters may again obtain personal information through a variety of means, including phishing scams, social engineering, and data breaches. Once they have access to the victim’s personal information, they can use it to open a forex trading account in the victim’s name, conduct fraudulent trades, or withdraw funds from an existing account.
False account information
A forex company may face the risk of false or fraudulent account information provided by clients. For example, a client may provide false identification documents or other information (i.e. false employment information or financials) to open an account and engage in illegal activities.
3. Money laundering
Smurfing
Smurfing involves the breaking up large amounts of illegal money into smaller transactions to avoid detection and the use of multiple individuals to deposit those amounts in various accounts.
In the context of forex trading, this may involve multiple small transactions to move money from trading accounts belonging to smurfs to various accounts controlled by the criminals in financial institutions in an attempt to obscure the original source of the funds.
Use of multiple accounts
The use of multiple accounts or aliases to conduct transactions is a practice that is common among money launderers seeking to avoid detection, making it difficult to track the flow of funds.
By using multiple accounts, criminals can make a series of small, seemingly unrelated trades that are designed to avoid detection. These trades can be used to move illicit funds between different accounts or to disguise the source of the funds through a series of apparently unrelated trades.
The use of multiple accounts for money laundering with CFDs can be challenging to detect, as the trades may appear to be legitimate and may not raise red flags on their own.
Conclusion
The Forex industry faces a range of financial crime risks, including insider trading, market manipulation, and fraud. These activities can undermine market integrity, erode investor confidence, and facilitate illicit activities such as money laundering and terrorist financing.
To mitigate those risks, forex industry participants must have strong customer identification and verification processes in place and other measures including transaction monitoring and surveillance systems and take a proactive approach by establishing and implementing clear policies and procedures including regular training and education to their employees.
