Market manipulation has been the central concern related to economic instability and illicit trading practices. Globally, trading is responsible for a significant portion of the country’s GDP. For this reason, the United States’ trading export value surpassed $2 trillion in 2022.
Due to the high economic impact, imposters exploit the trading channels to manipulate financial marketing practices. These measures are termed wash trading as they create the illusion of financial exchanges. Wash trading is the act of illicitly raising the demand for an asset to manipulate the investor’s financial decisions. This blog aims to provide an analysis of wash trading and its influence on the facilitation of money laundering practices.
Understand the Concept of Wash Trading – A Brief Guide
Wash trading is a market manipulation tactic in which the potential trader buys and sells an asset multiple times for the same asset without changing its actual ownership. This creates the illusion that a trading activity has been undertaken, which ultimately boosts the overall trading volume. Through these manipulative operations, imposters replace one financial asset with another one.
However, wash trading is considered illegal under the Security Act of 1934 and the Commodity Exchange Act. This process works when at least one of the trading parties registers the exchange in a financial structure. Businesses can identify the wash trading practices when financial exchanges have been made within the accounts containing the same beneficial owners.
Money Laundering and Wash Trading – What’s the Difference
The ultimate aim of wash trading is to manipulate the financial market with illicit and ambiguous exchanges. However, there is a fine line between wash trading and money laundering, which is discussed below:
| Wash Trading It is a trading process that revolves around the financial exchanges between the same parties to boost the trading volume of underlying assets. Wash trading deceives the stakeholder’s investment decisions through market manipulation. | Money Laundering Money laundering is the conversion of illicit funds into legitimate sources through integration. This measure aims to conceal the origin and source of illicit financial funds. |
Scams Related to NFT Wash Trading Practices
Non-fungible tokens (NFTs) are unique assets that ease the trading of virtual assets across cryptocurrency channels. However, this makes them susceptible to the imposter’s illicit transactional and trading practices.
NFTs are used for wash trading purposes, as the same asset is exchanged several times while reporting for only the first sale. Through these exchanges, the assets go back to the same seller ultimately in one way or another, which creates discrepancies in the financial and transaction tracking.
Impact of Crypto Wash Trading on the Virtual Transactions
Cryptocurrency channels are often targeted by the imposters to facilitate the wash trading operations. Through wash trading, the imposters manipulate the overall trading volume of a particular crypto asset, which complicates the identification of authentic crypto assets.
Therefore, an effective anti-money laundering practice is necessary to identify and overcome the instances associated with the facilitation of wash trading concerns. These measures ensure the identification of unauthorized crypto exchanges in real-time.
Strategies to Identify and Detect Wash Trade Activities
In order to reduce the manipulative practices through wash trading, businesses are required to adopt several strategies, which are:
- Organizations must prevent self-trading activities in which the buyers and sellers are restricted from trading with the same beneficial owners.
- Traders are prevented from opening multiple accounts in order to combat the things related to wash trading activities.
Combat Wash Trading Crypto With AML Laws
AML laws and regulations reduce the probability of wash trading operations. These laws prevent imposters from exploiting multiple transactional and trading accounts from engaging in illegal activities. Businesses are required to implement a risk-based trade assessment approach, which stimulates the tracking of inter-account trading effectively.
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These trading activities are considered illegal by various regulatory bodies as they exploit the overall financial operations. Therefore, a strict and optimized AML module is crucial to identify and overcome these activities. This further requires the implementation of a watchlist and sanction screening process in order to identify the transactional histories and risk profiles of potential customers before allowing them to trade assets globally. Therefore, the identification and elimination of wash trading operations are necessary to stimulate marketing functionality and stability while reducing the threats associated with money laundering activities.
Concluding Remarks
Wash trading is the illicit practice of exchanging the same asset across the same financial accounts. These operations complicate the overall financial structure as they exploit the investors into making uninformed decisions. Additionally, wash trading is slightly different from the money laundering practices but they both stress the exploitation of financial structure.
Therefore, it is crucial to implement a strategic anti-money laundering program through which the transactional and financial trading operations are effectively detected and identified. AML laws ensure that all trading is carried out through legitimate channels and reduce the probability of illicit channels facilitating unauthorized activities.
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