Mirror trading is a phenomenon in the financial sphere that occurs on global stock and currency markets; it is not forbidden. Fundamentally, mirror trading is the simultaneous execution of two counter-moving transactions, such as buying bonds or shares in one currency and selling them in another. In the world of mirror trading, there are many different forms. This technique offers a chance for legitimate profit, which is frequently taken advantage of in activities such as Forex trading, one of the biggest financial markets in the world, which is a thriving international marketplace where investors and traders exchange virtual currencies.
Mirror trading is another name for the technique of replicating successful peers' trading strategies, in which investors synchronize their trade flows with those of their more experienced counterparts. However, the main subject is not this particular concept of mirror trading. Rather, the attention is shifted to mirrored transactions, which are simultaneous purchases and sales of the same securities.
What is a Mirror Transaction?
Mirror trading reveals yet another exciting use beyond exchange rate fluctuations. In this case, the capital market serves as a hidden means of transferring funds between various jurisdictions while concealing or partially hiding the parties involved. This scenario creates the appearance of two separate parties conducting almost simultaneous transactions in different currencies when one entity purchases and another entity sells the same financial instruments.
The institutions that facilitate these transactions need clarification because, in actuality, the economic owners of both sides of the transaction remain the same.
Mirror trading, as a fraud type, is a widespread practice in which an intermediary represents two companies with identical ownership in different countries. This technique is frequently used for private money transfers. This is how Deutsche Bank mirror trades are explained:
- The Request: The trader approaches Deutsche Bank or another sizeable international bank to request two almost simultaneous trades. They claim that the foreign company wants to sell an equivalent amount of the same stock in a Western nation, like the UK, at a comparable price. For example, a Russian company plans to purchase a significant amount of stock in a publicly traded company for a specific amount. It is called "mirror trading" because these two trades are nearly exact replicas.
- Execution: Using money from the Russian company, the trading desk in Moscow oversees the buy order. The sell order is handled concurrently by the matching trading desk in London or another Western location. Afterward, the trader or the client designates an account to receive the sale's proceeds.
- The Outcome: The result is that these trades, which usually involve substantial amounts, such as $10 million, could be more economically sound. The mirror traders still lose because of different intermediary commissions, such as those from the foreign bank and the Russian trader, even if they can prevent selling the stock in the foreign market for less than the purchase price, which can be challenging to do.
Deutsche Bank’s “Mirror Trades”
Between 2011 and 2014, Deutsche Bank, one of Germany's largest financial institutions, was embroiled in a questionable financial practice involving mirror trades. During this period of relatively low profitability, the bank's traders, perhaps looking the other way, inadvertently played a role in enabling Russian oligarchs to clandestinely move their funds beyond the reach of financial regulations and controls.
Wall Street's powerful Deutsche Bank expressed regret for having been involved in the fraud and said it had since resolved any mistakes it made. It has consented to pay the financial regulators in New York and the United Kingdom a total of approximately $630 million in fines.
How Can Mirror Transactions Be Detected?
Regarding itself, mirror trading is an acceptable financial activity that can be applied to arbitrage plans. Taking advantage of price variations entails the simultaneous purchase and sale of financial instruments in various currencies and locations. The origin and nature of the funds being transferred, however, are the main issues with Deutsche Bank's involvement in these transactions.
These mirror trades allowed the bank's trading desk in Moscow to facilitate the transfer of an estimated $6 billion out of Russia. Two important factors are what make this situation contentious:
- No profit: the discrepancy of losing trades
The objective of a typical mirror swap is to profit from price differences. Nevertheless, neither the buyers nor the sellers of the trades at Deutsche Bank made any money from them. The unusual lack of profit raised concerns about the fundamental intent behind these deals.
- End-client anonymity: the dilemma of KYC and AML
What was even more concerning was the fact that these trade counterparts' ultimate customers were still anonymous. A significant shortcoming in the bank's Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols was the need for more accountability and transparency. These rules are intended to keep financial institutions from unintentionally acting as intermediaries for money laundering and other illegal financial operations.
This engagement has significant consequences. Due to Deutsche Bank's actions, regulatory inquiries and fines were initiated; authorities approximated that almost €10 billion worth of funds were transferred through mirror trades. It acts as a sharp reminder of how crucial regulatory compliance and transparency are to the financial industry.
How to Avoid Mirror Trading?
It becomes clear that even reputable financial institutions have the potential to get involved in illegal activities, frequently with senior management's consent or knowledge. To solve this problem, the organization, from the top levels to the lowest divisions, needs to foster an ethical culture. Two different approaches can be used to accomplish this transformation: strengthening the compliance function and improving internal control systems with powerful data analysis tools, especially for spotting potential anomalies like mirror trading patterns. These systems must be subjected to regular testing and ongoing monitoring to guarantee their effectiveness.
It is vital to establish precise prerequisites. An integral part of an effective transaction monitoring system for scenarios like mirror trading and potential financial irregularities is the definition of well-defined guidelines for prompt and thorough regulatory reporting of suspicious activities to local authorities.
How Can Sanction Scanner Help?
Leading the way in the creation of software for compliance with AML, Sanction Scanner's Transaction Monitoring Tool is an exceptional tool for identifying mirror trades and transactions. This tool is an effective first line of defense because it can identify possible risks in financial transactions quickly and strictly adhere to international AML regulations.
Sanction Scanner's Transaction Monitoring Tool offers a reliable and effective way to prevent mirror trade and transactions by effortlessly integrating into financial operations with its user-friendly interface and real-time monitoring capabilities. You can contact us or schedule a demo for more details on how Sanction Scanner can support your transaction monitoring efforts.