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A law enforcement action alleged that, over the course of two months, defendants engaged in a series of copper, gold, crude oil, and natural gas futures transactions on an electronic trading platform. One defendant repeatedly bought future contracts at low prices from another party and immediately sold them back at higher prices, effectively ensuring that one defendant made profits while the other took losses, even though there was no actual market risk involved. What is the name of this typology?
Correct Answer: C
Wash trading is a form of market manipulation where two parties coordinate to create artificial trading activity, often for money laundering, tax fraud, or price manipulation. Why Option C (Wash Trading) is Correct: No real market risk is taken-transactions are simply cycled between the same parties. Creates an illusion of liquidity or inflates asset prices artificially. Common in commodities, stocks, cryptocurrency, and futures markets. Red flag for money laundering: Criminals may use wash trading to layer illicit funds through financial markets. Why Other Options Are Incorrect: Option A (Short Position): A short position involves selling an asset one does not own and repurchasing it later at a lower price-this does not describe the described scheme. Option B (Reverse Flip): A reverse flip is a real estate money laundering typology, not applicable here. Option D (Bid-Ask Spread): This refers to the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept, but it does not involve fraudulent trading. AML Risks in Wash Trading: Can be used to move illicit funds through financial markets. Artificially increases trading volume and market price manipulation. Frequently flagged in AML transaction monitoring systems. Best Practices for Detecting Wash Trading: Monitor repetitive trading between related entities. Look for circular transactions with no economic justification. Use AI-based transaction monitoring to detect high-frequency wash trades. Reference: FATF Report on Money Laundering in Capital Markets SEC & CFTC Enforcement on Wash Trading Cases Wolfsberg Group Market Manipulation Risk Guidelines