Pump & Dump Scheme Reinvented: The Money Laundering & Terrorist Financing Risk

A Pump and Dump (P&D) scheme is a form of market manipulation which involves a firm or individuals artificially inflating the price of a penny stock or less known stock through misleading and false statements luring investors to invest in the stock. Once the selling volume has reached a high price and there are no more buyers, the stock price then falls creating big losses for the investors because they cannot sell the stock in time. The firm or individuals involved in the market manipulation can make huge profits.

Market Manipulation is illegal in most of the Stock Exchanges.

With the rise of cryptocurrencies and establishment of cryptocurrency exchanges facilitating trades in cryptocurrencies, we find the ‘Pump and Dump Scheme’ of market manipulation is being reinvented to suit cryptocurrency trading.

The number of cryptocurrencies in the market today are 2000+. The total cryptocurrencies market capitalization is estimated as being $100bn as of December 2018.

Old Scam, New Technology:

The P&D scheme within cryptocurrencies is simple; The fraudster introduces a low value cryptocurrency and tries to pump its price by announcing the target price of the new currency in forums and groups. The investors try to increase their wealth instantly and try to invest in the digital coin. Once investors start to buy the coins, the price rises. Then an announcement is made in the group to sell the coins to make a profit. During this period the fraudsters who had already bought the coins will sell it as quickly as possible to new investors who are still interested in buying it. Before the new members try to sell the coins, the price drops and the market collapses.

The website - https://pumpdump.coincheckup.com/ shows the less known digital coins peaking due to the Pump & Dump Activity.

Why is Pump & Dump activity considered illegal?

Cryptocurrencies are traded largely on unregulated and anonymous online exchanges and many of them do not consider the Pump & Dump scheme as illegal. Most of the fraudsters who orchestrate the sale of the fewer known cryptocurrencies are linked to organized crime, money laundering and to terrorist financing.

Regulators View on Cryptocurrency Pump & Dump:

Market manipulators are ever active trying out new technologies to widen their operations and to ensnare vulnerable investors. Their locations are not easily identifiable and they are usually elusive. Cryptocurrency trading, unless curbed, will continue to pose a threat to unwary investors. There is an urgent need for regulators to address the risks associated with such trading, and to mitigate the harm to investors by creating awareness in their minds about the evils of Pump and Dump Scheme.

Lysis Financial provides services across Governance, Risk and Compliance, regulatory audit and remediation, enterprise-wide risk management frameworks, design of client on-boarding and AML target operating models, compliance policies and procedures.

We are able to work with Cryptocurrency exchanges to ensure they are able to meet their regulatory requirements from 2020, we can also work with cryptocurrency providers to ensure they have the required level of AML controls to ensure they meet their legal obligations both within the UK and Europe once the 5MLD comes into force.

For more information please contact info@lysisfinancial.com


Author: Vanitha Vinayak, Consultant at Lysis Group