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Explained: How ‘mule’ accounts are used for front running in stock markets

Explained: How ‘mule’ accounts are used for front running in stock markets
Market regulator SEBI has banned a dealer at broking firm IIFL and five of associates for being part of a front running operation. The dealer Santosh Singh and Adil Suthar, an ex-sub broker at a leading retail broking firm were found to have masterminded this operation, using four entities who served as ‘mules’, and whom the SEBI order terms as mule account holders.
Let us understand front running and stock market mules in a bit more detail.
What is front running?
Front running is the act of illegally buying or selling shares ahead of a substantial order by a client of a broking firm. If it is a large buy order, the front runner will buy the stock in his personal account and when the client’s order causes the stock price to rise, the front runner will sell out his position at a profit. Likewise, if it is a large sell order, the front runner will short sell the shares or its futures beforehand, and when the client’s order gets executed and causes the price to fall, the frontrunner will square up his short position at a profit.
What is a mule account and who are mule account holders?
Mule Account Holders (MAH) are the entities directly/indirectly recruited/ employed by the masterminds of the front running operation.
The masterminds operate and control the trading account, demat account and bank accounts of the ‘mules’. The three accounts are collectively referred to as “Account Set”.
What purpose do mule accounts serve?
The mastermind(s) of the operation, who get to know of impending orders from big clients deposit cash/funds directly/ indirectly, in the bank account of the mule account holders.
Then the buy or sell orders are placed from the trading account of the mule account holder to ‘front run’ the orders of the big client.
The ‘front run’ order is subsequently squared off, and the proceeds are withdrawn either by way of cash through ATMs or through layered transactions. Using a mule account not only helped the masterminds put multiple layers between them and the front running trades but also helps in covering up any audit trail.
What are the different kinds of mule accounts?
‘Family and Friends’ account: These are the trading accounts that are “lent” by the persons known to the mastermind. For e.g., from family members, extended family members, friends, acquaintances, etc. The mastermind gets access to the aforesaid trading accounts based on trust or on the strength of the relationship between him and the registered owner of the trading account. The registered owner of the accounts, may or may not have complete knowledge about the particulars of the trades being executed from his trading account.
‘On rent’ account: These are the trading accounts that are “on rent” from persons who were approached by the mastermind. The mastermind pays a commission to the registered owner for having operational control over the Account Set of the person recruited for this purpose including the trading account, demat account, and bank account. The registered owner, in such instances, has no knowledge about the transactions that are being carried out from his trading account.
Fraudulent account: The mastermind by using fraudulent/forged/synthetic identities, can open a new Account Set that cannot be traced back to him and will then execute the front running trades through such Account Set, a mule.
Dormant account: The mastermind after identifying a dormant trading account will update the material information in KYC, for instance, mobile number, bank account details, etc, before executing trades. Thus, the registered owner of the said dormant trading account may have no knowledge of transactions taking place from his trading account.
‘Misused KYC’ account: Here the mastermind after getting his hands on documents required for KYC, may open the Account Set. Thus, the Account Set would be opened by misusing KYC documents. In such a scenario the person to whom the documents pertain does not even know that an account has been opened in his name.
‘Coerced’ account: In this situation, the mastermind may exhort/influence a person over whom he has some kind of authority (superior-subordinate relationship) to sign papers/open an Account Set, which he can operate / control for his own benefit. The person who is the registered owner of the Account Set, may or may not have any knowledge/understanding of the use to which the accounts are being put.
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