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MC Explains: Why are mule accounts dangerous and how Sebi plans to use brokers as gatekeepers

These accounts are set up to “carry’” out or route illegal activities such as front-running and pump-and-dump scams. These accounts are in the name of one person but are used by others such as fund managers or brokers

March 30, 2023 / 01:45 PM IST
Brokers sometimes collude in the scam by helping set up mule accounts (Photo by Jan van der Wolf/Pexels)

Brokers sometimes collude in the scam by helping set up mule accounts (Photo by Jan van der Wolf/Pexels)

Stockbrokers will soon have to play a more active role in preventing capital market frauds, including helping weed out mule accounts.

Stockbroker regulations will be amended to cast a responsibility on the market intermediary to monitor fraud and market abuse, SEBI chairperson Madhabi Puri Buch told media after a board meeting.

What are mule accounts?

As the name suggests, they are accounts that are set up only to “carry’” out or route illegal activities such as front running or circular trading. They are registered in the name of one person but are used by others such as fund managers or brokers.

Also read: "We will not allow another Karvy type incident: Sebi chief"

How does Sebi tackle this?

The market regulator now employs high-end algorithms and extensive data sets with which it can detect activities such as front-running or pump-and-dump schemes.

At the press conference on March 29, Buch shared ways in which brokers have been gatekeeping, using innovative, low-tech methods or with high-tech systems.

One big brokerage, for instance, checked the age of the account-opening applicant against the applicant’s permanent account number (PAN). If the applicant was middle aged but the PAN was recent, it raised red flags that the account was being set up for misuse and was possibly a mule account.

“A person who is 45 and having a PAN card for the first time, where is the wherewithal for him to be trading in the market,” she quoted the broker’s reasoning, adding and the brokerage had turned down an application based on this.

Mule accounts Mule accounts.

Buch also said that some of the larger tech-based brokers were using technology to identify such accounts. One broker saw that a client was making “inordinate sums of money day after day after day” and thought that statistically, this was impossible. The brokerage shut the account.

The SEBI boss added that brokers were showing highly responsible behaviour. “We also have a small minority of brokers who are constantly colluding in the opening and facilitation of mule accounts… and in the facilitation of pump-and-dump schemes,” she said.

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Buch said the intent behind amending the broker regulations was to make sure that good practices were followed across the board and that the small minority of bad actors were impeded.

“(It is being done) to capture the best practices and also to mitigate collusion,” she said.

Also read: Sebi Board Meeting: Highlights from the press conference led by Sebi chief Madhabi Puri Buch

Do fraudsters still get away with it?

Yes, because it is hard for the regulator to pin the blame on someone. Fraudsters use platforms that allow encryption and deletion of messages that discuss the setting up of the accounts, profit-sharing terms, etc. Therefore, it becomes nearly impossible for the regulator to trace the blame back to the originator.

Asha Menon