International Money Laundering - Assignment Example

International Money laundering Student’s Name Institutional Affiliation Course Name Date of Submission International Money laundering Introduction Money laundering is one of the most common forms of financial crimes today. There has been a significant increase in the money laundering activities in the recent past. Stessens (2000, p. 3) defines money laundering refers to the concealment of the source of assets obtained through criminal activity to make the assets appear as if they are acquired through legitimate means. With the globalization of the financial markets, hundreds of billions of dollars are derived criminally derived through money laundering every year. Big multinational companies, in particular, are increasingly engaging in money laundering activities by abusing the accepted accounting principles to conceal illegal business activities (Madinger 2011, p. 13). However, engaging money laundering can have serious ramifications on a company that operates legally. Therefore, as money laundering activities increase, managers should be vigilant and initiate measures to prevent their companies from engaging in money laundering activities. The aim of this paper is to examine the impact of money laundering activities on the operations of a company. It will also describe the measures that managers can take to prevent their companies from engaging in money laundering activities. Concept of Money Laundering Money laundering has become a global phenomenon. Today, billions of dollars change hands through money laundering activities. Despite the popularity of the money laundering, the term is still less understood considering that it manifests in different forms. However, money laundering is a term used to refer to the legitimization of assets or money obtained through illegal means. In money laundering, the parties involved in the activity use different techniques to conceal the source of the assets or funds obtained through criminal activity to make it look as if the assets or funds are obtained through legal means (Parkman 2013, p. 73). Every country has its own definition of money laundering and the crimes that are considered to constitute money laundering. In the United States, it is estimated that more than $300 billion is laundered very year. Money laundering activities do not just happen at once. Instead, there are a series of steps/phases that are involved in any money laundering activity. The first step/phase is the placement phase that involves the introduction of the assets or money obtained through illegal means into the financial system (D'Agostino 2002, p. 14). Once the money has been introduced into the financial system, the parties involved in the money laundering deal conceal the sources of the money being laundered to make the assets look legitimate at the layering phase. Cover up is done by employing a variety of techniques, such as engaging the money laundered to multiple transactions. One the source has been concealed; the last stage is integration, where the money or assets are returned to the organization of financial world to make the source look legitimate. Techniques used to Avoid Detection Because money laundering is a criminal activity, organizations that engage in money laundering deals take every step possible to avoid detection. This is because when found, they risk facing prosecution and exposing the company to the risk of reputation damage and other related consequences. The first and most widely used detection avoidance that criminals use is the transfer of illegally-acquired assets from one bank to another and from one account to another. This is repeatedly done to make it complex and difficult for an audit trail to capture, thereby concealing the real source of the assets. Secondly, criminals sometimes opt to divide a large sum of money into smaller bank deposits (Stessens 2000, p. 33). The illegally acquired money is then deposited into different bank accounts to conceal making it difficult for investigators to identify the real source. Additionally, criminals may avoid detection by using the illegally acquired money to buy money orders in small amounts or breaking the huge amount into small quantities and using it to buy cashier checks (Parkman 2013, p. 78). These techniques are widely used by criminals to make it difficult for investigators to detect a money laundering deal in an organization. In fact, it is believed that although many money laundering deals are going on in various companies across the globe, reporting the actual figure has never been easy because of the avoidance techniques that most companies use to deceive investigators that a deal is legitimate. Money Laundering Execution Techniques Money laundering takes different forms and involves the application of different techniques. However, some of the money laundering techniques are more common and profitable than others. Therefore, managers are advised to be very vigilant on the more common money laundering forms to ensure that they are not used in the company to commit an illegality. The first and most common form of money laundering is bulk cash smuggling. This form of money laundering deal involves smuggling large amounts of cash into a foreign country bank to keep the secrecy of a client (D'Agostino 2002, p. 19). In developing countries, for instance, corrupt individuals use financial institutions to help them smuggle huge cash to help keep their illegally acquired money or assets from being discovered by transferring them to foreign bank accounts to their local bank account's name. The second and most common form of money laundering is structuring. Structuring is a form of money laundering where large amounts of money received from illegal sources are broken down into smaller units after which they are used to buy financial instruments, such as money orders. In so doing, a financial institution is able to hide the illegal source of the money, thereby making it difficult for investigators to detect or suspect the source of the money (Ridley 2008, p. 6). The third form is called trade-based laundering. This form of money laundering is almost similar to embezzlement in the sense that the criminal systematically alters the invoice by either raising or lowering the stated amount to facilitate the movement of the money being laundered. The fourth and most common form of money laundering is the cash-intensive business. This is a form of money laundering, where a legal business dealing with large sums of money use its accounts not only to deposit the amounts received from daily transactions, but also the proceeds received from illegal activities (Unger and Busuioc, 2007, p. 34). When reporting the incomes, the company includes even the money received from illegal means together with those obtained through daily transactions. The other common form is bank capture money lingering. This is a form of money laundering where the bank owned by a money launderer is used to launder money without fear of detection. Other forms of money laundering that are common include casino and real estate laundering. Impacts of International Money Laundering on Businesses Operating Legally Money laundering is a reality and a serious crime that has social, economic and financial implications on companies operating legally. Firstly, the having a positive reputation in the eyes of the public is a competitive advantage to any company. Therefore, companies strive to ensure that high integrity is maintained at all times so as to attract investors, customers and other stakeholders to the business (Cox 2014, p. 21). In this regard, it is argued that integrity and positive reputation is a valuable asset to a company, which takes companies many years to build. However, this reputation can be ruined easily by associating with money laundering deals. For example, if a financial institution like banks allows its employees to process a criminal activity because the directors or employees have been bribed or because the organization fails to take action against criminal activity, this could result in the institution being drawn to aid a criminal activity and become part of the criminal network. However, the detection of such complicity with criminal activities can have serious reputation damage to a company. If detected, this might affect the attitude of customers, other institutions, and the regulatory authority. For instance, investors might avoid associating with the company for fear that they might lose their investments when regulatory authority finds the company culpable (Ridley 2008, p. 11). Customers might also avoid dealing with the company since engaging in money laundering deals shows lack or integrity and responsibility. However, because companies cannot operate with the support of investors, customers, employees, the government and the community, the reputation damage might force the company to close down. In fact, such was seen in the 1990s when customer withdrew their deposits from the financial institutions that were suspected of aiding money laundering deals. In effect, the banks were forced to close down for lack of customers. Secondly, terrorism is one of the major criminal activities of the 21st century. In 2001, the United States suffered massively from the acts of terrorist attacks. The attack claimed the lives of more than 3200 people. Just recently in November 2015, a Russian plane was reportedly brought down in what is linked to terrorist activities. In the same month, France suffered one of its worst act of terrorism following the terrorist attacks at six different locations that claimed the lives of about 130 people. Whereas the 9/11 terrorist attacks were linked to al-Qaeda terror network, the attacks Russian airplane, and attacks in France have been linked to the Islamist State terror group ISIS. However, these terrorist groups have been found to get assistance with companies such as financial institutions that help them get money from their financiers to enable them to buy weapons and other resources that they might need (Woods 1998, p. 51). Therefore, engaging in money laundering business or being linked to a money laundering activity can hurt a company operating legally since it might make the company be linked to a terrorist group (Parkman 2013, p. 84). Consequently, this might put the company under investigations for supporting terrorist groups. Such investigations might scare customers and investors from engaging with the company, thereby resulting in poor performance and even closure by the authorities. In fact, there are quite a number of companies and financial institutions, in particular, that have been closed down for being linked to money laundering and terrorism. Drug trafficking is another vice that affects most countries across the globe. Reports indicate that drug trafficking is a multicolor business. However, drug trafficking is not only a criminal offense in itself but is also linked to terrorist activities. Because drug trafficking generates billions of dollars, terrorist organizations tend to use drug trafficking to enable them to generate the money they need to carry out terrorist activities (Cox 2014, p. 23). Unfortunately, their activities are aided by companies, especially financial institutions through money laundering. Because drug traffickers get their proceeds through banks, this is a testimony that their activities are aided by some financial institution that engage in money laundering deals with them by hiding the real source of the money (Mei, Ye and Gao 2014, p. 111). However, engaging in money laundering deals with drug traffickers can have serious implications for a company operating legally. Whenever detectives suspect a money laundering deal of such nature, this would immediately subject the organization to investigations that might affect the operation of the company. Worst still, being linked to such deals might portray a company as supporting drug trafficking something that might damage the image of a company, thereby contributing to its downfall (Woods 1998, p. 58). Money Laundering Case: The Bank of Credit and Commerce (BCC) scandal BCC's scandal of the 1980s and 1990s is a classical case of how financial institutions engage in money laundering activities that can have serious ramification on the operation of a company. BCC is a multination bank founded in 1972 by an Afghan entrepreneur Agha Hasan Abedi. The company's head offices are located in London and Karachi Pakistan. BCC grew very fast after its founding to the extent that, in a span of just a decade, the bank already had assets worth $20 and had grown its branches to more than 400 in more than 78 countries across the globe. This made BCC the 7th largest bank globally (Lohr, 1992). Despite the massive growth and performance registered by the firm, BCC became a subject of investigation in the 1980s for poor regulation. The investigation revealed that the bank had been involved in massive money laundering deals and shady deals, including gaining control in the American major bank. In 1991, the bank was raided by customers and regulator in some of its branches, locking all records to allow investigations to be conducted (BBC 2015). Upon investigation, it was discovered both in the UK and U.S. that the bank was formed with the aim of deliberately centralizing the entire regulatory review The investigators also discovered that that BCC operated under extensive secrecy as its activities were extremely complex and sophisticated to understand even to the bank experts. These were deliberately done to keep the affairs of the bank secret and allow the management to defraud the customers easily without being detected (Harvey 2008, p. 189). During the investigations, it was discovered that BCC had opened multiple accounts and laundering huge sums of money to prominent personalities, such as Saddam Hussain, Samuel Doe, and Manuel Noriega. Additionally, the bank was found to have been laundering money to criminal organizations among them being Abu Nidal and Medellin Cartel (Lohr 1992). Moreover, the Kerry Committee handling the matter also heard that the National Security Council also had accounts with the bank, which it used to transfer money and weapons for the Iran-Contra (Holley 1991). The scandal had serious ramification on BCC. Firstly, it resulted in the closure of the bank to help protect the customers from continued loss of their deposits through dubious means (Harvey 2008, p. 190). Secondly, the bank suffered serious reputation damage as its money laundering activities involved even terrorist organizations and individuals linked to human rights violations, such as Saddam Hussein. In fact, even before the closure of the bank, customers and investors had started withdrawing from the bank to avoid losing huge sums of money (BBC 2015). Accordingly, BCC's money laundering scandal not only tells of how companies engage in criminal activities but also how a reputed company came be reduced to rags for engaging in money laundering activities. Therefore, to ensure continued success, companies should ensure that high levels or integrity are maintained all the time to avoid engaging in money laundering activities or becoming an accomplice in any way. Ways in Which Managers Can Ensure That Their Companies Avoid Being Involved In Money Laundering As demonstrated in the literature, money laundering has serious ramification on a company. Therefore, managers of companies have a huge role to play to ensure that their companies do not engage in money laundering deals whatsoever. Fortunately, there are a number of strategies that managers can employee to prevent money laundering activities. Firstly, managers can prevent money laundering deals from being perpetuated in their company by observing customer due diligence (Ridley 2008, p. 16). Because the majority of money laundering activities is conducted with criminals that masquerade as customers, the best way to prevent such criminals from colluding with employees or directors to launder money is to ensure that their due diligence is observed (Hopton 2012, p. 56). This includes knowing them by taking all their details, such as the names, place of birth and residence, their occupation and any other information about the clients. Once the information customer due diligence is observed, the managers must ensure that the business relationship and transactions that all customers conduct with the company is closely monitored (Savona 2005, p. 54). This would ensure that any suspicious dealings involving money laundering are detected and prevented altogether. Secondly, managers can prevent their companies from engaging in money laundering by creating an ethical code of conduct and enforcing it. An ethical code defines the ethical behaviors that employees are required to portray. These include observing a high level of integrity and avoiding acts that go against the company's ethical code (D'Agostino 2002, p. 44). Thirdly, managers can prevent their companies from engaging in money laundering activities by making their business transactions easy to trace. Transaction traceability has been cited as one of the best ways of curbing money laundering. When transactions are not easy to trace due to the adoption of sophisticated and complex accounting system, it becomes difficult for a manager to know whether or not money laundering activities is being perpetrated by their employees (Unger and Busuioc, 2007, p. 42). Therefore, to ensure easy detection, managers should ensure that there is ease of traceability of transactions to determine the source of money for the company. This can be achievable by ensuring that all business transactions, regardless of the amount is recorded in a way that allow for easy traceability. Fourthly, managers can prevent money laundering activities in their company by instituting a strong internal control system. The best way for a manager to understand the activities and transactions in a company is to ensure that there is a working strong internal control system (Mei, Ye and Gao 2014, p. 112). This would ensure that any criminal or suspicious transactions that employees or managers might engage in is detected in the early stages and thwarted. Accordingly, these would prevent staff from engaging in transactions that are not approved by the company management. Additionally, managers can prevent their organizations from money laundering activities by hiring professional and reputed independent auditors to audit their books (Savona 2005, p. 66). Although Price Water House Coopers and Ernst & Young failed to detect the BCC scandal on time, employing the services of an independent audit team can help prevent money laundering activities by ensuring that such deals are detected early enough and thwarted. Conclusion Money laundering is a global phenomenon. Presently, billions of dollars of dollars are laundered years throughout the world. This is notwithstanding the fact that money laundering is an illegality. However, as demonstrated in the literature, money laundering does have serious negative effects on companies that operate legally. Being convicted of money laundering or being accomplice can damage the reputation of a company, thereby resulting in loss of confidence by stakeholders. It can also result in the closure of a company and being linked to terrorists or drug cartels, as was the case with BCC. Therefore, managers have a key role to play in ensuring that their companies do not engage in such criminal acts. Some of the techniques that managers can consider adopting include ensuring customer due diligence, ensuring traceability of transactions, creating a guiding ethical code, as well as instituting a strong internal control system and independent audit. References BBC 2015, 1991: International bank closed in fraud scandal, accessed 19 November 2015 http://news.bbc.co.uk/onthisday/hi/dates/stories/july/5/newsid_2495000/2495017.stm Cox, D 2014, Handbook of anti-money laundering. John Wiley & Sons, Oxford. D'Agostino, D. M 2002, Money laundering: Extent of money laundering through credit cards is unknown. DIANE Publishing, London. Harvey, J 2008, “Just how effective is money laundering legislation?” Security Journal vol. 21, pp. 189-211. doi:10.1057/palgrave.sj.8350054 Holley, D 1991, BCCI case sparks bank run in Hong Kong: Scandal: Depositors at Standard Chartered pull out their savings after a rumor spreads that its London license is at risk. The Los Angeles Times 11 August, accessed 19 November 2015 http://articles.latimes.com/1991-08-10/business/fi-315_1_hong-kong Hopton, D 2012, Money laundering: A concise guide for all business. Gower Publishing, Ltd., New York. Lohr, S 1992, World-class fraud: How B.C.C.I. pulled it off -- A special report. At the End of a twisted trail, Piggy Bank for a favored few. The New York Times, August 12, accessed 19 November 2015 http://www.nytimes.com/1991/08/12/business/world-class-fraud-bcci-pulled-it-off-special-report-end-twisted-trail-piggy-bank.html?pagewanted=all Madinger, J 2011, Money laundering: A guide for criminal investigators, third edition. CRC Press, New York. Mei, D., & Ye, Y., & Gao, Z 2014, “Literature review of international anti-money laundering research: A scientometrical perspective.” Open Journal of Social Sciences, vol. 2, pp. 111-120. doi: 10.4236/jss.2014.212016. Parkman, T 2013, Mastering anti-money laundering and counter-terrorist financing ePub eBook. Pearson UK, London. Ridley, N 2008, “Organized crime, money laundering, and terrorism.” Journal of Cyber Security, vol. 2, no.1, pp. 28-35. doi: 10.1093/police/pan006 Savona, E 2005, Responding to money laundering. Routledge, London. Stessens, G 2000, Money laundering: A new international law enforcement model. Cambridge University Press, Cambridge, MA. Unger, B., & Busuioc, E. M 2007, The scale and impacts of money laundering. Edward Elgar Publishing, London. Woods, B. F 1998, The art and science of money laundering. Paladin Press, Cambridge, MA. Read More