Risk of Money-Laundering among International Financial Institutions - Coursework Example

Risk of Money-Laundering Among International Financial Institutions Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction With rapid development in financial institutions, as a result of advancement in information flow, technology use and communication, money now can easily be transferred everywhere in the world without any big problem. This has resulted into the need to enact various provisions to combat activities related to money laundering through various financial institutions that engage in facilitating money transfer globally. According to (Aufhauser, 2003), money laundering “is the process of converting illegally acquired money from sources such as drug trafficking, terrorism and other various crimes in order to make it look as if its money obtained from legitimate sources.” The more the ‘dirty money’ gets into the banking system, the more it’s becomingly increasingly very difficult to identify its origin (Leong 2004). This way many financial institutions have found themselves in very difficult situation to deal with money laundering and that many of them have themselves in the press for allegations that their channels have been used for money laundering. The most recent and common example involves HSBC Bank. With this kind of allegations, then financial institutions that facilitate money banking globally are likely to taint their reputation and even risk withdrawal of their registrations. This essay is purposed to exploring this risk of money-laundering among financial institutions by looking various examples and also the various regulations that have been enacted to combat this crime that is affecting the global finance transfer industry. The financial institutions which are involved in international finance are facing the risk of the use of legal bank channels by some of their clients to transfer the funds which are illegally earned or obtained. The HSBC bank is currently facing such allegation which is just one example in recent times. This is one of the world major money laundering scandal that had almost put Barclays into a big shade. Barclays had been accused by the senate for entertaining money-laundering conduits within its systems for people dealing in drugs and terrorism (Blomberg and Orphanides 2004). The institution has been actually accused because of its structure in which the management is considered almost for all. In the bank for instance, if one is a manager, he is also an emperor not answerable to anybody. This is because every manager is responsible for his own department and issues related to compliance (He 2006). For example, in the bank, person from the head office and who is in charge of the group compliance was not allowed to knock in into a manger’s desk for regular checks to establish the sources of large amounts of dollar deposits that were made to the bank. According to the senate report, HSBC Bank had accepted about $15 billion which comprised bulk cash transactions that were made from different subsidiaries in Mexico and Russia and other world countries that are considered high risk in terms of money-laundering between 2006 and 2009. The company is also accused of not giving its head of group compliance, David Bagley to exercise his power and consequently reducing his powers to just one adviser (The Guardian 2012). What this implies is that the institution had failed to meet the required standards and regulations that are there to meet the customer expectations. This is because the internal systems had failed to keep on check the various transactions that involved large sums of money from people suspected to be engaging in illegal activities. Despite the complications that have been brought about by advancement in technology lack of accountability and transparency in transacting has been blamed as a major cause of this mega scandal. Money-laundering as an activity even though may seem as a short-term endeavor by individuals who engage in criminal activities like drug selling, at the end may have a very negative effect on the financial institution that facilitates these activities. Financial institutions face the risk of being listed as those institutions that do engage in illegal transactions even though this actually may not be their intention. Apart from reputation, the financial institutions also risk being struck of their licenses of operations for not complying with the expected standards. On the other hand, some financial institutions stand a chance of being heavily fined and this may have negative effect on the performance of the business (Johnston and Carrington 2006). Challenges in fighting money-laundering Despite the effort being made by the international financial institutions to deal with the issue of money-laundering, a number of factors have come to emerge as challenges to dealing with the menace. Globalization of the financial markets and financial flows is the evidence of how technology and use of internet to send money has evolved. With the creation of one large single market, money can now travel to every part of the world within a very short time. What this means is that some efforts being made to curb money-laundering are considered almost meaningless as new advancements are made every day (Johnson 2006). On the other hand, process of sending and receiving money within the financial market, seem to involve some regulations that are not consistent to dealing with money-laundering. What this means in the global financial market, is the inability to enact laws restrict the flow of money because of the existence of various laws by different countries. With globalization, global competition is eminent, and that more competitors are available and pressure thus continues to mount on various financial institutions to deliver on profits (Rosdol 2007). With this regard, it is therefore very possible for various financial institutions to compromise on the required standards in order to ensure that they are able to yield on their investment. The funds that are realized through money laundering has continued to increase rapidly, and the most recent estimate by FATF, the average amount of global money-laundering comprise between 2% and 5% of the world’s total output that is majorly gained through various crimes which include drug trafficking, corruption and fraud (The Guardian 2012). According to various commentators on issues related to money-laundering, the internet is considered as one of the major contributors of money-laundering also known as the cyberlaundering. According to Nigel Morris-Cotterill in the book, ‘How Not to Be a Money Launderer,’ the internet is nothing more than the messaging system. This is to mean that as banks try to transfer money globally through the internet they tend to send as a much information as possible. FATF argues that because of the large information that is being sent through the internet, it is not easy to identify all the customers. To money-launders this is a positive as wrong information can be given which is not easy to verify (Dolar and William 2007). Regulations on money laundering Even though different countries are known to have different policies with regard to preventing money-laundering, Anti-money laundering (ALM) policy is applied virtually in almost every country to ensure that there is some sanity in the transactions that are being made by different account holders who wish to transact in large sums of money. According to the AML, all banks are expected to abide by all the banks’ legal and regulatory obligations that are outlined in the Money Regulation Act of 2007 which is a Proceed of Crime Act of 2002 on the transfer of funds. The AML requires that all banks put in place appropriate policies and procedures that can be used to prevent and detect any activity related to money laundering well in advance (Hart 2010). While trying to make these policies meaningful, they are to be first of all communicated to the staff and must comprehensively address matters related to risk assessment and management and customer due diligence with regard to risk and monitoring measures. This is particularly important in ensuring that all the staff has a stake in preventing and detecting money-laundering activities. According to the United States Department of Treasury, Justice and Homeland Security, the AML should be scaled in such away that it deals with the nature and complexities involved in various money-laundering activities. According to (Schneider 2006) the policy will be able deal adequately with all money-laundering activities of all magnitudes. This is also important in identifying, assessing, monitoring and managing all laundering risks. While banks are expected to adequately to apply the AML policy to deal with money-laundering, they are also required to introduce Customer Due Diligence (CDD) and monitoring in order to measure, conduct continuous monitoring of business relationships and appropriate records in line with Money Laundering regulations. This is to ensure that at all times rightful information about the customer is sourced for to learn about their due diligence with regard to money-laundering (FitzGerald 2004). Conclusion Money-laundering is a major problem in the finance industry and more especially in those financial institutions that engage in transfer of money globally. This is because people, who engage in illegal activities, are likely to use financial institutions like banks to clean their money earned from illegal activities. With globalization and increase of use of internet in making financial transactions, money laundering has become so rampant. This is a big risk to businesses as they are likely to taint their reputation alongside being fined and deregistered from operating in the industry. Because of the great risk that money-laundering pose to the finance sector and even the customers, ALM policy has been put in place to ensure that all banks have in place mechanisms to prevent and detect any money-laundering activity well in advance. References Aufhauser, D 2003, ‘Terrorist financing: Foxes run to ground (Analysis)’. Journal of Money Laundering Control, 6(4), p. 301-305. Bagella M 2004, ‘Regional Externalities And Direct Effects Of Legislation Against Money Laundering: A Test On Excess Money Balances In The Five Andean Countries’. Journal of Money Laundering Control, Vol. 7, No. 4, p. 347-366. Blomberg, S and Orphanides, A 2004, ‘The macroeconomic consequences of terrorism’. Journal of monetary economics, Vol. 51, No. 5, p. 1007-1032. Dolar, B and William, F 2007, "The wealth effects of the USA Patriot Act: evidence from the banking and thrift industries", Journal of Money Laundering Control, Vol. 10, No. 3, pp.300-317. The Guardian 2012, HSBC money-laundering scandal almost puts Barclays in shade, retrieved on 30th September 2012, available at: http://www.guardian.co.uk/business/nils-pratley- on-finance/2012/jul/17/hsbc-money-laundering-barclays FitzGerald, V 2004, ‘Global financial information, compliance incentives and terrorist funding’. European Journal of Political Economy, 20, p. 387-410. Hart, J 2010 "Criminal infiltration of financial institutions: a penetration test case study", Journal of Money Laundering Control, Vol. 13, No. 1, pp. 55-65. He, P 2006, "Lawyers, notaries, accountants and money laundering", Journal of Money Laundering Control, Vol. 9, No. 1, pp. 62-70. 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