International Financial Institutions Risk of Money-Laundering - Example

International Financial Institutions Risk of Money-Laundering Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction With the liberalization of world trade, millions of business transactions are carried out daily some of which involve transfer of huge sums of money. Advancement in technology especially the increased use of the internet has made this possible. With new technology systems in place transfer of money can be done from any part of the world to the recipient in any destination within a very short duration. The primary aim of many businesses going into the world of business is to enhance their comparative advantage by penetrating into new markets (Watkins et al 2003). On the other hand, the existence of international financial institutions such as HSBC, MoneyBookers and PayPal among many others have been as a result of wanting to aid the process of transferring money for the increasing clients globally. However, as the customers have continued to increase, also does the number of transactions and as result, people with bad intentions have also joined wanting to use the legally established financial channels in wanting to transfer their ‘dirty money’ and make it look clean (Tang and Yin 2005). Money-laundering according to (Le-Khac et al 2009) is described as the process of trying to clean ‘dirty money’ by getting into the legal financial systems. Dirty money in this case refers to the money earned from illegal activities such as drug trafficking, human trafficking, terrorism, extortion and frauds. The more the financial transactions continue to increase, the more it is becoming increasingly very difficult for the financial institutions to deal with the menace. HSBC is the most recent example of those financial institutions that have had allegations labeled on them for allowing their systems to facilitate the transfer of illegal money. This is considered a major risk for institutions that are likely to be involved in the transfer of money globally (Vidyashankar et al 2007). Under this discussion, the issue of extensive analysis of money-laundering risk will be discussed by giving examples of different cases and also pay particular attention to the various policies that have been put in place to deal with this challenge. Global money-laundering cases Major international financial institutions are subject to losing their business by having certificates of registration withdrawn if their systems in any way are considered weak and failed to deal adequately with the problem of money-laundering. For instance, currently HSBC Bank is under very serious scrutiny by various organizations after allegations had been raised on the company that its systems are an encouragement to money-laundering activities (Hart 2010). This is the major allegation on money-laundering scandal that has come into the existence in the recent past. HSBC under the leadership of his CEO Barclays has received allegations for creating systems that are tolerant to activities related to money-laundering. HSBC is being charged for having ‘shameful ‘systems’ that have been a major cause of the numerous money-laundering activities in the company. Because of its failed systems and lack of competence to detect and prevent money-laundering activities, the bank has been charged a fine of $700 million go to US and the $1.3 billion to go to UK for encouraging mis-selling of various financial products to its market. The major problem with the bank has been blamed on its structure where internal controls actually have not been able to meet the required standards (The Guardian 2012). For instance, the institution is structured in such away that the managers in the higher rank including the CEO are not answerable for their activities. At the bank, every manager is working as an individual and heads a function as an independent. What this meant for the company is that many of the managers’ activities could not be audited. For example, the group head could not have the opportunity to have a look at those transactions that involve transfer huge sums of money to determine their validity. To the business, this kind of organization created a loophole whereby managers and external customers could have their transactions authorized even though they might not be legal. The scandal at HSBC is worth $15 billion which happened as large transfers of money through the bank and that were from various sources that were considered illegal. Major transactions in this scandal happened in its major subsidiaries namely Mexico and Russia and other countries that seem to bear much risk in terms of money-laundering. Lack of authority to group head, David Bagley to act is also considered as a major cause for the weakening systems through which money-laundering activities took place. In Hong Kong, the “Stooge and Non-resident Bank, is also accused of engaging in money-laundering activities. According to the police report, there is an upward trend in Hong Kong with regard to overseas frauds and deceptions involving remittance made to the bank accounts in Hong Kong and then transferred to the third parties (Cheung 2012). Further, the report by the police has warned that with the current trend, many cases are likely to emerge and which may be very difficult to tackle by the law enforcers. Even though some blame can be labeled on the advancement in technology and increase in the number of transactions, much of it go to the internal systems that are used as checks for the institutions finance transfer clearing systems (Han and Kamber 2005). Despite the good intention of many international financial institutions entering into the global industry of transferring money, it is emerging that money-laundering is becoming a major risk for many of these institutions. This is because many illegal activities such drug trafficking, human trafficking, frauds, extortion and terrorism have come in to complicate on the kind of the transactions and which involve large sums of money that go through this bank. If such like transaction goes through, then the involved financial institution is likely to suffer very big risk in terms of reputation, withdrawal of trading license and even huge fines which may paralyze the operations of the business (Kingdon 2004). Challenges to fighting money laundering It is estimated that approximately $500 billion is the amount of money that undergoes laundering every year globally. This is huge money and very big calculation for any institution involved. This depicts how the problem of money-laundering is rampant and continued to impact on the reputation of many institutions. And despite the effort being made to deal with this whole problem, many challenges which are major obstacles have continued to emerge. First and foremost, the globalization and liberalization of the world trade, many financial institutions have come into being which are not adequately regulated and that are likely to compromise the required standards for the need to make quick profits and grow their businesses (Rosdol 2007). On the same regard, globalization has been accelerated by the advancement in technology of which also contribute enormously to money-laundering activities in many of the financial institutions. Second, many of the financial institutions operate in very different markets and are based on very different regulations which are not consistent globally. What this means is that some regulations may not be sufficient in making sure that the required standards are maintained. In the global market, this is major setback while trying to enact different policies to deal with issues related to money-laundering (Tang 2005). For instance firm policies are required in ensuring that unlawful transactions are detected and reported before authority for further transfers. Because of the inconsistencies in regulations therefore, it is likely to remain a bit hard to completely wipe out all the activities related to money-laundering in the world market. Money laundering regulation Different regulations on money-laundering do exist even though they different across regions and countries. Because of the inconsistencies in the regulation, the Financial Action Task Force (FATF) which is a global standard body had been set to determine the various measures to be used against money-laundering and other related activities like terrorism and financing of massive destructive weapons (Le-Khac et al 2009). The ultimate objective of this body is to ensure harmonization of various jurisdictions on money-laundering by addressing the existing deficiencies. Further, the world community has made tremendous progress to fighting money laundering by giving the Ant-money Laundering (ALM), a priority. The purpose is to ensure stability in the international financial institutions. On the other hand, the International Monetary Fund (IMF) is trying to bring together all the major global players in the finance sector and letting to understand that money-laundering is a global challenge and that it should be fought by all if meaningful progress is to be made (IMF 2012). Conclusion Money-laundering is a global challenge and even though various regulations do exist to try and combat the crime, it is still evident that many international financial institutions are falling prey of the crime. This is because different criminals have continued to use the existing systems to clean-up their ill-gotten money. Advancement in technology and inconsistence are the major causes of the current situation with regard to money-laundering. In general, money-laundering continues to remain a global challenge and it elimination, is greatly depended on the enacting of regulations that are consistent and that regulate the operations of all international financial institutions. References Cheung, S 2012, Money Laundering: Suspected money-laundering cases in HK surge 29pc, retrieved on 6th October 2012, available at: http://www.scmp.com/news/hong- kong/article/1051907/suspected-money-laundering-cases-hk-surge-29pc Han, J and Kamber, M 2005, Data Mining: Concept and Techniques. Morgan Kaufmann publishers 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. International Monetary Fund (IMF) 2012, Anti-Money Laundering/Combating the Financing of Terrorism – Topics, retrieved on 6th October 2012, available at: http://www.imf.org/external/np/leg/amlcft/eng/aml1.htm Kingdon J, 2004, AI Fights Money Laundering, IEEE Transactions on Intelligent Systems, pp. 87-89. Le-Khac N, Markos S, O'Neill M, Brabazon A. and Kechadi, M-T. 2009, An Efficient Search Tool for an Anti-Money Laundering Application of an Multi-National Bank's Dataset, LA, USA. Tang, J. and Yin, J 2005, Developing an intelligent data discriminating system of anti-money laundering based on SVM, Proceedings of the Four International Conference on Machine Learning and Cybernetics, Guangzhou, Aug. 2005: pp.3453-3457. Tang, J 2005, A Framework on Developing an Intelligent Discriminating System of Anti Money Laundering, International Conference on Financial and Banking, Czech Rep. 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 Rosdol A 2007 "Are OFCs leading the fight against money laundering?", Journal of Money Laundering Control, Vol. 10, No. 3, pp. 337-351. Vidyashankar, G, Natarajan S and Sanyal S 2007, Mining your way tocombat money laundering. DM Review Special Report, Oct 2007. Watkins, RC et al 2003, Exploring Data Mining technologies as Tool toInvestigate Money Laundering. Journal of Policing Practice and Research: An International Journal. Vol. 4, No. 2, pp.163-178 Read More