Money Laundering and Corruption - Essay Example

Money Laundering and Corruption Introduction Money laundering is the techniques by which criminals conceal sources of money through illegal means in order to avoid any suspicion from law enforcers. In every year, billions of money is laundered across the globe; thus, FATF (Financial Action Task Force on Money Laundering) is unable to produce a reliable estimate of money laundered (Chaikin and Sharman 2009, p.46). Despite the unclear estimate of money concealed, the research indicates that billion dollars are concealed each year, and these pose a critical policy concern by the federal. The government and various financial institutions have made significant efforts of preventing and detecting and fraud issues. This is when making transactions issues that involve dirty money. Corruption is a moral impunity that involves embezzlement of funds and bribery issues. The government employs operational issues such as use of the FATF for investing corruption and conducting money laundering as well as asset tracing investigations. The Risks Posed By Money Laundering and Corruption to the Global Financial System and International Business Money laundry and corruption pose varied risks towards global financial system and international business. Laundering of money and corruption are interrelated because they both pose risks to customers and their products or transaction made and also impose risk to geographical risk factors in varied ways. There are many highlighted cases that have posed risks to many economies across the globe. Therefore, FATF has made considerable efforts of preventing money laundering and corruption. Therefore, their independent organization have implemented anti monetary laundry and combating terrorist financing activities in order to reduce the risks that may arise from these threats. Understanding risk posed by these threats is significant. This is because it enables the government to provide recommendation for a reporting entity to implement the risk management systems and assess the level of enhanced due diligence (EDD) in order to reduce risks. Customer Risk Factors Money laundry and corruption issues expose political people and other public official to risks. The measures employed in money laundry are intended to encourage entities to report risk sensitive issues existing in the entity or exposing politically persons to high-risk to customers. The politically exposed persons (PEPs) status does not reveal that a person is corrupt or incriminated for being corrupt, but it reveals the potential risks money laundering contribute to customers and their transaction process. The risk that corrupt PEP poses to the financial system is seen as one way of putting customers under risk especially when they are making transactions (Karsten 2003, p.15). Business relationships with PEPs contribute to increased customer risks because of increased possibility that an individual is holding. For instance, politicians may misuse authority by influencing their personal gain with an aim of achieving their own advantage. Moreover, the nature of the position may lead to customer risk factors. Someone holding a position in a certain office may have a substantial opportunity and authority of assessing the funds or assets of the state. He or she can take control over the government resources including setting money for combating terrorism issues and other activities; thus exposing customers to greater risks. For instance, the court case of Nicolau Dos Santos Neto, the ex-president of Brazil is one of the incidences that reveal the corruption nature of PEPs (FATF Report 2012, p.14). The actual corruption vulnerability may vary depending upon the extent to which they exercise authority in the hierarchy. It is significant to recognize that not all PEPs cause risks to customers. However, risks vary depending on diverse factors and among them is the country origin of the PEPs, industry involved or products or services used. It is vital for the policy enforcers to take care by establishing risk control measures. This will guarantee that the transactions are reliable with the affirmed purpose. Secondly, legal persons and legal arrangements that are done especially by the corporate vehicles such as companies or trusts may pose risks to customers. The mere involvement of legal organizations or arrangements made on transaction can only alone increase risk, but the clients and transactions legitimately made in everyday economic activities. Certain elements especially the corporate vehicles, client relationship and transactional activities can serve as indicators for money laundering risks. Corporate vehicles serve as the driving force for anonymous access to the financial system for their beneficial owners. The only ways of controlling money laundry and corruption is by placing measures and monitoring as well as restricting unusual transactions. Some indicators that pose risks may include corporate vehicles, trust and company service providers and involvement of individuals who claim to be beneficial owners to the corporate vehicle customer. For instance, the case study of James Ibori, the Nigerian governor is one of the examples of creating customer risks for claiming to be the beneficial owner by using corporate vehicles. James Ibori embezzled the funds of the state by acclaiming to be the beneficiary owner of corporate vehicle. Another case is that of Pavel Lazarenko, prime minister of Ukraine who engaged in different corruption cases through using corporate vehicles. Geographic/ Country Risk Factors One of the risk factors posed by money laundry and corruption involves geographical risk considerations. These include the linkage of the customer to jurisdictions and the corruption level to a given country. The country risk factors can be identified as one of the credible source of high corruption levels when assessing risks (Kwok, 2005, p.11). Therefore, there are numerous ways of determining in case a country falls under the risk category and these are taken into considerations when making determinations. First, it is significant to understand the anti-corruption framework, standards of practices used in a given country. For instance, the UNCAC (United Nations Convention against Corruption) is required to represent the anticorruption policy and employ effective standards for reducing corruption issues. They should encourage financial institutions to verify customer identities and take reasonable steps towards determining the identity of beneficial ownership of funds being transacted (FATF Report 2012, p.24). Secondly, specific anti-corruption measures are other ways of assessing the country risk such as providing financial disclosures through public officials and disclosure of public contracts. Many countries use require public officials to submit a declaration of business assets periodically. Disclosing business assets and liabilities will make it possible for the government to detect unexposed wealth variations and illicit enrichment. The disclosure curiosity of the public official is to spot prospective conflicts of concern that may impact business activities. These disclosures are an effective tool for detecting corruption and promoting accountability; thus increasing trust in public institutions. Disclosures of public contracts can also help in reducing corruption. The purpose of AML is to provide a reference point from which reporting organizations can engage in EDD (FATF Report 2012, p.26). For instance, the case of Randal Duke, U.S congressman representing Southern California is one of the cases for asset reporting for detecting corruption related to money laundering. Product, Transaction or Delivery Risk Factors This is another risk posed by corruption and money laundry, and it impacts products produced in a country. It also affects transaction or delivery or services and other activities carried out in an economy. It affect specific products, transaction or delivery channels; thus posing higher risks of money laundering. For instance, the most affected services may include private banking and payment received form an associated third party. For instance, the case study of Augusto Pinochet, the Chile leader was a private banking customer is one of the victim whose name was changed and this exposed private banking at risks. This is because many customers developed the fear of investing in private banks; thus impacting business activities in private banking sectors. In addition, cash transfer in public offices and trust accounts have been reported in recent cases of grand corruption. The PEPs are among the groups that highly engage in corruption, in public financial institutions. Current International Efforts in Dealing with Money Laundering and Corruption Issues The international organizations have made significant efforts of dealing with money laundering and corruption issues. International Monetary Fund (IMF) is one of the international organizations that have made significant efforts of dealing with issues of money laundry and corruption. These associations are concerned with the possible consequences that may result from financing criminals. Therefore, the IMF has made efforts of combating against bribery and money laundering in diverse ways. They have developed common techniques across the globe and implemented effective policies and standards that are critical for averting this crisis. Additionally, IMF provides technical assistance to the financial and non-financial sectors as well as exercise surveillance over its member states with an aim of evaluating the issues of money laundering. They develop and implement programs that help their member economies in addressing the problem of money laundering and corruption. Currently, IMF works in partnership with corruption and AML in three key significant areas. One of them is assessment whereby IMF evaluates strength and weakness employed by FASP (financial sector assessment program). The assessment programs include compliance measures and methodologies employed for combating issues of money laundering (Cremades and David 2007, p.67). The other role that IMF plays is providing technical assistance towards improving the financial sector. IMF works in conjunction with Word Bank in providing considerable technical assistance for their member state across the globe. The technical help includes strengthening the legal policies and employing financial supervisory frameworks for anti-money laundry. Lastly, IMF develop policies; thus these policies aim towards analyzing international practices for controlling corruption and they offer policy advice on anti-money laundry issues. Another international institution that deals with the issue of money laundering is FATF. This is an international organization, which has a primary role of developing or implementing global standards or policies for combating corruption and anti-money laundering. This organization is committed towards combating crimes and developing effective standards for preventing terrorist financing across the globe. It works with other member countries in focusing on prevention and terrorist financing activities. They also employ strategic action plan that addresses the issue of anti-money laundry deficiencies; thus improving global compliance of money laundering cross all the jurisdictions. Lastly, the FATF monitors progress of various jurisdictions and the way they implement effective action plan vital for combating corruption and money laundry. They continue working with other jurisdictions in making adequate progress and strengthening preventive measures. This is through applying effective counter-measures for preventing terrorism activities across the globe. The international communities have made efforts of fighting against corruption and money laundering across the globe. This is through protecting integrity and stability of the international financial system. They also have another goal of cutting off the available resources to terrorists and making the situation difficult for those engage in crimes issues. They have made surveillance action and played an integral role of combating money laundered and financing of terrorism. Financing terrorist is linked with combat money laundered because this money originates from illicit sources (Muller, Kalin and Goldsmith 2007, p. 127). Therefore, international community has expanded their work to AML (anti-money laundering) and broadened their scope to tackle CFT (combating the financing of terrorism) activities. The international members encourage their members to comply with the implemented standards for improving and preventing the threats caused by money laundering. The financial Intelligence Units (FIUs) encourage the AML and CFT regimes to provide reports for the transaction of money made on any suspicious related issues for criminal or terrorism activities. FIU is an international organization that receives reports and tracks any suspicious information made upon money used for crime or terrorism activities. It is significant for the government to establish a specialized agency in charge of preventing money concealed for crimes issues. FIU has made significant efforts of processing financial information in connection with terrorism to criminal activities across the globe (MacIntyre 2007, p.217). This is significant because a lot of money is used for illegal activities; thus impacting many economies across the globe. FIUs analyze, disseminate the findings or results provided by the intelligence groups and deliver the information to local authorities. FIU is currently well known as operational FIU units in different developmental stages. Therefore, the aim of FIU is to prevent international financial organizations from laundering money to non-development activities. Corruption and money laundering (CMIR) are a recent activity in an organization that was established by the European Parliament. The agenda of this organization is to prevent threats posed by criminal activities. The organization aims to invite numerous institutions and EU (European Union) organizations, and judicial authorities to develop and integrate comprehensive strategies vital for combating crimes, corruption as well as money laundered. CMIR plays significant roles including analyzing and evaluating crime issues, corruption and money laundered across the globe. They propose effective measures that enable EU to prevent and counter measure these threats both at national and international level. CMIR examines and evaluate the current legislation being implemented by the union towards combating these threats. They have laws and policies; thus, they ensure that they are evidence based and supported by the available threat evaluation and monitoring of compatibility with basic rights. This should be in accordance with the fundamental rights and doctrine underlying the external action of the treaty (Shehu 2005, 231). Disadvantages and Advantages Money Laundering and Corruption Disadvantages One of the disadvantages of money laundering and corruption is that it increases insecurity of international flow of capital and dampen the impact of FDI (foreign direct investment). Terrorist financiers use loopholes and differences between economies anti-money laundry; thus, they move their funds by using futile policies or illegal institutional frameworks (Beale and Paolo 361). Secondly, countries such as developing nations that can attract illegal or dirty money for short-term development activities will suffer the consequences of FDI in the long-term. This can impact their effective business performance; thus contributing to economic degradation. Lastly, corruption and money laundry can erode the economic activities through changing the demand for hard cash; thus making exchange rate more unstable or unpredictable. This will contribute to another problem of inflation in an economy where law offenders practice illegal activities. Advantages The major advantage of money laundry and corruption is one of the effective techniques for identifying illegal activities or criminal from engaging in terrorist activities. This is because it enables the criminal investigators or intelligence group to determine the way money is derived and used in illegal activities. Another advantage is that the international financial entities will become an ideal place of protection from corruption and money laundering issues. Conclusion Money laundering and corruption pose varied risks to global financial system and international business. One of the risks they pose is customer risks whereby they threaten customers when transact funds. This may impact effective performance of business activities across the globe. The nature of the position of a person may contribute to customer risk factors. Legal arrangements that are done especially by the corporate vehicles such as companies or trusts may pose risks to customers. The country risk factors can be identified as one of the credible source of high corruption levels when assessing risks. Product, delivery risks of services also affects transaction or delivery or services in an economy. However, the international organizations have made significant efforts of dealing with money laundering and corruption issues. These internationals institutions include IMF, FATF, CMIR and many others have made significant efforts towards combating money laundry and corruption. Money laundering and corruption increases insecurity of international flow of capital and dampen the impact of FDI. However, it is one of the effective techniques for identifying illegal activities or criminal from engaging in terrorist activities. Bibliography Beale, K. D., & Esposito, P. (January 01, 2009). Emergent International Attitudes towards Bribery, Corruption and Money Laundering. Arbitration: The Journal of the Chartered Institute of Arbitrators, 75, 3, 360-373. Chaikin, D. A., & Sharman, J. C. (2009). Corruption and money laundering: A symbiotic relationship. New York: Palgrave Macmillan. Cremades, B.M, & David J. A. C. (2007). "Transnational Public Policy in International Arbitral Decision-Making: The Cases of Bribery, Money Laundering and Fraud." Arbitration: Money Laundering, Corruption and Fraud, 65-91. FATF Report (2012). Specific risk factors in laundering the proceeds of corruption. Assistance to Reporting Institutions, 1-46. Hopton, D. (2009). Money laundering: A concise guide for all business. Surrey, England: Gower Pub. Karsten, K. (2003). "Money Laundering: How It Works and Why You Should Be Concerned." Arbitration : Money Laundering, Corruption and Fraud, 15-28. Kwok, M. T.(2005). 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