Financial Institutions and New Challenge - Essay Example

Financial institutions and new challenges: The risk of money-laundering Name: Student Number: Course Code: Word Count: Date of Submission: Introduction The world has either grown or turned into a universal village, community or market, depending on one’s perspective, where trade is not local anymore. Nations sell to and buy from amongst themselves at larger scales. International finance can be viewed as a result of the international trade between these countries. Even with the slow down trends in the world economy, activities of various nations continue to affect international relations. International finance is, therefore, inevitable. Supplementary to that, the strength of a country’s economies determines the dominance of its currency in this field. With these contributory ideas, this paper purposes to discuss the activities that international finance institutions engage in and the new challenges they encounter in this business. Broadly considered as a branch of financial economics, international finance is the economics of international money and involves the global financing systems. As the basis of this paper, concern is with the legalities of multinational financing, global funds management and genuine nature of multinational corporations and investors. The existence of these macroeconomics requires international finance institutions and banks for the legal transfer of funds internationally. The financial institutions in this business face a number of new challenges. Focussing on these challenges, this paper puts more perspective on the risk of money laundering. This is where the clients of international banks use the legal banking channels of their bankers to transfer funds or wealth of illegal acquisition. Financial institutions facing new challenges The necessity of international financing systems makes possible the consequential international financial crises. In the same way, banking risks for the banks come along with the existence of banks. These crises and risks depend on the nature of financial system used internationally. According to Hines (2009) international finance centres are the territories of choice for traders and investors because of they have low tax rates. These rates together with other attractive attributes of the centres improve the profitability of international business operations in such areas. The general expectation is that the financial facilities should operate efficiently and with adherence to the governing laws. The challenges faced are to be dealt with appropriately to promote good business. Hiring and managing employers is a critical aspect that is an example of a challenge. Hiring by the firm is a process and not a mere event. It has do be done with care so that the management ensures it know what it has to, about its employees and in what conditions to maximise their potential. Other challenges include strategies to be implemented for growth, capacity of response to risks and the power of competitors. Money laundering At this point focus is on money laundering as the major challenge to financial firms in this discussion. It comes with registering personalities and corporations as account holders in a bank, or as clients to international financing companies. Different publications and articles define and explain money laundering with a common thought, the intention to legitimize funds, assets or wealth acquired from criminal activities. Weber (2007) says money laundering refers to the act of illegally earning funds and, unfortunately, through proper banking procedures, converting these funds into those that are seemingly clean and legitimately obtained. The general reason for this is to distant oneself from the criminal activity that generated these monies. The subject criminals, therefore, take advantage of the financial institutions and banks to which they are clients to achieve this. By global agreement, the offence of money laundering occurs when one possess criminally obtained money with the intent of passing it through legitimate bank account to disguise its illegality. This is a financial transaction that has the purpose of covering up money originated from crime (Weber 2007). Such crimes include large scale trade of illegal drugs, human trafficking and piracy, among others. Most of the money obtained in this nature is free of tax and so the total profit in it motivates the activity. The methods and means of laundering have grown creative and deliberately complex over the years, to ensure difficulty in tracing the origin of suspicious money. The objective is to conceal the true source, ownership and intended use of the ill-gotten gains. By that, the criminals hide wealth, evade taxation, avoid prosecution and increase the profits they gain in criminal ways. According to a report by the Australian Transaction Reports and Analysis Centre, there are three main stages in the money laundering process. First is placement which defines how the illegitimate assets or funds introduced in the finance system. What follows this is layering, the process of moving and diffusing the funds to conceal them and make them more useful to the criminals. Lastly, integration follows. This makes funds available for the criminals to use in both legal and most probably other illegitimate businesses. An example of such activities is the illegal purchase of other assets like real estate businesses. It shifts the attention from the illegal nature to the current permissible engagement. Trends, threats and effects of money laundering The creative, massive and evolved nature of laundering makes the subject matter a potential threat to the global community and bankers in play. This fact also ensures the severity of it effects. The trends encompass the modernised modes of operation and new ideas to use of the illegal money, difficult to suspect. Even with the advanced banking technologies, launders still find their ways around this. Research (McDugall 2006) theorises that the activity has significant threats to the international community and the integrity of financial institutions. Regulatory and legal tools are therefore needed analyse and ascertain the extent of the effects; this is achievable with help from other legal mechanisms. In as much as the effects of laundering are widespread, with spotlight being on the international financial system, it challenges the stability and credibility of these institutions. If allowed then in a sense the criminal ensures that crime pays. That is disadvantageous for a country since it portrays itself as a hub for the activity. It, therefore, attracts criminals and enhances corruption and failing economy. Money launders intentionally make the process complex by using companies that engage their finances in other legitimate businesses. Most of these are in the private sector of business and that undermines and paralyses this section of the market. An example is transportation of drugs in food stuffs. The money obtained from the sale of these drugs is then invested in the same food business. Mackrell (2006) implies that it also leads to loss of control of economic policies. The practice renders these policies dysfunctional and gives power to criminals. Apart ruining the reputation of a financial institution, it causes a decline in stock value of the institution, loss of profitable businesses; the firm incurs investigation costs and fines, and even termination of the banking facility. Conditions that promote money laundering These are the conditions and environments that make it possible for the activity to go on. In the financial sector, it is the weak policies that are rarely respected that promote the illegal act. The launders take advantage of the systems that are not bound by these policies. Also, the penalties enacted for such offence are ineffective and so the big institutions deliberately involve in the process for larger profits. The complexity with which the process is carried out has made it difficult to pinpoint the perpetrators. The personalities who should help combat the activity are mostly corrupt and easily accept bribery from the criminals; this makes the fight even more difficult. Fighting money laundering The severity of the consequences of the unlawful activity necessitates the adoption and adherence to the policies that fight money laundering. The suggestion by Evans (2000) is that all the parties involved in the business should come together and join efforts to fight and contain money laundering. The financial institutions contribute by proper identification of customers and client, and properly keeping records of their clients. This ensures that anonymous accounts are not operated. Increased diligence also helps by investigating suspicious transactions and availing the information to relevant authorities. They must therefore comply and corporate with the relevant competent authorities by following given instructions. Additionally, administrative and regulatory bodies should be given the mandate to prosecute and punish, universally, any entities found guilty of the crime. Conclusion Conclusively, this discussion establishes that money laundering is a growing universal problem. It has economic impacts and consequences that threaten the international relations and demoralises social values. International financial system in Australia and elsewhere need to adopt systems of curbing this buy identifying and reporting their clients involved to law enforcement agencies. Reference List Australian Transaction Reports and Analysis Centre, Introduction to money laundering, Retrieved October, 10, 2012 from http://www.austrac.gov.au/elearning/pdf/intro_amlctf_money_laundering.pdf Evans, JL 200, International efforts to contain money laundering, Bankers Club, Mexico City Hines, JR 2009, International Financial Centres and the World Economy, University of Michigan, London. Mackrell, N 2006, Economic consequences of money laundering McDugall, AL 2005, ‘International arbitration and money laundering’ White and Case, Vol. 20, no. 5 Weber, R 2007, ‘Money laundering’ United States Attorneys' Bulletin, Vol. 55, no. 5 Read More