Risk management cycle and strategy of Money laundring in the US - Essay Example

Risk Management Cycle and Strategy of Money Laundering in the US Introduction The issue of money laundering has been the center of debate for quite a long time. Criminals and other terrorist groups have continued to use money-laundering schemes to hide their intermittent sources of money obtained by fraudulent means. According to the Office of the Foreign Assets Control, the United States continues to lose large amounts of dollars through money laundering activities (World Bank, 2009, p. 42). The country is also facing imminent risk of ever-lasting criminal and terrorist threats since the rate of money laundering activities is still high. As of today, economists in association with financial analysts fear that the United States will face an unimaginable loss of foreign investors in the not too far future mainly because of money laundering risks. This is so because the presence of money laundering activities brings about significant risks, which tarnishes the safety and soundness of a country’s financial industry (Hopton, 2009, p. 55). This paper will seek to discuss the risk management cycle and strategy of money laundering in the US by using the steps involved in ‘the risk management cycle’. Overview of Money Laundering Typically, money laundering is simply the process in which an individual or a group conceals the source where they obtain money via illicit means. The ways in which fraudsters can launder money are several and they can vary in accordance with their sophistication (Merna, and Al-Thani, 2011, p. 129). Every year, the government of the United States quotes the amounts of money that the country loses through money laundering activities. Given that most of the money obtained through fraudulent means goes to fund criminal and terrorist operations, it is agreed that the risks involved in money laundering expand to encompass the safety and security of the nation (Beare and Schneider, 2007, p. 48). As a result, the United States is likely to be sitting on a time bomb since anti-money laundering agents are moving at a slower pace unlike fraudsters who are at the verge of compromising the face value of the United States’ financial sector (Golden and Golden, 2011, p. 53). Recently, the International Monetary Fund’s report revealed that two to five percent of the world’s general economy is composed of laundered money. Nevertheless, the task force charged with the duty of combating money laundering business, commonly referred to as the FATF, communicated that it is not easy to provide an estimate of money obtained through laundering (Chatain, 2009, p. 33). Thus, it could not provide a tangible digit showing the exact amount of money lost through laundering activities in the US. Likewise, academic commentators point out that the United States followed by the United Kingdom loses a lot of money every year through fraudulent business rampantly carried out by criminals and terrorists (World Bank, 2009, p. 60). Generally, in order to assure investors of a safe and secure business environment where people can work without the fear of losing their money, the need to have strategic policies aimed at ending this vice is imminent (Levy, 2003, p. 87). The graph below provides a clear illustration of money laundering in the US. Financial Crime Statistics & Graph in the United States Available at: http://www.prosebeforehos.com/image-of-the-day/07/21/financial-crime-statistics-graph-in-the-united-states/ [Accessed on November 21, 2012]. Risk Management Cycle Based on the idea that the US government must set in place a number of approaches capable of assessing and subsequently providing a solution to this burning problem, a risk management cycle can prove to be essential since it gives a list of steps suitable for guiding the implementation of the set policies. Simply, a risk management cycle gives a systematic series that the implementation approach should follow in order to reduce or rather minimize the possibility of a risk that could occur in the future (Merna, and Al-Thani, 2011, p. 52). It progresses through a seven-stage procedure. Documented evidence maintains that a risk management cycle is a pragmatic method of scrutinizing those money-lending institutions that seem to have relaxed in the facet of monitoring the financial dealings of their customers (World Bank, 2009, p. 78). Knowingly, even the most trusted and common customers of any bank can be a money-laundering group’s member. First Step – Risk Identification Currently, the government of the United States, American citizens, businesspeople as well as all concerned agents resolve to keep their funds in banks and in other financial institutions. With reference to tangible evidence documented by a number of researchers, the money obtained through fraudulent means goes to facilitate the operations of terrorists and criminals around the world (Chatain, 2009, p. 69). A US survey carried out in 2007 determined that money laundering is the fourth largest source of funds for terrorists after drug trafficking and psychotropic substances. Indeed, investors’ as well as the US citizens’ money is no longer safe (Golden, Skalak and Clayton, 2011, p. 66). In fact, the survey revealed that the whole country is at risk of a severe financial crackdown prospected to happen in the not too distant future. This entails that the problem of money laundering is putting the safety and security of the entire United States at risk mainly due to its effects (Hopton, 2009, p. 70). Additionally, since the United States has a hand in almost everything that goes on in this world, it can be seen that the money-laundering problem poses a significant risk to the whole world and everything in it (World Bank, 2009, p. 99). Therefore, it is identifiable that the risk of money laundering will continue to haunt this country and those attached to it for many years unless the concerned agencies take drastic measures to curb the vice. Economies will weaken, people will continue to lose their money, and investors will continue to be scared away from investing in the United States, which, in turn, will lead to deteriorated GDP chiefly due to criminal activities involving fraudulent acquisition of monies (Beare and Schneider, 2007, p. 63). Substantially, money-laundering operations force countries risk to lose whole lots of benefits because investors and other potential groups in the society find it hard to have their money circulate in insecure and unsafe economy. Second Step – Risk Measurement Although the Financial Action Task Force on money laundering (FATF) asserts that it is impossible to give the correct amount of money lost through money laundering every year, it does not imply that financial analysts and economists cannot estimate the risks incurred through money laundering. Absolutely, it is possible to measure, through estimation, the amount of losses incurred through money laundering every year or after any other given time. According the Anti Money Laundering report released in 2009, the amount of cash laundered to overseas accounts every year is in billions of dollars. As a result, these activities involving money laundering in the US pose a serious challenge for the government’s concern. In addition, the report also projected that the United States economy will lose up to 7.5 percent of its GDP due to money laundering (Chatain, 2009, p. 81). This is simply measurement of the risks that the United States is likely to incur as time goes by and for that, if it is impossible to measure risks, at least analysts are able to estimate the extent of damage that may result from money laundering (Hopton, 2009, p. 88). In 2011, JP Morgan ended up paying the United States Treasury Department a huge amount of money totaling $88.3 million after the Treasury officials suspected that the bank had involved itself in dubious transactions with Cubans in both 2005 and 2006. The officials said that the bank had transacted a lump sum of around $178.5 million with unreliable Cubans. Sensibly, the deal here is that the bank lost large amounts of money to expenses that it could evade were it not for money laundering cases in the US (Beare and Schneider, 2007, p. 86). Further, future prospects point out that the US will continue to lose money through money laundering methods which include but are not limited to structuring, bank capture, trade based laundering, cash intensive businesses, bulk cash smuggling, and black salaries (Golden and Golden, 2011, p. 79). Third Step – Risk Analysis Many researchers imply that there is no way that people can avoid risks completely (Merna, and Al-Thani, 2011, p. 52). However, there are steps which, when followed, can control, retain, avoid and/or transfer risks. The United States government with the support of financial institutions can control the amount of risks incurred through fraudulent activities by reducing the cases of money laundering in this country. Truthfully, this is not an easy task, but with the required mechanisms, the country can realize tangible change within the expected time. Analysis of these money laundering risks shows that it would prove difficult for the financial institutions and the United States government to control or retain risks involved in money laundering predominantly because the amount of the costs involved is too high (Levy, 2003, p. 98). Nonetheless, the government can achieve a bit of success in this battle by avoiding some of the significant risks that come along with money laundering, by transferring them (Beare and Schneider, 2007, p. 97). Graph showing how fraud pending cases continues to rise in US Available at: http://www.fbi.gov/stats-services/publications/financial-crimes-report-2010-2011/image/money-laundering-pending.jpg [Accessed November 21, 2012]. Fourth Step – Decisions Banks, the government, and other money financial institutions are the agencies that stand to lose lots of money in case a money laundering operation takes place. Having seen the extent to which money laundering can cost the country, the US government set up certain measures aimed at controlling and evading effects of money laundering (Chatain, 2009, p. 93). These approaches include the Money Laundering Control Act, which sanctions any criminal activities involving money laundering. The decisions made by the government and other responsible parties affect the wellbeing of the country’s financial security. Under the United States Code, there are stipulations that seek to contain ‘specific unlawful activities’ (SUAs) involving money laundering (World Bank, 2009, p. 107). In this case, the government made decisions based on attaining fraud-free economy through enactment of various containment acts and enforcement of the set prohibition codes. Under this spectrum, the government set protocols that require financial institutions to counter check every single transaction involving transfer or withdrawal of money exceeding $10,000 dollars (Hopton, 2009, p. 105). Furthermore, the government sought to keep a close eye on any financial transaction involving transfer of money with a dubious or suspicious source. Fifth Step – Implementation According to the Financial Crimes Enforcement Network, for the United States to attain an economy without the risk of money laundering effects, it must enforce any stipulated law, code, and/or protocol. The presence of these security measures aids in reducing, controlling, retaining, and avoiding as well as transferring the risks that may emanate from money laundering operations (Beare and Schneider, 2007, p. 114). In turn, the country will also reduce criminal activities, drug trafficking, and terrorist threats since these groups facilitate their operations using money obtained through fraudulent means. At the time of combating any money laundering operations, the government incurs large costs. These exorbitant costs are traumatizing to the country’s economic growth and the government can spend this cash on other beneficial activities (Merna, and Al-Thani, 2011, p. 225). Sixth Step – Monitoring This step involves keeping track of the set policies and decisions in order to ensure that the intended organizations carry out their activities by following them. Crucially, in order to ensure that the US does not risk losing its value in the financial industry, the AML and any other concerned agency should resolve to ensure that financial institutions implement the set decision (Golden, Skalak and Clayton, 2011, p. 103). JP Morgan contained a risk involving millions of dollars mainly due to risks involved in money laundering. To ensure reduced cases of money laundering, the government through the Treasury Department punished those financial institutions who failed to follow the right financial transaction protocols by fining such institutions as JP Morgan (Levy, 2003, p. 118). This is simply an implementation exercise. Seventh Step – Policies Studies show that the United States is entrusting such a serious matter with the wrong agencies. Believably, if the AML were capable of controlling the money laundering operations in the US, the country would not stand to lose such large sums of dollars every year (Hopton, 2009, p.122). Hence, it should set in place sequential yet strict rules and regulations that will see to the financial sector of the country becoming safe and secure for everyone (World Bank, 2009, p. 116). Potentially, there should be changes in the current protocols and codes as well as additional stipulations in order to hasten the war against money laundering (Beare and Schneider, 2007, p. 131). It should also involve the power of media in exposing those agencies and individuals said to have links with terror groups carrying out money laundering activities in the US land. Risk Management Strategy and Conclusion The government should instill strategic plans required by every concerned agency in identifying the required tasks with a view to reaching the set goals of reducing risks that emanate from money laundering. The risk management strategy should involve imposing heavy fines on those financial institutions found guilty of fostering money-laundering activities through transaction scrutiny failure (Chatain, 2009, p. 112). Moreover, the government should institute congruent methods of capturing terrorists involved in money laundering business and give them a long time in prison (Golden and Golden, 2011, p. 125). Finally, having discussed the risks and effects involved in money laundering, the US government should determine to implement new resolutions capable of combating this vice. References Beare, M. E. and Schneider, S., 2007. Money laundering in Canada: chasing dirty and dangerous dollars. Toronto: University of Toronto Press. Chatain, P. L., 2009. Preventing money laundering and terrorist financing: a practical guide for bank supervisors. Washington, D.C: World Bank. Golden, T. W., Skalak, S. L. and Clayton, M. M., 2011. A guide to forensic accounting investigation. Hoboken, N.J: John Wiley & Sons. Hopton, D., 2009. Money laundering: a concise guide for all business. Surrey: Gower Pub. Levy, S. M., 2003. Federal money laundering regulation: banking, corporate, and securities compliance. New York: Aspen Publishers. Merna, T. And Al-Thani, F. F., 2011. Corporate risk management. New York: John Wiley & Sons. World Bank, 2009. Combating money laundering and the financing of terrorism: a comprehensive training guide. Washington, D.C: World Bank. Read More