European Communities (EC) Directive of March 1990 defines Money Laundering - Assignment Example

A. Money –laundering According to Article of the draft, European Communities (EC) Directive of March 1990 defines “Money Laundering,” as the conversion or transfer of property with the knowledge that such property is derived from serious crime. This is for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences. This act will help the casualties to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime. Due to money-laundering, illegally obtained money is made appear to be legitimate or from a legitimate source (Stessens). JP Morgan Chase & Cos underwent a review of its compliance of anti money laundering rules after it was suspected of aiding transactions involving drug money and sanctioned countries. An independent branch within the treasury called the Office of the Comptroler of Currency conducted this investigation into JP Morgan systems that are designed to monitor and filter such forms of transactions. These investigations came in handy when regulators were making efforts to crackdown on money laundering that included the transfer of drug money through the banking network as well as transfer of funds from countries like Iran, which are facing international sanctions. The investigations showed that JP Morgan had issues with their transactions monitoring systems and this prompted its payments to the Treasury Department an amount worth $88.3 million to settle for the charges on the allegations that it engaged in prohibited transactions linked to Iran and Cuba. This means JP Morgan engaged itself into transactions of large sums of money with criminals allowing the criminals to maintain control of proceeds they get from illegal means and ultimately provide legitimate cover to such money. This form of activities made the criminals cushion their proceeds and assets from the forfeiture laws hence facilitating their ambitions. JP Morgan admits having witnessed the transfer of money, in fact hundreds of millions of transactions and customer records per day and an annual error rates, which were a tiny fraction of a percent though they claim they had n intent of violating the laws. The industry has also maintained that such violations are almost always unintentional. Though it is likely that the banks in question will be accused of faulty oversight that made any unlawful transactions possible (Stessens). In May, JP Morgan made a loss of $2 billion as trading loss, despite the fact that the derivative risks were to even grow to $3 billion and even $5 billion, the investor argued that this was little for a company, which was healthy, and making money (Tett). The risk advisors argued that one loss did not matter much if it could be offset by some gains during trade. This act by JP Morgan revealed the kind of risks that banks engaged them into though the incentives encouraged much of risk taking. JP Morgan also found it better to engage in trade by taking enormous risks with its derivatives since they are cushioned by the government as the government is able to take taxpayers funds to bail them out in case of a crisis. Such huge risks in derivatives are also taken due to the pay that is tied to the short- term results. A requirement that shareholders posses more of equity capital makes them suffer consequences when big risks turn against the firm making the owners want to take huge risks putting more of their money to risk (Privault). During the US subprime crisis, the Credit Rating Agencies played some crucial roles at various stages though they are extensively criticized of the understatement they made of the risk involved with new and complex securities. This is the act, which caused the housing bubble, as three key Credit Rating Agencies were the enablers of the financial meltdown. It is argued that this crisis could not have occurred had the agencies not been there as the investors relied on them totally for their investment plans. Therefore, the higher a credit rating agency made the higher the flow of global investor funds into these securities an act, which funded the housing bubble. Because of the credit rating, agencies over $3.2 trillion in loans were advanced to homeowners with bad credit and undocumented incomes and their inability to pay lead to the housing bubble causing a meltdown in the economy (Tett). Credit rating agencies are evaluative measures given that they give reports on the risks involved with various investments. The regulators can therefore only reevaluate and re-examine and improve the agencies in their efforts to help in the level of risk determination. The agencies can also be encouraged by the regulator to address perceived or actual conflicts of interest as well as institute additional monitoring programs. Regulators enforcing U.S. anti money-laundering laws are required to issue cease-and-desist orders (Tett). B. Determination of LIBOR and its importance LIBOR stands for London Interbank Offered Rate; this is the interest rate at which banks can borrow funds in a marketable size form other banks in the London Interbank Market of which the rate is fixed on a daily basis by the British Bankers Association. This rate in its determination is derived from a filtered average of the world’s most credit worthy banks’ interbank deposit rates for huge loans of maturities of between overnight and one whole year. The LIBOR interest rates are not based on actual transactions. On every working day at around 11 a.m. (London time), the panel banks inform Thomson Reuters for each maturity at what interest rate they would expect to be able to raise a substantial loan in the interbank money market at that moment. The reason that the measurement is not based on actual transactions is because not every bank borrows substantial amounts for each maturity every day. Once Thomson Reuters has collected the rates from all panel banks, the highest and lowest 25% of value are eliminated. An average is calculated of the 50% remaining ‘mid values’ in order to produce the official LIBOR rate for the day (Fukuda). For short-term interest rates the LIBOR rate are considered as the most important benchmarks. In the professional financial markets, LIBOR is employed as the base rate for numerous financial products like the futures, swaps and options. In the process of setting the interest rates for loans, savings and mortgages banks will also consider the LIBOR interest rates as their benchmarks. This explains why LIBOR is monitored with great interest as it is used as the basis of almost all the other rates. These rates were first used in 1986 after conducting the test of their efficiencies in the first two years. LIBOR is normally set by 16 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe (Privault). Therefore, LIBOR is important because, it is the rate that the worlds most preferred borrowers borrow money. In addition, lenders lend for investments in the economy. The world’s most preferred borrowers also borrow at this rate and this is only allowed for corporations with good credit ratings. This rate is further important as it has the ability of diluting the effects of the FED rate cuts, which is considered great by investors. In the event that the LIBOR rates are high, the FED rates will take a vacation and in the process they become lower since high LIBOR rates restricts people from taking loans and this makes the FED discount rates suitable for the local person. In both the financial and the commercial fields, LIBOR is employed to be a reference rate in three major interest rate fixing instruments that range from standard interbank products, the commercial field products as well as the hybrid products. It is important to know that the use of LIBOR can be abused resulting into a criminal offence that is investigated and prosecuted. C. Evaluate what has gone wrong with the LIBOR system London Inter Bank Offered Rate is the most important set of numbers in the global financial platform. This is because it holds the trust of the financial system participants and all the fundamental assumptions are known to be the truth of which if the otherwise turns out then there is a scandal as was reported in the summer. LIBOR is used, as a benchmark for interest rates all over the world and this is arrived at when all the big banks are asked what cost they would borrow money currently. Once these rates are determined huge amounts of money in terms of derivatives, corporate loans and mortgages are pegged on the rates. The mistake that is with the LIBOR systems is that they are rigged and the evidence is that Barclays agreed to pay the regulators for the manipulations they undertook with a crop of other banks also under investigations of the same scandals (ARM indexes LIBOR). Given that the LIBOR estimates are not audited, rigging them has never been a hard nut to crack. This is because they are never compared to the market prices given they are simply put together by a group of people without being supervised by the government or the regulator. The banks were found to simply tell some simple lies in order to manipulate the LIBOR (Fukuda). Banks and relevant financial institutions were lured into this given the lucrative deals that they experienced when the traders made big bets that depended on the LIBOR hence with small change in the rates would hand them quite big sums. Banks also used the words of the Commodities Futures to distort the LIBOR during the financial crisis; this is because if their estimates would be higher, the regulators and all the stakeholders would suspect they are going under and start to worry. This prompted them to set the LIBOR lower to make them and their systems appear stronger, and this was a fabricated lie since instead of bringing out the true picture LIBOR reflected what the banks wanted the public and the stakeholders in the financial sector to believe. As a result of the freedom that was left for the banks to set the LIBOR rates, they resorted to lies and discrepancies all of which only lead to their favor making self regulation an uphill task (Privault). It is quite painful that the wrong acts, which lead to the crushing of the financial system, could be detected in time but trust on the banks to care for their welfare deterred them from interference only to be disappointed. This also happened partly because of greed making us believe that self-regulation is not an appropriate control most so when the control function is left to the individuals to be controlled. Reputation is also not a factor as the traders are only paid depending on the amount they make to the banks and the reputation they keep is never recognized. The LIBOR system as a regulator proved non-trustworthy as far as the financial world is concerned (Fukuda). D. Why the western regulatory not acted or have been slow to act to stem or to impose penalties for these violations of LIBOR systems A report by Financial Services Authority shows that the western regulatory authority has failed to act or impose penalties for the violators of the LIBOR systems because of a variety of factors. This is despite the fact that it was proved Barclays and Royal Bank of Scotland falsely inflated or deflated their average interest rates in order to illegally benefit from trades or to an extent give the impression that they are more creditworthy which was different from the actual case. In the FSA’s focus to deal with the crisis plus the facts of dealing with contributions and administration of LIBOR, these activities were not regulated acts. This made FSA as a regulator quite narrowly focused in handling LIBOR related issues. The reasons why the regulators were reluctant to act or did not act at all is due to the following reasons. They were not able to identify ways of knowing the irregularities because of the absence of the ways of identifying and assessing their impacts. The new regulatory bodies must therefore establish good risk and governance frameworks to enable risk based prioritization decisions. Secondly, between the western regulatory authorities and the LIBOR there was no clear division of responsibilities. There is therefore the need to clearly distinguish the roles and responsibilities of each of the authorities, which include those for receiving, and sharing LIBOR related information and the prompt means to act on such information as accurate as necessary. Both the FSA and PRA were not involved in consultations for the establishment of clear internal roles and responsibilities related to LIBOR (Fukuda). Such inclusion are necessary so that there can be proper coordination and control on the same issues. The sharing of intelligence was not appropriate among the regulatory bodies, which made realization, and action of information was not adequate. For the sake of all staff behavior, such principles require reinforcement to be quite effective. Given that, there was no clarification of responsibilities, that the FCA and PRA senior management should clarify responsibilities in relation to the use of information from external sources including analysts reports, media articles and market data. This is to ensure that there is no conflict of information that is used in the regulatory responsibilities of the bodies to ensure that these failing in systems do not occur again (ARM indexes LIBOR). Another crucial factor that caused a mishap is the lack of the effective working arrangements for the sake of circulation and sharing of information. This included the aspect as to whom information ought and should be circulated and the action required of the recipient of the information of such reports. If this was successful, abuses such as the possibility that traders were in direct communication with the bankers before the rates of interest were set hence accuse them of the insider information. If the regulators had conducted the investigations in time, the crisis would have been averted through prosecution and establishment of intensive measures. D. Measures that are being taken to ensure that manipulation of LIBOR is not happen again. After the act by banks and traders made the banks incur such heavy costs in terms of fines and disgorgements to the authorities, it was time to take precautionary measures to ensure that the same mistakes do not occur again. Among the measures taken, include the banks taking action on their side as the regulators also strive to formulate actionable measures. Such measures may be long term or short term. The recommendations for LIBOR improvement entail; Regulation where a new regulatory structure is instituted which include criminal sanctions for the individuals who try to manipulate the measure. Secondly, there is the governance aspect where the oversight and governance role is transferred from the British Bankers Association. Finally, we will look at the rate itself where a range of technical changes will be integrated to make the system work better and this entails streamlining a range of currencies and the maturities, which are currently in use. Regulation is the first step for the credibility while reforming LIBOR given that it will ensure that there is clarity, consistency and effectiveness in the regulatory regime in place. The FSA is also given room to take action against those who break the rules while providing confidence that no misconduct will be left unseen or go unpunished. To ensure that such unacceptable behavior are dealt with accordingly stronger regulatory measures are required and these will include:- the submission and administration of LIBOR should and must become regulated by the FSA. Secondly, the point men in these processes should be approved by the FSA. Thereafter, the government should amend the financial services as well as the markets so that they can allow the FSA to have prosecutor power hence able to prosecute manipulation or attempted manipulation (Fukuda). When it comes to governance, there should be an introduction of a code of conduct for the submitters of which this code of conduct will introduce specific guidelines that prescribe the introduction of corroboration by trade data. There will be tough new systems and controls, which will be put in place of which the submitting firms will be subjected to. Under such governance rules, transactions will undergo some form of recording with the need for regular external audits of the firms. On the LIBOR rate, there should be some immediate changes in which the LIBOR rate itself is derived. This derivation procedure should be designed in such a manner that it is able to establish a link between transactions and the submissions by the firms. Major stakeholders as a way of ensuring credibility have for a long time advocated this aspect. The volume of transactions that forms each LIBOR benchmark and the variance across different maturities and currencies are closely examined given that some of them contain very few trades while some of the LIBOR benchmarks are used for very few transactions (ARM indexes LIBOR). Works Cited ARM indexes LIBOR. Butler, NJ: HSH Associates, 2000. Print. Fukuda, Shinʼichi. Market-specific and currency-specific risk during the global financial crisis evidence from the Interbank markets in Tokyo and London. Cambridge, MA: National Bureau of Economic Research, 2011. Print. Privault, Nicolas. An Elementary Introduction to Stochastic Interest Rate Modeling. 2nd ed. Singapore: World Scientific, 2012. Print. Stessens, Guy. Money laundering a new international law enforcement model. Cambridge: Cambridge University Press, 2000. Print. Tett, Gillian. Fools gold: how the bold dream of a small tribe at J.P. Morgan was corrupted by Wall Street greed and unleashed a catastrophe. Free Press hardcover ed. New York: Free Press, 2009. Print. Read More