3/26/2018
VULNERABILITY OF FINANCIAL
SECTOR BUSINESSES TO
MONEY LAUNDERING
Research Proposal | Mr Subadar
Table of Contents
1.0
Introduction: ..................................................................................................................................... 2
1.1 Statement of the problem: ................................................................................................................. 2
1.2 Purpose of the study ........................................................................................................................... 2
1.3 Structure of Study ............................................................................................................................... 3
2.0 Literature Review .................................................................................................................................... 3
2.1 Stages of Money Laundering .............................................................................................................. 4
2.2 Factors making financial institution vulnerable to money laundering ............................................... 5
2.3 Need and Importance of detecting money laundering for financial institution ................................. 5
2.4 Effects of Money laundering: .............................................................................................................. 5
2.4.1 Economy....................................................................................................................................... 5
2.4.2 Erosion of financial sector............................................................................................................ 5
2.4.3 Reduction in Government Revenue ............................................................................................. 6
2.4.4 Socioeconomic Costs.................................................................................................................... 6
2.5 Measures to combat money laundering in financial institutions: ...................................................... 6
1.
Anti-Money Laundering ................................................................................................................ 6
2.
Financial Intelligence Unit ............................................................................................................. 6
4.
Evaluate and implement new processes ...................................................................................... 7
5.
Know your customer principles .................................................................................................... 7
2.7 Empirical Findings: Money Laundering and Financial Means of Organized Crime ............................. 7
3.0 Intended Research Methodology ........................................................................................................... 8
3.1 Research objectives ............................................................................................................................ 8
3.2 Source of data ..................................................................................................................................... 8
4.0 Methodology....................................................................................................................................... 8
4.1 Sample Design ..................................................................................................................................... 8
4.2 Questionnaire Design.......................................................................................................................... 8
4.3 Limitation of Study .............................................................................................................................. 9
4.4 Data Analysis ....................................................................................................................................... 9
4.5 Hypothesis test ................................................................................................................................... 9
4.6 Tentative “Gnatt table”..................................................................................................................... 10
References: ................................................................................................................................................. 11
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Title: Vulnerability of financial sector businesses to money laundering: A global phenomenon
Introduction:
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1.0
The new technologies adopted by financial institutions are making them increasingly vulnerable
to various risks such financial crimes which include money laundering. Martin Wheatley, chief
executive of the FCA, has warned that banks have still not done enough to combat money
laundering .International Monetary Fund (IMF) estimated that the aggregate size of laundered
money worldwide is 2% to 5% of global GDP in 1998. Statistics shows that the figures of money
laundering are gaining territory worldwide. Due to this it has become increasingly important to
make the financial institutions system more robust in order to detect cases of money
laundering and preventing measures also to be taken on national and international ground to
remediate against this phenomenon, the deployment of new sophisticated new technologies in
the financial sector provides new opportunities for laundering proceeds. The increase scope
and seriousness of these activities have led to call for strong regulatory and law enforcement
provision that will make it difficult to use financial sector and investment services for criminal
activities. Example creation of anti-money laundering and financial intelligence unit which are
not available in all countries.
1.1 Statement of the problem:
Today a country's economy largely depends upon the advancement of technology. It made the
job a lot easier, but it came with its own challenge. But with continuous financial crimes and
fraudulent activities that are being committed through financial institution it seems that there
are weaknesses in financial systems and has become of great importance to review the
information system as they are the sectors more prone to money laundering in an economy.
Martin Wheatley, chief executive of the financial conduct authority states that Britain's major
banks remain vulnerable to being used to fund terrorism and money laundering by criminal
gangs, despite being fined billions of pounds in recent years for failing to crackdown on illegal
financing. In addition the Financial Conduct Authority (FCA) warned that its analysis of 17 banks
found that half, including four major UK lenders, still did not have proper processes and
procedures for ensuring they were not involved in facilitating money laundering.
Money laundering scandals on bank such as Lloyds Banking Group and Barclays have been fined
for breaches of anti-money laundering rules. Deutsche Bank has been fined more than $630m
(£506m) for failing to prevent $10bn of Russian money laundering and exposing the UK
financial system to the risk of financial crime. In addition to the case of BAI in Mauritius and ExPrime Minister case of seizing of Rs800 million in his house. Hence the study is premised toward
assessing vulnerability of financial institution on money laundering
1.2 Purpose of the study
The purpose of my study is to assess the vulnerability of financial institutions to money
laundering and to find out measure how to overcome this phenomenon with new techniques,
implementation of more robust system and raising question of ethical behavior of professional
accountants and code of ethics. With many cases of money laundering on international and
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national hand it is obvious that an indication that accounting standards are not being complied
in firms and auditors and accountants are being unethical in their jobs
Today money laundering activities is everywhere. Undeniably Mauritius is of no exception as
cases of corporate collapse, money laundering, ethical negligence and various fraudulent
practices have been reported in several financial sector of the economy thus affecting the
financial stability and economic development of Mauritius. The study will be useful to assess
the following:
⇨ Assess the internal control system of financial institution on money laundering cases
⇨ Examine the unethical behavior and solution to overcome it
⇨ How regulatory bodies might be effective in assessing cases of money laundering to
maintain financial stability in the economy
⇨ Assessing the Know your customer(KYC) cases in banks and financial institution
1.3 Structure of Study
Chapter 2 - Focuses on the literature review where an overview of definitions, theoretical
framework and empirical evidences will be presented and discussed.
Chapter 3 – Illustrate how the study is carry out and information about the research methods
related to targeted population, types of sample size and questionnaire is designed.
Chapter 4 - Here it will deals with the analysis and Findings
2.0 Literature Review
The Financial Action Task Force on money laundering (FATF) response defines money
laundering
“The goal of a large number of criminal acts is to generate a profit for the individual or group
that carries out the act. Money laundering is the processing of these criminal proceeds to
disguise their illegal origin. This process is of critical importance, as it enables the criminal to
enjoy these profits without jeopardising their source.”
A channel or medium is required to carry out money laundering activity. The preferred medium
that a Money launderer chooses is the financial institution that is efficient and costs less while
carrying out the transactions (Masciandaro, 1999).Such activities ruin the integrity of those
financial institutions and affects their soundness or stability. As a result of their weak integrity,
they loses the investors confidence and eventually direct foreign investments are reduced. This
process in turn disturbs the long-term economic growth of the country. Barret
(1997),Masciandaro and Portolano (2003), Paradise (1998) and Quirk (1997) argued in their
studies that the economic and financial systems of a country are threatened by money
laundering.
Agarwal and Agarwal (2006, 2004) estimate from forecasts, from regression analyses and taken
from economic intelligence units, that global money laundering amounts to more than 2.0 to
2.5 trillion US$ annually or about 5-6% of World GDP in 2006 (44,444 trillion US$ in 2006) to be
contrasted against an observed figure of US$ 500 billion to one trillion in 2004 (Agarwal and
Agarwal (2004)) within the banking sector only. Recent IMF estimates on money laundering by
the drug traffickers who “introduce” the proceeds gained through the role of drugs into the
legitimate financial market amount to between 2-5% of world’s GDP, about 600 billion
annually. Target financial institutions of money laundering are banks and offshores companies.
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2.1 Stages of Money Laundering:
Money Laundering is the process of taking ‘dirty’ funds and converting it into ‘clean’ funds.
There are three stages in money laundering:
1.
Placement
2.
Layering
3.
Integration
Placement: Is the first stage in money laundering where the cash proceeds of criminal activity
enter into the financial system.
This is most critical stage for any money launderer as the criminal can effectively mask his
‘dirty’ funds by commingling his ‘clean’ funds and create an aura of legitimacy.
Examples of Placement include:
 Depositing into bank accounts via tellers, ATMs, or night deposits
 Changing currency to cashier’s checks, bankers drafts or other negotiable
instruments
 Exchanging small notes/bills for large notes/bills
 Smuggling or shipping cash outside the county
Layering: Is the second stage in money laundering where attempts are made to distance the
money from its illegal source through layers of financial transactions.
Examples of Layering include:
 Sending funds to different onshore and offshore bank accounts
 Creating complex financial transactions
 Loans and borrowing against financial and non-financial assets
 Letters of credit, Bank Guarantees, Financial instruments, etc.
 Investments and investment schemes
 Insurance products
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Integration: Is the third stage of money laundering. This stage involves the re-introduction of
the illegal proceeds into legitimate commerce by providing a legitimate-appearing explanation
for the funds.
Examples of Integration include:
 Buying businesses
 Investing in luxury goods
2.2 Factors making financial institution vulnerable to money laundering
As you can see in the graphic above, banking institutions are required by money launderers to
conceal their illegal funds. If their system is not robust enough this what make them vulnerable
to catch these money launderers.
Modernisation in technology, particularly in ICT has brought various different ideas banks or
other NBFIs to offer new products and services through new means of delivery. These new
products and services and often contain fast transmission of digitized information, facilitating of
fund movement and transcending distance within or across the national boundaries (Bradley
and Steward,2002) and anonymity (Philippsohn,2001). According to Mishkin and Strahan (1999)
and Berger (20003) speed, distance and anonymity are the key factors that are rapidly changing
the financial system. However, Masciandro (1998, 99) and Philippson (2001) implied that those
new benefits including e-banking and all sorts of e-money technologies have made money
laundering activities even more robust. As a matter of fact, FATF (2001) on their typology report
identified the online banking facility and internet as the major money laundering vehicle now
days. According to Chief Financial Officer Report (2002) “Technology changes have influenced
the operating strategies of many banks and Non-banks as they seek to compete in the
increasingly fast-paced and globally
2.3 Need and Importance of detecting money laundering for financial institution:
As they are the major financial instrument for money, if they go undetected at the first and
second stage they will have adverse consequences:
2.4 Effects of Money laundering:
2.4.1 Economy: Money laundering impairs the development of the legitimate private sector
through the supply of products priced below production cost, making it therefore difficult for
legitimate activities to compete. Criminals may also turn enterprises which were initially
productive into sterile ones to launder their funds leading ultimately to a decrease in the
overall productivity of the economy. Furthermore, the laundering of money can also cause
unpredictable changes in money demand as well as great volatility in international capital flows
and exchange rates.
2.4.2 Erosion of financial sector: While the financial sector is an essential constituent in the
financing of the legitimate economy, it can be a low-cost vehicle for criminals wishing to
launder their funds. Consequently, the flows of large sums of laundered funds poured in or out
of financial institutions might undermine the stability of financial markets. In addition, money
laundering may damage the reputation of financial institutions involved in the scheming
resulting to a loss in trust and goodwill with stakeholders. In worst case scenarios, money
laundering may also result in bank failures and financial crises.
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2.4.3 Reduction in Government Revenue: Money laundering also reduces tax revenue as it
becomes difficult for the government to collect revenue from related transactions which
frequently take place in the underground economy.
2.4.4 Socioeconomic Costs: The socio-economic effects of money laundering are various
because as dirty money generated from criminal activities are laundered into legitimate funds;
they are used to expand existing criminal operations and finance new ones. Further to that
money laundering may lead to the transfer of economic power from the market, the
government and the citizens to criminals, abetting therefore crimes and corruption.
As we have seen if at the crucial stage of money laundering the financial institutions are not
able to detect those money launderers, this is what will happen to the economic growth and
development of the economy.
The Quirk study also conducted empirical tests on the relationship between GDP growth and
money laundering in 18 industrial countries for the first time. It found evidence that significant
reductions in annual GDP growth rates were associated with increases in the laundering of
criminal proceeds in the period 1983­90 (Quirk, 1996).
2.5 Measures to combat money laundering in financial institutions:
1. Anti-Money Laundering: Anti money laundering regulations have become a much
larger burden for financial institutions and enforcement has stepped up significantly.
AML is a term mainly used in the financial and legal industries to describe the legal
controls that require financial institutions and other regulated entities to prevent,
detect, and report money laundering activities.. During 2011–2015 a number of major
banks faced ever-increasing fines for breaches of money laundering regulations. This
included HSBC, which was fined $1.9 billion in December 2012, and BNP Paribas, which
was fined $8.9 billion in July 2014 by the US government. An effective AML program
requires a jurisdiction to criminalise money laundering, giving the relevant regulators
and police the powers and tools to investigate; be able to share information with other
countries as appropriate; and require financial institutions to identify their customers,
establish risk-based controls, keep records, and report suspicious activities
2. Financial Intelligence Unit: Today, most financial institutions globally, and many nonfinancial institutions, are required to identify and report transactions of a suspicious
nature to the financial intelligence unit in the respective country. For example, a bank
must verify a customer's identity and, if necessary, monitor transactions for suspicious
activity. This is often termed as "know your customer". This means knowing the identity
of the customer and understanding the kinds of transactions in which the customer is
likely to engage. By knowing one's customers, financial institutions can often identify
unusual or suspicious behavior, termed anomalies, which may be an indication of
money laundering
3. Suspicious activities: Financial Institution must report transaction on a Suspicious
Activity Report (SAR) that they deem "suspicious", defined as a knowing or suspecting
that the funds come from illegal activity or disguise funds from illegal activity.
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4. Evaluate and implement new processes: Financial institutions are thus re-evaluating
their processes and technology and regulators expect that banks should approach their
obligations with energy and resources. As a result, banks have devoted significant
resources to build out and improve anti-money laundering compliance systems. That
process will continue indefinitely as regulators’ expectations expand.
5. Know your customer principles: The routine application of the KYC principle is a must.
External auditors regularly draw samples to check for the institution’s adherence to the
principle. Even if the institution is actually not misused for money laundering, noncompliance with the respective regulations can lead to administrative fines.
6. International Attempts to Curb Money Laundering: The Basle Principles suggest
policies and procedures in four areas to curb Money Laundering in the banking
sector:
⇨ Customer Identification - This re-emphasizes the wise saying 'Know Your Customer'(KYC)
⇨ Compliance with Laws-The rules and regulations pertaining to financial transactions as
performed in different Banking related statutes, must be experimented
⇨ Cooperation with Law Enforcement agencies - Banks should combine forces fully with
national law enforcement authorities to the degree permitted by precise local
regulations regarding Customer privacy
⇨ Adherence to the Statement- Holding fast to the Statement entails that banks need to
adopt policies that are unswerving with the Statement and guarantee that all staff
members are well-versed of the bank's policy in this regard
2.6 Notable cases on money laundering financial institution and banks: Empirical Findings
1. Bank of Credit and Commerce International: Unknown amount, estimated in billions, of
criminal proceeds, including drug trafficking money, laundered during the mid-1980s
2. Ferdinand Marcos: Unknown amount, estimated at US$10 billion of government assets
laundered through banks and financial institutions in the United States, Liechtenstein,
Austria, Panama, Netherlands Antilles, Cayman Islands, Vanuatu, Hong Kong, Singapore,
Monaco, the Bahamas, the Vatican and Switzerland.
3. In December 2012, HSBC: paid a record $1.9 Billion fines for money-laundering
hundreds of millions of dollars for drug traffickers, terrorists and sanctioned
governments such as Iran. The money-laundering occurred throughout the 2000s
2.7 Empirical Findings: Money Laundering and Financial Means of Organized Crime
Studies done by Friedrich Schneider: One of the most well-known economists doing macro
estimates of the size and development of money laundering is John Walker (2007, 2004 and
1999). His model of global money laundering is based on standard economic theory, in which
he tries to develop an international input-output-model. Walker determines the laundering
pathways by an “attractiveness index”, which is based on a range of factors that express the
opportunities and risks presented by the financial sectors/institutions in each country. He
claims that his approach to quantify money laundering is arguably superior to those based on
analysis of financial transactions, since there is no potential for the double counting inherent in
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the layering and placement stages of money laundering processes. Walker (2007) concludes
that since 2000 global money laundering may account for as much as US$ 3 trillion p.a. and that
business fraud exceeds illicit drugs as a source of laundered money.
3.0 Intended Research Methodology
3.1 Research objectives: This study strives to answer the main component of the research
problems and to assess the vulnerability of financial institution on money laundering. In this
regard, the subsidiary objectives are:
⇨ Assess the internal control system of financial institution on money laundering cases
⇨ Examine the unethical behavior and solution to overcome it
⇨ How regulatory bodies might be effective in assessing cases of money laundering to
maintain financial stability in the economy
⇨ Assessing the Know your customer(KYC) cases in banks and financial institution
3.2 Source of data: In conducting the research, both primary and secondary data will be used to
collect quantitative data. Secondary data from past research done on vulnerability of financial
institution on money laundering through journals, web publications, magazines, articles or
media.
Afterwards primary data will be fresh and updated data collected in order to analyze the matter
of vulnerability of financial institution towards money laundering critically. This would be done
though surveys, questionnaire sends to financial institution, banks and all. Also interviews
maybe done from student and professional perspective also. Primary research tends to be
costly and time consuming.
Research Instrument: Collection of data will be done through questionnaires, survey and
interview, which will help to obtained updated and real facts data. Therefore questionnaires
will prove to be helpful in making a research more pertinent as required data will be gathered
from banks and other financial institution
4.0 Methodology
4.1 Sample Design: In selecting the sample size, both probability and non probability sampling
techniques will be used. Concerning the non probability sampling, it will be used to select banks
and offshore companies in Mauritius and even the top big 4 companies in accounting and
auditing also as these firms tend to do lots of transaction daily with money and offshore
companies tend to make transfer of money this can tend to be a risk for money laundering. In
addition, 10 more financial and banking institution firms in Mauritius will be selected using
simple random probability sampling and questionnaires will be sent to each firm, addressing to
bank service providers.
4.2 Questionnaire Design: As data collection techniques, questionnaire will be sent to capture
demographic data of respondents and their opinions with respect to the research questions.
The questionnaire will be divided into FOUR parts, as described below:
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SECTION A – Understanding money laundering and if respondent ever heard about these cases
before in Mauritius.
SECTION B – Factors causing financial and banking institution more liable to money laundering
activities.
SECTION C- Regulatory bodies on money laundering such as Anti money laundering and
financial intelligence unit
SECTION D- Profile of respondent
4.3 Limitation of Study: It would be laid upon time constraint- no response to questionnaire
sent or delaying in answering them. In additional difficulty in fixing meeting for interviews with
professional bankers and accountants will be the main constraints.
4.4 Data Analysis: The result obtained from the survey will be illustrated graphically in order to
have a descriptive of the composition of the sample. In addition, a descriptive analysis will be
done which eventually will help in the calculation of the mean and standard deviation of result
obtained. Moreover the study will also make use of hypothesis testing
4.5 Hypothesis test: Hypothesis testing will be used to test the results obtained from the
questionnaire as survey, which will be included in the Analysis section of my dissertation next
year. Hypothesis test will be more specific and makes a prediction on experimental outcome as
it will be used to clear the purpose of the research activity. All the 4 research objectives will be
tested with hypothesis test, where variables will be in term of H0 and H1 as describe below:
1) H0- There is no difference in means concerning financial institution and banking and money
laundering
H1- There is a difference in means concerning financial institution banking and money
laundering
2) Ho- There is a difference in means concerning reasons of financial institution banking and
money laundering
H1- There is no difference in means concerning reasons of financial institution banking and
money laundering
3) Ho- There is no difference that financial institution banking sectors have an impact on money
laundering
H1- There is a difference that financial institution banking sectors have an impact on money
laundering
4) Ho-There is no relationship between the 2 strategies concept and money laundering
H1- There is a relationship between the 2 strategies concept and money laundering
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4.6 Tentative “Gnatt table”
Activities
1
Introduction
2
Literature Review
3
Overview of
Sector/Market/Economy
4
Research Methodology
5
Analysis of Data
6
Conclusion
Aug
2017
Sep
2017
Oct
Nov Dec Jan Feb Mar
2017 2017 2017 2018 2018 2018
Conclusion:
Money laundering is a serious threat to global financial system and good governance. It is also
boosting international crimes and terrorist activities. Governments in various countries today
have come up with different legislations to deal with this menace. However more needs to be
done in this regard. Moreover it is politicians, who are high risk customers who indulge in this
activity.
In times of globalization, financial institutions and banks would like to become important
players in the financial setup. This could be achieved only by ensuring that proper prevention of
money laundering norms are in place and have been setup effectively. In the absence of these
norms it is likely that the indigenous institutions and banks shall be black listed by the foreign
countries. Thereby there is a need to not only effectively implement the anti-money laundering
operations, but also to ensure that there is a constant review of the anti-money laundering
(AML) programme and timely up gradation as well. Banks need to strictly adhere to the Know
Your Customer (KYC) Guidelines, setup by the RBI.
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References:
⇨ Syed Burhanur Rahman, Attorney,(2009) Your story Money laundering New Delhi. [online]
Available at https://yourstory.com/2009/02/money-laundering-2/2009
⇨ The telegraph.co.uk Band and Finance[online] Available at
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10153728/Major-banksstill-vulnerable-to-money-laundering-says-top-regulator.html [ 1july 2013]
⇨ Agarwal, J. D. and Aman Agarwal (2006), Money Laudering: New Forms of Crime,
Victimization, presented at the National Workshop on New Forms of Crime, Victimization,
with reference to Money Laundering, Indian Society of Victimology, Department of
Criminology, University of Madras, India.
⇨ The guardian,Russia Money Laundering(2017)business[online]Available at :
https://www.theguardian.com/business/2017/jan/31/deutsche-bank-fined-630m-over-russiamoney-laundering-claims [2017]
⇨ An Electronic Journal of the U.S. Department of State • Vol. 6, No. 2, May 2001
⇨ Financier Worldwide,(2013) Anti-money laundering issues for financial institutions[online]
Available at: https://www.financierworldwide.com/anti-money-laundering-issues-for-financialinstitutions/#.WNuI62-GPcs(2001-2017)
⇨ Financial Intelligence Unit website Mauritius on Consequences of Money laundering
⇨ Anti-Money Laundering & Counter Terrorism Financing Act 2006 (Australia), the Anti-Money
Laundering and Countering Financing of Terrorism Act 2009 (New Zealand), and the Anti-Money
Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance
⇨ Nigel Morris-Cotterill (1999). "A brief history of money laundering"
⇨ David Winch, "Money Laundering Law Changes" (2006)
⇨ International Federation of Accountants. "Anti-Money Laundering" (PDF). Retrieved 27
March 2014.
⇨ "The Prevention of Money Laundering (Amendment) Act, 2005" (PDF). Retrieved 10
November 2013.
⇨ Schneider, F. (2010). “Money Laundering and Financial Means of Organized
Crime: Some Preliminary Empirical Findings”. Economics of Security Working Paper 26,
Berlin: Economics of Security
⇨ Walker, J. (1995). ‘Estimates of the Extent of Money Laundering in and
through Australia’. Paper Prepared for the Australian Transaction Reports and
Analysis Centre, September 1995, Queanbeyan: Jonh Walker Consulting
Services
⇨ Walker, J. (1999). ‘How Big is Global Money Laundering?’. Journal of Money
Laundering Control, Vol. 3, No. 1
⇨ Schneider, F. Klingmair, R. (2004). ´Shadow Economies around the World: What Do We Know?´.
Institute for the Study of Labour (IZA) Bonn, Discussion Paper No. 1043, March 2004
⇨ Smekens, M. Verbruggen, M. (2004). ‘De Illegale Economie in Nederland.’ Centraal Bureau voor
de Statistiek, 20 september, 2004
⇨ A Global Agenda: Issues Before the 52nd General Assembly of the United
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