(Tiểu luận) role of financial institutions in combating money laundering case of alibaba’s money laundering

Trang 1 FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCE ROLE OF FINANCIAL INSTITUTIONS IN COMBATING MONEY LAUNDERING & CASE OF ALIBABA’S MONEY LAUNDERING Instructor : Mr.. Since

FOREIGN TRADE UNIVERSITY

FACULTY OF BANKING AND FINANCE

ROLE OF FINANCIAL INSTITUTIONS IN COMBATING MONEY LAUNDERING

Hanoi, June 2023

Table of Contents

A Abstract 3

B Introduction 3

C Literature review 5

1) Money Laundering and its effect 5

2) Financial Institution’s Control Mechanism on Money Laundering 6

D Main content 8

I/ Overview 8

1) Definition 8

2) Types of money laundering 8

3) Types of financial institutions 10

4) Function of financial institutions 12

5) The relationship between financial institutions and money laundering 12

II/ Money Laundering 13

1) The process of money laundering 13

2) The history of money laundering 14

3) The impact of money laundering 16

4) Most famous money laundering case 17

III/ The roles of financial institution in combating money laundering 18

1) Anti-laundering organizations 18

2) AML guidelines for banking and finance 19

3) The effects of AML regulations 21

IV/ Case Study: The Alibaba Incident 22

1) Background 22

2) Analysis 23

3) Alternatives 23

4) Recommendations 24

E Solution and Recommendation 24

F Conclusion 25

G Reference 26

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The integrity and stability of the financial system and the economy as a whole are seriously threatened by money laundering It undermines the rule of law and good governance while facilitating the actions of criminals, terrorists, and dishonest government officials Since banks are frequently the first place illegal funds enter the legitimate financial system, they play a critical role in preventing and identifying money laundering This essay examines the role of financial institutions in preventing money laundering and the opportunities and challenges they may encounter It analyzes how financial institutions adhere to international standards and best practices for anti-money laundering It also takes a look at some previous money laundering cases to learn about how they were able to bypass the anti-money laundering system of financial institutions The paper ends with some policy recommendations for financial institutions and regulators to improve their collaboration and coordination in preventing money laundering and its associated crimes

To support the analysis, the paper draws from various sources, including academic literature, industry reports, and case studies The paper concludes by summarizing the key findings and implications for policymakers, businesses, and other stakeholders interested in money laundering prevention Ultimately, this paper adds to the growing body of research on the risk of money laundering and the essential role of finance institutions in combating it

In this paper, there will be inevitable shortcomings We would appreciate all the comments and advice in order to improve the report further more

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1 Reasons for choosing the topic

Money laundering has recently become a major concern for both developed and developing countries Governments all over the world are currently devoting a sizable portion of their budgetary resources to safeguarding the economy from financial criminals because such crime not only hurts the country in question but also the neighboring nations Financial globalization, on the other hand, makes it simpler for criminals to transfer money from one nation to another by getting around the prohibition against financial transactions between nations The initial cause of the socio-economic and financial disruptions between the nations was financial crime More recently, these activities have contributed to terrorism across the globe, fueling the need for countries where financial crime has occurred and money has been transferred to take coordinated action to safeguard their respective economies from terrorist attacks

According to a paper published by KPMG (2007), more than $1 trillion USD is reported to be laundered annually by drug dealers, arms traffickers, and other criminals Therefore, preventing money laundering and its consequences, such as financing terrorism, is still a significant challenge for national and international policymakers Financial institutions frequently serve as the intermediaries between money launderers and the financial system As a result, when criminals or terrorists unintentionally use a financial institution, it harms not only that institution's reputation but also the reputation

of the entire country Money laundering among developing nations raises the risk of default or fraudulent activity among financial institutions, which affects the financial stability of the economy

It is more crucial than ever to design and implement systems, specifically financial systems, in order to combat money laundering given the effects it has on financial institutions The goal of this paper is to examine notorious money laundering cases from

3 Scope of the Research

The scope of this research paper is to examine the role of financial institutions in combating money laundering, systems that developed countries have been implementing and previous money laundering cases, with one case study example from

a recent crime incident in Vietnam for fraudulent and money laundering

4 Structure of the Research

Structure of the research report: The essay is made with six main chapters: Chapter 1: Literature Review

Chapter 2: Overview

Chapter 3: Money Laundering

Chapter 4: Financial Institution role in combating money laundering Chapter 5: Case Study

Chapter 6: Conclusion

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funneling his ill-gotten gains through launderettes to construct the pretense of a

images of sophisticated multinational financial operations that transform proceeds of drug trafficking into clean money (Levi, 2002) This metaphor of dirty money, income, proceeds or whatever being washed in order to become white or clean, is still adequate for all definitions of money laundering (Unger, 2006)

Vaithilingam and Nair (2009) shows that countries have low incidence of money laundering if they have high development of internet adoption, low incidence of brain drain, sound legal, tax and financial systems On the other hand, the soundness of the financial system depends on the low level of ML, sound legal and tax system (IMF 2001) Therefore it can be argued that the soundness of the financial system depends on

a low level of money laundering Therefore, developing countries need to give importance to identify the impact of ML in their financial system, so that they can prepare appropriate rules and regulations to combat such effects (Kutubi, 2011) Money laundering was the subject of a thorough study by Unger et al (2007), who divided the effects of money laundering into short-term and long-term effects They claim that short-term effects typically occur within one or two years and include losses

to the victim and gains to the launderer, distortions of consumption, saving and, investment, artificial price increases, unfair competition, changes in imports and exports, effects on output, income, and employment In regards to the longer-term effects, Unger et al (2007) argued that these threaten privatization, changes in foreign direct investment, risk for the financial sector, solvability, liquidity, profits for the financial sector, reputation of the financial sector, contamination of legal business by illegal business, corruption and bribe

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nations, but it is challenging for them to identify the launderer in transactions Financial institutions are threatened because the prevalent crime of money laundering threatens their survival and integrity Therefore, financial institutions should take certain steps to stop money laundering, including hiring management that monitors compliance of institution policies with anti-money laundering regulations, collecting extensive consumer data, maintaining proper records of customer information and their previous transactions, training of financial institution staff, and other measures (Ajayi and Abdulkarim, 2010)

The majority of international initiatives on money laundering, including BASEL II, FATF, Wolfsberg Group, and EU Third Money Laundering Directives, place an emphasis on enhancing corporate governance and increasing senior management accountability of the banking firm to combat money laundering For the first time, the United States (U.S.) adopted the Money Laundering Control Act in 1986 to safeguard the system from money launderers Later, the majority of developed and developing nations adopted various AML guidelines created by various international organizations According to Mugarura (2011), the most effective way to combat money laundering and other frauds is through AML regulations, particularly those that deal with customer record keeping, employee training, and reporting suspicious transactions The fact that the FATF regulations are not legally binding renders their impact weak Until and unless they are incorporated into the country's national law, these regulations are ineffective This disadvantage leads to a lack of global compliance; as a result, it is necessary to implement FATF regulations by carefully tailoring changes to national laws and strictly adhering to penalizing and punishing laws

Sharman (2008) has brought to light the possibility that 170 nations could adhere

to a uniformed anti-money laundering system even though 200 countries differ in every way (cultural, political, economic, etc.) Because of external pressures rather than national will, anti-money laundering policies are ineffective in developing countries

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and prevents them from being fully discussed and evaluated

Jensen and Cheong (2011) had used published report compliance ratings from 2004

to 2010 in order to conduct research on developing nations in the Asia-Pacific region to assess their adherence to the adoption and implementation of FATF recommendations Overall results have shown that countries have made progress in the fight against money laundering crime and adoption of FATF standards, but closer examination of each recommendation separately has shown that about 90% of Developing Member Countries (DMC) are partially in compliance with the requirement for customer record keeping, about 80% are partially in compliance with the requirement for suspicious transaction reporting, and 72% are partially in compliance with the requirement for employee record keeping

Kutubi (2011) examined Bangladesh's development of an ALM system The financial institutions were given "guidance on money laundering prevention" by the Bangladeshi government A monitoring organization called the Financial Intelligence Unit (FIU) had been established within Bangladesh Bank The anti-corruption commission was also given the authority to ask a judge to order the freezing of a person's allegedly illegally acquired property The act placed certain financial institutions and the Central Bank under two categories of obligations: preventing and combating money laundering The act placed certain financial institutions and the Central Bank under two categories of obligations: preventing and combating money laundering Banks, financial institutions, insurance companies, money exchangers, any company or institution involved in the transfer or remittal of money, any other institution operating under Bangladesh Bank approval, and other institutions as may be mandated by the Bangladesh Bank are among the institutions that were required to take action to prevent money laundering

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I/ Overview

Money laundering is the conversion or transfer of property; the concealment or disguising of the nature of the proceeds; the acquisition, possession or use of property, knowing that these are derived from criminal acts; the participating in or assisting the movement of funds to make the proceeds appear legitimate

A financial institution (FI) is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange

The ways to launder money are always evolving as criminals have come up with creative ways to launder their illicit funds These are the commonly methods of money laundering:

a) Shells

Shell corporation is one of the most used terms in money laundering today A very popular type of money laundering, it refers to companies that don't have any physical operations, business activities, employees or assets Basically, they are legitimate business entities that are used to raise money and finance a merger, acquisition or operations of a startup company

Their mode of existence and operation gives room for launderers to use them as an avenue to hide illegal activities or avoid paying taxes For example, people do this by setting up shell companies in countries that guarantee anonymity, therefore, they can easily make deposits and transfer money under the radar to different accounts With shell companies, individuals can also avoid paying taxes and reporting income to relevant authorities Shells and shell corporations are of vital discussion when answering the question - what the types of money laundering

Individuals with unexplained excess credits place such money into bank accounts

of countries with less or no jurisdiction related to anti-money laundering The no disclosure policy in those tax haven countries makes the criminals feel safe, defeating the law

e) Money Mules

Cash smugglers who help carry the illegal cash across different countries and deposit that cash in countries with less stringent tax laws are equally liable as the money launderer is

f) Crypto currencies

The newly inserted online transacting currency in the form of cryptos such as Bitcoin and several others has increased the chances of money laundering Increasing amounts of OTC trade might result in the heavy transfer of funds between countries The lack of strict KYC norms in some crypto currencies has also acted as an invitation

to money laundering

Banks are one of the most important institutions that are used in money laundering operations, given the advantages enjoyed when compared to other institutions These advantages are convenient, accessible and safe for money launderers to use banks and

to access the International payment system which offers them the ability to transfer money through modern electronic methods instead of using the traditional methods The process of money laundering includes activities within the banking system starting from the deposit on the counter to use the international payment system There are six major factors that contribute to providing an ideal environment for money laundering: the role

of private commercial banks as lawyers for the client, the powerful clients who have a strong balance sheet, the secrecy culture of the company, the secret terms of reference,

to the general factors mentioned above, the actual products and services provided by the bank work also create opportunities for money laundering operations

Step 2: Layering

The second money laundering stage occurs after the ill-gotten gains have entered the financial system, at which point the funds, securities or insurance contracts are converted or moved to other institutions, further separating them from their criminal source Such funds could then be used to purchase other securities, insurance contracts

or other easily transferable investment instruments and then sold through yet another institution The launderer may also disguise the transfer as a payment for goods or services or transfer the funds to a shell corporation

Step 3: Integration

The third stage involves the integration of funds into the legitimate economy This

is accomplished through the purchase of assets, such as real estate, securities or other financial assets, or luxury goods

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Money laundering basically rewards corruption and crime and successful money laundering damages the integrity of the entire society, undermines democracy and the rule of the law Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and entire governments The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society

b) Economic impacts

Effect on Money Demand

In economies where there are no regulations on laundering, where there is a system that stores bank or customer information, and where banking secrecy is strictly enforced, the informal economy ratio to the national economy is high The cash inflows and outflows are easy for launderers With the rapid and uncontrolled inflow of money into the country, consumption rates and especially luxury consumption, are increasing However, significant increases in exports, imports, foreign payments deficit, inflation, interest, and unemployment rates may be significant These unstable demands for money caused by black money will negatively affect monetary policy

Effect on Growth Rates

Real sectors can suffer significantly from financial instability in the country As a result, foreign investors have become crucial for companies However, it isn't easy to attract foreign investors to the country in money laundering countries Because the price instability caused by black money in the financial system will affect the economy's credibility in the external environment, rational entrepreneurs will find it inconvenient

to invest in the country because they will also consider the country's risk while investing If the legal money escapes from entering the country, it will result in investment rates not increasing So there will be a long-term sustainable growth decline

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Severe losses caused by black money to sources of income cause significant problems in the financial system's functioning These problems experienced by the economy also have social consequences The increasing enrichment of specific individuals and groups causes social degeneration One of the most critical damages of black money to be determined is its negative effect on income distribution Although the negative impact of the decline in income sources and the differentiation in income distribution is difficult to measure, it is also challenging to compensate for social damage The gap between individuals in terms of income distribution increases the tendency to commit crimes and makes money attractive

Effect on Tax Revenues

Revenue from taxes has the most significant share in public revenues If this income

is low, it will raise the possibility that public revenues will not meet the public expenditures, and if this possibility occurs, budget deficits will occur Income generated

by black money is earnings that countries do not tax These gains will result in reductions in tax revenues

Effect on Financial Institutions

Sudden changes may occur in the assets and liabilities of financial institutions that are unknowingly used in money laundering, which will create a risk for the institutions The news of money laundering of these financial institutions draws the attention of the public authority In that case, the pressure on auditing for these institutions will increase, and the institution's reputation will be damaged