The legitimate economy Essay Example

The legitimate economy Essay Example The legitimate economy Essay The legitimate economy Essay A huge reason for trying to regulate the financial market is to stop financial crime. This is caused by the human nature of greed. However it is aided by three other factors, weak governments, poor national financial regulation and corruption. One of the biggest causes has become more reported since the disaster of 9/11 which is terrorism. The terrorist need to be funded and are doe largely through illegal gains. The effect of financial crime is quite severe, it can diminish the reputation of a countries financial sector desecrating its economy. National security can be threatened with an increase in criminals using the market for illegal purposes. Interest rates can be unstable due to the high integration of capital markets. Finally it reduces tax revenues through underground economies, competes unfairly with legitimate business organisations, damages financial markets and disrupts economic development. The FSA are concerned with 3 main types of financial crime, money laundering, fraud and dishonesty, and market misconduct such as insider dealing. One of the biggest financial crime problems is money laundering, this is defined as: The methods criminals use to hide and disguise the money they make from their crimes9 In other words it is the way that criminals make it incredibly hard to trace their monies origins back to anything illegal. This process can be done in small or large ways and has been made easier by the development of technology and its use in the global financial market. In 1920 the American Mafia found that they could do this in large amounts through starting legitimate businesses such as launderettes or slot machine companies. In todays society it is possible to transfer huge amounts of money in seconds all around the world through many different accounts and transactions. Each transaction makes it harder to trace the origins of the money. 10 It is currently estimated that the amount of money that is laundered world-wide makes up 2. 5% of the worlds gross domestic product (GDP). This constitutes to between an amazing 590 billion dollars to 1. 5 trillion. The lower figure would be the equivalent to Spains economic output per year. The Financial Action Task Force (FATF) reported these figures. The process of money laundering comprises of three different sections. The first is placement, the second layering and lastly integration. Placement was discussed in the case of Crown v Duff11. The placement is the break up of large sums of money into smaller amounts. Layering is where the criminal engages in a series of transactions to disguise the money from its source. Integration is where the money has re-entered the legitimate economy. Obviously the easier it is to launder money the more that will be laundered. The FATF was set up as an inter-governmental organisation, which aims to develop and promote policies to combat money laundering. Currently the FATF has 31 members. Money laundering was to be tackled by many different institutions in the UK. The police would obviously be close to the acts of criminals, which would include money laundering. However the police only deal with minor offences, major cases are passed on to specialised agencies such as MI5 and MI6. The Serious Fraud Office (SFO) is an independent governmental institution, which prosecutes for serious or complex fraud. The SFO was established in 1988 after trials, just after the FSA 1986, however it was created by the Criminal Justice Act 1987 (CJA). The flaw with the SFO is that it only investigates fraud of over 1 million pounds and so can be avoided if the money laundered is anything below this limit. The National Criminal Service (NCIS) works on behalf of the police and other law enforcers and is one of the special organisations mentioned above. The Economic Crime Branch was developed as a specialist division of NCIS primarily dealing with economic offences, such as money laundering. This was created after the FSMA 2000 but obviously not a bi-product of it. However the organisation would work closely with the FSA, this was greatly received news as John Abbott, the director of NCIS stated: This important agreement reflects the increasing focus on anti-monetary laundering activities that NCIS has long supported. 12 Since the FSMA the FSA have produced a Handbook of Rules and Guidance. This Handbook is like a code of conduct that all financial business organisations must follow or risk losing their licence of trade issued by the FSA itself. In respect to money laundering, all business organisations and individuals that carry out a regulated activity must be assessed to be competent, honest and is financially sound. Once authorised, the FSA supervise the financial businesses to make sure, among other things, that suspicious transactions are reported and that precautionary procedures are implemented effectively. All of the procedures are highlighted to the firms in the newly issued Code of Market Conduct and those firms that are found not to be following the code can have a financial penalty given to them or could even lose their authorisation of trade. Further powers are given to the FSA in respect to criminal activities through the Criminal Justice Act 1993 and the Money Laundering Regulations 1993. The FSA have powers of enforcement including the power to interview and seize documents. The FSA decide which cases to investigate through a policy of risk taking, they take in to consideration the impact the cases have on the regulatory objectives set be FSMA and the general principles of good regulation. However, the FSA has to consider the Human Rights Act 1998, stemmed from the European Convention on Human Rights, to ensure that they are not acting illegally. The SIB was given both legislative and administrative powers and supervised the numerous SROs and Recognised Professional Bodies (RPBs) within the financial market. The SIB gave licenses to the business organisations to trade in the UK financial economy but it was the RPBs who regulated the policies of the professional organisations such as the Law Society and Lawyers. The SIB was designed to combine self-regulation and statutory regulation covering a wider scope than had been seen previously. The FSA 1986 also supported for standard and administrative criminal sanctions, affording civil remedies to investors who suffered a loss as a result of contravention of its provisions, or those of sub-ordinate rules and regulations or the corresponding provisions of SROs. The CJA 1993 and the MLR 1993 aided the SIB in prosecuting those who knowledgeably or negligently aided in the process of money laundering. The labour party decided, as well as other reasons, that the process of regulation was expensive as well as the fact that there had been at least two major scandals in the 1990s which was evidence enough to suggest that the system was flawed. The FSA was created with its statutory objectives and its immense powers to regulate more of the financial market than ever before, making some people wary of making the institution too bureaucratic or unaccountable. The FSMA gave the FSA many of these powers creating the legal framework to support such a large organisation. It ensured that not only was the FSA the body to authorise and supervise but also to prosecute. The FSA would be able to work closely with other organisations such as the Serious Fraud Office. The FSA claimed that, in relation to money laundering: We will be doing more work across the whole financial sector to assess the effectiveness of firms money laundering controls and customer identification procedures. 13 However, statute helped the SIB to do exactly the same thing, the difference being that the FSA has complete control over the process including request or suggestions of new legislation to aid it in the fight against money laundering. Phillip Thorpe, MD of the FSA stated: the new act will for the first time give us new powers to instigate criminal prosecutions and to fine firms where their arrangements fail to come up to standard14 In conclusion, the SIB was on the right track in relation to money laundering; it identified where the problems could / would be and tried to enforce a Code of Conduct to ensure that financial organisations were operating at a standard that ensured that money laundering would be very difficult. However, the SIB lacked the powers necessary and werent able to supervise all parts of the financial services. There were many pieces of legislation made to aid the SIB such as the CJA and the MLR but neither allowed the SIB to enforce directly without going through the SROs. The FSA have been given more scope and enforcement as well as prosecution powers than the SIB ever had. The FSA is able to work with other organisations to ensure that they can meet objectives that the SIB lacked. However, I believe that the FSA could not be in such a powerful position without the aid of the SIB. The reason for this is because the SIB created a hierarchy that allowed self-regulation and had the policies to deal with money laundering but was unable to put itself into practice because of the lack of power and direct communication with the financial market. The FSA has been able to take the powers from the HM Treasury and the SIB who allowed the SROs to be abolished. The SROs wouldnt have been able to prepare the financial market in such a way as if the FSA came into force in 1986. To summarise, I think that the FSA 1986 or the SIB was a preparatory stepping stone in the evolution of financial services regulation and the FSA wouldnt be in the position it is now to deal with financial crime if this evolution had not occurred. However, the effectiveness of the FSA is yet to be determined and ultimately only time will show evidence of success or failure.