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The Impact Of Financial Crime

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Published: Wed, 03 May 2017

As nowadays more markets are emerging and there is an increased in financial sector thus they become possible targets for financial abuse. Financial crime is a critical issue and it has likely devastating economic, security, and social impact. It encourages corrupt public officials, drug dealers, illegal arms dealers, terrorists and others to run and enlarge their criminal organisations. Financial system abuse has negative impact on a country’s macroeconomic performance which may cause welfare losses. Globalization and financial market in particular facilitates financial abuse. This section briefly reviews the impact of financial crime.

Economic impact

Trust is based on the continuation and development of financial markets. The performance of financial markets depends greatly on the assumptions that high professional, legal, and ethical standards are respected. Integrity which is the soundness, truthfulness honesty and the allegiance to standards and codes, is one of the most valued assets by investors and financial institutions. Financial crime abuse may implicate financial institutions’ and authority reputation, which may discourage investors’ consequently weakening the financial system. The connection between financial market integrity and financial stability is emphasized in the Basel Core Principles which address the prevention and declaration of financial system abuse.

Financial system abuse may have other negative macroeconomic consequences. Financial crime can implicate bank soundness with large fiscal liabilities, discourage foreign investment, and increase the unpredictability of capital flows and exchange rates. In times of very high capital flexibility, financial crime makes national tax collection and law enforcement more difficult. Financial system abuse and the various forms of financial crime which exist may also alter the allocation of resources and the distribution of wealth and can be costly to detect and prevent. Economic damage is also affected from the charges on the reputation of a country therefore such charges can affect the willingness of investors to do transaction in a country. The damage caused by financial crime may cause financial crises or attenuate confidence in financial system. The most microeconomic impact is felt in the pricate sector. Financial crime offenders use front companies which join the proceeds of illicit activity together with legitimate funds, to camouflage the illegal gains. These front companies have access to illicit funds, allowing them to finance their activities. In some cases, front companies are able to offer products at lower prices than that of the cost the manufacturer produce its products. Therefore front companies have a competitive advantage over legitimate firms and its is very difficule for the legitimate firms to compete with front companies. In that case, the criminal enterprise causes negative macroeconomic effect.

Financial institutions that depend on the interest of crime face difficulties in maintaining their assets, liabilities and operations. For example, large amount of money may be deposited at a financial institution but then disappear resulting in a liquidity problem and cause bank runs. Certainly it has been noticed that bank failures are mostly associated with criminal activities. Financial abuse may minimize government budgets consequently causing a loss of control of the economic policy. Its can affect currencies and interest rates as offenders reinvests their gains where their activities are not detected. Financial crime causes also monetary instability sues to inappropriate allocation of resources. In brief, financial crime may result in changes of money demand which are unexplainable and a rise in the capital flows, interest and exchange rates. Offenders are interested only in protecting their gains thus thay have a tendency to invest their money in activities that are not benefit to the economy. According to John McDowell and Gary Novis (2001), financial crime decreases government tax eventually causing harm to tax payers which in turn makes the collection of tax difficult.

Risks to Privatization Efforts

Money laundering is a threat to the efforts of many nations to put in place reforms into their economies through privatization. Criminal organizations have the financial resources to outbid legitimate purchasers for previously state-owned enterprises. Besides, as privatization initiatives are often economically useful, they can also provide as a medium to launder funds. In the past, criminals have been able to purchase marinas, resorts, casinos, and banks to hide their illicit proceeds and further their criminal activities.

Reputation Risk

Nations cannot let their reputations and financial institutions stained by an organization with money laundering, particularly in today’s economy. Confidence in markets and in the signaling role of proceeds is deteriorated by financial crimes such as the laundering of criminal proceeds, widespread financial fraud, insider trading of securities, and embezzlement. The pessimistic reputation that outcomes from these actions weaken legal universal opportunities and sustainable increase while drawing attention to international criminal organizations with unwanted reputations and temporary goals resulting in diminished development and economic growth. Furthermore, once a country’s financial reputation is damaged, reviving it is very difficult and requires significant government wealth to fix a problem that could be avoided with suitable anti-money-laundering controls.

Social Costs

There are significant social costs and risks associated with money laundering. Money laundering is a process essential to making crime meaningful. It allows smugglers, drug traffickers and other criminals to develop their operations thus driving up the rate of government due to the need for improved law enforcement and health care expenditures to fight the penalty that result. Amid its other pessimistic effects, money laundering transfers economic power from the market, government, and citizens to criminals. In addition, the pure scale of the financial power that accrues to criminals from money laundering has an undignified result on the society. In severe cases, it can guide to the virtual capture of legitimate government.

Overall, money laundering presents the world community with a complex and dynamic challenge. Indeed, the international nature of money laundering requires global values and global assistance if we are to reduce the skill of criminals to launder their profits and carry out their criminal actions.

People are victims of economic crime; they lose their homes, business and most importantly their livelihoods. According to Richard Pratt (2005), economic criminals use the financial system both to commit the crime and to hide the proceeds that is in some cases economic crime can also discourage the capability of financial system to donate to the creation of wealth and at the same time generates economic opportunity. Participants of financial crime use mainly the financial system to control the gain of the financial system’s activities. They are enthusiasm to take part in businesses that have no economic aim but are intended to camouflage the connection between the crime and their money. This transaction creates profits which usually are not disclosed.

THE IMPACT OF COUNTERFEITING

Industry world-wide loses billions of dollars every year to counterfeiters. These costs impact on victims countries in a number of different ways. First of all, industries which find themselves in direct competition with counterfeiters endure a loss in sales. Indeed, some markets are even under control by criminals, creating barriers of entry for the manufacturers. Some would argue that the buyers of the fakes would not have bought the genuine item but that is a very narrow argument and can only apply to a small segment of luxury goods. Many counterfeit products today are of higher quality and compete directly with the genuine items. In addition, consumers who are cheated into trusting that they bought a authentic article when it was actually a fake, charge the producer of the product when it fails, making a loss of concern. Even cheaper and obvious copies that are bought in good faith represent a serious threat to the company that wants its brands associated with quality and exclusivity. Thirdly, beside direct losses of sales and goodwill, one should not forget the expenditure involved in protecting and enforcing intellectual property rights. The right owner becomes involved in costly investigations and litigation when combating counterfeiters and may also have to spend further sums on product protection. The budget for anti-counterfeiting is rarely well defined within an organisation, but spans across several departments such as marketing, human resources, product development and legal departments.

Costs to countries where counterfeiting takes place

Such countries suffer both tangible and intangible losses. First, foreign producers of reputable products become reluctant to manufacture their products in countries where counterfeiting is rife as they cannot rely on the enforcement of their intellectual property rights. Hence, such countries not only lose direct foreign investment but also miss out on foreign know-how. Second, if many products from such countries, including genuine ones, gain a reputation of being of poor quality, this will cause export losses which in turn implies both job losses and loss of foreign exchange. It could be argued that the counterfeiting industry creates jobs but these jobs are often poorly paid, often involve substandard working conditions and sometimes use child labour. Third, the foundation for new business development in a country is the existence of a legal system to protect the rights of the entrepreneur and to promote fair competition. The prevalence of counterfeiters in a market discourages inventiveness in that country since it deters honest producers from investing resources in new products and market development. A further direct loss for the government of countries that become havens for counterfeiters, are tax losses, since the counterfeits are normally sold through clandestine channels and counterfeiters are not generally keen to pay tax on their ill-gotten gains. Fiscal losses are increasingly shown to justify action by enforcement officials.

Costs to countries where counterfeits are sold

Countries promoting tougher enforcement of intellectual property rights in the world have a strong case for doing so. The economic costs of counterfeiting for such “victim” countries include job losses, missed sales opportunities and lost tax revenues. In the long run counterfeiting discourages investment in product development since a company will not get all the benefit from its investment. The governments of countries where counterfeits are sold will also have to expend increasing amounts of money in funding police and other investigation and enforcement operations. Furthermore, the judicial authorities, including the courts and prison service, need to spend additional time and money in sentencing and dealing with counterfeiters.

Social costs

Ultimately, it is the consumer who pays the cost of unfair competition. Although many consumers believe they are getting a bargain when they buy counterfeits, the actual value of the

product is normally much lower. Hence, they end up paying an excessive price for an inferior product. The inferior quality of many counterfeits, particularly those relating to health and safety, have had disastrous effects. It is no longer rare to find counterfeit parts in aircraft and other vehicles causing death and injuries, or counterfeit pharmaceuticals in hospitals. Workers in factories where counterfeits are produced are frequently exploited. They often work in a poor working environment and are repeatedly exposed to health and safety risks. In addition, they are generally poorly paid. Counterfeiting has attracted both organised and petty criminals who have not only derived huge profits from this trade but have also used it, both as a means to invest the proceeds of crime and to finance other crimes.


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