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Philippine Stock Exchange : The anatomy of financial crime

by August 6, 2016 General

Recent reports about what appeared to be money-laundering schemes involving a domestic bank have sparked an interest in financial crimes and fraudulent activities.What is financial crime? Financial crimes are crimes against financial property or assets involving unlawful conversion or transfer of the ownership of someone else’s property to one’s own use and personal benefit. It involves any or more of the following: fraud, theft, scams or confidence tricks, tax evasion, bribery, embezzlement, identity theft, insider trading forgery, counterfeiting, money laundering and terrorist financing. It may even involve additional criminal acts, such as burglary, violent crimes, or computer hacking.Financial crime may be divided into two essentially different, although closely related types of conduct: First, those activities that dishonestly generate wealth for those engaged in the conduct in question, e.g., exploitation of insider information or the acquisition of another’s property by deceit with the intention of securing material benefit; and second, those that do not involve dishonest taking of a benefit, but protect a benefit that has already been obtained, or facilitate the taking of such benefit, e.g., where someone attempts to launder criminal proceeds of another offense in order to place these beyond the reach of law.There are essentially seven groups of people who commit financial crime: (1) organized criminals, including terrorist groups who perpetuate large-scale frauds to finance their operations; (2) corrupt heads of state who use their position and power to loot the coffers of their countries; (3) business leaders or senior executives who manipulate or misreport financial data to misrepresent the company’s true financial picture; (4) employees from the most senior to the most junior who steal company funds and assets; (5) customers, suppliers, contractors or other persons with no connection to the corporation; (6) external fraudster in collusion with an employee; and (7) the successful individual criminal, serial or opportunist fraudster in possession of the proceeds of those who have committed financial crime.The financial system is most vulnerable to fraud due to the often complex nature of financial services. Detecting and preventing fraud within the financial sector poses an almost insurmountable challenge. They may come from the within the organization or outside it. Internal and external fraudsters combine to commit significant fraudulent acts. The victims of financial system fraud may be the financial sector firms themselves or the customers of those firms. The proceeds of this fraud are rarely generated in cash.The funds that are the target of the fraud are generally already within the financial system, but will undoubtedly be moved in order to confuse the audit trail.Three ways by which such financial crimes are done, are insider trading, terrorist financing and money laundering. On insider trading, it is possible in the case of financial services businesses that are themselves listed, for directors and customers to commit the offenses. For good governance businesses and their employees should comply fully with all relevant disclosure rules. Any money, goods, or property derived from insider dealing activity is capable of predicating money-laundering offenses.Terrorist organizations require financial support in order to achieve their aims as a successful terrorist group, building and maintaining an effective financial infrastructure. Terrorists often control funds from a variety of sources around the world, and often involves money laundering. Sophisticated techniques may involve different types of financial institutions, multiple financial transactions, the use of different financial instruments and other kinds of value-storing assets, using intermediaries, such as financial advisers, accountants, lawyers, shell corporations and other service providers, transfers through, to and from different countries. It is basically a process by which proceeds of criminally derived property are ‘laundered’ or made legitimate.Some examples of financial crimes over the last 20 years are Enron, which exploited accounting loopholes, shady financial reporting, covering up billions in debt from failed projects and deals, improper audit and conflicts of interest with its auditor, Arthur Andersen-this occurred between 1985 and 2001. Shareholders lost $11 billion, and 7500 Enron employees lost their jobs when it was declared bankrupt. Another example is Bernard Madoff who engaged in a sophisticated Ponzi scheme, which defrauded thousands of investors, who lost almost $65 billion from the 1980s to 2008. Another was the rogue trader, Nick Leeson, who worked out of the Singapore office of Barings Bank, the oldest merchant bank in London. Leeson carried out unauthorized trades in Nikkei index futures, which bombed out after the Kobe earthquake in 1995, resulting in the insolvency of Barings Bank.The most recent example is HSBC London, which was exposed in 2012 for having contributed directly to international drug trade by laundering billions of dollars of drug cartel proceed. It was forced to pay $2 billion in penalties. Last, of course, we may mention the Philippines BW Resources scandal through insider trading and other fraudulent securities practices through the Philippine Stock Exchange and which rocked the Estrada presidency in 1999.(c) 2016 Business Mirror Provided by SyndiGate Media Inc. (, source Middle East & North African Newspapers