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MGT604 - Management of Financial Institutions - Lecture Handout 40

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Financial Crimes

What is Money Laundering?

Defined in non-technical terms, money laundering is the conversion of 'dirty' money into - seemingly - 'clean' money. Dirty money is money that meets the following conditions: (1) it has been derived by illegal means and (2) for an outside observer it is possible to identify that condition (1) applies. Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source, and/or destination of money, and is a main operation of the underground economy. In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognized as potentially practiced by individuals, small and large businesses, corrupt officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and even corrupt states, through a complex network of shell companies and trusts based in offshore tax havens. The increasing complexity of financial crime, the increasing recognized value of so-called "financial intelligence" in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy has led to an increased prominence of money laundering in political, economic, and legal
debate.

Process of Money Laundering

Money laundering is often described as occurring in three stages: placement, layering, and integration.

  • Placement: refers to the initial point of entry for funds derived from criminal activities.
  • Layering: refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point, and the end of the laundering cycle.
  • Integration: refers to the return of funds to the legitimate economy for later extraction.

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MGT604 - Management of Financial Institutions - Lecture Handout 12

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INTERNATIONAL FINANCIAL INSTITUTIONS

World Trade Organization

(WTO) is an international organization designed to supervise and liberalize international trade. The WTO came into being on January 1, 1995, and is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1947, and continued to operate for almost five decades as a de facto international organization. The WTO is governed by a Ministerial Conference, which meets every two years; a General Council, which implements the conference's policy decisions and is responsible for day-to-day administration; and a director-general, who is appointed by the Ministerial Conference. The WTO's headquarters are in Geneva, Switzerland.

Criticism on WTO

Although the stated aim of the WTO is to promote free trade and stimulate economic growth, some believe that globally free trade results in the rich (both people and countries) becoming richer, while the poor are getting poorer. Martin Khor, Director of the Third World Network, argues that the WTO does not manage the global economy impartially, but in its operation has a systematic bias toward rich countries and multinational corporations, harming smaller countries which have less negotiation power. He argues that developing countries have not benefited from the WTO Agreements of the Uruguay Round, because (among other reasons): market access in industry has not improved; these countries have no
gains yet from the phasing out of textiles quotas; non-tariff barriers such as anti-dumping measures have increased; domestic support and export subsidies for agricultural products in the rich countries remain high. Other critics have characterized the decision making in the WTO as complicated, ineffective, unrepresentative, and non-inclusive, and they have proposed the establishment of a small, informal steering committee (a "consultative board") that can be delegated responsibility for developing consensus on trade issues among the member countries.

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