GROUP PRESENTATION 2 topic fraud, corruption illegal activities

VNU University of Economics and BusinessGROUP PRESENTATION 2 Topic: Fraud, Corruption & Illegal Activities Lectures: Ms PhungThi Thu Huong Subject: International Banking Hanoi, 2021... I

VNU University of Economics and Business

GROUP PRESENTATION 2

Topic: Fraud, Corruption & Illegal Activities

Lectures: Ms PhungThi Thu Huong

Subject: International Banking

Hanoi, 2021

INTRODUCTION 2

I Fraud 3

1.1 Definition 3

1.2 Causes of fraud 3

1.3 Common types of fraud 3

II Corruption 6

2.1 Definition 6

2.2 Causes of corruption 7

2.3 Common types of corruption 8

III Money Laundering 9

3.1 Definition 9

3.2 How is money laundered? 10

3.3 Where does money laundering occur? 11

IV.Terrorism Financing 12

4.1 Definition 12

4.2 The Link between Money Laundering and Terrorism Financing 14

4.3 Combating Financing of Terrorism 14

V Impact of fraud, corruption, money laundering and terrorism financing on economic development 15

VI Case Studies in some international banks and in Vietnam 17

6.1 In some international banks 17

6.2 In Vietnam 18

VII Prevention of Fraud, Corruption & Illegal Activities 19

7.1 Some Polies to prevent Fraud, Corruption & Illegal Activities 19

7.2 International commitments and regulation of economic crime 25

7.3 The role of some Business Units and Positions in these above policies 27

CONCLUSION 29

REFERENCES 29

Fraud, corruption, and corporate crime serve as examples of white-collar crime.Alone or in combination, they can contribute to the collapse of corporations oreven be instrumental in a national or global financial crisis as happened in2007–2008 Corruption of this nature on such a large scale is a malignantcancer that sinks a country ever deeper into national debt Fraud and corruptionraise ethical issues and indicate dishonest behavior

Historically, corruption has been seen as an enabler of some types of economiccrime and organised criminality, for example through payment of bribes to lawenforcement agencies or undue influence in decision-making However, modernforms of corruption – which the paper interprets as usually transnational innature – are even more intertwined with economic crime Both sets of crimesshare similar drivers, rely on similar mechanisms to move and launder illicitfunds, and deprive societies of much needed financial resources, threatening notonly economic and social stability of other countries across the globe, but alsothe rule of law and democracy

Due to these common characteristics, certain instruments to combat corruptionand economic crime could be productively brought into closer alignment.Legislation addressing fraud should also include corruption as a criminaloffense Moreover, international cooperation is required in the investigation andprosecution of both corruption and economic crime schemes, as well as for assetrecovery purposes Transparency in political funding may also ensure thatpolitical and electoral campaigns are not tainted by proceeds of corruption andeconomic crime, and could help prevent capture of state institutions

I Fraud

1.1 Definition

There is no precise, universal, legal definition of fraud and no single criminaloffence that can be called fraud It is usually taken to involve theft – the

removal of cash and assets to which the fraudster is not entitled – or falseaccounting- falsification or alteration of accounting records or other documents.

A business or organization may be exposed to:

• external fraud, perpetrated by individuals outside the organization

• internal fraud, perpetrated by Management or employees

• collusion, between someone within the organization and an outsider

1.3 Common types of fraud

Generally, fraud may be divided into two main types:

Profit and loss frauds:

An organization is likely to be vulnerable to a variety of small frauds Thesemay be difficult to detect as individually they may be for relatively smallamounts (though over time they may be significant) Large frauds would belikely to be discovered; however, whether this is in time to save the business isuncertain Therefore, in terms of impact, the amount of time taken to spot afraud is key

Balance sheet frauds (i.e cut-off problems, accounting data manipulation,

etc.):

These often tend to increase in size, thus, leading to discovery, even thoughsuch frauds may not necessarily involve misstated financial reports Whilst therisk of fraud may be greatest in those businesses handling cash or consumergoods, it is widely accepted that all businesses are vulnerable to fraud of onesort or another The risk due to fraud may come from four broad categories (theexamples mentioned in each category are not exhaustive):

a Employees abusing their position or making misrepresentations:

• The misappropriation of assets (such as cash, stock, reimbursement ofexpenses, payroll, stationery, etc.);

• Malicious destruction of assets;

• Transactions not reported intentionally;

• Unauthorized transaction;

• Mismarking of position intentionally;

• The manipulation of documents – this can include altering documents as well

as producing false ones

b Suppliers taking advantage of their customers (the latter being either the Bank itself or its borrowing customers):

• A supplier of goods or services may recognize weak or non-existent checkingcontrols This can result in fewer items being delivered than stated on thedelivery note, or even the wrong type of goods Without sufficient checks ongoods received it may be difficult to complain later Another common fraud is

to invoice for the wrong quantity or at the wrong price

• The company purchaser(s) may not be independent (e.g he/she may be related

to, or be receiving advantages from the supplier) This can result in substandardgoods being bought at an uncompetitive price This fraud is an example ofcorrupt practices by employees and is dealt in more detail in the Section underCorruption (below)

• Directory fraud is whereby fictitious invoices or letters are received Unlessthe business has an authorization process to identify fictitious invoices, there is

a danger that the recipient will pay simply because their company’s name is onthe invoice

• Maintenance or subscription costs – fees may be taken, but the supplier maynot provide a proper service

c Customer frauds:

• The most frequent and significant type of fraud performed against bankinginstitutions by customers or potential customers is various techniques to by-passdue diligence controls in order to obtain credit that will not be repaid or used asagreed

• More significant frauds may occur if employees collude with either suppliers

or customers

d Information Technology Fraud:

• A threat to an organization’s security can come about when upgrading orreplacing a computer system An unscrupulous consultant/retailer may be able

to fraudulently alter data or access confidential files

• Another possible source of threat may come from the internet, e.g hacking,which is circumventing or bypassing the security mechanisms of an informationsystem or network for destroying, disrupting or carrying out illegal activities onthe network or computer systems.

• New technological developments may present a whole new range of threats,e.g the improper use of the email system

Tax fraud - tax evasion versus tax avoidance or mitigation:

It is often difficult to assess with certainty and distinguish between illegal “taxevasion” from legal “tax mitigation or avoidance”, due to the complexity of thetax schemes, the ambiguities in some tax laws, as well as due to erraticenforcement by tax authorities This is exacerbated by the fact that, in somecountries, allegations of illegal tax practices and the instigation of taxinvestigations are often misused to discredit competitors or to damage politicalenemies The main causes of avoidance and evasion are high taxes, impreciselaws, insufficient penalties and lack of equity in the tax system

Tax Evasion

Tax evasion, in general, refers to illegal and fraudulent actions which lead toescape from taxation In other words, tax evasion can be defined as thedeliberate effort by companies, institutions, organizations, individuals and otherentities to evade tax by illegal methods This illegal activity can be operated by

a false declaration or no declaration at all of taxes due to the relevant taxauthorities, or by the deliberate misrepresentation or conceal of the true state ofaffairs by destroying or fabricating records, keeping parallel accounts, failing toreport income, or smuggling Tax evasion is a crime

Tax avoidance

Tax avoidance, on the other hand, encompasses the use of legal activities, inorder for the taxpayer to avoid paying taxes or reduce the tax liabilities, byimplementing methods that take advantage of the tax code and exploit theloopholes of the relative legislation The practice of tax avoidance takes place atthese sections and areas of the tax code which are ambiguous and in need offurther interpretation The most important difference between tax evasion andtax avoidance is that the former is related to illegal activities, whereas taxavoidance succeeds in minimizing tax liabilities by actions that are inaccordance to the tax law

II Corruption

2.1 Definition

Corruption is a term associated with various illegal, illicit or immoral activities

or behaviors In the context of banking and International Financial Institutions,corruption could be defined as the abuse of official office or position forpersonal gain or enrichment, or the misuse of one’s position to assist others inimproperly or unlawfully enriching or empowering themselves

2.2 Causes of corruption

Corruption within an organization arises due to various factors, including:

• The lack of an effective ethical and control awareness culture

• Ineffective corporate governance, policies, procedures and internal controls

• Lack of transparency and inadequate communication channels

• Low wages of staff, limited job satisfaction or an unfair remuneration/ benefitssystem

Public corruption can be mainly traced to government intervention in theeconomy Hence policies aimed at liberalization, stabilization, deregulation, andprivatization can sharply reduce the opportunities for corrupt behavior Wheregovernment regulations are pervasive, however, and government officials havediscretion in applying them, individuals are often willing to offer bribes toofficials to circumvent the rules Identifying such policy-related sources ofcorruption is obviously helpful in bringing it under control The followingsources of corrupt practices have for some time been well known:

• Trade restrictions

• Government subsidies

• Price controls whose purpose is to lower the price of some good below itsmarket value (usually for social or political reasons)

• Multiple exchange rate practices and foreign exchange allocation schemes

• Low wages in the civil service relative to wages in the private sector

• Natural resource endowments (oil, gold, exotic lumber) - since they cantypically be sold at a price that far exceeds their cost of extraction and their sale

is usually subject to stringent government regulation, to which corrupt officialscan turn a blind eye

2.3 Common types of corruption

Corrupt practices and consequently the efforts to combat corruption maybroadly rest upon the following three pillars (with illustrative examples ofcorrupt behaviors):

● Corruption at the micro-level (or “individual corruption”) - such as

corrupt practices within the governance of the organization and financed projects:

Bank The design, selection or tolerating of uneconomical projects because ofopportunities for financial kickbacks and political patronage

- Procurement fraud, including collusion, overcharging, or the selection ofcontractors, suppliers, and consultants on criteria other than the lowestevaluated substantially responsive bidder

- The misappropriation of confidential information

- The deliberate disclosure of false or misleading information on the financialstatus of corporations that would prevent potential investors from accuratelyvaluing their worth, such as the failure to disclose large contingent liabilities orthe undervaluing of assets in enterprises slated for privatization

- The sale of official posts, positions, or promotions; nepotism; or other actionsthat undermine the creation of a professional, meritocratic service

- Extortion and the abuse of office, such as using the threat of a performanceappraisal or disciplinary sanctions to extract personal favors

● Corruption at governmental or country level (or “systemic

corruption”):

- Illicit payments of “speed money” to government officials to facilitate thetimely delivery of goods and services to which the public is rightfully entitled,such as permits and licenses

- Illicit payments to government officials to facilitate access to goods, services,and/or information to which the public is not entitled, or to deny the publicaccess to goods and services to which it is legally entitled

- Illicit payments to prevent the application of rules and regulations in a fair andconsistent manner, particularly in areas concerning public safety, lawenforcement, or revenue collection

- Payments to government officials to foster or sustain monopolistic oroligopolistic access to markets in the absence of a compelling economicrationale for such restrictions

- The theft or embezzlement of public property and monies

- Obstruction of justice and interference in the duties of agencies tasked withdetecting, investigating, and prosecuting illicit behavior

● Corruption at an international level:

- “Syndicated Corruption” encompasses elaborated systems that are devised forreceiving and disseminating bribes, often internationally, whilst “Non-Syndicated Corruption” involves individual officials that may seek or competefor bribes in an ad hoc and uncoordinated fashion.

III Money Laundering

“money laundering” includes the following:

• the conversion or transfer of property, knowing that such property is derivedfrom criminal activity or from an act of participation in such activity, for thepurpose of concealing or disguising the illicit origin of the property or ofassisting any person who is involved in the commission of such activity toevade the legal consequences of his action;

• the concealment or disguise of the true nature, source, location, disposition,movement, rights with respect to, or ownership of property, knowing that suchproperty is derived from criminal activity or from an act of participation in suchactivity;

• the acquisition, possession or use of property, knowing, at the time of receipt,that such property was derived from criminal activity or from an act ofparticipation in such activity;

• participation in, association to commit, attempts to commit and aiding,abetting, facilitating and counselling the commission of any of the actionsmentioned in the foregoing indents

3.2 How is money laundered?

In the initial or placement stage of money laundering, the launderer introduceshis illegal profits into the financial system This might be done by breaking uplarge amounts of cash into less conspicuous smaller sums that are thendeposited directly into a bank account, or by purchasing a series of monetaryinstruments (cheques, money orders, etc.) that are then collected and depositedinto accounts at another location

After the funds have entered the financial system, the second –or layering–stage takes place In this phase, the launderer engages in a series of conversions

or movements of the funds to distance them from their source The funds might

be channelled through the purchase and sales of investment instruments, or thelaunderer might simply wire the funds through a series of accounts at variousbanks across the globe This use of widely scattered accounts for laundering isespecially prevalent in those jurisdictions that do not co-operate in anti-moneylaundering investigations In some instances, the launderer might disguise thetransfers as payments for goods or services, thus giving them a legitimateappearance

Having successfully processed his criminal profits through the first two phases

of the money laundering process, the launderer then moves them to the thirdstage –integration– in which the funds re-enter the legitimate economy Thelaunderer might choose to invest the funds into real estate, luxury assets, orbusiness ventures

3.3 Where does money laundering occur?

Generally, money launderers tend to seek out areas in which there is a low risk

of detection due to weak or ineffective anti-money laundering programs.Because the objective of money laundering is to get the illegal funds back to theindividual who generated them, launderers usually prefer to move funds throughareas with stable financial systems

Money laundering activity may also be concentrated geographically according

to the stage the laundered funds have reached At the placement stage, forexample, the funds are usually processed relatively close to the underlyingactivity; often, but not in every case, in the country where the funds originate.With the layering phase, the launderer might choose an offshore financialcentre, a large regional business centre, or a world banking centre –any locationthat provides an adequate financial or business infrastructure At this stage, thelaundered funds may also only transit bank accounts at various locations wherethis can be done without leaving traces of their source or ultimate destination

Finally, at the integration phase, launderers might choose to invest launderedfunds in other locations if they were generated in unstable economies orlocations offering limited investment opportunities.

IV.Terrorism Financing

4.1 Definition

According to a widely accepted definition "terrorist financing" means theprovision or collection of funds, by any means, directly or indirectly, with theintention that they should be used or in the knowledge that they are to be used,

in full or in part, in order to carry out any of the following offences:

a Attacks upon a person's life which may cause death;

b Attacks upon the physical integrity of a person;

c Kidnapping or hostage taking;

d Causing extensive destruction to a government or public facility, a transportsystem, an infrastructure facility, including an information system, a fixedplatform located on the continental shelf, a public place or private propertylikely to endanger human life or result in major political and/or economicdisruption and major economic loss;

e Seizure of aircraft, ships or other means of public or goods transport;

f Manufacture, possession, acquisition, transport, supply or use of weapons,explosives or of nuclear, biological or chemical weapons, as well as researchinto, and development of biological and chemical weapons;

g Release of dangerous substances, or causing fires, floods or explosions theeffect of which is to endanger human life;

h Interfering with or disrupting the supply of water, power or any otherfundamental natural resource the effect of which is to endanger human life;

i Threatening to commit any of the acts listed in a to h.;

j Public provocation to commit terrorist offences;

k Recruitment for terrorism;

l Training for terrorism;

m Aggravated theft with a view to committing one of the offences listed from

group, including by supplying information or material resources, or by fundingits activities in any way, with knowledge of the fact that such participation willcontribute to the criminal activities of the terrorist group.

Knowledge, intent or purpose required as an element of the above activities may

be inferred from objective factual circumstances

These intentional acts, defined as offences under national law, which, giventheir nature or context, may seriously damage a country or an internationalorganisation, shall be deemed to be terrorist offences where committed with theaim of:

• Seriously intimidating a population

• Unduly compelling a Government or international organization to perform orabstain from performing any act

• Seriously destabilising or destroying the fundamental political, constitutional,economic or social structures of a country or an international organisation

In examining the financing of terrorism, it is important to distinguish two types:i) financing of terrorism through money laundering and ii) financing ofterrorism through the use of legitimate funds If the criminal proceeds of apredicate offense were used to finance terrorism, this would constitute bothmoney laundering and financing of terrorism and would be caught by theprovisions of most national anti-money laundering laws

The second type of financing of terrorism involves the use or abuse oflegitimate funds to finance terrorism

4.2 The Link between Money Laundering and Terrorism Financing

The techniques used to launder money are essentially the same as those used toconceal the sources of, and uses for terrorism financing Funds used to supportterrorism may originate from legitimate sources, criminal activities, or both.Nonetheless, disguising the source of terrorism financing, regardless of whetherthe source is of legitimate or illicit origin, is important If the source can beconcealed, it remains available for future terrorism financing activities.Similarly, it is important for terrorists to conceal the use of the funds so that thefinancing activity goes undetected