The financial sector is one of the most important sectors in an economy. It can be argued that in Mauritius there are millions and millions of liquid transactions which are dealt in the financial sectors. Hence, one of the crucial aims is to preserve the smooth functioning and the integrity of the Mauritian financial market. Unluckily, many companies have been collapsing and some are on the verge of; the offshore centers are in crisis, crashes on the stock exchange, illicit money transactions and so on are incurring. In other words, the financial system is in peril in many economies including Mauritius. Henceforth, the term financial abuse is often used to describe such activities.
Financial crime has often been used interchangeably by the term financial abuse. Financial abuse has the broadest meaning, encompassing not only illegal activities that may harm financial systems, but also other activities that exploit the tax and regulatory frameworks with undesirable results. When financial abuse involves financial institutions (or financial markets), it is sometimes referred to as financial sector abuse. Financial crime, which is a subset of financial abuse, can refer to any non-violent crime that generally results in a financial loss, including financial fraud. It includes a range of illegal activities such as money laundering, tax evasion, circumvention of exchange restriction, illegal cross border fund transfer or capital flight, sale of fictitious financial instruments or insurance policies, stock manipulation, embezzlement of non-financial institutions and financial fraud such as cheque and credit card fraud, mortgage fraud, medical fraud, corporate fraud, bank account fraud, payment (point of sale) fraud, currency fraud, and health care fraud, production of Counterfeit of Counterfeit money.
No internationally accepted definition of financial crime exists. Rather, the term expresses different concepts depending on the jurisdiction and on the context. When a financial institution is involved, the term financial sector crime is used. There is no single, broadly accepted understanding of the meaning of the term 'financial crime.' Rather, the term has been used to describe a number of different concepts of varying levels of specificity. At its absolute broadest, the term has occasionally been used to refer to any type of illegal activity that result in a pecuniary loss. This would include violent crimes against the person or property such as armed robbery or vandalism.
Financial institutions can be involved in financial crime in three ways: as victim, as perpetrator, or as an instrumentality. Under the first category, financial institutions can be subject to the different types of fraud including, e.g., misrepresentation of financial information, embezzlement, check and credit card fraud, securities fraud, insurance fraud, and pension fraud. Under the second (less common) category, financial institutions can commit different types of fraud on others, including, e.g., the sale of fraudulent financial products, self-dealing, and misappropriation of client funds. In the third category are instances where financial institutions are used to keep or transfer funds, either wittingly or unwittingly, that are themselves the profits or proceeds of a crime, regardless of whether the crime is itself financial in nature. One of the most important examples of this third category is money laundering.
Financial institutions can be used as an instrumentality to keep or transfer the proceeds of a crime. In addition, whenever a financial institution is an instrumentality of crime, the underlying, or predicate, crime is itself often a financial crime. There is a growing perception in many key jurisdictions that the most rapidly growing category of predicate crimes are financial, although illegal drug trafficking remains a major predicate crime. Although the circumstances vary from country to country, the preeminence of financial crimes as predicate offenses is found mainly:
in major financial centers, and
In the location of a financial institution (e.g., where the criminal profits are laundered) which may be a different location from where the predicate crime was committed.
Financial crimes are growing in sophistication and criminals accumulate significant sums of money through offences such as drug trafficking, investment fraud, extortion, corruption, embezzlement, tax evasion and tax fraud. The nature of financial crime means that the same activity may violate a number of different laws. Different government agencies may be involved at various stages of tackling financial crimes, including prevention, detection, investigation and prosecution of offences and the recovery of the proceeds of crime. The real costs of financial crimes and abuse are immense. They retard social and economic progress, particularly in developing and transition economies. Trade and investment flows, the functioning and integrity of financial markets and hence the allocation of resources are distorted. Most importantly, confidence in democratic institutions and public support for an open, modern world economy are seriously undermined.
For the purpose of this dissertation, four types of financial crimes have been focused upon, that are the most prevalent today; Money laundering, Financial Fraud, Tax evasion and stock manipulation. Statistics indicated that there is a massive amount of amount of money recently eroded in them. These crimes have one striking common feature. They all rely on the concealment of the movement of money either across national frontier or within the country and are ultimately tied into the financial system. So the Mauritian sector will have to put great emphasis upon in order to bring more transparency in the financial sector. This is because there has been the development of international organizations and many countries have signed conventions preventing financial crimes. For instance, the most important one are the IMFC, FSF, FATF, OECD, IOSCO, INERTPOL, IAIS, IFAC, FIU, FBI, the World Bank and the Basel Committee.
Problem statement
Financial crimes, including corruption, tax fraud and money laundering, are a threat to all countries, both developing and developed. The sums are vast. Estimates have put total proceeds from all illicit activities at 3.6% of global GDP. Recognizing the importance of the issue, G20 leaders and Finance Ministers have consistently urged all jurisdictions to work together to control this threat, to adhere to the international tax, prudential and anti-money laundering standards and have mandated OECD to help improve inter-agency co-operation in the fight against illicit activities.
It is thereby clear that there is indeed a potential problem when talking of financial crimes. Consequently, the problems identified are firstly the presence of escape routes and loopholes in the current Mauritian legislations concerned with financial crimes. Next, the predominance of corporate failures such as Societe General in France and Enron in the USA are symptoms of future corporate failures and corporate scandals. Furthermore, stock manipulation has a waterfall effect on foreign stock market which is often termed as an indirect economic impact. Moreover, as the century moves to another one, criminal and perpetrators of financial crimes are resorting to newer means and strategies to corrupt the financial system. In addition, our money laundering law has not still acquired a good reputation in the eyes of foreign financial investigators. Indeed, it cannot be denied that there is a lack of forensic accountants, fraud experts and financial crimes investigators in the Mauritian financial market in order to ensure its integrity. According to Jerry Rowe, adviser of OTA, developing countries such as Mauritius are more vulnerable to financial crimes since criminals are more tempted to penetrate the financial systems which are the least protected.
Chapter 1
MONEY LAUNDERING
INTRODUCTION
Definition
According to ACFE (2005), Introduction to Fraud Examination study text page 409, money laundering is defined as the disguising of the existence, nature, source, ownership, location and disposition of property derives from criminal activity.
The internationally accepted definition is found in the UN Convention against Illicit Traffic in the Narcotics Drugs and Psychotropic substances also known as the Vienna Convention. However, in connection with the money laundering Mauritius has ratified the United Nations Conventions against Transnational Organized Crime on the 21 April 2003. The United Nations takes part in the direct efforts through the United Nation's Office for Drugs Control and Crime Prevention Global Program against Money Laundering which monitors weaknesses in global financial systems and assists countries' in criminal investigations.
How far money laundering is a peril?
According to the IMF, money laundering has been estimated about 2% to 5% of global GDP1. In fact, the proceeds of money laundering come from two major sources namely from drugs sources and from non-drug sources2. The aim of money launders is to confuse and obscure the money path so that it will be a difficult task to build a money trail and trace the proceeds of crime. Hence, money laundering poses a threat on the Mauritian financial system.
The usual method of money laundering is to conduct transactions in cash in such a way as to conceal the true nature of transactions. Usually problems occur regarding large volumes of cash that is transporting it, converting cash into assets which can be invested or spent. In fact, the object of laundering is to convert cash into assets. Once the sources of the funds have been disguised, the next step is to use funds to acquire assets. Asset acquisition provides the criminal with a source of income that appears to have been generated by a legitimate activity.
According to the ACFE, since the 11th September 2001, the scope of anti-money laundering has widened and now encompasses the following sectors:
Insurance
Banking
Solicitors
Accountants
Estate agents
Luxury Goods providers
Casinos
Bureau de change
Each of these diverse organizations has different money laundering profiles and consequently different system design requirements. Following the attack in 2001, now the USA is using the Patriot Act 2001 to crack down on money launders.
In addition to this, money laundering has even the cause of huge companies like BCCI, Enron, Worldcom, Parmalat and so on. There have recently been amendments in the US constitution to take account of these collapses. BCCI was the greatest scandal in the history of banking. The BCCI was heavily involved in laundering activities, but it easily evades regulations in many countries. The bank was found to have about 3000 criminal customers. In addition, it used to finance criminal activities such as gun running, terrorism and narcotics trading. Huge sum of money involved in illicit and fictitious trading used to travel in many countries where the bank office situated.
Stages
The offence of money laundering involves 3 key stages referred as placement, layering and integration.
At placement 'dirty money' is inserted directly into the financial system. The layering process then attempts to separate the proceeds from their criminal origin by moving them through a series of financial transactions, making it harder to establish the connection between the two. The final stage in the money laundering process is integration, whereby the money launderer creates a legitimate explanation for the source of funds, allowing them to be retained, invested into the legitimate economy or used to acquire assets.
Traditionally, money laundering has been described as a process that takes place in three stages as follows:
Placement - This is the first stage in which illicit funds are separated from their illegal source. Placement involves the initial injection of the illegal funds into the financial system or carrying of cash across borders.
Layering - After successfully injecting the illicit funds into the financial system, laundering them requires creating multiple layers of transactions that further separate the funds from their illegal source. The purpose of this stage is to make it more difficult to trace these funds to the illegal source.
Integration - This is the final stage in a complete money laundering operation. It involves reintroducing the illegal funds into the legitimate economy. The funds now appear as clean income. The purpose of the integration of the funds is to allow the criminal to use the funds without raising suspicion that might trigger investigation and pursuit.
In reality, the three stages often overlap and the benefit from many crimes including most financial crimes does not need to be 'placed' into the financial system. Licensees in Mauritius are most likely to be exposed at the layering and integration stages of the money laundering process.
Mauritian Overview of the money laundering law
The Financial Intelligence and Anti-Money Laundering Act 2002
The principal anti-money laundering legislation in Mauritius is the FIAML Act which repealed the Economic Crime and Anti-Money Laundering Act 2000. The offences of money laundering are contained within Part II, Section 3 of the FIAML Act
The Prevention of Terrorism Act 2002 - "POTA"
The POTA aims at combating terrorism in general and empowers our legal system to adequately deal with the phenomenon of terrorism.
Chapter 2
Stock Manipulation
2.1 Introduction
2.1 What is stock manipulation?
The World Bank president, Mr. Paul Wolfowitz, has commended Mauritius (along with Malaysia and South Africa) for ranking among the top 10 countries in the world in terms of investor protection.
Mr. Wolfowitz added that developing countries must improve business conditions and run their public and private sectors in a transparent way if they want to attract investors and fight poverty. "It's true that vast amounts of international capital are potentially available to help developing countries grow and create jobs and provide opportunities for their people to escape poverty, but to access that capital, to attract investors, developing countries especially, the poorest ones, need to improve their investment climates and ensure that these resources, private and public, are managed in a transparent way," he told the International Corporate Governance Network in a speech in Washington (6 July 2006).
"This is absolutely vital for harnessing the entrepreneurial energy of the private sector. Today, the private sector accounts for 90 percent of jobs in the developing world and ultimately, it will be these jobs that offer the most promising path out of poverty," he added.
Mauritius has been ranked tenth amongst the countries which best protect investors by one World Bank Group report, Doing Business: Protecting Investors (2006). This report rates countries on the strength of an investor protection index, which distinguishes three factors: transparency of transactions, the extent of director liability and the ease of shareholder suits. According to this index, Mauritius has joined the league of the countries which best protect investors.
Mr. Wolfowitz further outlined that a study carried out by the World Bank showed that U.S. mutual funds are more likely to invest in emerging markets with strong shareholder rights, legal frameworks and accounting policies. While small in comparison, foreign investment between developing countries is growing five times faster than developed-to-developing investments, and nearly tripled to $47 billion in 2003 from $14 billion in 1995, he said.
"Corporate governance is one essential component of building a healthy investment climate and boosting investor confidence. We know that companies with well-defined shareholder rights, solid control environment, high levels of transparency, and disclosure, and an empowered board of directors, have no trouble attracting investors and lenders," Mr. Wolfowitz said.
