Definition of financial crimes
Financial crimes share the same meaning as other terms like white-collar crime, financial abuse and financial fraud. According to section 6(3) of Financial Services and Markets Act 2000, financial crime can be defined as any kind of criminal conduct relating to money or to financial services or markets, including any offences involving fraud or dishonesty, misconduct in or misuse of information relating to a financial market or handling the proceeds of crime. Sutherland E. H. (1983) defines financial crimes or commonly known as white collar crime as an offence committed by an individual of respectability and of high social status in the course of his career. Based on Financial System Abuse, Financial Crime and Money Laundering - Background paper prepared by Monetary and Exchange Affairs and Policy Development and Review Departments, it describes financial crime as any non-violent crime resulting in a financial loss. Weelford C. F. and Ingraham B. L. (1994) classified three categories of white collar crimes into business and professional crimes, occupational crimes and individual frauds. Tomlin J. R. (1982) put victim of financial crimes into five groups which consists of individual as victim, corporate or business enterprises as victims, government institution as victims, international order as victims and society as victims.
Components of financial crimes
Based on Pickett K. H. S. and Pickett J. (2002), financial crime comprises of several components. One of the component is it is deceitful, meaning that people who are involved in financial crime tends to cheat, lie, conceal, hide and manipulate the fact. Moreover, it is intentional as people are intentional, purposeful and not spontaneous of their action to illegally gain advantages. Another component is that it breaches trust, people ruin trust of other people as they defraud them or their business. in addition, financial crime involves losses where there are an illegal activities that secure an illegal gain or advantage from financial victim as described in definition of financial crimes. Financial crime may also be concealed. It is usually not known by the public and stays hidden indefinitely. Last but not least, there may be an appearance of outward respectability meaning that these crimes may be conducted by respectable individuals of power and of high society status. It may also be an individual or company that was employed by the victim.
Example of financial crimes
There are many examples of financial crime, for example,
Money laundering
Buchanan B. (2004) states that money laundering is a global phenomenon and international challenge where it is a crime that comprises of complicated series of transactions and numerous financial institution across many foreign jurisdictions. Money laundering is an activity where the process of transferring of illegally obtained money or investments through an outside party like offshore financial centers to conceal the true sources. In simple words, money laundering is turning unlawful and immoral money obtained by illegal activities like drug trafficking, human trafficking, terrorists, blackmailers, corruption, frauds and organized to legal money into lawful money where it is available for daily activities. There are three stages of money laundering according to McDowell J. and Novis G. (2001) which consists of placement, layering and integration. Placement is the stage where the illegal money is deposited into financial institution, then the money will be separated from their illegal origin through layers of complex financial transactions through layering. Finally it will be used as legitimate transaction to disguise its unlawful origin by integrating.
Tax evasion
Tax exemption is legal where there are certain ways to exempt from tax but tax evasion is an illegal and unlawful activity where it dodges tax without any acceptable legitimate reason by taking advantage of tax loopholes and special exemption. One difference of tax exemption and tax evasion is the legality of taxpayer's actions based on Sandmo A. (2004). Tax exemption is a legal framework of tax law that it exploits loopholes in tax law to reduce their tax liability. They are not afraid of possible detection because it is legal and appropriate. On the other hand, tax evasion is an illegal activity where taxpayers intentionally or unintentionally refrain from reporting their taxable income to the government. It is a violation of tax law and may be punish if detected.
Financial fraud
Financial fraud can be explained by the intentional and purposeful act or action of deception and dishonesty of an individual or company involving financial transactions for purpose of personal gain and personal advantage. There are many different types of financial fraud, such as consumer fraud, credit card fraud, company funds fraud, check fraud, identity fraud, mortgage fraud and insurance fraud. Credit card fraud happens when someone intentionally took credit card of someone else and uses it for personal gain in the name of the cardholder without the knowledge of them. Company frauds are scheme of employee or non-employee to take advantage of company funds or confidential customer's information without company consent for personal advantage. Check fraud happens when the check is diverted to an unauthorized person who accesses the funds and then closes the account. Identity fraud occurs where people are not who they claim to be or forge another person's identity by utilizing their personal information.
Invade of exchange restriction
Every financial exchange or financial institution has their own exchange law and control. Invade of exchange restriction is an illegal action where they may intentionally or intentionally invade exchange restriction for their personal gain or to cover their misconducts. Once found to be guilty, invader may be kicked out, disposed or blacklisted from the financial institution or exchange.
Corruption
Sampford C., Shacklock A., Connors C. and Galtung F. (2006) explains corruption as public official (A) acting for personal gain, violates the norms of public office and harms the interests of the public (B) to benefit a third party (C) who rewards A for access to goods or services which C would not otherwise obtain. Corruption is an act of dishonesty and untruthful involving bribery or exploitation of asset for personal gain. It is an illegitimate, unlawful and immoral act conducted by powerful individual with demand to those of powerless who are capable or incapable of rejecting. For financial corruption, there are people who bribe their way for their own purpose, for example to secure them from being unveils from their wrongdoings in the financial sector.
Embezzlement
Embezzlement is a kind of financial crime where a person misuse or misappropriate the assets entrusted to the person. They have the rights for the assets because of the entrustment by the original asset owner but then misuse the asset for unintentional purpose. In financial context, embezzlement can involves misuse of financial assets like shares or stocks where it was handled by a broker. Fraudulent happens when a person converted the property that was entrusted by the original holder to his or her own use without the consents of the original holder.
Other examples of financial crimes includes counterfeiting, insider trading, trade secret fraud, securities fraud, mail fraud, government fraud, environmental fraud, computer fraud, bankruptcy fraud and antitrust fraud.
Impacts of Financial Crimes
Financial crime is a serious crime that long terms affecting countries economical, financial reputations, and trustability among partnership.
Economic growth, security and social consequences
Economics of a country will impact by the financial crimes. For the money laundering it normally will occur at some hotel and construction industries. This is because in a construction the money launders able to get the short term interest from the construction. However when the industries was no longer suitable for the money launder, they will subsequently abandon the industries. Then it will cause that particular industries collapse and this will affect the economics of the country. Furthermore, money laundering has potentially devastating economic, security and social consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and more. The financial aspects of crime have become more complex due to rapid advances in technology and the globalization of the financial services industry.
Damage to the country's financial reputation
The country may loss their reputation because the high level of the financial crime, it will cause the investor feel less confident with the country, they will decide to invest their money in other country rather than here, so at the same time financial crimes will lead to the country loss their opportunity not only at local and also around the global, because the country was attached to some safety and security problem. Besides that, once a country's financial reputation has been damaged, it is difficult to gain back.
Loss of consumer confidence in businesses
Financial crimes such as identity theft, internet fraud, check and credit card fraud and prescription fraud may lead to customer privacy and confidentially being losses. Such as identity theft ,they stealing the identity of certain customer and pretend to be him or her to have a deal or some of it even use the information to open an account to make a loan from bank. The client confidentiality has been loss, it will cause to loss of confident and trust to the country. Some of the small company has ignore of the security responsibility, it lead to those fraud have the opportunities to occur. For example, Company A have good reputation and great strategy in business industry for it efficient cash flow, however there is a leak of internal information related to company top management using financial crimes to run the business have been compromised. As a conclusion, do you think investor have the courage to make investment into Company A?
Affect the tax revenue of government
Money laundering it may lead to several impacts to a country. One of that is it may affect the tax revenue of government. This is because the each transaction of business has use the high transparency process to avoid tax by government in a high rate, so it will make the government more difficult to collect the tax .Therefore, government will loss of their revenue. If tax revenue are dramatically reduces, government may face bankruptcy. In one country, government is the core of country, if revenue is reduce but expenses is still increasing, where do the government search for money to pay daily expenses. In long term, country will have to borrow loan from other country to support it own, and the economy will the face the worst.
Reduced ability to attract foreign investment
Financial crime may lead to reduce the ability to attract foreign investment .Before an investor enter an country to make an investment ,they will first look at the country 'regulatory system, local expertise, economy and political stability and so on. When a higher rate of financial crimes occur in a country, those investor will not setting up and run their investment in this country. The reason is when that investor comes to the country; they have to worry about their business. A strong regulation system and economic structure will be a symbol or a precondition to attract the foreign investment. In point of view of foreign investor, a county have the " names " of money laundering, why should they make investment into that country as seen the government did't perform any protection, legal action or put serious claims against those financial crimes.
Increases in the costs of security and regulation
Besides that, in order to control the financial crimes government, each company and organization should impose rules and regulation .For those private company and organization they have to use the advance technology and the security system to detect the financial crimes, this may cause the company and organization to lose a lot of fund or revenue. The main point is to improve internal control of the management system to prevent any fraud happen. Furthermore, they should employ some of the professional to help them create the most effective security system or hire the right jobs for the right person. For the government ,they has impose the Anti Money Laundering Act 2001.In United Kingdom also impose one of the legislation which is Serious Organized Crime Agency (SOCA) in order to report those involved in the money laundering.
