GLOBAL PERSPECTIVE OF FINANCIAL CRIMES

by Aman Birdi

Abstract
The world has witnessed large scale scams, frauds and various other financial crimes. They
have had an adverse effect on the world creating various problems such as increased
unemployment. This research paper provides an in-depth study into understanding the global
perspective of frauds i.e., motivation of offenders to commit financial crimes through the help
of theories by Donald Cressey and Travis Hirschi and Michael Gottfredson i.e., fraud triangle
theory and motivation theory and their impact on the economy of a nation and the regulatory
national, international and intergovernmental bodies/organisation involved in fighting against
such crimes. This study has been conducted on the basis of various secondary sources such as
journal articles and the internet.

Introduction
During the recent times, financial crime has become a concern for almost all the nations. The
concern is due to the aftermath effects it has on the economic stability of a country be it a
developed or a developing country and hampers their growth. 1 These crimes generally involve
deceiving someone through fraudulent means for personal financial gains. There is no such
definition that exists in context of the term financial crime and is understood as a non-violent
crime which results in wrongful financial loss. 2 The list of activities that financial crimes are
not exhaustive but also involves the below mentioned activities to constitute a financial crime

i. Embezzlement: It means that the person who has been entrusted with the
funds/assets for a certain purpose misuse it for an unintended purpose.3
ii. Tax evasion: An individual or a group of individuals wilfully avoids to pay taxes
or pays less taxes. 4
iii. Money laundering: It is an act of transferring/hiding the money obtained through
illegal source. The main aim of money laundering is to transform the illegal money
into legal money through various levels of transactions and disguise its primary
origin and finally to get the money back to the person who generated it i.e., the
primary source.5
iv. Terrorist financing: It is the generation of funds for terrorist activities which is
through various legitimate sources such as charitable donations and also through
illegitimate sources involving criminal activities such as money laundering,
smuggling, drug trade, etc.6

1
https://www.int-comp.org/careers/your-career-in-financial-crime-prevention/what-is-financial-crime
2
https://www.imf.org/external/np/ml/2001/eng/021201.pdf
3
https://legaldictionary.net/
4
Supra 3
5
https://www.fatf-gafi.org/faq/moneylaundering/
6
https://www.fintrac-canafe.gc.ca/fintrac-canafe/definitions/terrorist-terroriste-eng

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 v. Bribery: Bribery is an act of giving, receiving or a sort of solicitation or anything
of value which is likely to hamper the decision-making process to whomsoever it is
given. 7

Why people commit crime?

i. Motivation: According to a theory of crime by Travis Hirschi and Michael
Gottfredson during the 1990 of self-control where the initial part of the theory was
given by Hirschi in 1969 which focused more on the aspect of social bonds that low
social bonds can be a reason behind the criminal behaviour. The theory mainly aims
towards both self-control as well as opportunity. The idea of opportunity theory of
commission of a crime depends upon various social, economic and environmental
conditions and as per this theory the people who might take advantage of an
opportunity and who might not can be easily distinguished. As per this theory the
motivation majorly is due to greed, desire, personal gratification, revenge/pleasure.

ii. Fraud Triangle Theory (Donald Cressey): Cressey in this theory postulated by
discussing about the reasons why people commit fraud. During this he interviewed
various criminals mainly on the basis of what makes them violate the trust of the
other person. He laid down three factors pressure, opportunity and rationalization
the must be present for the commission of an offence. 8

a. Pressure/Motive: Every offender faces some kind of pressure for commission

of an offence, these pressures can either be due to financial or non-financial
reasons. If the offenders believe that they were pressurized, it can be a likely
reason for them committing fraud amongst which financial pressure is seen to
be the most common reason for such unethical acts/behaviours. About 95% of
people commit fraud due to financial pressures. A few examples of pressure
include, greed, debt, family financial problems, addiction to illegal activities
such as drugs, etc.9
b. Opportunity: It is the second most essential element which contributes towards
a fraudster committing an offence which is usually due to the ineffective
governance standards. This concept in simpler terms means that when
opportunity/circumstances are available or lay in favour of any person, they will
take advantage of that opportunity/circumstance. In most of the cases what is
perceived is that when there are low risks of getting caught/detection of an
offence, there are more likely chances that fraud will take place. An example of
it would be, when in an organisation there are certain loopholes which might be
related to irregular audit, weak internal control, etc. there are likely chances that
an employee will take advantage of the opportunity. 10

7
https://www.acfe.com/uploadedFiles/ACFE_Website/Content/review/bc/01-Introduction.pdf
8
http://oaji.net/articles/2015/1447-1448561634.pdf
9
Supra 8
10
Supra 8

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 c. Rationalization: This is the third element of Cressey’s theory which means the
excuses or reasons provided by the fraudster for his unethical or criminal acts.
It refers to that the fraudster must create an idea of which is morally accepted to
him prior to engaging in any such unethical or criminal activity. It is a
justification for the fraudster or an employee who lacks moral reasoning and
integrity. 11

Impacts of financial crimes

Financial crimes have adverse effects on countries’ economies and their performance as it leads
to welfare losses. Two major things that facilitate financial crimes are globalisation and
financial market integration. There are severe macroeconomic consequences due to financial
crimes. The efficient working of the financial markets depends upon the high level of
professional, legal and ethical code of conduct which is the attracts the investors from various
jurisdictions to invest in the country’s economy. When financial system of an economy is
abused, it deters the foreign investors from investing in that country’s economy and weakens
their trust in the financial system. The evidence related to financial crimes are limited. There
have been various cases where there have been reputational losses to an entire industry, market,
companies. There have been circumstances where the crimes are limited in nature but had
significant impact on an individual country. Financial crimes hamper the budget and policies
made by the government.12 These activities can erode an entire nations economy if appropriate
measure is not taken along the time and the countries shall keep their policies and framework
flexible so that the offenders are not able to take undue advantage of the loopholes to and are
able to easily evade the law enforcements.

In circumstances where there is a negative effect on the country’s reputation it tarnishes and
hinders the global opportunities related to sustainable growth and future developments i.e.,
short term or long-term goals of a country. Once the reputation of a country is tarnished by
such financial crime activities, it leads to financial unsoundness which further increases the
volatility of unprecedent and unpredictable changes of capital flows and exchange rates. It
affects the decision-making process of policies such as determining the GDP of the country,
national income, tax collected, allocation of resources and distribution of wealth. Most of the
situations where banks have faced a financial crisis is mostly due to the financial crime
activities that took place that causes the government to lose control over its economic policies
which results in high volatility of money demand and the offenders invests that money through
multiple transaction at some place where there is low risk of detection. These if not stopped or
looked after can result in financial crisis. 13 The money of tax payers is meant for the welfare
of public and developments but are used to mitigate these crimes. This leads to stagnation of
government development projects and weakens trust and faith of the citizens in government.

11
Supra 8
12
https://www.imf.org/external/np/ml/2001/eng/021201.pdf
13
https://www.uniassignment.com/essay-samples/finance/impact-and-consequences-of-financial-finance-
essay.php

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The Interpol in a statement relating to the financial crimes stated that in the recent times with
the advent of cryptocurrencies such as Bitcoin, Ethereum, etc., there has been an evident uprise
in financial crimes specifically money laundering. Funds generated out of financial crimes are
usually used towards illegal activities such as terrorist financing. 14 It is realised that the
opportunistic criminals take undue advantage of the loopholes in regulatory framework and use
it to their own benefits and exploit the system.

Due to financial crimes, there is siphoning of millions of dollars from nations economy and
poses a real threat to the economy of the nation and in turn affects the global markets.

Different types of financial crime have different effect on the societies, businesses, economy.
For example, if we look at money laundering per se, it is a way through which the money
obtained through illegal means converted into legal money and is transferred by way of series
of transactions to a place where there is low risk of detection in order to conceal the identity of
the primary source.15 Further, the laundered money is either used for personal gains or towards
other illegal activities such as terrorism as there exists a close linkage between both money
laundering as well as terrorist activities.16 Under money laundering the terrorists derive funds
from various low level crimes such as smuggling, narcotics, safe heavens, etc and they find out
various ways to move the money within organisations by disguising its primary source.
National security plays an essential role in controlling terrorist activities and a country having
inconsistent policies relating to terrorist financing is vulnerable to national security and in turn
international peace and security.

Fight against financial crimes

Various global initiatives formed as governing/regulatory bodies to combat financial crimes
are:

i. Financial Action Task Force (FATF): FATF was established in 1989 in Paris by
G7 Summit. It was formed with the aim to set standards and promote effective
implementation of legal, regulatory and operational framework to combat money
laundering and terrorist financing and the adverse effect caused by such activities
on the society as there were eminent threats to the banking and financial institutions.
With the advent of time, it has recommended various international standards that
are to be mandatorily followed by the countries. In 2012, its efforts were to obstruct
the financing and proliferation of weapons which could result in mass destruction.
It later developed standards for organised crimes and corruption. It keeps on
updating its recommendations and is continuously strengthening and adding new
risks such as related to virtual assets as lately there has been widespread popularity
of cryptocurrencies. 17

14
https://www.interpol.int/en/Crimes/Financial-crime
15
Supra 12
16
https://2009-2017.state.gov/j/inl/rls/nrcrpt/2003/vol2/html/29843.htm
17
https://www.fatf-gafi.org/about/

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 ii. Financial Intelligence Unit (FIU): It was established in 1990’s as a central agency
for receiving, analysing and disseminating information related to suspected
financial transaction to prevent money laundering. The IMF and the world bank
along with their member nations provide assistance in strengthening FIU’s. Once
suspicious transactions are detected by the FIU’s, it helps law enforcement agencies
in combating the problem in a more systemised manner. The information gathered
by them can be used by national and international law enforcement agencies for
ease of investigation process.18
iii. Basel Committee on Banking Regulations: It regulates the banking authorities by
supervising practices and it was established in 1975 by the Governors of Central
Bank which were a part of G-10 countries. It issues guidelines in accordance to the
international community which the banks are expected to follow. It had made
various substantial contributions to the banking sector globally set standards. It also
stated that the application of four principles is very necessary which are (i) know
your customer, (ii) compliance with law, (iii) cooperation with law enforcement
agencies, (iv) adherence to statement.19
iv. International Narcotics Control Board: It is an independent and a quasi-judicial
body established in 1968 for the implementation of United Nations Drug control
conventions with respect to the Single Convention on Narcotics Drugs, 1961. It has
laid down various other conventions of the UN as well such as Convention against
Illegal Traffic in Narcotic Drugs and Psychotropic Substances, 1988 and
Convention of Psychotropic Substances, 1971. It aims towards ensuring that
adequate measures are being taken by the respective governments to prevent the
illicit trade of drug to be used for medicinal and scientific purposes. They assess the
chemicals that are used in illicit drugs and further a decision is taken whether or not
such chemicals be placed in national or international control.
v. International Organisation of Securities Commission: It was admitted as an
associate member of association of securities regulatory organisation in 1991 and
was made a full-fledged member in 1997. It plays an essential role in ensuring and
assisting its member in order to help them achieve high level of regulatory
standards.20
vi. United Nations Convention Against Corruption: It came into force on 4th
December, 2005 in accordance with Article 68(1). The proposal to form an international
convention regarding corruption was adopted from 8th United Nations Congress on
Prevention of Crime and treatment of offenders, 1990. This convention has a wider
approach and is the sole legally binding instrument on anti-corruption. It enfolds five
major areas such as preventive measure, law enforcement and criminalisation,
international cooperation, asset recovery, information exchange and technical assistance

18
https://www.imf.org/external/pubs/ft/FIU/fiu.pdf
19
https://www.gfsc.gg/commission/publications/international-regulatory-supervisory-bodies
20
Ibid

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 and cover bribery, trading under influence, abuse of powers and various other acts of
corruption.21

Approaches for preventing and combating financial crimes

The world has discovered various diversities of financial crimes which signifies that a single
institution or a regulatory body cannot efficiently control such diverse kind of crimes due to
which various international and national regulatory bodies and conventions are formed for
supervising and regulating different financial crimes. The only way such crimes could be
prevented is by developing a control mechanism for which firstly the vulnerable areas need to
be identified and further defence mechanism be made to protect those vulnerable area/points
of crime. Every organisation shall have basic structure of system such as background checks
while recruiting a new staff member, procedures and policies related to the protection of assets,
etc within an organisation. Such elements of an organisation are essential means for prevention
of fraud and other financial crimes. There are various approaches if adopted can help in
prevention and control of financial crimes: 22

(i) Audit: The accounts of a company shall be audit after frequent intervals to keep a
check on the financial transactions and whether there seems to suspected financial
transaction in order to provide as a safeguard against various financial crimes. If
such suspected transactions are detected at an initial stage, such crimes can be
prevented.
(ii) Transparency: Public disclosure procedures are very necessary for to safeguard an
organisation from financial crimes. The companies whether private or public shall
publish their accounts and disclose their income and expenditure for better
transparency and the trust of public in their organisation.
(iii) Regulatory system: It is essential for identifying any misconducts and further
responding to it appropriately in order to ensure that the market integrity is
maintained. There are various remedies available such as litigation, companies own
regulatory mechanisms, procedure and policies which are as important as
government regulatory mechanisms.
(iv) Public awareness: These frauds can be easily prevented at the first stage only if
people are aware about the various kinds of crimes that might occur in their field of
industry, therefore the organisations shall spread awareness about various
prospective victims of crime and the types of crimes and activities to be seen as red
flags and the appropriate response that should be taken for preventing the crime.
The authorities that are to be informed in case any suspected transactions are
detected and the hotlines of appropriate regulatory bodies and law enforcement
agencies.
(v) International Cooperation: As fraud can be committed by people in residing in
different jurisdictions and in order to nab those offenders there needs to be a multilateral
international cooperation between the two nations i.e., where the offence took place and

21
https://www.unodc.org/unodc/en/corruption/uncac.html
22
https://www.imf.org/external/np/ml/2001/eng/021201.pdf

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 the jurisdiction where the offender resides. For the purpose of this there are various
treaties and agreement between two nations and such transnational crimes require
immediate international cooperation.
(vi) Cash transaction reporting mechanism: There are numerous cash transaction in
money laundering as well as tax evasion which becomes a problem when such
transactions go undetected. This problem persists since a long time due to which a new
regulation was brought into action which stated that the banks are supposed to report
any transaction which are beyond a certain specified amount to the central authority or
any transaction which appears to be suspicious. The places where these mechanisms are
already in place, it becomes easier for those jurisdictions to track the money.

Conclusion
This article reviews the existing journal articles and information available on various other
sources such as international intergovernmental organisations working against financial
crimes. Motivation being one of the most essential reasons for commission of a financial crime.
According to the elements of fraud triangle theory i.e., pressure, opportunity, rationalization
which are the reasons for commission of an offence, it is said that a offender who committed a
fraud under any element of the theory cannot commit the crime unless they have the capability
to do so. The aforementioned approaches for preventing and combating financial crimes cannot
guarantee the prevention of financial crimes but can help in reducing the number of crimes.
The more the preventive measure are taken the more will the number of such crimes reduce. It
is advised that the nations keep their policies and procedures flexible so that the offender cannot
take undue advantage of the loopholes to surpass the regulatory bodies and law enforcement
agencies.

Electronic copy available at: https://ssrn.com/abstract=3917078