essay 4 - outline

Intro:

·         The Fed didn't start lowering rates until January 2001, and lowered them about 1/2 point each month, resting at 1.75% in December 2001. This kept interest rates high when the economy needed low rates for cheap business loans and mortgages.

One of the causes of the 2008 recession was that the Fed was also slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest-only loans. – (amadeo)

·         Throughout the mid 2000s, we all heard the ads on the radio; get a mortgage for no money down. Lending standards were lowered and lowered until people with no jobs, no income, no assets and no credit rating were able to get huge mortgages for no money down and no proof of income. (Montana)

·         Deregulation and stability had afforded Wall Street traders a self-confidence that encouraged them to take significant risks, many centered on America’s growing number of homeowners, who took advantage of relaxed credit restrictions and a market wide open to lending. Subprime mortgages (high-risk home loans) began to take their toll on the economy as homeowners defaulted or fell behind on payments.- (“Recession”)

·         . In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses. – (amadeo)

·         These mortgages were securitized or turned into mortgage backed securities that people could invest in. For example, take a 10 block area around your home. Put all those mortgages into an envelope. You don’t know the credit worthiness of those mortgages. Cut up the envelope into smaller pieces all holding all kinds of mortgages and then sell those pieces to investors. These pieces were called tranches.

These were called collateralized debt obligations (CDOs). Those who owned them would get paid when each person in that certain tranche paid their mortgage and did not get paid when the mortgages were not paid and the defaults and foreclosures started.

There was such a huge demand for these CDOs and not enough mortgages that the banks invented CDOs, these were called synthetic CDOs.

Two big problems caused the banks to live in their dream world during this housing “bubble”. How they listed their assets on their books. They listed these CDOs at inflated prices when in reality they were dropping like a rock. When they had to list them properly at current market value, everyone could see the banks didn’t have nearly the assets they claimed to have.

The second problem was leverage. Many of these banks had leverage of 30 or more to 1. Meaning for every dollar of their own they invested in these mortgages, they used $30 borrowed dollars to invest.

Other bank problems that led to the Great Recession include shadow banking, the unregulated derivatives market and the repo market or repurchase agreements. – (Montana)

·         In the summer of 2008, both institutions were on the verge of collapse. A $300 billion credit line was extended to stabilize Fannie Mae and Freddie Mac, but ten days later Lehman Brothers, an international financing firm, declared bankruptcy, the largest in U.S. history. The next day, the federal government authorized an $85 billion buyout of A.I.G. Financial Products, an insurance group closely related to Goldman Sachs, another financial behemoth specializing in investments. Citigroup, Merrill Lynch, and other companies teetered on the brink of bankruptcy and were forced to radically restructure. A general alarm sounded as the healthy financial institutions shut down credit lines and less-fortunate companies scrambled for economic security through mergers, buyouts, and federal bailouts. (“recession”)

·         Bush signed the Troubled Asset Relief Program (TARP) on 3 October, authorizing $700 billion in rescue funds to beleaguered banking firms. More than $17 billion was carved out to save the auto industry. (“recession”)

·         By December 2008, employment was declining faster than in the 2001 recession. – (amadeo)

Thesis: the 2008 recession could have been avoided if the Federal Reserve had better regulated new financial instruments, if the government hadn’t kept interest rates and lending standards so low, and if finance companies hadn’t taken on a large amount of risky securities.

First Section: The major cause for the 2008 recession was massive deregulation by the government because they failed to notice the risky actions being taken by financial institutions

·         The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, - (Chan)

·         The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.” – (Chan)

·         The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence. – (Chan)

·         It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.” – (Chan)

·         The pithiest explanation I've seen comes from New York Times columnist and Nobel Laureate Paul Krugman, who noted in one interview: "Regulation didn't keep up with the system." In this view, the emergence of an unsupervised market in more and more exotic derivatives—credit-default swaps (CDSs), collateralized debt obligations (CDOs), CDSs on CDOs (the esoteric instruments that wrecked AIG)—allowed heedless financial institutions to put the whole financial system at risk. "Financial innovation + inadequate regulation = recipe for disaster is also the favored explanation of Greenspan's successor, Ben Bernanke, who downplays low interest rates as a cause (perhaps because he supported them at the time) and attributes the crisis to regulatory failure. – (Weisburg)

·         Deregulation and stability had afforded Wall Street traders a self-confidence that encouraged them to take significant risks, many centered on America’s growing number of homeowners, who took advantage of relaxed credit restrictions and a market – (“Recession”)

Second Section: Low interest rates because of the 2001 recession led to lowered lending standards, which caused the housing bubble to grow until it peaked in 2008.

·         Most analysts find former Fed Chairman Alan Greenspan at fault, though for a variety of reasons. Conservative economists—ever worried about inflation—tend to fault Greenspan for keeping interest rates too low between 2003 and 2005 as the real estate and credit bubbles inflated. This is the view, for instance, of Stanford economist and former Reagan adviser John Taylor, who argues that the Fed's easy money policies spurred a frenzy of irresponsible borrowing on the part of banks and consumers alike. – (Weisburg)

·         High interest rates are also a cause of recession. That's because it limits liquidity, or the amount of money available to invest. In spite of the stock market decline in March 2000, the Federal Reserve continued raising interest rates to a high of 6.25% in May 2000. The Fed didn't start lowering rates until January 2001, and lowered them about 1/2 point each month, resting at 1.75% in December 2001. This kept interest rates high when the economy needed low rates for cheap business loans and mortgages.

·         One of the causes of the 2008 recession was that the Fed was also slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest-only loans. – (amadeo)

Third section: even though all financial institutions felt the impact of the recession, the few that went under lost because they unwisely bought large amounts of mortgage backed securities that were extremely risky.

·         Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence.

It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt. – (Chan)

·         Other analysts look to the underlying mindset that supported the meltdown. People like to say that the crisis was caused by shortsightedness, stupidity, and greed. But those are weak explanations, unless you think human nature somehow changed in the final decades of the 20th century to make people greedier or more foolish than they were previously. This isn't impossible, but it's hard to support. A subtler psychological argument is that the economy fell prey to recurring delusions about risk and bubbles, which economists Carmen Reinhart and Kenneth Rogoff describe in their book This Time Is Different. – (Weisburg)

·         Countrywide and a host of other mortgage companies started lending money for homes to anyone and everyone, regardless of their income or credit rating. Throughout the mid 2000s, we all heard the ads on the radio; get a mortgage for no money down. Lending standards were lowered and lowered until people with no jobs, no income, no assets and no credit rating were able to get huge mortgages for no money down and no proof of income.

Mortgage writers were not checking the information on mortgage applications and even encouraged applicants to lie on the mortgage applications. These loans were known as sub-prime, Alt-A and NINJA loans (No income, no job or assets). These mortgages came with low initial teaser rates and were ARMs (Adjustable Rate Mortgages) and in two years they would reset to a much higher payment. Some people were actually defaulting on their first mortgage payment.

The thinking was home prices would never go down and continue upward. This caused increased speculation with people buying numerous houses. Flipping was buying a home, waiting a short amount of time and selling it for a profit while others were buying numerous homes and renting them.

Mortgage companies didn’t really care since they sold most of these mortgages they wrote, so they would not be on the hook if these mortgages defaulted. – (Montana)

·         These mortgages were securitized or turned into mortgage backed securities that people could invest in. For example, take a 10 block area around your home. Put all those mortgages into an envelope. You don’t know the credit worthiness of those mortgages. Cut up the envelope into smaller pieces all holding all kinds of mortgages and then sell those pieces to investors. These pieces were called tranches.

These were called collateralized debt obligations (CDOs). Those who owned them would get paid when each person in that certain tranche paid their mortgage and did not get paid when the mortgages were not paid and the defaults and foreclosures started.

There was such a huge demand for these CDOs and not enough mortgages that the banks invented CDOs, these were called synthetic CDOs.

Two big problems caused the banks to live in their dream world during this housing “bubble”. How they listed their assets on their books. They listed these CDOs at inflated prices when in reality they were dropping like a rock. When they had to list them properly at current market value, everyone could see the banks didn’t have nearly the assets they claimed to have. – (Montana)

The second problem was leverage. Many of these banks had leverage of 30 or more to 1. Meaning for every dollar of their own they invested in these mortgages, they used $30 borrowed dollars to invest.

Other bank problems that led to the Great Recession include shadow banking, the unregulated derivatives market and the repo market or repurchase agreements.- (Montana)

essay 4 - research

http://useconomy.about.com/od/grossdomesticproduct/a/cause_recession.htm

Economic recessions are caused by a decline in GDP growth, which is itself caused by a slowdown in manufacturing orders, falling housing prices and sales, and a drop-off in business investment. The result of this slowdown is falling employment, and rising unemployment, which causes a slowdown in retail sales.

Irrational exuberance in the housing market led many people to buy houses they couldn't afford, because everyone thought housing prices could only go up. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses.

By August 2007, banks became afraid to lend to each other because they didn't want these toxic loans as collateral. This led to the $700 billion bailout, and bankruptcies or government nationalization of Bear Stearns, AIG, Fannie Mae, Freddie Mac, IndyMac Bank, and Washington Mutual. By December 2008, employment was declining faster than in the 2001 recession.

In 2009, the government launched the economic stimulus plan. It was designed to spend $185 billion in 2009. And in fact, it halted a four-quarter decline in GDP by Q3 of that year, thus ending the recession. However, unemployment continued to rise to 10%, and many business leaders still expected a W-shaped recession by the end of 2010. High unemployment rates still persisted into 2011.

http://www.slate.com/articles/news_and_politics/the_big_idea/2010/01/what_caused_the_economic_crisis.html

In 2007, the housing bubble burst, leading to a high rate of defaults on subprime mortgages. Exposure to bad mortgages doomed Bear Stearns in March 2008, then led to a banking crisis that fall. A global recession became inevitable once the government decided not to rescue Lehman Bros. from default in September 2008. Lehman's was the biggest bankruptcy in history, and it led promptly to a powerful economic contraction. Somewhere around here, agreement ends.

Most analysts find former Fed Chairman Alan Greenspan at fault, though for a variety of reasons. Conservative economists—ever worried about inflation—tend to fault Greenspan for keeping interest rates too low between 2003 and 2005 as the real estate and credit bubbles inflated. This is the view, for instance, of Stanford economist and former Reagan adviser John Taylor, who argues that the Fed's easy money policies spurred a frenzy of irresponsible borrowing on the part of banks and consumers alike.

The pithiest explanation I've seen comes from New York Times columnist and Nobel Laureate Paul Krugman, who noted in one interview: "Regulation didn't keep up with the system." In this view, the emergence of an unsupervised market in more and more exotic derivatives—credit-default swaps (CDSs), collateralized debt obligations (CDOs), CDSs on CDOs (the esoteric instruments that wrecked AIG)—allowed heedless financial institutions to put the whole financial system at risk. "Financial innovation + inadequate regulation = recipe for disaster is also the favored explanation of Greenspan's successor, Ben Bernanke, who downplays low interest rates as a cause (perhaps because he supported them at the time) and attributes the crisis to regulatory failure.

http://go.galegroup.com.ezproxy.frederick.edu/ps/retrieve.do?sgHitCountType=None&sort=RELEVANCE&inPS=true&prodId=GVRL&userGroupName=fred30208&tabID=T003&searchId=R3&resultListType=RESULT_LIST&contentSegment=&searchType=BasicSearchForm&currentPosition=3&contentSet=GALE%7CCX1929800107&&docId=GALE|CX1929800107&docType=GALE

Though the economic recession seemed to hit the nation with a sudden fury in 2008, the storm had been gathering force for years. Deregulation and stability had afforded Wall Street traders a self-confidence that encouraged them to take significant risks, many centered on America’s growing number of homeowners, who took advantage of relaxed credit restrictions and a market wide open to lending. Subprime mortgages (high-risk home loans) began to take their toll on the economy as homeowners defaulted or fell behind on payments. When Henry Paulson reluctantly accepted the position of secretary of the treasury in 2006, he immediately began to reach out for economic reform. Paulson initially focused on Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), two government-sponsored mortgage institutions responsible, either directly or indirectly, for nearly one-half of the nation’s $12 trillion in mortgages. Facing a war of economic ideology between a Democratic congress and a conservative white house, Paulson failed to achieve a compromise to address concerns about fannie mae and Freddie mac’s continued viability and, more broadly, the volatility of subprime mortgages.

 In the summer of 2008, both institutions were on the verge of collapse. A $300 billion credit line was extended to stabilize Fannie Mae and Freddie Mac, but ten days later Lehman Brothers, an international financing firm, declared bankruptcy, the largest in U.S. history. The next day, the federal government authorized an $85 billion buyout of A.I.G. Financial Products, an insurance group closely related to Goldman Sachs, another financial behemoth specializing in investments. Citigroup, Merrill Lynch, and other companies teetered on the brink of bankruptcy and were forced to radically restructure. A general alarm sounded as the healthy financial institutions shut down credit lines and less-fortunate companies scrambled for economic security through mergers, buyouts, and federal bailouts. By late September, the Bush administration began lobbying for a massive bailout of Wall Street firms. The crisis hijacked the 2008 presidential election as both candidates, Republican senator John McCain and Democratic senator Barack Obama, flew back to Washington, D.C., to attend an emergency meeting at the White House. Despite the hysteria of bipartisan fights, with Republicans blocking legislation and McCain suspending his campaign, Bush signed the Troubled Asset Relief Program (TARP) on 3 October, authorizing $700 billion in rescue funds to beleaguered banking firms. More than $17 billion was carved out to save the auto industry.

The political fallout was immediate, but the recession continued to deepen, provoking further federal action. While fiscal conservatives condemned the bailouts for using taxpayer money to rescue corrupt or incompetent companies, the newly elected Obama administration stepped in with a federal stimulus package to save failing state governments that were struggling to meet payrolls and to continue welfare and unemployment programs. In February 2009, the American Recovery and Reinvestment Act offered $787 billion in federal funds for domestic spending to help struggling homeowners and state and local governments. A month later, news reports revealed that parting CEOs from Wall Street firms that had benefited from bailouts received shocking severance packages. These “golden parachutes,” as they were labeled in the media, along with Obama’s stimulus package, elicited a mammoth response from conservatives and liberals alike. In particular, a new group of activists, the Tea Party, organized against federal spending. A series of conservative governors tried to block their states’ access to the stimulus. By early 2010 the economy had stabilized, but unemployment remained high. The Tea Party widened its platform to become the anti-government party, distancing itself from earlier attacks on CEOs and even endorsing golden-parachute recipient Carly Fiorina, former CEO of Hewlett-Packard, in the Senate race in California

. http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=0

http://economics-the-economy.knoji.com/what-caused-the-great-recession-of-20082009/

essay 4 - what i need to know

could the 2008 recession have been avoided?

what i need to know

• What factors led to or caused the recession
• what warning signs were there, ways it could have been detected earlier
• what actions against the recession were taken (besides the recovery act)
• what could have been done earlier, what solutions were proposed

essay - 4 what i already know

Could the 2008 recession have been avoided?

What I know

• Recession caused by many economic factors
• one attempted solution to fix recession after it had already happened was the Recovery act or stimulus under president Obama
• resulted in many banks closing or going under
• many people lost a large portion of their savings
• many companies went out of business or had to be bailed out by the government 

essay 3 - final draft

Scott Johnson                                                                                                                                     

 Dr. Kerr       

 EN101-12

 11 April 2013

The Invisible Crime of Money Laundering

The crime of money laundering is becoming an increasingly larger problem in the world with rise of modern financial markets. There were almost 900 convictions of money laundering in 2001 alone, and it is likely that there are many money launderers that were not convicted or went completely unnoticed (Layton). Many people have heard of the crime of money laundering, but are unaware of what it actually is. The U.S. Department of the Treasury summarizes it as “financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities”. The specific details of money laundering are complicated, but the entire process can be broken down into the three general steps of placement, layering, and integration.

The first step in the money laundering process is the placement of dirty cash into the financial system. Before this stage, criminals have large amounts of “dirty” cash on hand that they have acquired from illegal activity. They then need to insert the money into the legitimate financial system to unload the burden of guarding large amounts of cash (Layton; “Three-Stage Process”). According to the article “How Money Laundering Works”, the most common way of inserting the money into the financial system is depositing it into a bank or other financial institution. This is the riskiest stage of the process because the money has not yet been “cleaned”, and it is suspicious to deposit large amounts of cash into a bank without identifying a legitimate source for the money (Layton). The U.S. department of Immigration and Customs Enforcement explains that criminals can move the money “by employing complex and sometimes confusing documentation associated with legitimate trade transactions”. Another way that money launderers often avoid suspicion from law enforcement at this stage is by using a technique called “smurfing”, where they have many different people deposit small amounts of money into different accounts at the bank so that it can be acquired in full after it has been cleaned (“A Three-Stage Process”). Other ways of inserting the money into the financial system include using the illegal money to purchase chips at gambling institutions or using it to repay loans from banks or money lending businesses (“A Three-Stage Process”).

In the second step of the money laundering process, the money is “layered” through many transactions to make it difficult, if not impossible, to trace. The money launderer starts this process by sending the money that has been deposited to many different offshore accounts (Layton). The money is then continuously transferred to different accounts and other financial instruments in many different countries (A Three-Stage Process”). According to Billy Steel, the author of “Money Laundering: the Stages of the Process”, the purpose of this stage is “to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds”. This is the most complex stage because the more “layered” the money is, the more difficult it will be to trace back to the illegal source (Layton). Ways that money launderers conceal the money even further include changing the currency, investing in overseas stock markets that record only a small amount of transactions, or purchasing high valued items such as diamonds or yachts (Layton).

The final step in the process is integration, where the money is “cleaned” and returned to the criminal through an apparently legitimate source. At this stage, the money launderer can use the money without being caught because it is extremely difficult to trace it back to the illegal source (Layton). However, according to the money laundering prevention specialist company, About Business Crime Solutions Inc., the criminal must still complete this stage “in a manner that does not draw attention and appears to result from a legitimate source”. Money launderers often do this by taking advantage of other countries’ bank secrecy laws and granting themselves loans that have guaranteed secrecy, investing in legitimate business like casinos and check cashing institutions, or transferring the money by wire from a bank in a different country that the launderer owns (Layton; Steel). Another method includes the sale of high priced items like artwork or jewelry (“A Three-Stage Process”).

The complicated process of money laundering results in criminals benefiting from illegal activity, while law enforcement attempts to unravel the mystery to put the criminals behind bars. While some criminals who commit money laundering get away with the crime, recent crackdowns by law enforcement have put some of the large scale money launderers in prison. In 2005, Texas congressman Tom Delay was indicted on money laundering charges after it was discovered that he had illegally accepted corporate donations and used them for campaigning (Layton). Delay and his conspirators had funneled the funds through the national republican committee, which then sent equal amounts to Texas for use in his campaign (Layton). With large scandals like this alerting law enforcement to the seriousness of money laundering, efforts will certainly be made to punish more criminals who commit this crime.

Works Cited

"A Three-Stage Process." MoneyLaundering.ca. Business Crime Solutions Inc.. Web. 6 Apr 2013. <http://www.moneylaundering.ca/public/law/3_stages_ML.php>.

Layton, Julia. " How Money Laundering Works."HowStuffWorks.com. HowStuffWorks, inc., n.d. Web. 3 Apr 2013. <http://money.howstuffworks.com/money-laundering.htm>.

"Money Laundering." ICE.gov. Department of Immigration and Customs Enforcement. Web. 8 Apr 2013. <http://www.ice.gov/money-laundering/>.

"Money Laundering." Treasury.gov. U.S. Department of the Treasury, n.d. Web. 6 Apr 2013. <http://www.treasury.gov/resource-center/terrorist-illicit-finance/Pages/Money-Laundering.aspx>.

Steel, Billy. " Money Laundering - Stages of the Process."Laundryman.u-net.com. Billy Steel, n.d. Web. 6 Apr 2013. <http://www.laundryman.u-net.com/page5_mlstgs.html>.

essay 3 - first draft

 Scott Johnson                                                                                                                                    

 Dr. Kerr       

 EN101-12

 8 April 2013

The Invisible Crime of Money Laundering

The crime of money laundering is becoming an increasingly larger problem in the world with rise of modern financial markets. There were almost 900 convictions of money laundering in 2001 alone, and it is likely that there are many money launderers that were not convicted or went completely unnoticed (Layton). Many people have heard of the crime of money laundering, but are unaware of what it actually is. The U.S. Department of the Treasury summarizes it as “financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities”. The specific details of money laundering are complicated, but the entire process can be broken down into the three general steps of placement, layering, and integration. Any way money laundering

The first step in the money laundering process is the placement of dirty cash into the financial system. Before this stage, criminals have large amounts of “dirty” cash on hand that they have acquired from illegal activity. They then need to insert the money into the legitimate financial system to unload the burden of guarding large amounts of cash (Layton; “Three-Stage Process”). According to the article “How Money Laundering Works”, the most common way of inserting the money into the financial system is depositing it into a bank or other financial institution. This is the riskiest stage of the process because the money has not yet been “cleaned”, and it is suspicious to deposit large amounts of cash into a bank without identifying a legitimate source for the money (Layton). The U.S. department of Immigration and Customs Enforcement explains that criminals can move the money “by employing complex and sometimes confusing documentation associated with legitimate trade transactions”. Another way that money launderers often avoid suspicion from law enforcement at this stage is by using a technique called “smurfing”, where they have many different people deposit small amounts of money into the bank so that it can be acquired in full after it has been cleaned (“A Three-Stage Process”). Other ways of inserting the money into the financial system include using the illegal money to purchase chips at gambling institutions or using it to repay loans from banks or money lending businesses (“A Three-Stage Process”).

In the second step of the money laundering process, the money is “layered” through many transactions to make it difficult, if not impossible, to trace. The money launderer starts this process by sending the money that has been deposited to many different offshore accounts (Layton). The money is then continuously transferred to different accounts and other financial instruments in many different countries (A Three-Stage Process”). According to Billy Steel, the author of “Money Laundering: the Stages of the Process”, the purpose of this stage is “to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds”. This is the most complex stage because the more “layered” the money is, the more difficult it will be to trace back to the illegal source (Layton). Ways that money launderers conceal the money even further include changing the currency, investing in overseas stock markets, or purchasing high valued items such as diamonds or yachts (Layton).

The final step in the process is integration, where the money is “cleaned” and returned to the criminal through an apparently legitimate source. At this stage, the money launderer can use the money without being caught because it is impossible to trace it back to the illegal source (Layton). The cleaned money must be legitimately assimilated into the financial system so that the criminal has access to it (Steel). Money launderers often do this by taking advantage of other countries’ bank secrecy laws and granting themselves loans that have guaranteed secrecy, investing in legitimate business like casinos and check cashing institutions, or transferring the money by wire from a bank in a different country that the launderer owns (Layton; Steel). Another method includes the sale of high priced items like artwork or jewelry (“A Three-Stage Process”).

The complicated process of money laundering results in criminals benefiting from illegal activity, while law enforcement attempts to unravel the mystery to put the criminals behind bars.

Works Cited

"A Three-Stage Process." MoneyLaundering.ca. Business Crime Solutions Inc.. Web. 6 Apr 2013. <http://www.moneylaundering.ca/public/law/3_stages_ML.php>.

Layton, Julia. " How Money Laundering Works."HowStuffWorks.com. HowStuffWorks, inc., n.d. Web. 3 Apr 2013. <http://money.howstuffworks.com/money-laundering.htm>.

"Money Laundering." ICE.gov. Department of Immigration and Customs Enforcement. Web. 8 Apr 2013. <http://www.ice.gov/money-laundering/>.

"Money Laundering." Treasury.gov. U.S. Department of the Treasury, n.d. Web. 6 Apr 2013. <http://www.treasury.gov/resource-center/terrorist-illicit-finance/Pages/Money-Laundering.aspx>.

Steel, Billy. " Money Laundering - Stages of the Process."Laundryman.u-net.com. Billy Steel, n.d. Web. 6 Apr 2013. <http://www.laundryman.u-net.com/page5_mlstgs.html>.

essay 3 - outline

Thesis:  The process of money laundering can be divided into three steps, placement, layering, and integration

Intro:  what is money laundering, crimes that lead to or need the process of money laundering, why criminals money launder, brief description of process, maybe famous case to gain attention in the beginning.

·         “In October 2005, U.S. congressman Tom DeLay was indicted on money laundering charges, forcing him to step down as House Majority Leader. Money laundering is a serious charge -- in 2001, U.S. prosecutors obtained almost 900 money-laundering convictions with an average prison sentence of six years. The rise of global financial markets makes money laundering easier than ever -- countries with bank-secrecy laws are directly connected to countries with bank-reporting laws, making it possible to anonymously deposit "dirty" money in ­one country and then have it transferred to any other country for use. “

·         The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists.

·         Drug traffickers in particular need to launder money because they deal with everything in cash, and cant keep all the cash on them because its physically to much to store

Placement

The first step in the money laundering process is the placement of dirty cash into the financial system. Before this stage, criminals have large amounts of “dirty” cash on hand that they have acquired from illegal activity. They then need to insert the money into the legitimate financial system to unload the burden of guarding large amounts of cash (Layton; “Three-Stage Process”). According to the article “How Money Laundering Works”, the most common way of inserting the money into the financial system is depositing it into a bank or other financial institution. This is the riskiest stage of the process because the money has not yet been “cleaned”, and it is suspicious to deposit large amounts of cash into a bank without identifying a legitimate source for the money (Layton). The U.S. department of Immigration and Customs Enforcement explains that criminals can move the money “by employing complex and sometimes confusing documentation associated with legitimate trade transactions”. Another way that money launderers often avoid suspicion from law enforcement at this stage is by using a technique called “smurfing”, where they have many different people deposit small amounts of money into the bank so that it can be acquired in full after it has been cleaned (“A Three-Stage Process”). Other ways of inserting the money into the financial system include using the illegal money to purchase chips at gambling institutions or using it to repay loans from banks or money lending businesses (“A Three-Stage Process”).

Layering

In the second step of the money laundering process, the money is “layered” through many transactions to make it difficult, if not impossible, to trace. The money launderer starts this process by sending the money that has been deposited to many different offshore accounts (Layton). The money is then continuously transferred to different accounts and other financial instruments in many different countries (A Three-Stage Process”). According to Billy Steel, the author of “Money Laundering: the Stages of the Process”, the purpose of this stage is “to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds”. This is the most complex stage because the more “layered” the money is, the more difficult it will be to trace back to the illegal source (Layton). Ways that money launderers conceal the money even further include changing the currency, investing in overseas stock markets, or purchasing high valued items such as diamonds or yachts (Layton).

Integration

The final step in the process is integration, where the money is “cleaned” and returned to the criminal through an apparently legitimate source. At this stage, the money launderer can use the money without being caught because it is impossible to trace it back to the illegal source (Layton). The cleaned money must be legitimately assimilated into the financial system so that the criminal has access to it (Steel). Money launderers often do this by taking advantage of other countries’ bank secrecy laws and granting themselves loans that have guaranteed secrecy, investing in legitimate business like casinos and check cashing institutions, or transferring the money by wire from a bank in a different country that the launderer owns (Layton; Steel). Another method includes the sale of high priced items like artwork or jewelry (“A Three-Stage Process”).

Conclusion

The complicated process of money laundering results in criminals benefiting from illegal activity, while law enforcement attempts to unravel the mystery to put the criminals behind bars.

·         The Bank Secrecy Act (1970) basically eliminates all anonymous banking in the United States. It gives the Treasury Department the ability to force banks to keep records that make it easier to spot a laundering operation. This includes reporting all single transactions above $10,000 and multiple transactions totaling more than $10,000 to or from a single account in one day. A banker who consistently violates this rule can serve up to 10 years in prison.

·         The 1986 Money Laundering Control Act makes money laundering a crime in itself instead of just an element of another crime, and the 1994 Money Laundering Suppression Act orders banks to establish their own money-laundering task forces to weed out suspicious activity in their institutions. The 2001 U.S. Patriot Act sets up mandatory identity checks for U.S. bank patrons and provides resources toward tracking transactions in the underground/alternative banking systems frequented by terrorist money handlers. For a more complete list of U.S. anti-money-laundering legislation, see FDIC: Bank Secrecy Act and Anti-Money Laundering.

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essay 3 - research

http://money.howstuffworks.com/money-laundering2.htm

·         “In October 2005, U.S. congressman Tom DeLay was indicted on money laundering charges, forcing him to step down as House Majority Leader. Money laundering is a serious charge -- in 2001, U.S. prosecutors obtained almost 900 money-laundering convictions with an average prison sentence of six years. The rise of global financial markets makes money laundering easier than ever -- countries with bank-secrecy laws are directly connected to countries with bank-reporting laws, making it possible to anonymously deposit "dirty" money in ­one country and then have it transferred to any other country for use. “

·         The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists.

·         Drug traffickers in particular need to launder money because they deal with everything in cash, and cant keep all the cash on them because its physically to much to store

·         There are three steps to money laundering

1.       Placement – placing the money into a legitimate  financial institution, done usually offshore or in secrecy, usually in small amounts

2.       layering – this step involves sending the money through many different offshore accounts, wiring it to accounts in countries with secrecy laws so the money is anonamous, purchasing many expensive items. This is all done in an effort to make the money difficult , if not impossible to trace back as dirty money once it reaches step 3

3.       integration – this is where the dirty money becomes clean money. This is done in various ways, such as investing in certain legitimate businesses and cutting the profits, or the sale of expensive items the dirty money was used to purchase after it went through the layering step

·         eddie antar – large scale case of crazy eddies electronics. Laundered 8 million. Put money back in to business as revenue, inflated stock price. He then sold stock and profited 30 million. Serving 8 year prison sentence.

·         Tom delay – texas congressman that illegally accepted corporate donations, sent them to republican national headquarters in d.c. and then back to texas for use in his campaign.

·         The Bank Secrecy Act (1970) basically eliminates all anonymous banking in the United States. It gives the Treasury Department the ability to force banks to keep records that make it easier to spot a laundering operation. This includes reporting all single transactions above $10,000 and multiple transactions totaling more than $10,000 to or from a single account in one day. A banker who consistently violates this rule can serve up to 10 years in prison.

·         The 1986 Money Laundering Control Act makes money laundering a crime in itself instead of just an element of another crime, and the 1994 Money Laundering Suppression Act orders banks to establish their own money-laundering task forces to weed out suspicious activity in their institutions. The 2001 U.S. Patriot Act sets up mandatory identity checks for U.S. bank patrons and provides resources toward tracking transactions in the underground/alternative banking systems frequented by terrorist money handlers. For a more complete list of U.S. anti-money-laundering legislation, see FDIC: Bank Secrecy Act and Anti-Money Laundering.

http://www.treasury.gov/resource-center/terrorist-illicit-finance/Pages/Money-Laundering.aspx

·         Money laundering generally refers to financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities. Money laundering facilitates a broad range of serious underlying criminal offenses and ultimately threatens the integrity of the financial system.

·         The United States Department of the Treasury is fully dedicated to combating all aspects of money laundering at home and abroad, through the mission of the Office of Terrorism and Financial Intelligence (TFI).  TFI utilizes the Department's many assets - including a diverse range of legal authorities, core financial expertise, operational resources, and expansive relationships with the private sector, interagency and international communities - to identify and attack money laundering vulnerabilities and networks across the domestic and international financial systems."

http://www.laundryman.u-net.com/page5_mlstgs.html

·         I) PLACEMENT

·         This is the first stage in the washing cycle. Money laundering is a "cash-intensive" business, generating vast amounts of cash from illegal activities (for example, street dealing of drugs where payment takes the form of cash in small denominations). The monies are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms; for example: travellers cheques, postal orders, etc. (more details follow).

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·         ii)LAYERING

·         In the course of layering, there is the first attempt at concealment or disguise of the source of the ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. The purpose of layering is to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds.

·         Typically, layers are created by moving monies in and out of the offshore bank accounts of bearer share shell companies through electronic funds' transfer (EFT). Given that there are over 500,000 wire transfers - representing in excess of $1 trillion - electronically circling the globe daily, most of which is legitimate, there isn’t enough information disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money. Other forms used by launderers are complex dealings with stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high degree of anonymity available, the chances of transactions being traced is insignificant.

·         iii)INTEGRATION

·         The final stage in the process. It is this stage at which the money is integrated into the legitimate economic and financial system and is assimilated with all other assets in the system. Integration of the "cleaned" money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth.

·         Methods popular to money launderers at this stage of the game are:

·         the establishment of anonymous companies in countries where the right to secrecy is guaranteed. They are then able to grant themselves loans out of the laundered money in the course of a future legal transaction. Furthermore, to increase their profits, they will also claim tax relief on the loan repayments and charge themselves interest on the loan.

·         the sending of false export-import invoices overvaluing goods allows the launderer to move money from one company and country to another with the invoices serving to verify the origin of the monies placed with financial institutions.

·         a simpler method is to transfer the money (via EFT) to a legitimate bank from a bank owned by the launderers, as ‘off the shelf banks’ are easily purchased in many tax havens.

Placement Stage Layering Stage Integration Stage Cash paid into bank (sometimes with staff complicity or mixed with proceeds of legitimate business). Wire transfers abroad (often using shell companies or funds disguised as proceeds of legitimate business). False loan repayments or forged invoices used as cover for laundered money. Cash exported. Cash deposited in overseas banking system. Complex web of transfers (both domestic and international) makes tracing original source of funds virtually impossible. Cash used to buy high value goods, property or business assets. Resale of goods/assets. Income from property or legitimate business assets appears "clean".

http://www.moneylaundering.ca/public/law/3_stages_ML.php#placement

·         The placement stage represents the initial entry of the "dirty" cash or proceeds of crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding and guarding large amounts of bulky of cash; and (b) it places the money into the legitimate financial system. It is during the placement stage that money launderers are the most vulnerable to being caught. This is due to the fact that placing large amounts of money (cash) into the legitimate financial system may raise suspicions of officials.

·         The placement of the proceeds of crime can be done in a number of ways. For example, cash could be packed into a suitcase and smuggled to a country, or the launderer could use smurfs to defeat reporting threshold laws and avoid suspicion. Some other common methods include:

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·         Loan Repayment		·         Repayment of loans or credit cards with illegal proceeds
·         Gambling		·         Purchase of gambling chips or placing bets on sporting events
·         Currency Smuggling	·	·         The physical movement of illegal currency or monetary instruments over the border
·         Currency Exchanges		·         Purchasing foreign money with illegal funds through foreign currency exchanges
·         Blending Funds	·	·         Using a legitimate cash focused business to co-mingle dirty funds with the day's legitimate sales receipts

·         This environment has resulted in a situation where officials in these jurisdictions are either unwilling due to regulations, or refuse to cooperate in requests for assistance during international money laundering investigations.

·         To combat this and other international impediments to effective money laundering investigations, many like-minded countries have met to develop, coordinate, and share model legislation, multilateral agreements, trends & intelligence, and other information.  For example, such international watchdogs as the Financial Action Task Force (FATF) evolved out of these discussions.

·         The Layering Stage

·         After placement comes the layering stage (sometimes referred to as structuring). The layering stage is the most complex and often entails the international movement of the funds. The primary purpose of this stage is to separate the illicit money from its source. This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.

·         During this stage, for example, the money launderers may begin by moving funds electronically from one country to another, then divide them into investments placed in advanced financial options or overseas markets; constantly moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage of delays in judicial or police cooperation.

·         The Integration Stage

·         The final stage of the money laundering process is termed the integration stage. It is at the integration stage where the money is returned to the criminal from what seem to be legitimate sources. Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose.

·         There are many different ways in which the laundered money can be integrated back with the criminal; however, the major objective at this stage is to reunite the money with the criminal in a manner that does not draw attention and appears to result from a legitimate source. For example, the purchases of property, art work, jewellery, or high-end automobiles are common ways for the launderer to enjoy their illegal profits without necessarily drawing attention to themselves.

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