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International Banking Law and Money Laundering

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Money Laundering in International Banking Law


Law is a set of rules that are required through public institutions to govern behaviour. This assignment based on international banking law on the sights of a Trainee who is recruited in a Law firm that advises banks and various economic organization operated worldwide. Nowadays banks try to capture international market place capturing local market. So the law which is crying need to regulate internationally is matter of concentrations. So this assessment will be showed the law and other criteria to control over a bank internationally.

The rationale behind the laws in the international market.

Banking law covers the many areas and state regulations governing commercial institutions.  Many solicitors who practice in this zone of the law handle everything from client disputes and objections to a bank, to complex process between domestic and international bank, their stockholders, the administration, and other parties. However, most banking law solicitors are hired to deliver advice regarding regulatory compliance. Banks may choose to continue in house counsel for this resolution, or to seek support from an independent law firm (Banking Law, 2015).

Banking Regulatory authority is joint into only one financial-service agency, Communal governance regulation in the financial sector has been viewed as a specialty area with standards and rules formed to achieve the dominant objectives of financial regulation safety and reliability of the financial system, and customer and stockholder protection. In the circumstance of banking regulation, the traditional principal negotiator model used to examine the relationship between shareholders and directors.It has taken together leaders of the letter of credit communal from the fields of banking, law, commercial, regulation, and academia in forums and educational events to adoptive and promotes the interchange of ideas (Legislation, 2008).

There are few objects of bank regulation and those are helping to control banking in international market. Those are Prudential which helps to decrease level of risk, Systemic risk reduction called the risk of distraction from adverse exchange conditions, Misuse of banks that are prohibited criminal purpose, Shelter banking confidentiality and Credit allocation. There are strong rationales behind international banking law. There are few rationale for regulations that helps to control the activities of banks in the international market. It can be said free banking system controlling the supply of total amount of banknotes and credits that can be reinforced by any given stock of cash reserves. The other one called financial systems are more prone to period of flux than other firms. The main reasons for financial area regulation are: To ensure systemic stability, to offer smaller & retail clients with protection and to keep consumers against monopolistic exploitation (Fiordelisi, 2013).

There are three types of regulation: a) Structural (or systemic) regulation. b) Prudential regulation. c) Conduct of business regulation.

  1. Structural regulation: This system mainly emphasis on the safety and soundness of the economic system. This regulation also provides government safety like deposit insurance and lender of last resort.
  2. Prudential regulation: This system of regulation is mainly anxious with consumer protection. It relates to observing and supervision of economic institutions. The cause of saying prudential is various regulatory instruments, mainly capital adequacy.
  3. Conduct of business regulation: This regulation is concerned how banks and other financial institutions execute their organization. It engage to monitoring and supervision of financial institutions. It emphases on establishing rules to minimise the risk that: Consumers receive bad advice, Frauds and misrepresentation and Employees and financial advisor act incompetently (Fiordelisi, 2013).

Maintaining banking system internationally is not the same as doing banking system at home. The different between national and international banking is noted here. First, there are fears that international banks are not as “nationalistic” as domestic banks. It may be said that domestic banks are there to precaution the national interest. Second, Foreign bank helps recapitalize the collapsing banking sector in nation sector , the “99 percent Foreign Equity Contribution” limit created anxieties that a country is too open relative to its ASEAN neighbours, which remain fairly protective of their banking industries. Third, the country which is a major foreign owner and investor with whom a country often has conflict. Level of Competition will practice in foreign markets is likely to be more energetic and multipart than domestic markets. At last it can be said that Countries determine their laws based on the needs of their nations not the concerns of external companies. Everyone obeyed that international law is a noblemen’s agreement which is privileged, but not always. (Wihardja, 2012).

The scope to which the laws actually control and impact the activities of banks in the international market,

International regulatory framework for banks is known as Basel III. It is a comprehensive set of reform measures, established by the Basel Committee on Banking Supervision, to support the regulation, supervision and risk management of the banking sector. The purpose of Basel III is to lessen the capability of banks to harm the economy by taking on additional risk.

The Basel III regulations have enclosed numerous important changes for banking capital structures. First of all, the least amount of equity, as a percentage of properties, will increase from 2% to 4.5%. There is also a supplementary 2.5% “buffer” required, taking the total equity requirement to 7%. This buffer can be utilised during times of economic stress, but banks doing so will face compressions on their capability to recompense dividends and otherwise arrange capital. Banks will have until 2019 to instrument these changes, providing them adequately of time to do so and checking a sudden “lending freeze” as banks challenge to improve their balance sheets. It is potential that banks will be less commercial in the future for these regulations. The 7% equity requirement is a lowest and it is likely that many banks will try to maintain a somewhat complex figure in order to provide themselves a cushion. Banks that are more stable will be able to issue debt at a minor cost. At the same time, the stock market might allocate a higher Price Earnings multiple to banks that have a less risky capital structure (Perry, 2010).

Basel III is not a solution, and will not single-handedly restore steadiness to the financial system and check future economic crisis. However, in grouping with other measures, these regulations are likely to assistance produce a more stable financial system. Greater financial constancy will help produce firm economic growth, with less risk for crisis fuelled declines such as that experienced following the global financial crisis of 2008-2009 (Perry, 2010).

As with any regulations, the ultimate effect of Basel III will depend upon how it is applied in the future. Furthermore, the actions of international financial markets are reliant on a wide variety of issues, with financial regulation being a large section. Nevertheless, it is potential to understand about some of the possible impacts of Basel III for depositors.

The aim of Basel III tries to overcome micro prudential nature of previous Basel consensus by presenting the notion of macro prudential regulation. Macro prudential regulation controls system wide risks that can amass across the banking sector and as well as the pro cyclical increase of these risks over time. The Basel III was formed by G10 countries to set up international standards for banking supervision with especially focus on capital adequacy requirements of banks. Basel III banks are required to hold 4.5% of common equity and 6% of Tier I capital of risk-weighted assets (RWA). Two additional capital buffers in form of (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer of 2.5% of capital during periods of high credit growth, was introduced. One vital change which Basel III carried was the recognition that a micro prudential approach to capital requirements needed to be complemented with macro prudential regulations (Jayadev, 2013).

The most important drawbacks under Basel III as prudential regulation provided by Acharya (2012) are as following: Micro theoretic solution to problems arising at Macro level, Failure to account for Feedback Effects, Static Risk weights of assets class and No Leverage Restriction. One of important weakness of all Basel accords as a prudential regulation was the influences of private players in process of expressing the regulatory norms in Basel accords which certified their interest were taken care of. The problem of Basel as prudential framework is its increasing complexity. Hoenig (2013) argues that the basic flaw of allowing large banks to use highly complex modelling tool to estimate risk of different asset categories was continued in Basel III too. It implies that regulatory capital increase as envisaged in Basel III can be generated by manipulating risk estimates.

Basel III has increased the quality and quantity of level I capital and there is a donation of countercyclical buffer capitals, still contained assumption that market discipline devise will  work in restraining the bank from attractive in any excessively risky actions, is the major theoretical problem of this regulatory framework. The issue of measuring risk capital of banks through inner modelling and its allegation is also not correctly resolved. It ignores endogenous or dynamic evolution of risk of the underlying asset and endogenous liquidity risk associated with such overleveraged risky advantage (Sherpa, 2013).

Rationale (i.e. reasons) for money laundering duties being imposed on banks by countries such as the US as in the case of HSBC.

Money laundering is that the method of remodelling the take of crime into seemingly legitimate cash or alternative assets. Money obtained from bound crimes, like extortion, trading, drug traffic, extra-legal gambling and non-payment is “dirty”. It has to be cleansed to seem to possess been derived from non-criminal activities in order that banks and different money establishments can modify it while not suspicion. Money laundering is often outlined as happening in 3 steps: placement, layering and integration.

The rationale for money laundering duties being imposed on banks by countries such as the US as in the case of HSBC is that Money laundering  threatens  the  credibility  and  effectiveness  of  financial  systems  and  it  has  many negative  effects  on  countries  economic  structures. It  may  cause  serious  macroeconomic distortions  and  misallocation  of  resources  and  capital  around  the  world,  and  hinder  economic growth and reputation. The banking system is one of the most important vehicles for money laundering. The way of money laundering are electronic payment systems, wire transfer and electronic money transfer, branchless banking, private banking, correspondent banking and offshore banking (Sarigul, 2013).

Like HSBC in USA, Standard Chartered PLC engaged in money laundering duties in UK in 2012. The rationale of duties were established and imposed on banks because of hindering money laundering. As a cite example, we can mention an instance. On 6 August 2012, the New York Department of Financial Services (DFS), led by Benjamin Lawsky, suspect customary chartered of activity $250 billion in transactions involving Iran. In step with the terms of the settlement, the bank in agreement has to pay a $ 340 million fine. The bank in agreement to put in a monitor to supervise the bank’s concealment controls for a minimum of 2 years, and appoint “permanent officers United Nations agency can audit the bank’s internal procedures to forestall offshore cash laundering”. The monitor can report on to the DFS. Lawsky’s statement aforementioned “the parties have in agreement that the conduct relevant concerned transactions of a minimum of $250bn.” Many monetary analysts expected that, as a result of its sturdy monetary position, the bank would be able to simply cowl the $340 million fine while not having to boost additional capital. On nineteen August 2014, the bank was penalized $300 million by the big apple Department of economic Services for breach of money-laundering compliance associated with doubtless speculative transactions involving customary chartered shoppers in urban centre and therefore the UAE. The bank issued an announcement accretive responsibility and regretting the deficiencies, at an equivalent time noting the ruling wouldn’t jeopardize its U.S. licenses (Wolf, B., 2014).

THREE money laundering duties imposed on banks in preventing money being laundered

Russia and the Bank of New York Mellon said Thursday they had extended a settlement in a US$22.5 billion lawsuit associated to an infamous 1990s money laundering indignity. Russia’s Federal Customs Service withdrew its lawsuit in a Moscow court after the bank (BNY) definite to pay it just US$14 million in an out-of-court settlement, the two sides publicised in a combined statement. The service had sued BNY in a Moscow court in May 2007, demanding that Russia suffered US$22.5 billion in damages from a 1990s money laundering scheme run by a former BNY vice president and her spouse. The husband and his partner’s team had earlier entreated guilty after being blamed by U.S. authorities of functioning an account through which billions of dollars of Russian money were laundered from 1996 to 1999.In 2005, BNY admitted to a role in the laundering of US$7.5 billion in what is fictional to be one of the biggest money-laundering schemes in history. Russia filed the suit saying that it deserved US$22.5 billion because of a provision in U.S. law that allows victims of money laundering to sue for three times the amount that was laundered (AFP, 2009).

Liberty Reserve name of a site established in Costa Rica-based centralized digital currency service that billed itself as the “oldest, safest and most popular payment processor … serving millions all over the world. In May 2013, Liberty Reserve was closed by United States federal prosecutors under the Patriot Act after an investigation by authorities across 17 countries. The USA charged organiser Arthur Budovsky and six others with money laundering and operating an unlicensed financial contract company. Liberty Reserve is supposed to have been used to launder more than $6 billion in criminal proceeds during its history. Liberty Reserve had been reopened by a Canadian firm Liberty Reserve Canada LLC and was planning to still operate similar money transfer services but complying with laws and regulations. In late 2014 the website was postponed by the hosting service provider (Information week, 2013).

TWO loan structures and ONE other main form of loan structure

A syndicated loan is provided by a group of lenders and one or several commercial banks or investment banks known as lead arrangers’ structure, arrange, and administer that. The syndicated loan market is the leading way for corporations in the United State and Europe to top banks and other financial institution providers for loans. The United State market initiated with the great leveraged buyout loans of the middle of 1980s, and Europe’s market blossomed with the promotion of the euro in 1999 (Research Gate, 2014).

Syndicated loan has the following features. It has huge amount and long term loans condition. It has less pressure on banks and diversified risk. It also provides large amounts of loans with longer term and easy action management. It has fewer restrictions on the use of proceeds. It is easier in management. It is more appropriate as compared to a simple loan from single or multiple banks. The debtor does not have to deal with a large number of lenders (Research Gate, 2014).

On the other, Mortgage backed securities (MBS) is a type of asset-backed security that is secured by a mortgage, or more usually a collection of sometimes hundreds of mortgages. The mortgages are retailed to a group of individuals that refuge, or packages, the loans composed into a security that can be sold to investors. There are three parties involved in the structure MBS: the seller, the issuer and the investor. They also take the concern of acting as the contractor, collecting principal and interest payments from borrowers. Issuers purchase loans from venders and pool them together to issue MBS to investors (Investopedia, 2013).

It has prepayment risks, though these are especially pronounced. Prepayment risk is the risk of insolvents paying more than their compulsory monthly payments; thereby lessen the profit of the loan. Prepayment risk can be resolute by many features, such as the present and issued mortgage rate variance, covering turnover and track of mortgage rate (Investopedia, 2013).

Above the two structures I prefer to syndicated loan structure due to its facilities. Syndicated loan facilities can growth competition for business, prompting other banks. It is flexibility in structure and pricing. This loans bring the mortgagor greater visibility in the open market. Syndicate banks sometimes are eager to share views on business issues.

Role that the above THREE loan structures play in banking.

It is a very common question which loans is more acceptable to an individual and companies. Basically, individuals or companies search for those loans which more beneficial. Above the two structures of loans individuals or companies take out syndicated loan. The reason behind that is an individual borrower raises a loan which would exceed the capacity of a single bank. It also cut down on management capacity since the borrower communicates only with the arranger/agent. It also expansion the financing base through the contribution of other banks. It is less costly than numerous lines through multiple institutions. It supports to improve broader financial relationships (Gala, 2009).

Leading banks take benefit from syndicated loan. Banks fund arrangement and other charges can be earned without requiring capital. This loan helps enhancement of bank’s reputation. This loan structure also create positive relation with their clients. This loans entree to lending chances with low marketing or processing costs. It triggers more facilities to contribute in future syndications as network of the banks founds a level of comfort with each other. In case the mortgagor runs into problems, participant banks have equal treatment (Gala, 2009).The working capital loans can assist the company in financing accounts, managing core cash flows, supporting supply chains, backing production and marketing processes, providing cash support to business expansion and carrying current assets.

Objectives and purpose behind the government or bank making the policy or decision.

Bank loans are an important tool in a governments financing toolkit. There are two types of bank loan policy. Those are investment loans and development policy loans. Investment loans known as long term loan duration 5 to 10 years help to develop in finance goods, works and services. Development policy loans provide external financing to aid government’s policy and institutional reforms (GFOA, 2013).

Above the loan policy, Development policy loan are perfect and more effective for external financial instructions. Development policy loans offer quick-disbursing support to countries with outside financing requirements to support structural reforms in an economic sector or in the economy as a whole. They support the government policy and institutional changes required to make a dynamic environment that encourages fair and continued development for every sector of society. Over the past two decades, development policy lending previously called modification lending-has accounted, on average, for 20 to 25 percent of total Bank lending. Development policy loans were originally considered to deliver support for macro-economic policy improvements and adjustment to economic crises. Over time, they have changed to focus on longer-term structural, financial sector and social policy reforms. Loans pursue to address complex institutional issues such as strengthening education and health policies, improving a country’s investment climate, and addressing weaknesses in governance, public expenditure management and public financial accountability (World Bank, 2001).

The financial crisis in the year of 2007–2008, also known as the Global Financial Crisis and 2008 financial crisis, is considered by many economists that is worse than 1930s. The impact of a fall in bank lending also depends on other factors in the economy. The bank loan fall in European wide recession also UK export sector. The rate of bank rate was high which impact on bank loan. The cut in interest rates to 0.5% in 2009, helped people to afford the interest payments on bank loans. Lower rates makes the payment loan cheaper also helping to maintain consumer spending. The fall in bank disposition and negative news concerning the state of the industry caused an enormous fall in client confidence. This fall in client confidence contributed to the decline in disbursal and economic process. Alternative Lending from traditional banks has dropped. However, this has encouraged customers to seek alternative forms of lending. Item Club report showed that although bank and building society lending to persons had shrunk by 23% (£34bn) since 2007, lending by alternative consumer credit providers had risen by 42% (£29bn) over the same period (Pettinger, 2012).


These laws ought to lead to a somewhat safer financial set-up, whereas maybe restraining future economic process to a little degree. For investors, the impact is probably going to be various, however ought to lead to safer markets for bond investors and maybe bigger stability for securities market investors. Associate degree understanding of metropolis III laws can enable investors to raise analyse the money sector going forward, whereas additionally helping them in formulating economics opinions on the steadiness of the international financial set-up and also the international economy.


Acharya, V. (2012). The Dodd-Frank Act and Basel III: Intentions, Unintended Consequences, and Lessons for Emerging Markets. ADBI Working Paper 392, Tokyo: Asian Development Bank Institute.

AFP (2009). Russia, U.S. bank settle US$22.5 bil. Lawsuit. [ONLINE] Available at: http://www.chinapost.com.tw/international/europe/2009/10/23/229782/Russia-US.htm. [Last Accessed 16 Feb 2015].

Banking Law, 2015. Guide to Bank and Bank Regulation Law. [ONLINE]Available at: www.hg.org/banking.html [Last Accessed 16 Feb 2015]

Fiordelisi, F., 2013.  Bank Regulation and Supervision, Management. University Roma Tre, Italy.

Gala, C. (2009). Loan Syndication. [ONLINE] Available at: http://www.slideshare.net/Dharmikpatel7992/loan-syndication-24275360. [Last Accessed 16 Feb 2015].

Government Finance Officers Association (2013). Understanding Bank Loans. [ONLINE] Available at: http://www.gfoa.org/understanding-bank-loans. [Last Accessed 17 Feb 2015].

Hoenig, T. and Speeches (2013).  Basel III Capital: A Well-Intended Illusion. FDIC: Federal Deposit Insurance Corporation. Available at: < http://www.fdic.gov/news/news/speeches/>[Accessed 16 Feb 2013]

Informationweek (2013). Liberty Reserve Operator Pleads Guilty To Money Laundering. [ONLINE] Available at: http://www.informationweek.com/applications/liberty-reserve-operator-pleads-guilty-to-money-laundering/d/d-id/1112164. [Last Accessed 16 Feb 2015].

Investopedia (2013). Introduction to Asset-Backed and Mortgage-Backed Securities. [ONLINE] Available at: http://www.forbes.com/sites/investopedia/2013/01/18/introduction-to-asset-backed-and-mortgage-backed-securities/. [Last Accessed 16 Feb 2015].

Jayadev, M.  (2013). Basel III implementation: Issues and challenges for Indian banks, IIMB Management Review. 25 (2), pp.115-130.

Leblond, P., (2014). Journal of Banking Regulation 15. [ONLINE] Available at: http://www.palgrave-journals.com/jbr/journal/v15/n3-4/full/jbr201411a.html. [Last Accessed 16 Feb 2015].

Legislation (2008). Financial Services and Markets Act 2000. [ONLINE] Available at: http://www.legislation.gov.uk/ukpga/2000/8/contents. [Last Accessed 16 Feb 2015].

Maria Monica Wihardja (2012). Foreign banks vs. domestic banks. [ONLINE] Available at: http://www.thejakartapost.com/news/2012/08/28/foreign-banks-vs-domestic-banks.html. [Last Accessed 16 Feb 2015].

Mervyn K Lewis and Kevin T Davis (2008). Domestic and International Banking. [ONLINE] Available at: http://mitpress.mit.edu/books/domestic-and-international-banking. [Last Accessed 16 Feb 2015].

Perry, B. (2010). Understanding the Basel III International Regulations. [ONLINE] Available at: http://www.investopedia.com/articles/economics/10/understanding-basel-3-regulations.asp. [Last Accessed 16 Feb 2015].

Pettinger, T. (2012). Importance of Bank Lending to UK Economy. [ONLINE] Available at: http://www.economicshelp.org/blog/6571/alevel/importance-of-bank-lending-to-uk-economy/. [Last Accessed 17 Feb 2015].

Research Gate, 2014. Banking and Insurance: Institutional investment in syndicated loans. [PDF] http://www.researchgate.net/publication/227437995_Summary_of_Institutional_investment_in_syndicated_loans

Sarigul, H., (2013). Money Laundering and Abuse of the Financial System. International Journal of Business and Management Studies. 2 (1), pp.287-301

Sherpa, D., (2013). EUROPE AND GLOBAL ECONOMIC REBALANCING. Critical Evaluation of Basel III as Prudential Regulation and. 253 (1), pp.3-16

Wolf, B., (2014). Exclusive – Standard Chartered to scour records for money laundering, with penalty at stake. [ONLINE] Available at: http://uk.reuters.com/article/2014/08/11/uk-banks-moneylaundering-stanchart-idUKKBN0GB26720140811. [Last Accessed 16 Feb 2015].

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