7LA514 International Banking And Finance Law Assessment Answer

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Question :

DERBY LAW SCHOOL ASSESSMENT BRIEF - COURSEWORK

Module Code 7LA514
Module Title International Banking and Finance Law
Assessment Method Two pieces of coursework.
Weighting
Each of the two pieces of coursework is worth 50% of your overall mark for this module
Learning Outcomes TestedTo pass this assessment students will need to demonstrate that they can:
  1. Evaluate the applicable law on international financial regulation and banking
  2. Critically assess the current structure of the global financial system
  3. Develop subjective opinions to remedy and fortify the current global financial system
Rationale
To satisfy the marker that they have met the learning outcomes tested by this assessed task, students will need to supply the marker with evidence that they can:
  1. Analyse the question posed;
  2. Identify the legal principles needed to reply the questions of law raised by the question;
  3. Use the legal principles identified to give an accurate reply to the questions of law raised by the question;
  4. Review materials addressing these issues;
  5. Research beyond the materials studied;
  6. Select the arguments responding to the question posed;
  7. Articulate their understanding and analysis in a clear, precise, and concise fashion; and
  8. Develop an original point of view supported by arguments used


Assessment criteria are descriptive statements designed to identify the specific properties/ characteristics/aspects of your work the marker will consider when marking/grading it. In other words assessment criteria are designed to answer the question: ‘What am I being assessed on?
The assessment criteria for this assessment are:
  1. Performance - Respond to the question/s posed
  2. Parameters - Using the materials studied and collated through research responding to the question/s posed;
  3. Required standard - Producing an original response to the question/s posed
  4. Additional requirements:
Students should:
  1. Analyse and apply the substantive principles to the assigned question/s;
  2. Offering solutions where appropriate;
  3. Summarise key points;
  4. Ensure the accuracy and written style of the substance of their response by ensuring the:
    1. Legal accuracy of the information; and
    2. Clarity and accuracy of their response as a whole.
Competences Developed
By completing this assessment, students will be able to evidence competency in the following areas:
  • Demonstrate a capacity for conceptual, critical and reflective thinking
  • Analyse information and situations carefully and critically
  • Implement innovative solutions
  • Demonstrate awareness of how knowledge is applied in a variety of contexts, including business and professional development
  • Connect learning, research and practice
  • Engage in creative problem solving
  • Create new ideas and solutions
  • Use initiative to solve problems
  • Articulating ideas effectively and in writing
  • Utilising technology appropriately
  • Dealing successfully with complexity and making sound judgements
  • Solving problems through effective analysis and decision making
Furthermore this assessment provides students with the opportunity to develop/demonstrate the following transferable skills:
  • Problem solving
  • Research
  • Autonomy
  • Communication and literacy
Further information about graduate competencies/transferable skills can be found in the ‘Student Assessment Handbook: Coursework’


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Answer :

Law


Question one

In this question, an anti-money-laundering (AML) system to be designed for the bank that is based in the European Union and has retail and corporate clients from the European Union and also from the non-European Union nations. As a result, the risk factors that need to be considered while designing the AML procedure for the bank need to be considered. The lawmakers in the EU have taken several steps for strengthening and clarifying the significance of the link that is present between anti-money laundering/countering financing of terrorism (AML/CFT) and the potential issues and also for complementing the present legal framework of the EU. Among these steps, features the amendments made in the Capital Requirements Directive. These amendments have been made for the purpose of further clarifying the link that is present between AML/CFT supervision and prudential supervision and due to which the potential supervisors are required to act on AML information. This has been developed with a view to set up strong alignment for the better internal control system and lower down the complexities of the process. 

Apart from it, the Anti-Money-Laundering Action Plan has also been adopted by the Council of European Union. There are several objectives present in case of this action plan and it also mentions the deliverables and timelines, along with highlighting the need for introducing the effectiveness of AML/CFT supervision. Even if the supervision of the compliance on part of financial actions with AML requirements is still under the exclusive jurisdiction of national AML authorities, it has been noted in this action plan that in order to achieve the better exchange of information and the collaboration that takes place between potential supervisors and the authorities, particularly those from the non-EU countries, is very important for achieving effective supervision.  There is also set up strong alignment of the work program which also assists in developing the strong work program for the better undertaken work approach. 

In this regard, the ECB Banking Supervision while exercising its responsibilities related with potential supervising, is required to act upon the concerns related with money laundering and terrorism funding that can have an impact on the safety and the soundness of these institutions, including the banks. The concerns related with money laundering or the financing of terrorist activities, particularly the concerns that arise out of the AML/CFT authorities evaluation of money laundering or terrorist funding risks present in case of individual institutions, are going to be considered in the process of potential supervising and particularly, even if not exclusively as follows:

  • At authorization, the extent to which the business model of the applicant, the proposed a systems of risk management and control and the appropriateness of its members, shareholders, overall management, senior managers and the key functionaries give rise to risks related with money laundering and terrorism funding. 
  • As a part of the continuing supervision, in assessing the acquisitions of qualifying holders and in proper and fair assessment of management.
  • In case of the supervisory review and evaluation process (SERP), including the review of business models, risks, governance, credit operations and the internal risk management present in the bank.
  • Regarding the taking of potential administrative measures and especially, imposing pecuniary penalties or proceeding for the withdrawal of the process of authorization, and interest in making sure that the weaknesses present in the field of AML/CFT, having a prudential impact are considered while applying the prudential supervisory measures and also the power of alleviating the prudential concerns.

In view of the presence of this scenario, the continuous need related with having increased exchange of information between the prudential supervisors and the AML authorities within the European Union and also in case of the non-EU countries and having closer cooperation is a significant. The reason is that, as mentioned above, the prudential supervisors are going to use the information available with the AML authorities in the process of supervision and the AML supervisors are also going to use the information available with prudential supervisors for informing the approach related with AML/CFT supervision of the financial institutions.  This is done with a view to strengthen the work process and set the authority for the particular department for the better supervision. 

The increased focus on regulation and supervision alone is not going to be sufficient for successfully dealing with money laundering and the funding of terrorism in the financial sector. At the same time, it also needs to make knowledge that financial institutions are going to play the main role in this regard. The reason is that the institutions are the first who have to make sure that they are not being used for this purpose and the AML/CFT issues are receiving proper attention from the management. At the same time, it is also necessary that the Bank should make sure that the members of its management at the senior level are having a good reputation at all times and have sufficient knowledge and experience for performing their responsibilities. In the same way, the bank is also going to be responsible for making sure that governance and risk management processes adopted by it are sufficient and allow the bank to identify, evaluate and manage the risks, to which it may be exposed, including the money-laundering risks. 

In the recent past, several banks have come under scrutiny due to their alleged failure of enforcing effective AML/CFT measures. Therefore there is an increase in the guidance notes and the European Union is also getting ready for implementing the fifth EU Anti-money Laundering Directive (2018/843/EU). In the present regime, there have been certain weaknesses identified in case of AML/CFT.

  • Governance failures- Ideally, this happens as government fails to comply with the applicable rules and also fails to set up strong governance program. 
  • Ineffective compliance with legal requirements concerning AML/CFT- There is need to set up legal compliance program and governance set up process for the work program. 
  • Ineffective, group policies related with AML/CFT- The undertaken policies and program is set up for the effective process system and meet the failure in the undertaken work pogrom. 
  • Failure to mediate the highest business models- The undertaken program which is failed to undertake for the better work program. 

By highlighting several outstanding structural issues, there have been demands for greater harmonization and supervision by the national authorities, closer potential supervision switch is of cross-border situations, and systematic cooperation with the main non-EU authorities. At the same time, it has also been emphasized that the European banking authority should also play a significant role by taking the lead in making sure that any breach of the relevant rules is properly investigated by the national supervisors and also to facilitate international cooperation in this regard.

Under the circumstances, it has become very significant that the gatekeepers (banks and other entities) , should have applied the measures that are necessary for preventing money laundering and funding of the terrorist activities. Traceability of financial information is always considered as having a significant deterrent effect. In this regard, the first anti-money laundering directive was adopted by the EU in 1994, preventing the misuse of financial system for money laundering. It was mentioned by this provision that the obligor entities are going to apply consumer due diligence requirements while they were going to enter into a business relationship. Therefore the banks are required to identify and verified the identity of its customers, monitored the transactions and report any dubious transactions. This legislation has been revised it regularly for dealing with the risks that are related with money laundering and funding of terrorism. The European Union has also adopted a modernized regulatory framework in 2015, which included the following:

(i) Directive (EU) 2015/849 related with the use of financial system for money laundering or terrorist funding.

(ii) Regulation (EU) 2015/847 concerning the information on payer accompanying the transfer of funds. It makes the transfer of funds more transparent and in this way helps the law enforcement agencies in tracing criminals and terrorists.

Non-EU subsidiaries of EU Banks: there is a new regulation related with the non-European Union subsidiaries of the EU banks. This comprehensive update has been issued by the European Banking Authority (EBA), which regulates the banks throughout the European Union. The purpose of these new regulations is to deal with any administrative loopholes present related with the subsidiaries of EU banks that are present in the countries outside the European Union for making sure that they are also in tune with the requirements of their main branch. For this purpose, the EBA is going to look at the nations that actively avert the EU banking regulations (including the ones related with AML) from being enforced in their jurisdiction for preventing the sharing of information. Some of the nations that are likely to include in this regard are the Middle Eastern, Eastern European nations and the offshore jurisdictions. 

For this purpose a thorough risk assessment of AML/CFT risks should be undertaken in the relevant offshore jurisdiction. At the same time, the bank is also required to provide targeted training to its staff members, wherever applicable. The bank should also try to get the consent from the customers or should perform specified additional measures for managing the risk regarding the sharing and processing of the data related with its customers, and disclosing information concerning suspicious transactions and transferring the data of the customers the member nations. The bank is also under an obligation for terminating the relevant business transactions or relationships. 

At the same time, the European Commission has also revealed its ability to compile a new list of the nations which present a risk related with money laundering after the EU member states have rejected the idea to name and shame those who have been taking part in money laundering. Therefore, the Commission had decided to discuss with the government, the issue of coming up with a black list of the nations concerning money laundering and the funding of terrorist activities.

It is also very important that the bank seriously considers the warning given by the Special Committee. While in the past, generally EU money laundering was considered as an activity related with smaller nations and having weaker regulatory regime. But there have been incidents where scandals have hit the major institutions in the recent past from the nations that have a strong record against money laundering. Therefore, if the large institutions from the strongest regimes have proven to be susceptible, what can be said of the key and the compliance programs in case of the smaller institutions present in other member nations.

It can be stated in the end that the bank needs to realize that only the increased supervisory and regulatory IS not going to be sufficient for successfully dealing with the issue of AML in the financial sector. At the same time, it also needs to be noted that financial institutions are going to play the main tool in this regard. The banks should make sure that they are not used for such purposes and the issues related with AML receive sufficient attention from the management. At the same time, with the help of its AML procedure, the bank is also required to make sure that the members of the management are capable enough of performing their duties in this regard.

Question 2

In the present question, the bank is going to develop a savings instrument and needs to make sure that it is compatible with the tenets of Sharia law. It needs to be noted in this regard that Islamic finance acquires a significant position in international financial system and certainly it has been among the deep fast's growing components of the system during the last few decades. In the global financial taxes, that was a renewed debate regarding the role that can be played by Islamic finance in stabilizing the financial system, in view of the strong ethical principles present in the system and its religious foundations. 

There are four basic principles present in case of Islamic finance, and these principles have been derived from the Quran and Sunna. According to the first principle of Islamic finance, it has been made that paying interest (which can be any predetermined payment over and above the principle) is going to be prohibited. The result is that in case of Islamic finance, the banks use contracts for creating exposure to the real sector and therefore they must make sure the efficient risk management. The second principle is related with the concept of profit and loss sharing. The parties to financial transactions are required to share the risks as well as the rewards that are going to be attached with it and in this way the excessive buses and profits can be minimized. According to the third principle, there is a prohibition of uncertainty or speculation. Any uncertainty that may be present in the terms and conditions of the contract is strictly prohibited. However, risk taking is permitted when all the terms and conditions have been clearly mentioned and made known to all the parties. In the same way, the fourth principle requires the use of asset-backing. Therefore, every financial transaction should be related with tangible or an identifiable underlying asset, which makes sure that the Islamic banks are always connected with real economy. 

 Sharia savings accounts: the Sharia compliant savings accounts that are offered to the customers by the banks are different from the regular savings accounts, because in this case instead of paying interest to the customers, which is prohibited under Islamic law, the savings of the customers grow by paying the profit. The sharia savings accounts are available to all the customers in the UK and they are also considered to be highly competitive as compared to the regular savings accounts, and therefore they generally feature among the top deals. The reason is that in this case the money invested by the clients is not going to be used for funding the businesses that are not permitted under the sharia principles like tobacco, alcohol on gambling. The result is that these savings accounts are a very good choice for the clients who are looking for having an ethical savings account.

At the same time, it also needs to be noted that the sharia savings accounts are compliant with the banking regulations. Under the banking regulations, it is required that the banks should place measures for ensuring the safety of the deposits made by the customers. The result is that all the deposits made by the customers into sharia savings are protected. Therefore in case of an unlikely event that the expected rate of profit has not been achieved or if it should be unexpectedly lower than the time of the opening of the savings account, the bank is required to contact the customers and give them a choice to either continue with the lower rate of expected profit or to break their deposit with no penalty and giving them all the profit that has been made by them till date. However, such a thing has not happened, but still, it remains a possibility. As a result of the application of banking regulations, the savings made by the customers are required to produce the advertised it turns, and mitigate any losses that could have been made as a result of the bad investment performance. 

It also needs to be stated in this regard that a Sharia savings account can be opened by any person. Therefore it is not necessary that the customer should be a Muslim or a person actively practicing Islam can be allowed to go for a sharia savings account. However it needs to be noted that even in the sharia savings account can be opened by a person of any religion, the normal restrictions related with savings accounts are still going to apply, for example, the person should be more than 18 years for borrowing money. 

It needs to be noted that different types of Islamic savings accounts available to the customers. These include the fixed term deposit accounts. Generally the account lasts for a particular period of time, which is normally between six months and five years. The second account type is instant access savings account. It allows the customers to deposit and withdraw the money instantly. The other type of account is notice savings account. In this case the customer is required to give a notice to the bank before withdrawing their money; generally this notice has to be given before 30 to 90 days. 

Another question generally ask in this case is if sharia banking is more ethical. It needs to be noted that sharia banking follows the ethical guidelines that have been provided in Islam, but several of these rules may appeal to the non-Muslims also. Therefore, the persons who want to go for ethical banking, opening a sharia account can be an option worth investigating to see if these principles align with the values of these persons. Hence it can be stated that there is some common ground present between Islamic banking and ethical banking. Some of these principles will appeal to non-Muslims also, who agree with the underlying principles of equitable distribution of money, the idea of fair trading, well-being of the community as a whole and spending the money judiciously. In view of the banking crisis, it is possible that many savers may be attracted by the approach adopted by Islamic banking towards investment as the only invest in real assets and don't make investments in financial instruments that depend on speculation. 

Therefore when a person wants to open an Islamic savings account, instead of being offered an interest rate, the bank is going to offer target profit to the customer, which the bank will try to achieve for the customer by investing the money deposited by the customer in compliant investments. These may include the houses that have been purchased through the Islamic mortgage scheme of the bank. The profit made by such an account is liable to pay tax, just like the interest that needs to be paid on the standard savings accounts. The third reason that an element of risk is present in this case, the customers should agree that they are ready to suffer a loss also.  However, among these, advantage of good rate of return accompanied with the type of account also offers the benefit of a lack of risk related with uncertain and speculative investments. In this case, the investments made by the bank are considered by many religious and secular customers as ethical.

It is worth mentioning that that the sharia compliant savings accounts in the banks are protected in a similar manner as are the other savings accounts, which means that the capital invested in these accounts is not at risk. There are certain reasons due to which the general people think of opening the sharia compliant savings account. First of all, certain ethical benefits are present in case of opening a sharia savings account. These ethical benefits may appear to be appealing for the persons from different religions and also for the secular savers. This is particularly true in case of the persons who have concerns regarding the type of businesses in which the bank may be involved. Opening and managing a sharia compliant savings account is similar to opening and managing any other type of savings account in the bank. Generally the same processes are used in this case; however, there can be some difference present in terminology and ethics. 

In this way the term sharia compliant is related with the banks that follow the Islamic principles of finance. In case of the savings accounts, the banks following the sharia principles are not going to pay interest to the customers but in its place, they are going to be a prophet that has been generated from the deposits made in the savings accounts. Therefore, mostly as a normal bank, the is the bank also invests its money paid by the savings account holders in sharia compliant ventures. As a result, the money will not be invested by the bank in the businesses that provide goods or services like alcohol or tobacco or are involved in gambling, because these activities are against the Islamic principles. The money that has been made by the investments made in the bank is received by the bank and then the bank pays to its customers. The ERP mentions the profit that is expected by the bank to be made on the money and it is known as a target. In this regard, it is necessary that the bank would advertise the ERP as a percentage so that the customers can evaluate what the savings account is to offer them as compared to the interest rates that can be given by the conventional banks. But it needs to be noted at this rate is not guaranteed and therefore it can be adjusted anytime, even there are no instances where the ERP has been reduced.

The approach towards the risk in case of Islamic financial products is very different from the conventional products. Therefore, while it is possible that an Islamic financial product may have similar objectives like a conventional financial product, but generally it will have a different arrest or reward profile. Sometimes, this unconventional nature of risk or reward profile appears to be attractive for the potential investors even when there are no religious reasons present to motivate them. At the same time, even the basic principles related with Islamic finance are well understood and generally accepted, sometimes there can be variations present in the viewpoint of Islamic scholars regarding how these principles are going to apply in particular cases. Therefore it is possible that a particular deal may be considered as acceptable at a particular place but the same deal may not acceptable at some other place. 

There are certain advantages present a case of the sharia compliant savings bank accounts. Among these advantages is the advantage of good rate of return. Similarly, this type of account also offers the benefit of a lack of risk related with uncertain and speculative investments. In this case, the investments made by the bank are considered by many religious and secular customers as ethical. On the other hand, there are certain disadvantages also associated with these accounts. For example, there is no guaranteed interest (even if the ERP has been always met but there's no guarantee). The consumers don't have a lot of choice regarding institutions which offer these accounts. However, the choice related with the most suitable savings bank account depends on the individual.