| MONEY and BANKING | STORIES | LOW GRAPHICS |
|
STORIES ABOUT FOREIGN EXCHANGE |
|
My friend Preston was on vacation with a friend in the Czech Republic (Prague). They had made reservations at this restaurant that was recommended to them as an excellent place for a champagne brunch. He said that the brunch was magnificent and had everything one could imagine: smoked salmon, lobster, a variety of champagne and much more. When he and his friend asked for the check, they were nervous to see how much it cost. After converting the Koruny’s into dollars (checking and rechecking in disbelief), they realized that this brunch had cost the two of them only ten U.S. dollars. They left twenty U.S. dollars with wide-eyes following them out of the restaurant. From this story, we see how even though money is supposed to set a value on goods and services, the exchange rate can distort this value system |
"The word 'intervention'...conjures up images of the government sending in the US Cavalry to impose order...Another analogy from the American West may be more appropriate that the arrival of the Cavalry. The foreign exchange market is a herd of steers, and central banks are herd dogs. They bark and nip at the heels of the steers, with the aim of moving the herd in the desired direction." |
|
references |
|
|
|
|
Hawala networks exist around the world and are prominent in countries with large numbers of South Asian expatriates, such as Switzerland, England and The United Arab Emirates. One example of the use of Hawala in money laundering schemes is the Metro Goldwyn Meyer (MGM Studios)- Cannon fraud scandal of 1997. Giancarlo Parretti the former CEO of the entertainment companies, MGM, Cannon and Pathe, and the companies’ chairman, Florio Fiorini, were indicted in a $1.5 billion dollar fraud case. Parretti and Fiorini were charged with international money laundering as well as the falsification of tax returns. The methodology of the fraud is as follows: 1. Parretti and Fiorini falsified statements to the Securities and Exchange Commission regarding the source of funds used to acquire a controlling interest in Cannon. 2. Cannon was renamed the Pathe company and then sold movie theaters that it owned to a Dutch company named Cinema 5. Cinema 5 borrowed about $180 million from the Dutch branch of the French bank, Credit Lyonnais. It was later discovered that Cinema 5 was a false company established to hide a network of foreign companies. The $180 million used to “buy” Pathe’s theatres was actually an accounting trick used to erase the equivalent amount of debt. 3. The United States MGM Studios was acquired by Pathe in March of 1990. Paretti and Fiorini assigned MGM assets to Credit Lyonnais Bank Netherlands. In order to make the merger of MGM and Pathe complete, Parretti and Fiorini transferred $500 million dollars in debt through Hawala networks in Switzerland, The Netherlands and India. These transactions were bundled in the form of imports. At the end of the transfer network, Paretti and Fiorini declared these imports as assets valued at $500 million dollars. |
|
Sources: |
|
|
|
|
|||
|
|||
Since Niagara Falls is a huge tourist attraction, the surrounding businesses allow people to pay for purchases using U.S. dollars. Thus, one could either exchange their money at the exchange booths or choose to pay with U.S. dollars. The difference is that by paying with U.S. dollars, you get less for you money. These businesses use a lower exchange rate, thus increasing their profit. 
Perhaps the most infamous cases of misuse of financial markets are tied to money laundering. The Hawala system is not an underground financial system nor is it a black market, yet its legality is questionable in South Asian countries, as it is a system that allows the transfer of money based on the speculation of exchange rates. According to India’s and Pakistan’s Foreign Exchange Regulation Act (FERA): (e)xcept with the previous general or special percussion of the Reserve Bank, no person, whether an authorized dealer or a moneychanger or otherwise, shall enter into any transaction which provides for the conversion of Indian currency into foreign currency or foreign currency into Indian currency at rates of exchange other than the rates for time being authorized by the Reserve Bank. 
From the perspective of the Pakistani student it is more desirable to send his remittances through the Hawaladar. In summary the benefits that this student receives are: a guarantee that the money will be delivered in person and not lost in transit, the ability to send more money home at minimum cost, and the assurance that there will be no paper trail that could alert the Immigration and Naturalization Services. In essence the Hawala system provides the benefits that financial intermediaries provide-lower transaction costs without formally being part of the regulated banking system. Like banks, Hawaladars are able to provide their services at a lower costs than banks due to two main factors: their average costs are low as they operate only with a calculator, fax and/or email. More importantly, the Hawaladars have connections with import/export firms in their ethnic communities in the United States and in the home country. This allows them to bundle the remittances with the large number of transactions of the firm for the day and thus take advantage of economies of scale. In fact the Hawaladar will package the remittances in the form of goods that can be quickly sold by a Pakistani or Indian Hawaladar to recover the money. Because of the minimal paper trail, low costs and substantial profits, the Hawala system is used for more than remittance transfer; it is often used to launder money. Money resulting from drug deals, terrorist activities and the like are “cleaned” because they are bundled with remittances and import/export monies. 
