The paper investigates the essential principles of the fraudulent and wrongful trading processes using the examples from legal system of two countries, the USA and the UAE. The paper discusses the key shortcomings of the wrongful trading and shows the essential principles of the defining and punishing systems in the countries. Furthermore, the paper represents one of the issues which goes together with fraudulent and wrongful trading, the money laundering. This problem, as it has been investigated, plays an important role when it comes to the development of the economies. The main conclusion which has been made from the literature studied consists in the fact that it is extremely difficult to fight against this type of trading since it brings much more benefits than the legal one. Thus, it is of high importance to introduce, establish, and develop a law system which would be ready to prevent the acts of the wrongful trading in order to sustain correct and proper functioning of the economies.
In terms of the nature of modern commerce, trading, and the finance complex, some specialized terms related to the transaction or financing are typically used. Such terms are often used in commercial fraud to make the scheme look genuine, to impress or influence victims, to hide their failure in clarifying inconsistencies or unlawful details of transaction, etc. Because the fraudsters are themselves often ignorant, they often use incorrectly specialized terms, thus showing that the transaction is not genuine (Figueroa, 2014).
This essay is aimed at investigating fraudulent and wrongful trading with the appliance of practical examples originated from the USA and UAE. The essay is structured in such a way that it defines the real issues, problems, and background of the trading. The essay consists of such sub-sections as “Fraudulent and Wrongful Trading: Defining the Terms”, “Discussion of the Reasons and Impacts of the Fraudulent and Wrongful Trading”, “Practical Examples of Fraudulent and Wrongful Trading: the USA and the UAE”, and “Conclusion.”
The Essence of Trade: a Short Note
The essence of trading consists in the fact that every investor wants to maximize profits. At the same time it should be remembered that profit is always proportionate to the perceived risk, which is different for various investment (Strader, 2015). When the risk is high, investors also expose your capital to risk, and they require higher return than they would usually receive from less risky investments. In other words, the higher is the risk, the higher the promised profits are (Kim, 2013). Commercial frauds distort this principle of proportionality. Thus, in order to attract investments, disproportionately high profits with little risk or no risk at all are promised. Often, even the promised benefits are much greater than what could be obtained from the supremely speculative investments (Kim, 2013).
Risk-free nature of the proposed investment highlights the variety of means, including the promises and guarantees that the fraudster gives to the third parties and/or the organizations. In some fraudulent schemes, the promises to provide evidence that the profit is already coming, to pay such profit from the initial investment or from money given by other investors are present. These are the so-called pyramid schemes.
Discussion of the Reasons and Impacts of the Fraudulent and Wrongful Trading
The information has always been and remains the dominant factor in decision-making in the trading area of the USA and the UAE as in any other market (Strader, 2015). Valuable from a commercial point of view, the information can relate to different areas of the company, can be domestic product, and can also be obtained under the agreement. However, due to uncertainty of its partners (competitors), the information has a certain value in the market (Karmel, 2015).
Achieving information transparency, openness and transparency of the financial market at the macro level, naiad market efficiency, its honesty and fairness, the lack of fragmentation is one of the key concepts in investment bank activities. Information transparency is an essential requirement for economic agents aimed at protecting customers (investors, depositors, users, etc.). The latter are fully informed as well as provided with equal opportunities to assess different types of risks including credit-related with a specific business providing services to them (Kim, 2013).
Thus, one of the most important principles of the functioning of the financial market is its information transparency, which implies the fullest awareness of investors in their decision-making rational for investing funds in financial assets. Moreover, they have equal opportunities and rights in the process of accessing to information. Information transparency of the market is achieved by carefully planned systems of disclosure of financial assets, their issuers, and their current status as well as the prospects, expectations, and risks that they carry (Wei, 2014).
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One of the aspects which goes along with the fraudulent and wrongful trading is money laundering. The procedure of money laundering is typical for almost all forms of transnational and organized crime. It promotes corruption, distorts economic decision-making, aggravates social problems, and undermine financial institutions (Imoniana & Silva, 2013). Various economic measures designed for excluding or limiting criminal activities of using illegal means of income are the important components for combating programs dedicated to criminology. The main factors contributing to money laundering include:
Inadequate controlling and monitoring of the activities of financial institutions, failure to comply with international standards of financial regulation activities developed by specialized international organizations (Ross, 2015);
The spread of corruption among state executive, law enforcement, and judicial authorities (Tunley, Whittaker, Gee, & Button, 2014);
The inability or limited possibility of exchanging financial information with foreign law enforcement agencies (Karmel, 2015).
In recent years, the schemes aimed at isolating and steeling have been using remote banking technology. Commercial fraud, as well as legal transactions, provides the use of multiple documents to explain, capture, and reflect the transaction. However, the documents usually used in commercial fraud often differ from the documents used in legal transactions either because they are improperly drafted, or because they contain any unusual characteristics. Such elements are included with the aim at stimulating investments, strengthening the credibility of the fraudster, and explaining unusual revenues promised by a crook, who may also establish an unusual procedure.
The probability of presence of the commercial fraud can often be determined by the identification of these inappropriate aspects (Imoniana & Silva, 2013). Documents used to support commercial fraud may be fictitious, genuine, forged, or fraudulent; they can also be properly or improperly authenticated or issued by individuals or institutions. Sometimes professionals can be involved in drafting and certificating the documents (Tunley et al., 2014).
The decisive importance for the functioning of modern financial markets is the transparency of and the information about these markets and investments being universally available. On the other hand, it happens that investors are making investments based on confidential information or information which is clearly not valued by everyone (Wei, 2014). In certain situations, the adoption of measures on the basis of such information may be illegal. As a part of other commercial activities of the company, it may lawfully seek for preventing disclosure of confidential information or information about production methods that the employees or other persons apply using different legal mechanisms in order to remain competitive in a particular industry (Tunley et al., 2014).
However, such limitations are almost always inappropriate to investors, particularly with regard to methods for obtaining funds. Excessive secrecy is considered to be the level that exceeds the level of compliance of the transaction (Wei, 2014). Privacy regulation may be often contained in the regulations or requirements along with ‘legal sanctions’. The latter are calculated to ensure that investors, if they disclose any information, would be responsible for the damage in order to make it clear that the decision-maker in finances will be considered as the involved party when the transaction will be disclosed (Karmel, 2015). Such secrecy is designed to hide the transaction, to prevent the appearance of due diligence; it does not allow investors to contact the consultants or relevant sources of information, which may help in avoiding fraud.
Since the money laundering process relies to a certain extent on existing financial systems and operations, the choice of criminals specific mechanisms is limited only by their ingenuity. Money is laundered through currency and stock markets, gold dealers, casinos, car dealers, insurance and trading companies, etc. (Keay, 2014). Private and offshore banking, shell corporations, free trade zones, electronic systems, trade and financial institutions – all these structures may possess hidden illegal activities.
Practical Examples of Fraudulent and Wrongful Trading: the USA and the UAE
The problem with the globality of corruption consists in one aspect, which is the prevention of corrupt practices at the international activities of transnational corporations. It becomes now extremely important. For example, in 2008, almost one-third of the one hundred companies with the largest capitalization is considered by Standard & Poor’s as the ones requiring internal cost control and political lobbying (Imoniana & Silva, 2013). Due to the lack of transparency of the activities within different companies, it is difficult to establish where they receive profit, pay taxes, or participate in political campaigns (Rodrigo, 2013).
For example, numerous studies show that about half of the surveyed companies did not disclose information on participating in the political processes. Consequently, it becomes clear that such situation may have an impact of corruption on some of the companies or the officials. However, there has been no such an accident in the last decade of the 20th century (Frunza, 2015). Thus, it notes the increasing public interest in the problem of corruption around the world. This issue of great importance is added to the national scientific studies (Karmel, 2015).
At some criminal liability corporations in the United States (as well as in the UAE), courts began to fail to fulfill obligations imposed on them by law; and it has resulted in harm for the society since the middle of 19th century because of the improper fulfillment of the legitimate actions (Karmel, 2015). The Supreme Court recognized the constitutional criminal liability companies in 1909 (Karmel, 2015).
What is more, the USA were the first country in the world to pass a law prohibiting bribery of foreign public officials in the course of commercial activity (so-called Foreign Corrupt Practices Act, enacted in 1977). It appeared due to the investigation carried out by a special commission, during which it was found that in 1970s (Imoniana & Silva, 2013), about 400 large US companies allow suspicious or illegal payments to politicians, foreign governments officials, and political parties in the amount of about $300 million in total (Frunza, 2015).
Some businessmen and some politicians stood against the adoption of the Act, because in many countries, where the state plays a crucial role in the economy, the state apparatus is so corrupt that it is impossible to do any business without bribes (Rodrigo, 2013). The US companies that do not give bribes, are inevitably crowded out by less honest competitors. According to estimates of the US Department of Commerce, the loss of the US companies in recent years has been approximately 35-45 billion dollars as a result of the banning to give bribes abroad (Keay, 2014). Eventually, the companies working in corrupt countries even make an exception.
They have had to inevitably declare the bribes and the amount of tax deductible expenses in late 1980s (Frunza, 2015). The US government decided to stop competition between developed countries in the world market of bribes. In 1988, the Congress in Us requested the Government (through the Organization for Economic Cooperation and Development) to negotiate with the majority of the developed countries the adoption of the Convention, which prohibits the companies from the participating countries to bribe abroad (Frunza, 2015).
Regarding the cases in the UAE, it is necessary to mention the fact that the country possesses the experience-accumulated jurisprudence. Engaging corporate responsibility takes place several times per year, it contributes to more thoughtful and takes into account past experience (Imoniana & Silva, 2013). Significant fines’ sizes have important preventive functions as the company management understands that in the event of a corruption offense the legal person may become bankrupt (Keay, 2014).
Some of the UAE firms have even introduced the post of anti-corruption director. Bringing to justice by depriving the corporation of signing the lucrative rights government contracts and export licenses deprives the company also of entering the global market, which reduces business’ and company’s reputation. There is an emphasis put on the prevention of vicious practice of bribing companies through such measures as the provision of reliable financial statements, audit accounting, and internal control. The penalties for violation of monitoring and internal reporting for individuals and legal entities may reach up to $25 million and/or doubled amount of benefits received (Rodrigo, 2013).
Opposite to the situation in the UAE, there is no comprehensive corruption offences statistics in the United States many other countries. There is no evidence of corruption crimes for certain periods, including how many of them are committed by legal entities and what sanctions were applied to them (Frunza, 2015). This creates considerable difficulties when attempting an objective analysis of existing corruption-related crimes, and thus improving the legal crime prevention. Considering the above-mentioned issues as well as the high latency of corruption, we can say with certainty that a relatively small number of legal entities are called to account (Keay, 2014).
The fines have no preventive value as the profits from corruption are much higher than them. It is necessary to work out a list of conditions for corruption practices when companies are in 100% of cases punishable by double-sized amount of the profits from corruption (Figueroa, 2014). Very often, the US multinationals complain that they cannot enter the market because of the corruption there. Moreover, there are frequent cases of sanctions for corrupt practices when exposing them in the media or applying to a court for unlawful activities within firms. Without these components of US TNCs, the systematic corruption is practiced in certain countries or regions all over the world (Figueroa, 2014).
Finally, it is important to provide one more example of wrongful trading in the USA. It was decided in the case Doe I vs Unocal. The plaintiffs filed a lawsuit not only against a California company Unocal, but also against the French Total company. The Ninth District Court confirmed the rejection of the claim against the Total as the company does not have sufficient business contacts in California. Business contacts, according to the Court, are not flowed out through the company’s relationship with its US subsidiaries. This could take place only in the case when the parent and its subsidiaries were really organizational unity or the subsidiary of the parent company would perform the task as its representative (Figueroa, 2014).
Total shares also trade in the United States, but it has not been evaluated as sufficient grounds to recognize the existence of an appropriate business contact. The Court considered it necessary to have a significant long-term contact with the United States (Ross, 2015). The court did not recognize the existence of such Total business contacts with the American company Unocal limited to the conduct of a joint venture in Burma (Keay, 2014). To answer the question whether foreign companies be sued in the United States, it is important, therefore, to specify the company’s business activities in the United States and the actual structure of the relations with its subsidiary within the US (Rodrigo, 2013).
The analysis of the USA and the UAE law in terms of the responsibility of legal persons for corruption practices shows that, despite the remoteness of its adoption and practical application, legal and regulatory frameworks are insufficiently systematized and not effective for realization of the corruption crimes reduction. The question about the need for binding international rules in this area, as well as a differentiated system of penalties for such violations, is up to the termination of the legal entity.
Finally, the legitimate transactions may sometimes contain errors that are not essential for the transaction, and if misuse is rare or if the error concerns the circuit only indirectly, it indicates less likely the commercial fraud. However, if illegal use of the term is essential to the scheme and if it is constant and frequent, it may indicate that the transaction is not legitimate.