MONEY and BANKING STORIES FULL GRAPHICS

 

STORIES ABOUT FOREIGN EXCHANGE
Champagne Brunch   Excchange Market  Beware_of_Exchange_Both Canadian X-rate  Hawala  Peru

Judy  Khuntaweetep: Champagne Brunch

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

 Tammy  Lee: Foreign Exchange Market

 

"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."

-Dominguez and Frankel (1993)

references

Levich, Richard M. "International Financial Markets: Prices and Policies." Boston: McGraw-Hill Companies, Inc., 2001, p. 644.

Beware of  Exchange Booth
Last Summer I was in Barcelona, Spain. We went to exchange money, and there were several exchange booths. One of the booths advertised the lowest rate. I went over there and changed several hundreds of dollars and the women would not give me the rate advertised because she said we changed too much. She quickly took my money and put it away. I asked her to change it back and she refused. I continued to try and change it back but she refused. So I stood there steering away every customer for about 2 hours, then I told the hotel to steer customers away from that particular exchange booth and they did. I also wrote a letter to Fodor's Travel Guide, asking them to tell tourists not to use that exchange booth in that part of Spain or any other exchange booth with that name.

Jesse Rijos: The Shady Business of the Canadian Exchange Rate.

It was a beautiful summer day in the city of Rochester, when a few friends of mine convinced me to tag along with them to Niagara Falls, Canada. I thought "why not", we could visit the falls as well as the tourist area. I knew the U.S. dollar was worth more than the Canandian dollar, which also made me happy. I could buy more souvenirs or visit a few more attractions. Although the latter is true, I found that the amount of satisfaction I received was really based upon whether or not I made use of the exchange booths. Allow me to clarify.

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.

The going rate of exchange between the U.S. and Canada is now at 67%. That is for every U.S. dollar, one can receive $1.67 of Canandian currency. What these surrounding businesses do is reduce this rate, between 50-55%. Meaning that now, one would only receive say $1.50 in Canadian dollars per U.S. dollar. The remaining 17 cents is profit for the businesses.

Also, it is very hard to realize that you are losing money by not going to the exchange booths and converting to Canadian dollars. This is so because most of the businesses do not publicize this information. In fact, the only way I figured it out was because I had a minimal amount of money I wanted to spend. Thus, when I saw that my money was rapidly diminishing, I did the math and did a little detective work. I learned it is almost always best to convert your money at the exchange booths because you'll get more for you're money.

references

http://www.oanda.com/convert/classic?user=AmericaOnline2

Hawala Parallel Financial Markets
 
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.
Hawala dealers (A.K.A Hawaladars), routinely disregard this law and often take advantage of the fluctuation of demand for Indian and Pakistani rupees in order to provide better rates for their clients. The issue of Hawala has received more attention from the United States intelligence and law enforcement communities because its role in money laundering and terrorist activities. In order to understand the Hawala system’s implication in money laundering, it is necessary to understand how it operates. The Hawala system actually functions as a parallel market that links the remittances of South Asians living in developed countries to their family members in India and Pakistan. For simplicity, we can consider the case of a Pakistani student working in a restaurant in New York on an expired student visa. He has saved USD 4, 000 and wants to send it home to his mother in Pakistan. The student has two options:
1. Go to a Bank (such as Citibank): Consequences: He must open an account -Will be charged $35 for the service of sending money home -Delivery can take up to a week and can cost as much as $40 to be sent to Pakistan -Can send money home only at the current rate of 1 USD= 59.12 Pakistani Rupees (PKR)(spot rate of 10/2/02) -Results if chosen : The student sends home 236,469 PKR – (35 +40 in fees)= 236,394 PKR
2. Send money through a Hawaladar: -Receives rate of 1USD= 63 PKR -Delivery is included and is guaranteed for that same day or the next -The Hawaladar takes 5% commission -Results if chosen: The student sends home 252,000 –5% commission= 239,400 PKR

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.

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.


By the time they were apprehended in Italy in 1997, they had diverted at total of $1.5 billion dollars in corporate funds to their private bank accounts mainly using shadow organizations, fancy accounting tricks, public document falsification and the money cleaning abilities of the international Hawala network. Mainly they shifted around debt, there were no legitimate assets nor equity in any of the transactions undertaken. The result was the collapse of Pathe-MGM. Legitmate creditors, bondholders and shareholders, mainly located in France, lost close to $600 million. Additionally French taxpayers carried this burden as the state-owned Credit Lyonnais bore the majority of the losses due to the behavior of its Dutch branch. The Hawala networks represent a new trend in money laundering as it is a parallel system. During the 1980s, money launderers used a complex series of banks and safe havens to clean their money. Now as bank secrecy laws and international regulations have been tightened, money launderers are looking to parallel networks with loose regulations to circumvent regulations of international money transfer in their countries. This development has serious implications for the financial systems of developing countries. Needed funds that could be used to pay taxes and pursue investment are being diverted from legitimate markets into untraceable ones. The situation is bound to get worse unless, financial markets stabilize and ensure the trust of the population.

Sources:
.Interpol Money Laundering Files: Money Laundering-The Hawala Alternative Remittance System,
http://www.interpol.int/Public/FinancialCrime
/MoneyLaundering/hawala/default.asp#3
2. Mrozek, Thom. “Former MGM Chairman and CEO Arrested in Italy in $1.5 Billion Entertainment Industry Fraud.” U.S. Department of Justice Office of Public Affairs: California, www.usdoj.gov/usao/cac/pr/202b.htm.

Matthew  Helming:  Peruvian Rainforest
 


When I was a sophomore in High School I went on a trip to the Peruvian rainforest to stay for two weeks in the jungle and perform research on bats and birds. We flew to Iquitos, Peru a city on the Amazon. There we stayed for a few days before and after being in the rainforest for about days. Anyway, upon our return from the rainforest we were given a few days to roam about the small city on the riverfront and explore. In order to buy souvenirs and food and anything we wanted we had to convert American currency. This could be done in two ways. You could go to a bank and exchange currency at the going market rate or you could go to the streets. On the streets there were guys selling Peruvian currency for less than the going market rate in the banks. So it was cheaper, for us as tourists, to buy currency from the street vendors. This wasn't easy because they were hard to find and were not looked upon as completely legal. They managed to find the Americans though. So after my first trip to the bank I was returning to the van and one of these vendors approached us all and asked us if we wanted to buy currency. My teacher encouraged us and so we did, for the rest of the trip. It made for the most extraction of value from our dollar. My question now upon reflection, is what effect do those street vendors have upon real currency markets? Do they de-value the Peruvian currency? Or, are they small enough an operation that they have little effect because the currency they sell doesn't go through official channels. I also assume that this sort of thing occurs all over the world and wonder if it is something taken into account? Does it have a significant impact on currency value? Anyway, that's my story, and it was a great trip. I bought insect displays that would cost hundreds of dollars in the US for the US equivalent of 30-40$. The displays contained species that are very rare and nearly impossible to find, again something I didn't discover until now. Interesting though, maybe.

references
Myself and my friends on a trip

 

 

 

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