Topic: Emerging issues in finance and financial management

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  • 5 Marks

AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management

Compare the functions of the IMF and World Bank and outline challenges faced by the IMF in West Africa.

The International Monetary Fund (IMF) and the World Bank are institutions in the United Nations system. They are twin intergovernmental pillars supporting the structure of the world’s economic and financial order.

Required:
i) Compare and contrast THREE functions of the International Monetary Fund (IMF) and the World Bank. (3 marks)
ii) Explain TWO challenges being faced by the IMF in attaining its objectives in West African Countries. (2 marks)

i) Comparison of functions of the IMF and the World Bank:

  1. Monetary cooperation vs. Development aid:
    • The IMF’s primary function is to stabilize exchange rates and offer monetary cooperation, while the World Bank focuses on long-term economic development and reducing poverty by funding infrastructure projects in developing countries.
  2. Short-term financial stability vs. Long-term development:
    • The IMF provides short-term financial support to countries facing balance of payment problems, while the World Bank supports long-term development projects aimed at reducing poverty and fostering economic growth.
  3. Conditional lending vs. Project financing:
    • IMF loans are often conditional on the implementation of economic policies aimed at stabilizing a country’s economy, whereas World Bank loans are generally directed towards specific development projects such as building schools, roads, and water systems.
      (3 marks)

ii) Challenges faced by the IMF in West Africa:

  1. Governance Structure and Key Policy Issues:
    • One of the challenges the IMF faces in West African countries is dealing with governance issues and the implementation of sound policy measures in economies often affected by political instability.
  2. Managing capital movements and preventing crises:
    • The IMF also struggles with managing volatile capital flows and preventing financial crises in the region, where economies are highly vulnerable to external shocks, commodity price fluctuations, and global market changes.
      (2 marks)
  • 6 Marks

AFM – May 2016 – L3 – Q4c – Emerging issues in finance and financial management, Regulatory framework and processes

Describe money laundering and identify risk-based approaches companies can use to combat it.

c) The growth of globalization has created more opportunities for free movement of capital/funds, which has resulted in a global canker called “money laundering.” There have been global efforts from governments and international institutions to combat the menace.

Required:
i) Describe in simple terms the concept of money laundering. (2 marks)
ii) Identify THREE risk-based approaches companies can adopt to combat the risk of money laundering. (4 marks)

i) Concept of Money Laundering

  • Money laundering refers to the process of concealing the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses. The goal is to make the proceeds of criminal activities appear to have been derived from a legal source. It is often associated with activities such as drug trafficking, terrorism financing, and organized crime.
    (2 marks)

ii) Risk-Based Approaches to Combat Money Laundering

  1. Identify Relevant Risks
    • Companies should assess the specific risks that are relevant to their business, such as customer behaviors, geographic areas of operation, and the nature of the business. Identifying risks at the onset allows for more targeted anti-money laundering (AML) measures.
      (1 mark)
  2. Conduct Detailed Risk Assessments
    • Companies should carry out detailed risk assessments on customer activities and delivery channels. This involves scrutinizing high-risk areas, such as large cash transactions or dealings with politically exposed persons (PEPs). Risk assessments help in determining the areas where stricter controls are required.
      (1 mark)
  3. Implement Effective Controls
    • After identifying and assessing risks, companies must design and implement robust internal controls. These controls should be aimed at managing and mitigating the identified risks. This could include customer due diligence (CDD) processes, ongoing monitoring of transactions, and reporting suspicious activities.
      (1 mark)
  4. Monitor and Update Controls Regularly
    • Continuous monitoring and updating of risk management controls is essential to keep up with evolving risks. Companies must ensure that their AML processes are effective and adapt to new threats or changes in the regulatory environment.
      (1 mark)

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