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ACC 821




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AUGUST, 2011

Title Page Table of Contents 1.0 2.0 2.1 2.2 2.3 3.0 4.0 4.1 5.0 6.0 Introduction Conceptual Framework Globalization Money Flow Factors Influencing Money Flows Include; Effect of Globalization on Money Flow Regulation of Money Flow Statutory and Regulatory Framework Ethical Consideration and the Role of Professional Accountant in International Money Flows Conclusion References



For centuries people involved in one form of trade, borrowing, investment, financial aid, begging or other forms of money-making ventures, seeking better opportunities for themselves and their families. Ever-improving globalization and communication technologies have accelerated this phenomenon, making it easier and less costly for people to transact businesses, communicate and make money easily. The steady and continuous movement of money through these activities is referred to as the flow of money. When they occur within an economy, it is termed local flow of money. It is called international flow when it involves more than one country. The positive and negative impact of globalization on these flows is examined in the next few sections of this work. 2.0 2.1 Conceptual Framework Globalization

The interaction between and among nations of the world which serves as a backdrop of globalization has impacted the world economy. Globalization was described as the growing economic interdependence of countries worldwide through the increasing volume and variety of cross-border transactions (Mitchell, 2008). It is the process of creating a world in which individual nation states are increasingly interdependent and interconnected (Stefanovic, 2009). More so, Palmer (n.d.) refers to it as the diminution or elimination of state-enforced restrictions on exchanges across borders and the increasingly integrated and complex global system of production and exchange that has emerged as a result. Hence, it is the integration of national economies into the international economies through trade foreign direct investment (FDI), capital flows and technology. It could be said to mean the relationship between and among countries of the world with the emergence of a social organization of space and time that is not bounded by the countries. While the effects of globalization are quite different in relation to various subject matters, it has made national distinction in money flows less relevant and has greatly intervened in the development of international transfer of funds and hence accompanied by a number of merits and demerits. 2.2 Money Flow

Global money flows, also referred to as hot money has been defined as the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts (Martin & Morrison, 2008). Based on this premise, it could be deduce that money flows could be legal as well as illegal. Illegal money

flows, as defined by Brada, Drabek and Perez (n.d.) is the flows of money that is either earned through, or used for, illegal activities or moved across borders illegally. Examples include money laundering, tax evasion, proceeds of grand political corruption and capital flight. Legal means of money flow include Foreign Direct investment and international money transfer. 2.3 Factors Influencing Money Flows Include; i. Foreign Direct Investment ii. Foreign Employments iii. International Commerce iv. Money Laundering v. Capital Flight

Foreign Direct Investment

Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise (Wikipedia). In an empirical research carried out by Prasad, Rogoff, Wei and Kose (2003), they noted that the recent wave of financial globalization that has occurred since the mid-1980s has been marked by a surge in capital flows in the form of foreign direct investment, among industrial countries and, more notably, between industrial and developing countries. This is termed financial globalization and in principle, it could help to raise the growth rate in developing countries through a number of channels. ii. Foreign Employments

Foreign employment has also been a major determinant of global money flow as employees in most cases sent money to their relatives back home. According to Gaudel (2006), Remittance income in developing countries has become a lifeline for economic development. By remittance, this means sending income in terms of money or goods in home by the migrants or workers who have their earnings outside their home country. Nowadays, this source of foreign income has been growing rapidly in each year in developing countries especially. Since long time across national boundaries, many migrants have been transferring

their income through the unofficial channels. Today, due to the establishment of different agencies, like the Western Union and the International Money Express (IME), the remittance flows has become popular for transferring cash or money in time to the recipients including retirees in their home countries. iii. International Commerce

This has been seen by various organisations, such as the FATF and the World Customs Organization as a key method to move (legally or illegally) large amounts of money derived from trade. The movement of money will be regarded as legal whenever it derives its source from a legitimate trade from the standpoint of the two countries involved. This could include payment for goods purchased, import duties and tax payment. Illegal means of money flow through international trade include; Over- and under-invoicing, false descriptions, Multiple Billing and Fictitious transactions iv. Money Laundering

Those involved in one form of financial crimes or the other try to conceal the `means of earning huge sums and as such find a ways of attributing the criminal proceeds to a lawful transaction. The Financial Action Task Force (FATF) in 2008 defined money laundering as the processing of criminal proceeds to disguise their illegal origin in order to legitimise the ill-gotten gains of crime. Criminals accumulate significant sums of money by committing crimes such as drug trafficking, human trafficking, theft and investment fraud. The perpetrators face dilemma in trying to spend the proceeds of these activities and as such consider laundering it so as to give a semblance of legitimate earnings. Money laundering is a serious threat to the legal economy and affects the integrity of financial institutions and can corrupt a society as a whole If left unchecked. (OECD, 2009). v. Capital Flight

According to Schneider (2001), Capital flight is defined as that part of the outflow of resident capital which is motivated by economic and political uncertainty. It is simply an illegal capital exports and It has been well pronounced since the debt crisis in the early 1980s and a growing strand of literature has focused attention on the outflows of resident capital in response to the distortionary impact of domestic policies and political instability. The phenomenon was termed capital flight and became a heated issue in the 1980s. Capital flight is a phenomenon, which though unobservable, is still assumed to be widely prevalent in developing countries.


Effect of Globalization on Money Flow

Globalization is a paradigm shift from the industrial era to the information era. It is a revolutionary change in the interaction and integration among people and business across the globe made possible by the creation of the information era. Drucker in Edward (2003) observed that in globalization, economy is changing structure from being organized around the flow of things and the flow of money to being organized around the flow of information. In an IMF staff Position Note issued in 2010, exchange rate appreciation, revenue accumulation and sterilization are major economic implications of global money flows. The points are further elaborated thus;

Exchange Rate Fluctuation. The first question is whether the exchange rate should be allowed to appreciate. Although countries are frequently concerned that an appreciation will damage competitiveness of the tradable sector, the multilateral context is paramount here: if the exchange rate is undervalued from a multilateral perspective, the appropriate response would be to allow the nominal exchange rate to appreciate passively in response to the capital inflows. But when the exchange rate is already overvalued (or roughly in equilibrium), and there are concerns about the impact of an appreciation on competitiveness, a more proactive policy response is required.


Reserve Accumulation The next question is whether the country has a relatively low level of foreign exchange reserves (e.g., from a precautionary perspective) and whether some further reserve accumulation would be desirable. If so, the capital inflows may present a useful opportunity to augment the central banks reserve holdings.


Sterilization. If there are inflation concerns, the resulting increase in the money supply can be sterilized through open-market operations or, more generally, a corresponding decrease in domestic credit. There are, however, limits to sterilization. Domestic financial markets may not be sufficiently deep to absorb a significant increase in sterilization bonds, and there is a fiscal cost associated with the differential between interest paid on domestic bonds and interest earned on reserves (particularly in the current low-yield environment).

Other factors include; i. Increased Economic Prosperity through Trade Liberation As regards impact on national economy, globalization can increase economic prosperity. It will usher increase in technical efficiency and reap economies of scale with the building of infrastructures to sustain competition and growth. Increased participation of national

economies in the world economy fosters domestic economic growth and prosperity. From an economic perspective, the primary engine that is driving the complex effects of globalisation on trade is liberalisation. Globalisation emphasises that trading among member countries should open up their markets and that trade in goods and services should be borderless. According to Killick in Edward (2003), a significant part of the world and a large numbers of countries are now effectively participating in the processes of integration and globalisation. In this regard globalisation may be thought of as the integration of economies through trade, capital flows and information technology.

Expanded Foreign Direct Investments

The rapid growth of Foreign Direct Investment (FDI) has also been an important element of economic integration. Overall world trade has grown two or three times faster than global GNP (gross national product) in the last decade. Rapid expansion of multinational companies from developed or rich countries operating globally and impacting FDI is another important effect of globalisation. There is a clear trend towards increasing FDI across most major regions of the world.

Overall Reduction in the Cost of Communication

Impacts of globalisation on the global scale include the overall reduction of communication costs associated with the information technology revolution. E-commerce is one of the outstanding aspects of trade that has grown tremendously due to globalisation. Fuelled by revolutions in information technology, organisation integration across widely distant geographies and markets within the world economy is now enhanced. This in turn has impacted on the flow of monetary resources. iv. Impact on Fragile and Poor Economies

This process of globalisation is one of the most critical developments affecting the evolution of national economies. Globalization offers participating countries new opportunities for accelerating growth and development but, at the same time, it also poses challenges to, and imposes constraints on policy makers in the management of national, regional and global economic systems. The risks and costs brought about by globalisation can be significant for fragile developing economies and the worlds poor. The downside of globalisation is most vividly epitomised at times of periodical global financial and economic crises. The costs of the repeated crises associated with economic and financial globalisation appear to have been borne overwhelmingly by the developing world, and often disproportionately so by the poor who are the most vulnerable. On the other hand, benefits from globalisation in booming times

are not necessarily shared widely and equally in the global community. In other words, globalisation has promoted inequality in the flow of monetary benefits and costs during periods of global financial and economic crisis. 4.0 4.1 Regulation of Money Flow Statutory and Regulatory Framework

i. Money Laundering Act The Money Laundering Act 2011 repealed the 2004 Act with its signing into law on Friday, June 3, 2011. The act is one of the principal acts regulating money flow in the Nigerian economy. Major requirements and demands of Money Laundering Act which prohibits (towards curtailing) the illegal and regulation flow of money are sections 1,2,3,5,6,7,9 and 10. ii. Nigerias Foreign Exchange Policy The Exchange Control Act, which was the principal legislation regulating foreign-currencyrelated transactions, was repealed in 1995. Exchange Control policies have become completely liberalized, except for a few controls that apply to banks, for the purpose of compiling statistics. At the moment, exchange control transactions are regulated principally by the Foreign Exchange (Monitoring & Miscellaneous Provisions) Decree No. 17,1995 and the guidelines of the Central Bank of Nigeria (CBN) Monetary Policy Circular, as may be stipulated, from time to time. iii. Foreign Exchange (Monitoring And Miscellaneous Provisions} Decree, 1995 This decree established an Autonomous Foreign Exchange Market ("AFEM"). Under the decree, an individual or corporate body may invest in any Nigerian enterprises or security, with foreign currency or capital imported into Nigeria through an Authorized Dealer (a bank or non-banking corporate organisation so licensed by the Central bank of Nigeria),either by telegraphic transfer, cheques or other negotiable instruments. Also, a person, whether resident in or outside Nigeria, or a citizen of Nigeria or not, may deal in, invest in, acquire or dispose of, create or transfer any interest and other money market instruments whether denominated in foreign currencies in Nigeria or not. (Nigerian High Commission, Australia)


Other Miscellaneous Exchange Control Matters

Prohibition of Importation and Exportation of the Local Nigerian Currency

The importation and exportation of the Naira is prohibited. However, Nigerian residents are allowed to hold on them maximum amount of N1,000 for settlement of local expenses immediately on their return to Nigeria from an overseas trip. Declaration of Foreign Currency Import of US$5,000 and Above Foreign currency import of US$5,000 and above or its equivalent are required to be declared on Form TM for statistical purpose only. Personal Travel Allowance All Nigerian citizens are entitled to purchase foreign currency for Personal Travel Allowance in the Autonomous Foreign Exchange Market. Nigerian children born abroad and holding foreign passports are entitled to the allowances, provided their status as Nigerians is verified. Business Travel Allowance Registered companies are allowed to purchase foreign currency for Business Trip Allowance (BTA). Expatriate Home Remittance Foreign nationals are allowed to remit 100 of their salaries net of tax as Personal Home Remittance (PHR). However, evidence of income earned and taxes paid have to be provided to the banks before remittances are made. Royalties, Technical Services, Management fees The remittable limit of fees for licence or technical service agreements ranges between 1 and maximum of 5 of net sales value. Similarly, permissible management service fee shall range between 2 to 5 of the company's net profit before tax: Management service fees in respect of projects where no profit is anticipated during the early years shall range from 1 to 2 of net sales during the first 3-5 years only. Remittable consultancy fees shall be up to a maximum of 20 of project cost and limited to projects of very high technology content for which indigenous expertise is not available. Service agreements for such high technology joint-ventures shall include a schedule for the training of Nigerian personnel for an eventual takeover. In addition, Nigerian professionals shall be involved in the project implementation from inception. Payment of Fees, Tariffs and Other Charges In Respect of Service Rendered in Nigeria With effect from 1st January, 1997, payment of fees, tariffs and other charges in foreign currency in respect of services rendered in Nigeria is now optional at the discretion of the party making the payment.

Abolition of Foreign Guarantees/Currency Deposit as Collateral for Naira Loans The prohibition of foreign guarantees for Naira denominated loans as contained in the Central Bank of Nigeria Monetary Policy Circular No.23, Amendment No.3 of April, 1989 remains in force. (Nigerian High Commission, Australia)


Ethical Consideration and the Role of Professional Accountant in International Money Flows

In the sociological literature, accounting firms are regarded as profession and assigned baggage of social responsibility and ethical conduct (Sikka and Hampton, 2005). This notwithstanding, stories about unethical behaviour by accountants abound. This is not to say that all accountants or accounting firms act unethically, by and large most acts honourably, but dissenting stories (as seen in Enron Corporation, WorldCom and Cadbury Plc saga and bubble burst) exist as an indication that, there is need for ethical sensitivity and ethical behaviour in the accounting profession. According to Duska and Duska (2003) accountants have a number of ethical responsibilities to perform and ethical and professional principles to uphold. Some of these responsibilities are statute-driven in that they are required to engage whistle blowing in salvaging the public interest and curbing transactions, activities and deals injurious to public wellbeing. However, there exist opinions and evidences from literatures which suggest that accountants are not meeting the expectation gap as regards the level of compliance with statutory, regulatory and professional ethics demands. For instance, Sikka (2006) stated that following the strong High court judgment in AGIP (Africa) Limited vs. Jackson & Others (1990), accountants received condemnation for knowingly abetting and aiding money laundering. With the aid of information technologies, proceeds of theft, fraud, tax evasion, drug trafficking, illegal capital flight, prostitution, terrorism and smuggling roam around the world. The International Monetary Fund estimates that between two and five percent of global gross domestic product (GDP) or around $2.5 trillion is laundered each year. The amounts are processed through structured transactions, sham contracts, shell companies, nominee bank accounts, trusts and tax haven. Fingers (accusing ones) are in most of these cases pointed at accountants, lawyers and bankers since they know or claim to know the worlds financial system and can create structures to conceal the movement of money. Accountants by their specialized training, skills and services are expected to contribute significantly to national development in many different ways. One of such is their stance and

determination to see that the virtues of integrity, accountability and transparency are well entrenched in the business environment in particular as well as the social, political and economic spheres in general. It has been noted that accountants and accountancy bodies exercise considerable influence in public policy formulation and implementation processes. The professional bodies have however been found wanting in right-channelling their influences in serving public interest. Sikka (2006) noted that although accountancy bodies claim to seek and build public interest by provide thought leadership or they claims that they ensure members serve the public interest and observe the highest ethical standards, such claims are highly contestable. A recurring financial lamentation is a disappointing failure on the part of accountants to meet their legal and moral obligations to report suspicious transactions to the authorities. For instance, between 1992 and 2000, the National Criminal Intelligence Service (NCIS), a UK government body responsible for collecting and analysing information about movements of laundered money, received notification of some 130,000 suspicious transactions. Of these, despite statutory obligations to report suspicious transactions, only 425 notifications came from accountants. As a corollary to the statics above, the Economic Secretary of the UK Treasury reported that, there is increasing use of the service of accountants to launder money. The Financial Action Task Force stated that an important trend has been the rise of a class of professional money laundering facilitators and also an increase in the number of accountants whose service are deployed to assist in the disposal of criminal profits, (Financial Action Task Force, 1996). The accountancy bodies however has been roped in as culprit and accomplice to the unethical and unprofessional dispositions of accountants in that most accountancy bodies do nothing or too little to discipline members or firms named in various scandals. The Accountancy bodies in making good their claim about high ethical standards and practices, authorities and regulators have the obligation to support anti-money laundering (and other regulations curtailing unregulated money flow) law and regulation. Other professional duties and demands expected of Accountancy bodies are: Continuing professional awareness campaign to ensure that all members realize the existence of the money laundering (prohibition) act and fully understand its provisions and the need to comply out rightly. Such awareness could be attained by wide publication in the Accountancy Journals (local and international) and by direct correspondence with members Participation in the formulation and implementation of anti-money laundering (and other laws to curb unregulated flow of money)

Promoting whistle blowing in the profession and instituting possible safeguard measures that will enhance the confidence level of professional accountants especially those in public practice.



Global flow of money is a major natural regulator of the world financial system. As many other mechanisms, it has been used, both legally and illegally, as a means of enriching individuals as well as nations states across the globe. It has various impacts on the world economy as demonstrated in this article and as such regulated by various laws and regulations across the globe.

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Sikka, P. (2006) Ethical gaps in accountancy bodies claims and practices. International Accountant (December, 2006). Blickman, T. & Aronson, D. (2009) Countering illicit and unregulated money flows. Retrieved August 6, 2011 from crime3_0.pdf