Hurricane Harvey’s Economic Impact

 In Anti-Money Laundering, Trending

As injury and death totals continue to become clearer in Texas following the catastrophic passing of “Hurricane Harvey” this past weekend, the state’s citizens have had no choice but to try to literally pick up the pieces of their lives left in ruin. As often occurs after events of this magnitude, most citizens have tried feverishly to reestablish any sense of normality that they can possibly attain, while facing the ultimate reality that their lives will likely never be the same. It goes without saying that the effects of natural disasters are felt most by the communities they directly affect, with the widespread destruction and devastation that ensue extending to numerous areas of citizens’ lives. However, it is in times like this that other issues that persistently affect countries (political, social, etc.) go by the wayside, with the themes of patriotism and camaraderie becoming paramount. While the togetherness that ensues in rehabilitation efforts is incredible, it is undeniable that the effects of natural disasters such as hurricanes can impact the financial system of a state, as well as a nation altogether, for years to come.

The effects on the local, state, and national economies following this storm alone have already become a point of discussion at the national and international level. Early tallies have already predicted that Hurricane Harvey could become the costliest natural disaster in the history of the United States, as potential costs related to the storm and recovery from it are expected to hold an estimated value of nearly $200 billion (USD). To put this total into perspective, the previous most expensive natural disaster in U.S. history was the infamous “Hurricane Katrina” that devastated New Orleans in 2005, accruing costs of approximately $120.5 billion in emergency relief, rebuilding, and recovery efforts. One of the key differences between the two storms was that Katrina impacted a far less populated area than Harvey did. The population of Houston is roughly four times the size of that of New Orleans in 2005, meaning more material objects (homes, cars, etc.) were present to be affected in Houston. Additionally, Houston’s geographically flat terrain coupled with inadequate infrastructure in place to manage the severe amount of rainfall and ultimate flooding that occurred only exacerbated the damage.  It is estimated that the state economy of Texas, which is the second largest in the United States, would be in the top-15 for largest economies in the world if it were its own country. Thus the outcomes of the storm are likely to have a monumental impact on state finances.

The estimated cost total for Harvey will equal or eclipse the combined costs of both Katrina and Hurricane Sandy, which ravaged the Mid-Atlantic and Northeast coasts of the United States in 2012. The $200 billion total also represent a 1% economic hit to the gross national product according to reports; quite significant when considering the relatively short lifespan of such a storm. With Harvey striking the center of the U.S. oil, gas, and energy country (Texas is the national leader in wind-powered energy, as well as natural gas and coal production), overall production levels have plummeted due to the evacuation efforts seen before the storm, along with flood waters forcing many plants to cease operation until further notice. It has been reported that most refineries “escaped serious physical damage from storm winds but the real concern is that many of these facilities have never seen floodwaters this severe” (Domm, 2017). The true effects in this regard can only truly be assessed following the return of refinery employees to work in the coming weeks, but the repercussions are likely to be felt throughout the energy sector for years to come.

Fox Business reports “Forecasters in The Wall Street Journal’s survey of economists estimate the storm will affect the most important economic reports at the national level in the months ahead” (Zumbrun & Chaney, 2017). Job gains are expected to drop in the tens of thousands per month in the third quarter, due in large part to the large population located in the greater-Houston area. While the city’s size has the power to negatively impact national employment and activity figures, it is believed that thousands of jobs will return in late-2017/early-2018 due to the employment opportunities created through the rebuilding process. Additionally, the growth rate of gross domestic product will fall by about 0.3 percentage points in the third quarter (Zumbrun & Chaney, 2017). When factoring in the impending devastation that will ensue in Florida and beyond when Hurricane Irma hits the U.S., the overall national impact of this hurricane season, which is still in its preliminary stages, will undoubtedly become the most severe in U.S. history. The magnitude of inflation and price-gauging (gas prices, airline prices, etc.), insurance claims and the lack thereof (i.e. Houstonians lacking flood insurance), unemployment filings, loss of assets, and decreases in household wealth will all likely become evident over the course of the next several weeks.

 

Global RADAR extends well wishes to the Texas communities affected by Hurricane Harvey, as well as to the Caribbean countries and areas of Florida affected by Hurricane Irma.

 

Weekly Roundup

 

FDIC Lets Discover Off the Hook

On September 1st, the U.S. Federal Deposit Insurance Corporation (FDIC) terminated its 2014 consent order with Discover, one of the world’s most prominent financial services organizations. The three-year old consent order involved the American bank’s inadequate anti-money laundering program and procedures, with Discover’s directors ultimately agreeing to adopt the proper steps to increase overall compliance through the implementation of improved protocols. Since this agreement was reached, Discover officials proclaimed that significant amounts of funds and resources have been devoted to this cause, including over $30 million spent on regulatory compliance in 2016 alone. Despite this positive development, “the credit card issuer continues to operate under a second regulatory agreement related to its anti-laundering efforts”, this one with the Federal Reserve Bank of Chicago (Wack, 2017).

The consent order coincides with the growing uprising seen amongst other large U.S. financial institutions against current money laundering legislation that continues to grow in scope and stringency. According to reports, a coalition of large banks based in the United States (coined “The Clearing House”) are lobbying for a total overhaul of the current requirements for the investigation and reporting of potentially illicit financial activity. Banks have argued that far too much money is being spent on compliance, money that can be used for other, more vital banking activities. An article written on the subject presented comparable opinions from multiple high-profile financial executives who believe that the vast amount of funds being invested into compliance is not the only issue. The article states that “rules imposed in the years after the Sept. 11, 2001 terrorist attacks and strengthened during the Obama administration are not merely expensive and onerous — they also have the distinction of being ineffective” (PYMNTS, 2017). The movement spearheaded by the Clearing House is expected to have a major impact on the regulatory compliance measures seen in the United States altogether in the coming months, and Global RADAR will provide updates on any new developments as they are announced.

 

U.S. Businessmen Convicted for Laundering Billions

On September 5th, two Miami businessmen dealing in imports of South American gold pleaded guilty in a money laundering case involving approximately $3.6 billion. Facing the possibility of spending up to 20 years in prison, the two men, Samer Barrage and Juan Granda, accepted a plea deal that will cut their prison terms in half. The men reportedly “admitted in Miami federal court that they imported illegally mined gold from Peru and other South American countries into the United States in a revised money-laundering conspiracy case that could send them to prison for up to 10 years” (Weaver, 2017). The men also admitted to smuggling tainted gold into Miami between 2013 and 2017 for the company that employed them, NTR Metals – a branch of the Dallas-based metal corporation Elemetal.

Federal prosecutors also discovered that in their smuggling attempts, “the two defendants circumvented Elemetal’s anti-money laundering compliance program by buying gold from a notorious Peruvian drug trafficker, bribing that country’s officials and falsifying paperwork” (Weaver, 2017). The men were reportedly warned against dealing with the Peruvian gold trafficker by a compliance officer from Elemetal, however the men forewent this disclaimer. Barrage and Granda then proceeded to create accounts at Elemetal for several Peruvian shell companies so that purchases and imports of hundreds of millions worth of gold could be made. These totals would have likely been much larger had Peruvian authorities not started a national crackdown on illegal gold mining and trade beginning in 2014. The case has highlighted Miami as one of the world’s largest illegal gold-trading hubs, with the vast majority of U.S. imports coming into the U.S. through Miami International Airport.

 

U.S. Senator Facing Bribery, Corruption Charges

For the first time in over nine years, a United States senator is on the hot seat for alleged unethical activity. Senior New Jersey senator Bob Menendez began his trial on Wednesday, facing 18 counts of federal fraud and bribery charges in a Newark, NJ court. It is alleged that Menendez, first appointed to the U.S. Senate in 2006, has accepted countless gifts, donations, and vacations from Florida benefactor Salomon Melgen, in exchange for Menendez using his position of power to lobby for Melgen’s business interests (Melgen is an optometrist in Florida). Email exchanges provided in court demonstrate that Menendez persistently pressured the Executive Branch on behalf of Melgen. According to the indictment, “Melgen directed more than $750,000 in campaign contributions to entities that supported Menendez, inducements to get Menendez to use his influence on Melgen’s behalf” (Schallhorn, 2017).  Additionally, Menendez accepted a luxury getaway for three nights in the heart of Paris at the expense Melgen, and used Melgen’s private jet to get there.

The improprieties do not end there however, as prosecutors also announced that there is considerable evidence linking Menendez to the pressuring of State Department officials in order to provide U.S. visas to three of Melgen’s girlfriends. Furthermore, Menendez is alleged to have attempted to use his position to help Melgen out of a Medicare dispute over unjust billing practices. Both Menendez and Melgen have pleaded guilty to all counts against them, although Melgen was convicted of 67 counts of health care fraud just four months ago in what many have regarded as one of the largest Medicare fraud cases in the history of the United States. Melgen’s sentencing is currently delayed until after this current trial concludes. Nonetheless, the outlook is bleak for the two men, with prosecutors holding no doubts that Menendez “sold his office for a lifestyle he couldn’t afford” (Schallhorn, 2017).

 

Citations

Domm, Patti. “Wall Street Braces for the Impact of Hurricane Harvey.” CNBC. CNBC, 28 Aug. 2017. Web. 

Pymnts. “FDIC Ends Consent With Discover Financial Unit.” PYMNTS.com. 31 Aug. 2017. Web. 

Schallhorn, Kaitlyn. “Sen. Bob Menendez Corruption and Bribery Trial Begins: What to Know.” Fox News. FOX News Network, 6 Sept. 2017. Web. 

Wack, Kevin. “FDIC Terminates Consent Order with Discover.” American Banker. 30 Aug. 2017. Web. 

Weaver, Jay. “Two Miami Men Convicted of Laundering Billions in Amazon Gold.” Miami Herald. 5 Sept. 2017. Web.

Zumbrun, Josh, and Sarah Chaney. “How Hurricane Harvey Will Ripple Through the U.S. Economy.” Fox Business. Fox Business, 07 Sept. 2017. Web.

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