12 Sep What is Money laundering? and its impact on society
toFor starters, money laundering ‘cleans’ the dirty origins of illegally-obtained cash.
So, Money launderers are frauds who use illegal means to earn money. Illegal arms sales under a big name, drug trafficking, smuggling, and the activities of organized crime for example drug trafficking and prostitution rings, can generate huge amounts of proceeds.
When a criminal activity generates substantial profits, the individual or group involved finds a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.
The United Nations Office on Drugs and Crime conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organized crimes. The report estimates that in 2009 criminal proceeds amounted to 3.6% of global GDP with 2.7% being laundered.
This falls within the widely quoted estimate by the International Monetary Fund, who stated in 1998 that the aggregate size of money laundering in the world could be somewhere between two and five percent of the world’s gross domestic product. Using 1998 statistics, these percentages would indicate that money laundering ranged between USD 590 billion and USD 1.5 trillion.
How is money laundered?
In money laundering, the criminals change their black money into white money through these 3 steps.
Placement: At this stage, the launderer inserts the dirty money into a legitimate financial institution. He opens bank accounts and submits the cash in the banks. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are bound to report high-value transactions.
Layering: The second stage is layering which involves sending money through various financial transactions to change its form and make it difficult to follow.
Several bank-to-bank transfers; wire transfers between different accounts in different names in different countries; making deposits and withdrawals to continually vary the amount of money in the accounts; changing the money’s currency; and purchasing high-value items property, possessions, expensive items, etc. to change the form of the money. This is the most complex step in any laundering scheme, and it’s all about making the original dirty money as hard to trace as possible.
Integration: At the integration stage, the money re-enters the mainstream economy, through bank transfer into the account of a local business in which the launderer is “investing” in exchange for a cut of the profits, the sale of a huge property bought during the layering stage or the purchase of a $10 million land from a company owned by the launderer. At this point, the criminal can use the money without getting caught. It’s very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.
Where does money laundering occur?
Generally, money launderers tend to seek out countries or sectors in which there is a low risk of detection due to weak or ineffective anti-money laundering programs. Now, as the objective of money laundering is to get the illegal funds back to the individual who generated them, launderers usually prefer to move funds through stable financial systems. Asian and African countries are more prone to crimes like these as the judiciary is under the government and is weak.
The impact of money laundering on societies and economy.
The integrity of the banking and financial services depends heavily on the perception that it functions within a framework of high legal, professional, and ethical standards. A reputation for integrity is one of the most valuable assets of a financial institution.
If funds from criminal activity can be easily processed through a particular institution either because its employees or directors have been bribed or because the institution turns a blind eye to the criminal nature of such funds the institution could be drawn into active complicity with criminals and become part of the criminal network itself. Evidence of such complicity will have a damaging effect on the attitudes of other financial intermediaries and regulatory authorities, as well as ordinary customers.
Due to money laundering, one can cite inexplicable changes in money demand, prudential risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flow and exchange rates due to cross-border asset transfers. Also, as it rewards corruption and crime, successful money laundering damages the integrity of the entire society.
Impact on economic development:
Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centers, but inadequate controls are particularly vulnerable as established financial center countries implement comprehensive anti-money laundering regimes.
With the damaged integrity of an individual financial institution, there is a damping effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be subject to the control and influence of organized crime. Fighting money laundering and terrorist financing is therefore a part of creating a business-friendly environment which is a precondition for lasting economic development.
What is the connection with society at large?
Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.
The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society. In countries transitioning to democratic systems, this criminal influence can undermine the transition. Most fundamentally, money laundering is linked to the underlying criminal activity that generated it as laundering enables criminal activity to continue.
Moreover, Money laundering is also a threat to the good functioning of a financial system.
In law enforcement investigations into organized criminal activity, it is often the connections made through financial transaction records that allow hidden assets to be located and that establish the identity of the criminals and the criminal organization responsible.
When criminal funds are derived from robbery, extortion, embezzlement, or fraud, a money-laundering investigation is frequently the only way to locate the stolen funds and restore them to the victims.
Most importantly, however, targeting the money laundering aspect of criminal activity and depriving the criminal of his ill-gotten gains means hitting him where he is vulnerable. Without a usable profit, criminal activity will not continue.
What should individual governments be doing about it?
A great deal can be done to fight money laundering and many governments have already established comprehensive anti-money laundering rules and regulations to combat this problem. These rules aim to increase awareness of the phenomenon both within the government and the private business sector and then to provide the necessary legal or regulatory tools to the authorities charged with combating the problem, Moreover strict actions should be taken against anyone who acts against the law.
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