Study on the Problem of Money Laundering

Introduction

Money laundering is a global problem. Measuring its impact is tough, as it takes place behind everyone’s eyes and it apparently is a victimless crime. Yet the damage it does can be devastating to the financial sector and economy’s ‘real’ and ‘external’ sector, especially in case of a developing country. By contrast, effective anti-money-laundering policies can reinforce a range of good-governance policies. This in result helps the country to sustain economical growth particularly by making the financial sector stronger.

Background

Because of the worldwide growing concerns over money laundering, G-7 summit established Financial Action Task Force (FATF) in Paris in1989. Its purpose was to generate an international response to this increasing problem. Since then this organisation has been playing a vital role in tackling money laundering. It works closely with other international bodies that develops and regulates Anti-Money Laundering (AML) policies world wide. FATF members have 29 countries and jurisdiction includes major financial centres in Asia, North and South America, Europe- as well as the European Commission and The Gulf Co-Operation Council.

Problem statement

Today a country’s economy largely depends upon the advancement of technology. It made the job a lot easier, but it came with its own challenge. Which concerns the international financial community the most is the bad guys are also using the technology to give their ‘proceeds of crimes’ a legal look. In short the money made by various criminal activities in various parts of the world is injected into a nation’s economy to camouflage it or give it a lawful appearance. This system is known as Money Laundering and this problem is growing to a serious proportion over time. IMF estimated that the aggregate size of laundered money worldwide is 2% to 5% of global GDP in 1998.

Regardless who or how the ‘dirty’ money is being used, the operational system or method is always the same. It is a dynamic three stage process. The stages are:

Placement- A large volume of cash which was obtained through illegal means is placed in to the financial system, can be used to buy high-price item or may be smuggled out of the country. The point here is to transform the cash into some other kind of asset to avoid detection.

Layering- this stage takes place to hide the true origin of the unlawful money. Here in layering stage a complex set of transaction takes place to obscure the trail of that cold hard cash and its real ownership. At this point the advancement of technology helps them. One the methods are Electronic Fund Transfer (EFTs). Others include conversion of monetary instrument, investments in legitimate businesses, purchasing real estates. In most of the EFTs are used frequently. Because of the busy lifestyles and easy access, a lot of EFTs are processed everyday. Among all those when a Phoney EFT takes place between an offshore account and a shell company, It is pretty hard to spot a criminal transaction at first look.

Integration- The final step of the process where the illicit money comes back clean to its owner and then integrated to the economy as investment into a legal business. Once integrated, it hides the identity or origin even further.

Research significance

There has been little research into the effects of money laundering on the economic growth, particularly in a developing country. Most of the researchers and their works were focused on measuring the amount and usage of money-laundering. Hence the majority of this vast subject has remained unstudied. Therefore the developing countries, which are the prime channels for international money-laundering, are suffering from the need for the guidelines to stop the erosion of the long-term economic growth caused by this problem.

Research question

In a developing country’s economy the role of the financial institutes such as- banks, non-bank financial institutes (NBFI), equity market-are critical. They help to sustain the economic growth by concentrating the domestic savings, even the overseas funding. For all these gaining customer trust is vital. Money laundering erodes these institute and affects the customer trust as this is interrelated with other criminal activities that is performed by the workers in financial sector or government. Besides that, money laundering facilitates domestic corruption and crime which results depressed economic growth. It also diverts the resources to less productive activity.

In the light of above discussion, proposed work is on following questions:

• What is money laundering?
• What are the negative effects of it on economic growth?
• How does it harm the developing countries?

Aims and objectives

The purpose of this study is to analyse harmful effects of the money laundering on the economic growth of a developing country. Because of the weaker economy, lack of strong policies and comparatively easy regulations the developing countries become an open market for such activities. Therefore those countries have scope to improve their policies, regulations and laws. The objectives of the proposed study are to know:

• What sectors are mostly being affected?
• What is the extent of the damage?
• What can the developed economic community do?
• What kinds of policies or regulations are being implemented?
• What kinds of policies or regulations can be improved?

As the time advanced, money laundering business has also evolved by keeping pace with the time. Technology has made it more undetectable. The businesses are booming and consequences are visible. But regulatory bodies are also taking necessary steps. They are tightening their borders, educating people, creating awareness. Still these are not enough for the countries affected. Most of the time, they don’t have enough resources to divert to that sector. As a result they are bleeding internally. Therefore we can assume the following:

Most of the economic damage done by money laundering through its developing country channel is at the expense of the developing economy.

The weaker regulations and policies are the more liberty a money launderer gets. Therefore they need to strengthen themselves, with the help of others if necessary.

The countries with the developed economy have sufficient resources, therefore options to fight this particular crime. But in case of the developing economies, if not handled in time, it can distort investment, encourage crime and corruption and increase the risk of macro-economic instability. Through this study some solutions may be found, or at least the gravity of the danger ahead.

Limitations

The expansion of money laundering problem is vast. At the same time a greater portion of this crime is goes unreported, hence unnoticed. Authorities all over the world has been struggling to get a proper grasp of the whole problem. The developments that are being made are on the implementations of AML policies and legal sector. But there is a great lack of research on the effects and consequences of money laundering in the developing economies. Therefore there is not enough data available to come to any exact conclusion. Besides, this research is based on the secondary data. So evaluating the existing data was not possible. To be able to do so, a higher level of intervention, e.g. Government, international banking authority etc. is necessary as this research involves the national financial data.

Overview

The first chapter of this research introduces the area or the topic to the audience. What is money laundering, how big or vast the problem is, how did it start and how it is done, what are the authorities doing about it and what are the limitations of this particular research has been described in this section. The second chapter includes an extensive and analytic review of the existing literature that is available to refer to about this subject.(incomplete**)