This part of the report contains a thorough and critical study of the books journals, articles and other materials that is available on money laundering. This review gives the audience an idea how much research has been done in this area. It also helps to get an idea of the world’s concept of money laundering.
A channel or medium is required to carry out money laundering activity. The preferred medium that a Money launderer chooses is the financial institution that is efficient and costs less while carrying out the transactions (Masciandaro, 1999).Such activities ruin the integrity of those financial institutions and affects their soundness or stability. As a result of their weak integrity, they loses the investors confidence and eventually direct foreign investments are reduced. This process in turn disturbs the long-term economic growth of the country. Barret (1997),Masciandaro and Portolano (2003), Paradise (1998) and Quirk (1997) argued in their studies that the economic and financial systems of a country are threatened by money laundering.
Despite of money laundering being a global problem, there has been a little research in the area of the harmful effects on economy. Some notable exception will include Uche, C U (1999) and Masciandro, D (2000). Most of the works were done on the legal framework or to develop effective AML policies over the years. Therefore quality data on the pervasiveness or any long term pattern of the affected economy is rather limited.
The origins of money laundering can be traced as far back as 1930s in organized criminal activities (Bosworth-Davies and Saltmarsh, 1994). So it is clear that the concept is not a new one. Over the years it just grew over its proportion. Financial Action Task Force defined the problem as:
‘ . . . the processing of a large number of criminal acts to generate profit for individual or group that carries out the act with the intention to disguise their illegal origin in order to legitimize the ill gotten gains of crime. Any crime that generates significant profit-extortion, drug trafficking, arms smuggling and some kind of white collar crime may create a ‘need’ for money laundering’ (FATF 1998).
According to Mulig and Smith (2004), the term ‘money laundering’ was originated by the organised crime families, who used to own legitimate laundry business to disguise or ‘launder’ very large amount of cash, which was in fact, earned through extortion, prostitution, gambling and drug business. United Nations office on Drugs and Crime (UNODC) explained that there are two reasons why the criminals, May it be the street crime or the corporate white collar embezzlement or maybe a corrupt public official, need to launder the money because, it leaves a paper trail as evidence of their crime. Secondly, the money itself is vulnerable to seizure so it needs to be protected. In other words it is an ‘Unfinished product’ to the criminal until it is cleaned.
A bigger portion of literature on money laundering concentrates on the legal framework. That includes the legislation and regulations that can be traced back to the US ‘war on drugs’ in 1980’s (Gill and Taylor, 2004). Since then it was a concern that was growing over time. In response to that, international agreements were being made to tackle such activities amongst which, the UN was the first international organisation to combat the crime globally. Subsequently, in 1989 G-7 established FATF. In the FATF annual report (FATF, 2006b) it was stated that, most of the illegal activities are linked with corrupt practices and lack of transparency. This subsequently arises to weaker governance which results poor and ineffective use of AML policies. Those are the places that become heaven for money launderers. Their activities erode the financial system from inside while taking advantage of the volatile economy.
In large scale money laundering operation, cross-border factor is always included. Therefore an international approach was a crying need to handle this problem effectively. That was also a reason why the UN and the Bank for international Settlement took the initiative to address the problem in 1980. Following the FATF formation, the regional grouping such as- Council of Europe, European Union, Organisation of American States And many others designed AML policies required and effective for their member countries. Asia, Europe, the Caribbean and southern Africa have created regional AML task force-like organizations, and similar groupings for western Africa and Latin America are being planned too.
As discussed previously, second stage of money laundering widely uses the technology as one of their means of ‘layering’ the ‘dirty money’, the use of it is becoming rather popular to them. The advances in technology, especially in Information and Communication Technology (ICT) have benefited the whole world. Money launderers are also included in the group of beneficiaries. They take full advantage of these benefits.
Modernisation in technology, particularly in ICT has brought various different ideas banks or other NBFIs to offer new products and services through new means of delivery. These new products and services and often contain fast transmission of digitized information, facilitating of fund movement and transcending distance within or across the national boundaries (Bradley and Steward,2002) and anonymity (Philippsohn,2001). According to Mishkin and Strahan (1999) and Berger (20003) speed, distance and anonymity are the key factors that are rapidly changing the financial system. However, Masciandro (1998, 99) and Philippson (2001) implied that those new benefits including e-banking and all sorts of e-money technologies have made money laundering activities even more robust. As a matter of fact, FATF (2001) on their typology report identified the online banking facility and internet as the major money laundering vehicle now days. According to Chief Financial Officer Report (2002) ‘Technology changes have influenced the operating strategies of many banks and Non-banks as they seek to compete in the increasingly fast-paced and globally Inter-dependent business environment.’
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