Money Laundering: Why It’s Bad For Society, Business and the Economy
Some people in the financial services industry may be wondering why money is bad but it is actually money laundering that has truly become a scourge of our times. According to figures from the United Nations Office on Drugs and Crime, global money laundering accounts for anywhere between 800 billion and two trillion US dollars every year. That’s an astounding 2-5% of the global GDP. It is clear that, in certain cases, crime actually DOES pay because of money laundering and funds that have illicit origin.
What is Money Laundering?
Money laundering is the process used by criminals who have made large amounts of funds from illegal activities such as terrorism or drug trafficking to ‘clean’ money that make it look as if it the funds have come from a legitimate source.
There are dozens of different ways that money launderers use to get money, from time-worn techniques such as inflating the cash receipts of a legitimate business like a casino or restaurant to an ever-increasing array of 21st-century methods including funnelling funds through virtual gaming or online betting shops and buying and selling cryptocurrencies. At the end of the process, the laundered funds have been ‘cleaned’ and can be used in regular financial institutions without raising suspicion.
The cost of money laundering to businesses, economies, financial institutions that are providing financial services and society as a whole is enormous and far-reaching. Let’s take a look at the negative effects of laundering and money that has an illegal origin.
What are the Effects of Money Laundering?
What are the Impacts of Money Laundering on Businesses?
Clearly, there are serious consequences for any organisation that is found to be laundering money, especially in the financial sector. Contracts may be lost and legal consequences imposed. And, of course, this kind of scandal tends to generate negative headlines for any company that is found to be involved, damaging reputations and causing customers to lose trust, forcing executives to take their business elsewhere.
A financial institution or company may not always be aware of money laundering and has not actively participated in any of the underlying wrongdoing. As a financial services provider, Infinity is at high risk of being targeted of groups or individuals that conduct criminal activities. We have to ensure stringent compliance with Know Your Customer (KYC) and anti-money laundering (AML) regulations looking out for red flags such as customers wanting to pay for policies via third parties, large premiums being paid with cash that could have an illegal origin and international bodies channelling payments via offshore banks.
We have a dedicated compliance team who keep up with new legislation concerning KYC and AML but many companies still struggle to keep abreast of the ever-changing regulations, not to mention the constantly evolving tactics employed by the money launderers.
Impacts of Money Laundering on the Financial System and Economy
Money laundering reduces tax revenue because activity taking place in the underground economy is undeclared. This has a negative impact on the economy as a whole and also gives illegal businesses an unfair competitive advantage over those operating and earning from legitimate sources.
When money laundering is the raison d’être of a business, generating profit is secondary and products are often sold for less than the cost of production, which, again, puts a legitimate business or financial institution with legitimate income at a disadvantage because it reduces the money generated from product sales.
Money laundering is also often a reason why productive businesses, bought for the sole purpose of cleaning money, become unproductive or ‘sterile’. Efficiency in the real sector of the economy is therefore reduced.
Studies show that financial crime and corruption act as a brake on economic development, slowing its growth. This is particularly damaging to developing economies who have fewer resources to direct towards fighting activities of illegal nature and imposing anti-money laundering regulations. The cycle of corruption can be difficult to break and often requires assistance from the international community.
Money laundered can also trigger exchange rate volatility and fluctuations in international capital flows, which hampers the legitimate economy and the financial system as a whole.
What are the Impacts of Money Laundering on Society?
The fight against illegal activity is expensive and inevitably government funds spent on implementing regulations and other crime-fighting policies are diverted from other areas of public spending such as health or education, so we all lose out.
When money generated illegally, also called ‘dirty money’, is successfully cleaned by criminals, it leads to more drugs, crime, violence and terrorist activities in an ever-increasing circle of criminality which draws more and more people into its net. When a large amount of funds can be made through illegal activities and not legitimate sources, businesses that previously had a legitimate source of income as well as public and government employees might be persuaded to jump on the criminal bandwagon to get a share of the illicit funds.
In recent years there has been a concerted global effort to combat money laundering with the introduction of many new anti-money laundering laws and a raft of regulations dictating how banks and other institutions that provide financial services must guard against, detect and report suspicious activity. If you’re an expat living in Asia you may have noticed extra checks on international transactions as a result of these anti-money laundering measures.
What are the Impacts of Money Laundering on Banks?
A bank is traditionally viewed as the pillar of economic success and a symbol of the legitimate financial system in the public and private sector. The best banking systems are able to ensure great production in every economic sector despite of the rampant money laundering issue across the financial system.
Money laundering can easily erode financial institutions and weaken the sector’s role in the growth of the country. However, the consequences of money laundering on a country’s economic development are difficult to quantify.
What are the Consequences of Money Laundering?
When a criminal or a group of criminals launder funds from institutions, there can be serious money laundering offences for the parties involved. Contracts may be lost. The government of other countries may also impose financial penalties under anti-money laundering laws.
As in all countries, money laundering is considered a criminal act and would likely involve an investigation done by the government and law enforcement officers that could result in a money laundering offence if proven true. As such, this kind of fraud scheme tends to generate negative headlines, which affects the reputation and stability of any company involved, on top of handing them legal consequences under anti-money laundering laws.
How do you Fight Money Laundering?
With our increasingly digital world opening more and more doors to criminality – Airbnb and Uber, for example, have both been exploited by money launderers – it is clear that the fight against money laundering is going to require global cooperation and innovative solutions. While there are many anti-money laundering laws in place, criminal organisations are still finding ways to make money laundering prolific.
I have over 20 years of experience in the financial services industry and hold a Chartered FCSI qualification. I ensure that our operations are fully compliant with the rules of our most stringent regulators.