Money laundering 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 global GDP. It is clear that, in certain cases, crime actually DOES pay.
» What is money laundering?
Money laundering is the process used by criminals who have made large sums from illegal activities such as terrorism or drug trafficking to ‘clean’ money to make it look as if it has come from a legitimate source. There are dozens of different ways to launder 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 ill-gotten gains have been ‘cleaned’ and can be used in the regular financial system without raising suspicion.
The cost of money laundering to businesses, economies and society as a whole is enormous and far-reaching. Let’s take a look.
» The effects of money laundering on business
Clearly there are serious consequences for any organisations found to be laundering money, especially in regulated sectors. Contracts may be lost and financial penalties imposed. And, of course, this kind of scandal tends to generate negative headlines for any companies found to be involved, damaging reputations and causing customers to lose trust and take their business elsewhere.
Businesses may not be aware of money laundering and may not have actively participated in any of the underlying wrongdoing. As a financial services provider Infinity is at high risk of being targeted. 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 and channelling payments via offshore banks. We have a dedicated compliance team who keep up with new legislation concerning KYC and AML but many companies struggle to keep abreast of the ever-changing regulations, not to mention the constantly evolving tactics employed by the money launderers.
» The effects of money laundering on the 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 legitimately.
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 legitimate businesses at a disadvantage.
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 crime and corruption act as a brake on economic development, slowing economic growth, and this is particularly damaging to developing economies who have fewer resources to direct towards fighting illegal activity and imposing AML regulations. The cycle of corruption can be difficult to break and often requires assistance from the international community.
Dirty money can also trigger exchange rate volatility and fluctuations in international capital flows.
» The effects of money laundering on society
The fight against clandestine activity is expensive and inevitably government funds spent on implementing AML regulations and other crime-fighting policies is diverted from other areas of public spending such as health or education, so we all lose out.
When ‘dirty money’ is successfully cleaned by criminals this leads to more drugs, crime, violence and terrorism in an ever-increasing circle of criminality which draws more and more people into its net. When such big money can be made through illegal activities, previously legitimate businesses as well as public and government employees might be persuaded to jump on the criminal bandwagon to get a share of the booty.
In recent years there has been a concerted global effort to combat money laundering with the introduction of many new anti-money laundering (AML) laws and a raft of regulations dictating how banks and other financial institutions must guard against, detect and report suspicious activity. If you’re an expat living in Asia you may have noticed extra checks on international transfers as a result.
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.