Money Laundering and Corruption - Essay Example

? Money Laundering and Corruption Overview The mafia is thought to be the origin of the word money laundering. During the coinage of the term, gangsters in the USA were earning a lot of money from illegal sources that included gambling, prostitution, extortion, and bootleg liquor (Salinger, 2005, p. 78). These monies needed a way in which they were going to be presented as legitimate in order to avoid speculation from the government. The most common way that they made their money look legitimate was from the purchase of outwardly legitimate businesses that dealt in cash. The most common business thus was Laundromats. A famous gangster known as Al Capone was one owner of such Laundromats where he made his dirty money look legitimate. However, in 1931, he was convicted for tax evasion. Many experts have conceded that the claim of origin of the phrase money laundering is a myth. Rather, they cite that since the money was gotten from illegal sources, it was considered “dirty”. In a bid to “cleaning it up” so that it looked legitimate, the phrase laundering of money was coined for this literal meaning. The process of money laundering is mainly meant to obscure the source of money by the use of a number of transfers and transactions. Meyer Lansky who was referred to as the Mob’s Accountant was very troubled that the monies gotten from the illegal activities could get people in jail for tax evasion. As such, he set about looking for the best way to launder money without consequences. It was when he discovered the value of Swiss banks. Here, he used the loan back concept where money would be “loaned” to people by the compliant foreign banks and then declared to the revenue with the bank even taking a tax deduction. Money laundering is a crime. However, since its conception, the term was first publicly used in the 80s where drug trafficking was the context in which it was mostly applied. The trigger for action against drug trafficking was the realization by the government that huge profits were being made at the expense of the society. The US government anticipated that such money would eventually corrupt and contaminate its structures. Money laundering is now regarded as a global phenomenon affecting all nations. The complications of dealing with this organizational and transactional crime are many since it is very adaptable and flexible assisted by the latest technology and the contracting of professionals. The global nature of the operations is also a challenge for the authorities to deal with. The presence of a large pool of resources, the ingenuity of its operators and the quest for profits are the major threats of money laundering as it expands and moves into new frontiers every day. Corruption is treated as an incurable disease because it affects every core of the social and moral fiber. There are many evils that are associated with corruption. Indeed, in most cases, it starts small and then grows into a cancer to all sectors of society, government and the economy. There is however no clear-cut correlation between the effects of corruption and the economy. The most visible consequences of corruption are the inequalities in the society with some earning more than others and an erosion of individual morals and the degradation of the moral fiber of the society in general. These are however not parameters that can be considered as being able to determine the economic consequences of corruption on the national scale. There are nations that do have a very high corruption index but yet are economically sound. There are also those that exhibit low levels of corruption but are poor performers in the economy. This is not an indictment to corruption but it is meant to show that corruption is so disguised in the society that it may affect or it may not affect the general economy (Mauro, 1995). Effects of money laundering and corruption The role that financial institutions play in the process of money laundering is the major contributor to the problems associated with the vice. Offshore banks particularly play a major role in the proliferation of the vice. This is because the bulk of illegal proceeds is laundered with the help of compliant foreign banks. Some countries like Switzerland have a very liberal bank system that has a lot of secrecy. Therefore, it is easy for one to deposit money in these banks and then get it back as legitimate money. Criminals who are keen on controlling syndicates that are sources of illegal money have devised a number of ways in which they ensure that the money they make is not traceable and is cleaned. First, they set up cash intensive businesses. The businesses can then deposit both the legitimate and illegal money earned in a bank account and it cannot be traced back as the evidence will indicate that the money was legitimately gotten. Another way is the use of casinos where ill gotten money is disguised as gambling winnings. Most criminals now control the casino business as a way of laundering their money as well as that of their partners. In most instances, the person willing to launder the money “looses” it while gambling and then gets it back in different ways from the casino. As the trend of money laundering continues to become more ingenuous, criminals have learnt the value of controlling the avenues for money laundering. It is common for criminal to purchase controlling interests in banks (Bartlett, 2002). This is mostly in those jurisdictions where the anti-money laundering legislation is weak. This is the perfect positioning for a person or syndicate wishing to launder money. Alternatively, there has been the formation of shell corporations and trusts. These are also dependent on the jurisdiction. In areas where it is not a requirement to disclose the true beneficiary or owner of a certain company, the avenue can be very efficient for laundering money. Another way in which money is laundered is the use of real estate. The seller of the property must be in cahoots with the money launderer. Here, the value of the real estate is lowered. The deficit is paid to the seller illegally whereas the launderer sells the property at its right price so that the proceeds look legitimate. There are other avenues that exist for laundering money including depositing small amounts of money in a large number of instruments while avoiding the anti-money laundering requirements. One can also purchase bearer instruments like money orders, which are then deposited. Additionally, some companies might have contracted employees who are paid in cash but do not actually exist. These black salaries meant for ghost workers are avenues of money laundering. The consequences of disguising the monies gotten by illegal means through the use of legal avenues can be far reaching to the financial system and to international business. The control of important business outlets like banks, casinos and other companies by criminals with the intention of laundering money is a cause for worry. This is because these are important contributors to the economy and sometimes might influence policy. This means that criminals may have the power to dictate policy in many places in the world where legislation might be lax. The consequences of financial systems being controlled by criminals are unimaginable. There has always been a certain degree of power that is attached to having a certain amount of money. Therefore, the existence of money in the hands of people who have gotten it illegally and who have power could mean very negative consequences for anyone attempting to question the legitimacy of such money and consequent power. It could also have very negative consequences for the financial systems and international business. Once criminals have control of financial institutions, they may get the impetus to expand their illegal trade into new frontiers in order to increase their earnings. There is no doubt that corruption affects the morals of a country. It is also no secret that the ethics governing the society are negatively affected. Additionally, it is widely considered that corruption erodes the financial capabilities of many people. There is need for corruption to be eradicated for the citizens of a certain country to reach the highest levels of income. There is also need to be rid of corruption in the echelons of government so that accountability and transparency can be practiced. There are very many avenues in which public funds are diverted for personal use by people or cartels within some governments especially in third world nations. The presence of corruption drives the citizens of a nation to enter into crimes and other social evils in a bid to getting some profit from the vice. The major problem associated with corruption is that it increases risks and uncertainity in the business environment. Many businesses are forced to pay extra in order to get licenses. In addition, there is extortion from gangs or payment to the police for protection in many places. All the factors that come down on the business person due to corrupt practices in society could lead to hardships in business in those areas. This means that businesses become less profitable and eventually are closed down leading to loss of revenues for government and unemployment for its citizens. This could only be a recipe for unrest. Anti-money laundering and anti-corruption efforts Money launderers have one major weakness. They have the desire to get their money look legitimate so that they can use it to enjoy themselves. Unless one distances him/herself from the criminal activities that generate the income, it is easy to get caught. This vulnerability is what the authorities are seeking to exploit in order to curb the money laundering trade and with it, a whole hoard of illegal activity. Since most of the money that is being laundered today has it origins from drug trafficking, it is important for the drug trade to be stopped. The volume of money received from the drug trade is higher than the volume of the drugs being moved (Booth, 2010). Thus, the government has identified several choke points where the arrest the money before it is available to deposit-taking institutions. In the UK, the Financial Action Task Force (FATF) is working relentlessly to get control of the points of entry of monies that are being intended for laundering. The choke points that they have identified are the points of entry of cash into the financial system, the transfers that occur within the financial system and the flows of cash across borders (Reuter & Truman, 2004, p. 28). The authorities cite the placement stage of the money laundering process as the point at which the launderers are most vulnerable. A first step has been to improve the reporting system especially in deposit-taking financial institutions. Another step has been the placement of penalties for deposit-taking institutions that assist in money laundering. This has led to institutions reporting suspicious deposits to the National Criminal Intelligence Service (NCIS). Additionally, the laws in the UK empower the police and custom officials to seize any amounts of money they conceive may be proceeds from drug trafficking. The Criminal Justice International Co-operation Act 1990 (CJICA) gives custom officials and police to seize monies in the excess of ?10,000. Integration of the global financial system due to advances in technology means that launderers can easily move their ill-gotten proceeds. Close international cooperation has been recommended in order to easily monitor the movement of money across national jurisdictions so as to counter money laundering. There are a number of agreements, both legal and financial, that have been reached and that are meant to counter this menace. The financial front advanced the BASLE statement of principles through the Committee on Banking Regulation and Supervisory Practices in 1988 which was meant to prevent the use of banks for criminal activities. The principle is meant to direct banks to monitor the movement of all monies they deem has been ill gotten from drugs, robbery, fraud, and terrorism. Its principles entail knowing the true identity of the customer, complying with the law to the letter, cooperation with law enforcement agencies and adherence to the statement that is fronted by the BASLE principle. The legal front has several treaties that have been internationally developed to curb money laundering. The Vienna Convention of 1988 passed the UN Convention against Illicit Trafficking in Narcotic Drugs and Psychotropic Substances (Cassella, 2007, p. 22). The treaty laid down the criminal statutes that were meant to confiscate drugs and also curd the laundering of money that is gotten from illegal means. It has a common wording and enforcement that has been adopted by individual countries in the world. It also requires that member states cooperate in the enforcement of the provisions of the treaty. The convention has been ratified by over 50 countries and it requires that countries take steps to identify, trace, freeze or seize any proceeds that they suspect are from drug trafficking. Additionally, there has been the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds of Crime (1990) and the EC Directive on Prevention of the Use of the Financial System For The Purpose Of Money Laundering (1991). Eradicating graft is one of the major challenges of many countries today. Corrupt is so pervasive in many countries that it is seen as a way of life rather than for the crime, it is. Unless there are large sums of money that have gone missing, people dismiss it as being irrelevant. Corruption has many parameters that define it. A child cheating in an exam or a teacher coming late to class have been considered as corrupt practices as they are fraudulent. The simple actions that people do in the early stages of development are the ones that lead to massive corruption in the future. Some governments like in Indonesia have started teaching about corruption in schools. They hope that by eradicating corrupt ideas in the mind of the young people, and then they may be able to make progress in the eradication of corruption on the national stage. Corruption in most countries occurs due to conflicts of interest. This means that regulating bodies are involved in the businesses that they are aimed to be regulating. An example would be a police officer owning a security company. There have been many initiatives that have been aimed at removing the conflicts of interest. The other important factor that will considerably reduce corruption is the proper use of sate resources. If governments are viewed by their citizens as being accountable and economical in the use of government resources, then, corruption perception might change (Ades & Rafael, 1994, p. 243). Another way of reducing corruption is the increase in the capacity of the government to monitor and oversee that all the anti-corruption measures are upheld. In many cases, governments have erected anti-corruption bodies but they have not had the power that they need to be able to effectively fight the vice. Additionally, the increased access to information by the public could be a driver to the eventual eradication of corruption, as corrupt public officials will desist from the misuse of public resources (Rose-Ackerman, 1978, p. 24). The final action that should be taken is the increased reporting of assets by government officials. Inventory of public property should be done so that resources that go missing may be investigated. Conclusion Money laundering and corruption are crimes that attract hefty penalties and jail times in many countries today. Money laundering involves the legitimization of illegally gotten money through the use of legitimate avenues. Many governments have ratified the UN conventions that are aimed at controlling the proliferation of money laundering practices. The major focus on the efforts that are aimed at curbing the laundering of money is on the point of entry of these monies into the financial system. Since the monies are usually in bulk, it is possible for them to be flagged. There has been sensitization on the part of deposit-receiving financial institutions so that they report any suspicious deposits and monies they may feel may be ill gotten. Moreover, the governments have put limits as to the amounts of money that arouse suspicion. In the UK, crossing the border with ?10,000 raises suspicion and custom officials and police officers are mandated to question a person over the money. In the US, any transaction that is over $10,000 is flagged and recorded. In curbing corruption, governments are attempting to educate people right from the primary schools about its evils. Moreover, there are other initiatives that have been taken including the formation of anti-corruption bodies that are aimed at investigating corruption allegations and prosecuting them. References Ades, A, and Rafael, T 1994, Competition and Corruption. Institute of Economics and Statistics Discussion Papers 169. University of Oxford: Oxford. Bartlett, B 2002, “The negative effects of money laundering on economic development.” Asian Development Bank. Accessed on 16th Dec, 2011 at http://www.u4.no/recommended-reading/the-negative-effects-of-money-laundering-on-economic-development/ Booth, W 2010, "Mexico targets money laundering with plan to limit cash transactions". Washington Post. Accessed on 16th Dec, 2011 at www.washingtonpost.com/ Cassella, S 2007, "Money Laundering Laws". United States Attorneys' Bulletin: 21–34. Accessed on 16th Dec, 2011 at www.justice.gov/usao/eousa/foia.../usab4703.pdf Mauro, P 1995, “Corruption and Growth.” Quarterly Journal of Economics 110.3 (August): 681-712. Reuter, P, and Truman, M 2004, Chasing Dirty Money. Institute of International Economics: Washington DC. Rose-Ackerman, S 1978, Corruption: A study in political economy. Academic Press: New York. Salinger, L 2005, Encyclopedia of white-collar & corporate crime. Sage Publications: Thousand Oaks. Read More