Shadow Economies and Money Laundering - Essay Example

Name Course Tutor Date Money laundering Money laundering involves attempts to hide the origin of illegally acquired property. Criminal activities such as drug trafficking have been known to thrive through this process. The understanding here is that all proceeds from drug related activities is considered illegal by most governments. These earnings are therefore a matter to scrutinize. Therefore, their scrutiny reveals their illegality and can lead to arrests and prosecution for the people involved. Therefore, an option available for such people involved in this kind of trade would be to conceal vital information in relation to the origin and beneficiaries of such monies making use of what Perkel terms “as the informal value transfer systems”(6). It remains true that money laundered runs into billions each year with the International Monetary Fund (IMF) estimating that up to 5 percent of the global economy in 1996 involved laundered money. It is true that this percentage is higher today over a decade after these statistics. Amedeo, Bagella and Busato assert that “measurements are available to determine the impact of money laundering for any economy” (343). The findings in such an undertaking are considered fundamental in determining the overall global impact resulting from these illegal processes. Governments and international organizations are currently working in collaboration to reduce or eliminate the presence of laundered money in their financial systems. Masciandaro consents that “a thorough consideration on how much the laundered money contributes to a country’s economy”(235) needs to be considered in depth. It is imperative to note that the laundered money could be as a result of various criminal activities among them drug dealing, tax evasion, fraud, terrorism financing and corruption. The general public ignorance of what money laundering is makes it difficult for this activity to be completely eliminated. The process of money laundering dates back to the times of concerted mafia activities. This term began by the mafia ownerships in the US. During this period gangs acquired huge sums of money through illegal activities such as prostitution, extortion and gambling. These gangs needed to conceal the sources of this huge sum of money and one of the ways, which was actually laundering was for them to purchase legitimate businesses using these illegal earnings. These kinds of dealings gave rise to property owners like Al Capone, who was later convicted of tax evasion. Therefore, money laundering involves acquiring ‘dirty’ money and subjecting it into a system to try to ‘clean it’ akin to the garment laundry process. Certain Swiss banks came in to help the mafia at that time to control this dirty money. It has not been until the 1980s that money laundering has caught public attention majorly being linked to drug trafficking activities. Governments have become aware that criminal groups making huge profits from drug trade are able to contaminate and corrupt administration state structures at all levels. Until today an aspect of the money laundering process that should be critically analyzed as well is the continued pursuit of profit and the extended areas of coverage for the criminal activities. The limited information in the public domain concerning money laundering means that this vice has broader dimension that can actually be imagined. Research has shown that the extend of this practice is on the global or international scale. With such enormous extend, governments consider introducing legislation to counter this crime. Walker concurs that “governments are enacting legislation such as the UK Drug trafficking offences Act 1986 (DTOA) to counter money laundering”(27). Additionally, other acts such as the criminal justice act 1993 in Scotland consider non-drug trafficking monies as illegal. Money laundering advances in typically three steps. Placement defines the first step in the laundering process. All the earnings from the illegal activities are introduced into the retail economy or the existing financial infrastructure. Another option open to the criminals is to smuggle the money outside the country. The objective of placement is to enable the launderer to transfer the money away from the location of acquisition majorly in order to avoid detection. Once this has been successfully done, these monies can then be used to acquire other acceptable assets as part of the cover up process. Layering involves the disguising of source or ownership of these earnings. This is normally achieved through the initiation and maintenance of complex layers of financial transactions that involve this money. The objective of layering is to delink the illegally acquired money from its criminal related source, which is achieved by hiding any audit trails that may need to be carried out. One of the perceived ways of creating layers is when a launderer transfers the proceeds by use of electronic funds transfer systems available globally. Notably, each day large sums of money pass through these systems. However, there appears to be no way presently to determine whether all these money is clean. Therefore, once suspect money enters such a system, the chances of it being traced becomes almost impossible. During integration the illegally acquired money is re-introduced into the legal financial systems and assimilated with the rest of the assets. The main objective is to cause the illegal monies to appear as though legitimately acquired, whereas that is not the case. Some of the ways by which the launderers achieve integration is by creating anonymous firms in countries like Switzerland where the right to secrecy is legally upheld. Borrowings from such firms by the same launderers can then be processed in the future. The launderer may also send fictitious export import invoices with overvalued goods. The electronic funds transfer systems are at the core of all these processes, which further complicates the matter. Having mentioned the processes, it suffices to assess the general effect that laundering has especially on financial institutions. Schneider indicates that “the burden resulting from tax and social security contributions”(7) seems to provide a fertile ground for shadow economy. A direct implication from such research findings would imply that financial institutions make tax reforms and if possible reduce tax rate deductions. Schneider proposes this correlation by postulating that “ increased intensity of regulations by financial institutions reduces freedom”(8) causing individuals to engage in money laundering. As much as financial institutions spearhead the battle against money laundering, it is important to realize that the stringent tax and social security contribution regulations set by the same institutions are causing more people to consider engaging in money laundering or passively get involved. Overall, though financial institutions are affected when they knowingly or unknowingly handle laundered money in a legal sense due to their obligations determined by legislation. To a greater extend, it is expected that such institutions put in place mechanisms to counter money laundering. For such institutions to establish these mechanisms they will incur the compliance costs which could run into large sums of money. These costs will cater for administratitive and training costs as well as other process-associated costs. While governments continue to grapple with this criminal activity, enactment of legislation seems to be one of the ways this crime can be reduced. In the UK for example, it is understood that third parties may be held responsible in the realization of property acquired illegally. Therefore, the court has the power to order the surrender of such property, which is linked to the illegally acquired proceeds through acts such as money laundering. Some banks can be acquired for minimal amounts of money, especially in the east European countries. There is also attempted access into the SWIFT system which is the main international service for wire transfer messages that actuate the funds transfer between banks. However, the success of such penetration may not be clearly evident and this continues to pose a great challenge to governments and other financial institutions. It is estimated, for instance, that in Russia illegal gangs have control of close to 400 banks with a substantial number of exchanges. This infiltration has given a significant leeway to continued money laundering activities. Recent technological developments have introduced cyber-payments has escalated the money laundering to another level. These setups are currently providing the parties involved with instantaneous anonymous and secure ways to transfer funds. Since cyberspace is unregulated, the situation is likely. It is therefore, evident that one of the greatest challenges faced in an attempt to address money laundering is the advent of new payment methods currently accessible in the cyberspace. Money laundering remains the main challenging obstacles facing the global economy. It can be realized from this research that technology has continued to aid this vice through new technologies, which is now being exploited by the criminal gangs. There is a growing understanding among the international fraternity that money laundering and organized crime are related. Because of the complex networks and the huge sums of money involved, money laundering will require elaborate concerted effort among all the affected with governments and economic institutions playing a leading role in order to deliberately check or reduce these money laundering activities. A worthwhile recommendation concerning money laundering must include strengthening global co-operation and information exchange as well as law enforcement. Compliance measures can also be implemented and upheld for all financial institutions as far as money laundering prevention is concerned. This may require external funding and standardization mechanisms. Finally, a careful consideration of the new technologies available and currently being exploited by launderers should be addressed and counter measures put in place. Works cited Amedeo, Argentiero, Michelle Bagella, and Francesco Busato. "Money laundering in a 2 sector model using theory for measurement." European journal of law and economics. 26. (2009): 341-359. Print Masciandaro, Donato. "Money laundering the economics of regulation." European journal of law and economics. 7.3 (1993): 225-240. Print. Perkel, Walter. "Money laundering and terrorism: Informal value transfer systems." American criminal law review. 41. (2003): 3-8. Print. Schneider, Friedrich. "Shadow economies and corruption all over the world." Paper presented at the 8th INFER Annual conference. 1.1 (2006): 3-51. Print. Walker, John. "How big is global money laundering." Journal of money laundering control:Emerald. 3.1 (1993): 25-37. Print. Read More