Money laundering

Contemporary Review, June, 2002 by Keith Suter

Money-laundering is facilitated in several ways in this example. 'Shell' companies in this example are registered companies that do little if any normal trading; they serve as a way of passing money. People selling works of art (who earn a commission on each sale) stand to benefit from the sale and have a disincentive to enquire too closely how the money is obtained. The price of a bank in the Cayman Islands is about $10,000 and the Islands (which are in the Caribbean) have more 'banks' than people; the banks exist more on paper than as buildings. At each point, the person may lose a little money on the transaction but that is of little worry because there was a large amount of illegal money to start with.

The international community opposes money laundering for six main reasons. First, law enforcement and revenue collection are vital activities for the stability of any country. Operations which hinder those activities jeopardize a country's financial foundations. They represent financial termites eating away at the ability of a government to raise money to pay for the provision of services. Additionally, money launderers are not so much interested in profit generation as in protecting their illegal proceeds. Thus they invest their funds in activities that are not necessarily economically beneficial to the country where the funds are located but in the best way of disguising them.

Second, combating money laundering is a costly exercise. Money has to be transferred from other areas (such as health, education or welfare) to pay for the additional law enforcement services. Additionally, tackling these people through the legal system is expensive because they can employ talented lawyers and accountants for their defence. Governments have to pay the top rate to lawyers and accountants to handle the prosecution.

Third, money laundering is conducted as a way of handling illegal gains, and so stopping the laundering should restrict the committing of those other crimes. This is particularly the case with drug money. The US government has not been able to wean its citizens off drugs and the 'drug war' military offensive has not stopped drugs from entering the US. The US government hopes that restricting money laundering will limit the capacity of criminals to capitalize on their crimes. Drugs traffickers can separate themselves from the criminal activity but they cannot separate themselves from the profits. Therefore, even if the police cannot stop the drugs, they can try to follow the money.

Fourth, money laundering distorts international financial flows and contributes to financial instability. Michel Camdessus, then the Managing Director of the International Monetary Fund (IMF), said in February 1998 that 'the estimates of the present scale of money laundering are almost beyond imagination -- two to five per cent of global gross domestic product'. Money laundering may have contributed to the financial crises in Mexico, Argentina, and parts of Asia because the money led to an over-heating of local economies.