Money laundering

Contemporary Review, June, 2002 by Keith Suter

Fifth, the need to find ways of injecting laundered money into a financial system means that some legitimate and unsuspecting businesses may be used as conduits for the money. Managers and employees may therefore be drawn into allegations of money laundering without their being aware that they were part of the crime. For example, most of the staff and customers of the Bank of Credit and Commerce International (BCCI) -- whose collapse in 1991 was the largest bank crash in history -- were ordinary law-abiding citizens, unaware that their bank was involved in extensive money-laundering.

Finally, this cheap money can undermine the market system. For example, in the United States organized crime gangs have used pizza parlours to mask proceeds from heroin trafficking. These front companies therefore have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates. They can then drive out the legitimate competition through their competitive advantage. This then leaves the organized crime gangs with an even wider base of operations. This is also a problem with the privatisation of government assets. As a government puts its assets on the market, so they could be bought by organized criminal gangs and so infrastructure projects such as railways, telecommunications and water systems could end up in the hands of criminal gangs.

During the 1980s western governments began to give more attention to working together to try to stop money laundering. For example, the Financial Action Task Force on Money Laundering (FATF), which is part of the Organization for Economic Co-operation and Development (OECD), the organization of the world's developed countries, has created Best Practice Guidelines on how to monitor illegal financial flows.

There is also the December 2000 UN Convention Against Transnational Organized Crime (with supplementary protocols on trafficking and migrant smuggling). This was signed in Palermo, Italy (where organized crime had tarnished the Sicilian city's name for many years). 124 countries out of the UN's 189 members signed on the spot; never before had an international treaty attracted so many signatures so soon after its adoption by the UN General Assembly. This is a clear indication of the growing international concern about organized crime. Also, the UN Office of Drug Control and Crime Prevention co-ordinates the Global Programme against Money Laundering (GPML). This helps UN member-states introduce legislation against money laundering and to develop mechanisms to combat this crime.

But so far there have been only limited successes in international cooperation because criminals are able to exploit the lack of an international government to create and enforce laws on money laundering. Additionally, drug profits are so great that the drug traffickers can pay for the best lawyers and accountants, undermine governments and bribe law enforcement agents.

The FATF has a list of many countries criticized for lax financial supervision. The most well known include the Bahamas, the Cayman Islands and St Kitts-Nevis in the Caribbean, and the Cook Islands, Marshall Islands and Nauru in the South Pacific. Other countries include: Russia, Lebanon, Liechtenstein and the Philippines. There is no penalty for being named by the FATF. However, the public stigma may be having some impact, as overseas people may shy away from having a legitimate bank account in those countries for fear of being seen as members of organized criminal gangs.