Economywatch: Why money laundering must be tackled head on

Money laundering, the various processes or methods by which profits or proceeds from criminal activities are disguised as legitimate funds, must be tackled head on to save the national economy from its deleterious effects.

Money laundering (ML), which also refers to the processes by which criminal proceeds are controlled and converted, stored, transported or transferred, managed, obscured, anonymised and enjoyed, is a derivative or second-order financial crime.

By this is meant that for Money Laundering to take place, there must be an underlying criminal activity (called Money Laundering predicate offence) that will generate proceeds, which when laundered, results in the offence of ML.

Financial crimes and fraudulent activities, which are therefore predicate offences of Money Laundering, have contributed greatly to messing up the economies of many countries around the world. This is so because a lot of governments have turned a blind eye to many Money Laundering predicate offences, to the destruction of their economies and the financial system, especially through the banking and insurance sectors.

The Gambia government, through the Finance and Economic Affairs ministry, will today table at the National Assembly its Anti-Money Laundering and Financing of Terrorism Bill 2012 for ratification by the country’s lawmakers.

This bill is expected to upgrade the country’s ‘deficient’ anti-money laundering and terrorism financing laws with a view to bringing it in line with international standards.

The Inter-Governmental Action Group against Money Laundering and Terrorism Financing (GIABA) - an arm of ECOWAS responsible for the prevention and control of money laundering and terrorist financing in West Africa - has been calling on the Gambian government to amend and pass a standard anti-money laundering legislation, to make it extremely difficult for money launderers to carry out their illegal activities in The Gambia. This is because the effects of money laundering on an emerging economy such as ours can be quite destructive. 

Here, following, are some of the deleterious effects of Money Laundering on an economy and the society if the illicit activity is left unchecked.

Volatility of Laundered Deposits (Here today, Gone tomorrow)

It has long been noted that failure to prevent money laundering could result in the undermining of the credibility of individual financial institutions and ultimately the entre financial system. Inflows of capital on the basis of non-commercial considerations were likely to be extremely volatile in the absence of adequate surveillance and supervision. Such volatility could fundamentally complicate macro-economic management by distorting exchange rate, monetary and fiscal policies.  Economists such as H.O. Amazu have said that unstable bank deposits, created by money laundering activities, are not good for the banks because they impede good planning. If a bank is unstable to plan well because of the volatility of its most critical ingredient, funds, sustained growth is hampered. The financial sub-sector is indispensable to the efficient functioning of a modern economy and failure to ensure that it operates unhindered could have injurious repercussions for the entire society. Money laundering is, therefore, inconsistent with, and inimical to, our national economic, social and political aspirations.

Loss of Revenue to the Government

Money laundering results in loss if revenue by the state. Money is taken out of the country through over- and under-invoicing of imports and exports respectively, or direct smuggling of currency in breach of legal requirements.

Furthermore, individuals and corporations systematically under-report or fail to declare their incomes for tax purposes, using anonymous bank accounts to hide the true situation, or relying on cash transactions, thereby evading tax. Such practices deny the government of the much-needed revenue for development, distorts the nation’s vital monetary and fiscal statistics needed for sound planning and budgeting.

Increase in Crime Rate

The activities of money launderers also result directly in the increase in the level of crime in the society with all its dire consequences on the wellbeing of the citizenry. Failure to prevent money laundering permits criminals to benefit from their actions, thus making crime an attractive enterprise. It also allows criminal organizations to finance further criminal activity. Furthermore, unchecked laundering would ultimately engender contempt for the law, thereby undermining public confidence in the legal and financial systems.

Undermines National Governments

The accumulation of economic and financial power by criminal organizations can ultimately undermine national economies and democratic systems. The experience of some Latin American countries like Columbia is a solid example.

The proceeds of money laundering are often employed in perpetrating heinous crime such as terrorism, and destablising governments. It undermines good governance and encourages corruption and lawlessness.

Retards the influence on Development of Indigenous Entrepreneurs

One of the most harmful consequences of widespread money laundering in a fragile growing economy such as The Gambia’s is its effect on the growth and development of indigenous entrepreneurs.  Money Laundering permits the importation of goods into the country which are sometimes sold at prices which make local production of equivalent goods economically unprofitable. The ripple effects of this act are enormous. Large quantities of goods dumped in the country by money launderers results directly in social and economic dislocation to the system by lowering of installed industrial capacity utilization, worsening the unemployment situation, reducing disposable incomes, increasing the level of crime and stress in the society, among other adverse consequences.

Negative External Image of the Country

Money Laundering does incalculable harm to the external image of a country. Today, many African nationals are treated with suspicion and, in some cases, outright disrespect in almost all the entry points of Western countries on account of some African countries’ increasing association with drug trafficking, advance fee fraud and the associated money laundering, even though only a very tiny percentage of Africans is engaged in these criminal activities.

Discourages Inflow of Foreign Capital

Unchecked money laundering activities constitute a serious impediment to the inflow of the much needed foreign investment into some African countries. Massive inflow of foreign capital, among other factors, is required to pull the continent’s economy out of the woods as it would provide the much needed boost to production, and reduce unemployment significantly, as well as increase workers’ disposable income. Unfortunately the activities of money launderers discourage the much needed foreign capital inflows.

Constrain the development of markets for financial products

Unchecked money laundering activities also undermine the trust ordinary people place in markets in financial services, which constrains the development of markets for a wider range of products which have the potential to provide self-sufficiency in sickness, unemployment and old age.

As I bring this contracted piece into conclusion – since there is a lot more to be learnt about Money Laundering – I would like to also mention that globalization, de-regulation and the integration and liberalization of the world’s financial system create an environment that organised criminals are only too ready to exploit. Measures to counter the use of the financial system by criminals should therefore be closely coordinated at both the local and international levels.