The phenomenal changes witnessed in the global economy in the past century have seen a rise in organized crime transcending any single nation’s boundaries. Money Laundering is a form of organized crime emanating from its direct association with other criminal activities. Black’s Law Dictionary 1027(8th ed. 2005) defines it as the practice of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced, FBI (2008). It is therefore, a form of organized crime committed along other criminal activities attempting to legitimize the earnings of illegitimate activities.
Evidence show that money laundering has been in practice for centuries. However, its increased recent association with other serious crimes such as trafficking of illegal narcotics and terrorism as well as the increasing social, political and economic implications has made it a major concern to the national and international community. The implication of money laundering on the global economy is far reaching and multidimensional as they affect different facets of the society; political, socio-economic and security.
The impact of money laundering on the Foreign Exchange markets of the different world’s economies is enormous. The process mostly involve large volumes of money According to the International Monetary Fund, it is estimated that that the cumulative range of money laundering could be up to a whooping 5% of the world’s Gross Domestic Product (GDP). Chong, A ; López-de-Silanes, F. (2007) ascertain that an estimated 1.5 and 2.0 trillion USD is involved in the laundering process annually. The uncontrolled movement of large amounts of money across different money markets has a direct negative impact on foreign exchange rate, Shehu, A. Y.(2008).
Furthermore, due to the volatile nature of exchange rates; there may be a need to increase productivity and to regulate cash flows across in a given economy; all of which lead to inflation, World Bank (2000). It is therefore necessary to put in place a centralized, modern foreign exchange control systems in order to control money laundering. Money laundering, being characterized by shadow transactions, is mostly carried out in the form of cash payments, through illegal means. This result to an increase in an illegitimate economy leading to an increase in the demand for currency, Chong, A ; López-de-Silanes, F. (2007).An exponential increase in currency demand affects the interest rates, income levels and tax burdens in a society.
Money laundering also has adverse effects on the income distribution across nations and people. It also creates economic distortions since launderers are inefficient investors in comparison to other legitimate investors. According to, Shehu, A. Y.(2008), the practice affects the earnings distribution which create distorted fiscal indices evidenced by discrepancy between income and expenditure measures of GDP of a given economy, inconsistency between the national statistics account for the official and actual labor force as the creation of underground economy leads to a decline in the participation in the official markets. This in turn leads to unequal allocation of scarce resources.
Money laundering leads to a decrease in the asset quality, loss of financial integrity (and therefore reputation) in a given economy as a result of an increase in liability. By the very nature of the practice, the direct and indirect involvement of financial institutions in different world economies may lead to a loss of confidence and credibility in the system, World Bank (2000). The financial institutions are involved though; Off-shore banking, electronics money transfers, letters of credits bonds and securities as well as other modern banking practices such as the use of internet, e-commerce, cyber money all of which provide launderers with opportunities to transfer money. Chong, A ; López-de-Silanes, F. (2007) proposes that tougher liability values should be established in order to limit the participation of the financial intermediaries in money laundering.
Money laundering also propagates the informal market thereby creating underground economies. The success of the laundering process depends on the techniques used. Informal cash businesses are integrated into the process. An example is gambling. It is estimated that large volumes of money is illegally transferred through the gambling process. According to Shehu, A. Y.(2008), the proceeds of the Casino business in the world increased by approximately 250% from USD 117 billion to USD 407 billion in the years between 1984 and 1994. This increase is largely attributed to the integration of money laundry into the gambling.
Corruption is synonymous with money laundering. As launderers seek to protect their interest, they infiltrate the political class and the law enforcement agencies through massive financial favors. They therefore control economic policies and programs of a country. As a result they may influence the privatization of state corporations and other financial institutions, and with the funds at their disposal, take control of the economy. This would inevitably lead to the introduction of unfavorable economic policies which would directly affect a given economy, World Bank (2000).
The criminal nature of money laundering and its associate activities leads to an increase in organized crime. There is an influx in violence and in extreme cases, confrontation of the legitimate government by the criminal groups in order to protect their interest. Increased levels of insecurity in any economy leads to real or biased negative investor perception. There are therefore serious economic repercussions (such as a decrease in foreign investment) in a given economy resulting from an increase in crime.
Large amounts of money are lost inform of evaded taxes and deviation of government resources to non beneficial activities, Chong, A ; López-de-Silanes, F. (2007). Since money laundering requires sophisticated techniques in order to disguise the original origin of assets, money launderers will certainly evade taxation as they seek to avoid detection. Besides, tax evasion is in itself a form of source of money laundering. Tax evasion involving hefty amounts of money may cause balance of payment problems and tax burden in a given economy, FBI (2008).
The attempt to control the activity has seen the introduction of anti-money laundering regulations in different countries, Rimmer, S. H. ; Jaggers, B.(2006). Critics however view these regulations as totally in effective in controlling the process since the regulations acts in; reducing the efficiency of banks and fostering other forms of crime such as smuggling. Chong, A ; López-de-Silanes, F. (2007). There is no single nation that can effectively deal with the menace since the operation of criminal groups transcends any single national boundary or sovereignty. It is therefore imperative that there be international coordination and cooperation in creating a legal framework to address the scourge.
References
1. Chong, A ; López-de-Silanes, F. (2007). Money Laundering and its Regulation.
Inter-American Development Bank, Working Paper #590. Retrieved from the internet on 4/07/2008 from;
;http://www.iadb.org/res/publications/pubfiles/pubWP-590.pdf;
2. FBI (2008). Money Laundering. Retrieved from the internet on 4/07/2008 from;
;http://www.federalcrimes.com/moneylaundering.htm;
3. Rimmer, S. H. ; Jaggers, B.(2006) Anti-Money Laundering and Counter-Terrorism Financing Bill 2006.Law and Bills Digest Section. Retrieved from the internet on 4/07/2008 from;
;http://www.aph.gov.au/Library/Pubs/bd/2006-07/07bd060.pdf;
4. Shehu, A. Y.(2008) Money Laundering: The Challenge Of Global Enforcement.
Retrieved from the internet on 4/07/2008 from;
;http://www.crime.hku.hk/moneylaundering.doc;
5. World Bank (2000). Money Laundering Muddening The economy. Retrieved from the internet on 4/07/2008 from;
;http://www.worldbank.org/fandd/english/0397/articles/0110397.htm;
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