What is money laundering and how does it affect society?

26.SEPT.08

Submitted by the Financial Intelligence Unit

Money Laundering is the process by which monies generated by criminal activities are converted through legitimate channels into assets that cannot be easily traced back to their illegal origins. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source, that is, the laundered monies could be spent with impunity.{{more}}

Drug trafficking is one of the primary predicate offences which generate monies which need to be laundered. Other criminal activities which may generate “dirty money” include, robbery, bribery, embezzlement and human trafficking. These activities can generate huge amounts of proceeds and produce large profits, creating the incentive to “legitimise” the ill-gotten gains through money laundering.

Steps of Money Laundering

•  Placement- this is where the launderer physically introduces “dirty” money into the commercial financial system, or transports it out of a particular country to another where they have minimal procedures in place to detect such. This is most challenging for the launderer, as it involves the actual, physical movement of illicit cash proceeds and is the step most closely connected with the actual crime. It is at this stage that the proceeds are likely to be intercepted.

•  Layering- is where money placed in the banking system is commingled with legitimate funds through a series of transactions which are meant to disguise, obfuscate or confuse the origins of the funds.

The object of these transactions in their frequency, volume, or complexity is to mimic legitimate transactions and obfuscate the true origin of the funds.

• Integration- here the illicit funds are returned to the legitimate economy, where they cannot be distinguished from legitimate, commercial sources of income. At this stage, the funds are so thoroughly integrated with legitimate monies that they are near impossible to isolate and identify.

What is the connection with society at large?

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.

The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society. In countries transitioning to democratic systems, this criminal influence can undermine the transition. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue.

How does fighting money laundering help fight crime?

Money laundering is a threat to the good functioning of a financial system; however, it can also be the Achilles heel of criminal activity.

In law enforcement investigations into organised criminal activity, it is often the connections made through financial transaction records that allow hidden assets to be located and that establish the identity of the criminals and the criminal organisation responsible.

When criminal funds are derived from robbery, extortion, embezzlement or fraud, a money laundering investigation is frequently the only way to locate the stolen funds and restore them to the victims.

Most importantly, however, targeting the money laundering aspect of criminal activity and depriving the criminal of his ill-gotten gains means hitting him where he is vulnerable. Without a usable profit, the criminal activity will not continue.

What should individual governments be doing about it?

A great deal can be done to fight money laundering, and, indeed, many governments have already established comprehensive anti-money laundering regimes. These regimes aim to increase awareness of the phenomenon – both within the government and the private business sector – and then to provide the necessary legal or regulatory tools to the authorities charged with combating the problem.

Some of these tools include making the act of money laundering a crime; giving investigative agencies the authority to trace, seize and ultimately confiscate criminally derived assets; and building the necessary framework for permitting the agencies involved to exchange information among themselves and with counterparts in other countries.

The fact that organized crime recognizes no territorial boundaries or the niceties of sovereignty pose a fundamental challenge for the society. The capabilities against money laundering should be strengthened to ensure an effective, efficient and more productive crusade against the menace. The society is asked to assist and cooperate to ensure that our country’s economical and social well being is maintained.