Welcome back!
Today’s topic is introduction to Anti Money
Laundering.
To begin with, Money laundering is the criminal’s
way of trying to ensure that, in the end,
crime pays. The most common types of criminals
who need to launder money are, drug traffickers,
embezzlers, corrupt politicians and public
officials, mobsters, terrorists and con artists.
Drug traffickers are in serious need of good
laundering systems because they deal almost
exclusively in cash, which causes all sorts
of logistics problems. Not only does cash
draw the attention of law-enforcement officials,
but it's also really heavy. In practice, criminals
are trying to disguise the origins of money
obtained through illegal activities so it
looks like it was obtained from legal sources.
Otherwise, they can't use the money because
it would connect them to the criminal activity,
and law-enforcement officials would seize
it.
On the socio-cultural end of the spectrum,
successfully laundering money means that criminal
activity actually does pay off. This success
encourages criminals to continue their illicit
schemes because they get to spend the profit
with no repercussions. This means more fraud,
more corporate embezzling (which means more
workers losing their pensions when the corporation
collapses), more drugs on the streets, more
drug-related crime, law-enforcement resources
stretched beyond their means and a general
loss of morale on the part of legitimate business
people who don't break the law and don't make
nearly the profits that the criminals do.
Money launderers are not interested in profit
generation from their investments but rather
in protecting their proceeds. Therefore they
invest their funds in activities that are
not necessarily economically beneficial to
the country where the funds are located. Furthermore,
to the extent that money laundering and financial
crime redirect funds from sound investments
to low quality investments that hide their
proceeds, economic growth can suffer. In some
countries, for example, entire industries,
such as construction and hotels, have been
financed not because of actual demand, but
because of the short-term interests of money
launderers. When these industries no longer
suit the money launderers, they abandon them,
causing a collapse of these sectors and immense
damage to these economies
The economic effects are on a broader scale.
Developing countries often bear the brunt
of modern money laundering because the governments
are still in the process of establishing regulations
for their newly privatized financial sectors.
Other major issues facing the world's economies
include errors in economic policy resulting
from artificially inflated financial sectors.
Massive influxes of dirty cash into particular
areas of the economy that are desirable to
money launderers create false demand, and
officials act on this new demand by adjusting
economic policy. When the laundering process
reaches a certain point or if law-enforcement
officials start to show interest, all of that
money that will suddenly disappears without
any predictable economic cause and that financial
sector falls apart.
While the financial sector is an essential
constituent in the financing of the legitimate
economy, it can be a low-cost vehicle for
criminals wishing to launder their funds.
Consequently, the flows of large sums of laundered
funds poured in or out of financial institutions
might undermine the stability of financial
markets. In addition, money laundering may
damage the reputation of financial institutions
involved in the scheming resulting to a loss
in trust and goodwill with stakeholders. In
worst case scenarios, money laundering may
also result in bank failures and financial
crises.
Money laundering diminishes government tax
revenue and therefore indirectly harms honest
taxpayers. It also makes government tax collection
more difficult. This loss of revenue generally
means higher tax rates than would normally
be the case if the untaxed proceeds of crime
were legitimate. It also threatens the efforts
of many states to introduce reforms into their
economies through privatisation. Furthermore,
while privatisation initiatives are often
economically beneficial, they can also serve
as a vehicle to launder funds. In the past,
criminals have been able to purchase marinas,
resorts, casinos, and banks to hide their
illicit proceeds and further their criminal
activities.
There is also a risk posed to the securities
markets, notably the derivatives markets.
As a result of the degree of complexity of
some derivative products, their liquidity
and the daily volume of transactions, these
markets have the ability to disguise cash
flows and hence are extremely attractive to
the professional money launderer. However,
their activities pose huge risks to these
markets. Firstly, the brokers used to execute
orders on behalf of money laundering clients
may be criminally liable for aiding and abetting
money launderers. A worrying situation is
the money launderers' skilful manipulation
of the futures markets. On local futures exchanges,
individuals have colluded to take correspondingly
short and long positions so as to clean money
debts being paid with dirty money, while profits
now being clean money. Secondly, another major
risk created is through the use of offshore
banks that may wash money using derivative
markets. As these banks are foreign, they
are not required to abide by the same regulations
as those of domestic investors as regards
overexposure to uncovered risk; they are able
to take on huge risk relative to their institutional
size. Should losses result from such positions
the debts may not be fully paid as the contracts
purchased may be only one step in the course
of a complex laundering chain that is untraceable.
Thus potentially huge losses could be incurred
by legitimate investors, causing damage to
the derivatives markets.
One of the most serious microeconomic effects
of money laundering is felt in the private
sector. Money launderers often use front companies,
which co-mingle the proceeds of illicit activity
with legitimate funds, to hide the ill-gotten
gains. In some cases, front companies are
able to offer products at prices below what
it costs the manufacturer to produce. Therefore
front companies have a competitive advantage
over legitimate firms that draw capital funds
from financial markets. This makes it difficult,
if not impossible, for legitimate business
to compete against front companies with subsidised
funding, a situation that can result in the
crowding out of private sector business by
criminal organisations. The management principles
of these criminal enterprises are not consistent
with traditional free market principles of
legitimate business, which results in further
negative macroeconomic effects.
Money laundering majorly happens in trade-based
transactions hence; Government should put
a cap on huge cash transactions as these mostly
take place in illegal activities like drug
trade and betting deals. There is a need to
check the generation of black money in the
education sector and through donations to
religious institutions and charities, generation
of black money through cricket betting, misuse
of exemption on Long Term Capital gains tax
so on and so forth.
Hence, it become important for all countries
to have strong Anti-money laundering or (AML)
laws, regulations and procedures intended
to prevent criminals from disguising illegally
obtained funds as legitimate income.
That’s all for today.
Thank you.
Hope you all now have a fair idea about Anti
Money Laundering and you may now apply this
knowledge to your day to day work.
I will come back with more such structures
in K.Y.C Bytes.
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Have a nice day ahead.
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