Money laundering: Myths and fallacies about making dirty money clean
By Dr. Clive thomas
SN, Sunday, December 23rd 2007
http://www.stabroeknews.com
Last week's column intimated that at least three items we have been
discussing for some time now, are directly related to the significant
roles played by two of the World Economic Forum's "problematic
factors," namely, "crime and theft" and "corruption" in the poor
results obtained by Guyana in the 2007-2008 Global Competitiveness
Report. These are 1) the extensive role of the underground economy 2)
the significant role of organized crime in it (phantom economy) and 3)
the scale, scope, and impact of money laundering on the economy and
wider society. In earlier columns I have already dealt at length with
the first two items. Today I take up the issue of "money laundering."
Definition
Let me begin with a strong word of caution. When considering money
laundering one must be very clear on what is fact and what is fallacy.
The first fallacy to note is that money laundering is not, as is
commonly believed, the exclusive domain of organized crime. In fact it
is the domain of all types of crime, organized or unorganized. Whenever
the proceeds of activities that generate gains are not reported and/or
occur outside of legal formal markets, money laundering is the
inevitable consequence. To take a case in point, all individuals,
firms, business organizations and other enterprises, that seek to evade
taxes, can only successfully do so if they hide and do not report and
then subsequently launder the wealth or income they obtain. The
definition of money laundering below highlights this. It is taken from
the Lectric Law Lexicon, which is based on US legal provisions:
"Conduct/Acts designed in whole or in part to conceal or disguise the
nature, location, source, ownership or control of money (currency or
its equivalents [cheques, electronic transfers]) to avoid a transaction
reporting requirement under state or federal law or to disguise the
fact that the money was acquired by illegal means."
The second fallacy is that the "money" referred to in the term, money
laundering, refers to cash and bank deposits (the traditional
definition of "broad" money). In fact other financial instruments (for
example, electronic transfers) as well as commodities (gold, other
precious metals, high-valued artefacts) are used as means of money
laundering. To limit money laundering only to cash and bank deposit
transactions would be incorrect.
A third fallacy lies in failing to recognise that money laundering is
directly linked to the operations of the entire underground economy,
which as we know refers to all economic transactions that take place
outside of formal and legal markets. As we saw in our earlier analysis
of Guyana, organized crime, while a substantial part of the underground
economy, is not the whole of it. Criminal activity not linked to
organized crime also takes place in the underground economy. Here
individuals, organisations and business units with proceeds from all
types of criminal activities, (for example, fraud, tax evasion, and
ordinary theft) also contribute to money laundering in the underground
economy as their proceeds and ill-gotten gains must be laundered, if
they are not reported.
'Victimless crime!'
Fourth, where there is money laundering the underlying activities that
initiate it are always criminal wrongdoings. However, because of its
nature and operation analysts believe many persons perceive money
laundering as a 'victimless crime.' That is, unlike an ordinary theft
or a fraud perpetrated against a person or organization the victim is
not immediately apparent. Yet, as we shall see, all law-abiding
citizens, the government, and the society as a whole 'pay' for these
criminal wrongdoings.
Have no doubt about it, we hurt ourselves and our country when we go
soft on money laundering. Indeed, many persons feel that in Guyana we
facilitate money laundering both actively (by not passing and enforcing
appropriate legislation) and passively (by turning a blind eye to its
existence).
A fifth fallacy is that money laundering takes place only through
banks, which as we know are the principal institutions dealing with
money. It occurs, however, through all types of financial institutions
and their assets. The truth is that if money laundering is confined
solely to banks, financial intelligence operatives can reconstitute the
source of the funds by deconstructing the deposit-withdrawal-conversion
trail through bank records.
This, however, does not deny that money laundering, in seeking to
'legitimize' the proceeds of criminal wrongdoings, sees legitimate
banks as prime targets.
Process
A sixth fallacy is to interpret money laundering as a single event or
episode. It is usually a very intricate and complex process. Thus,
according to the Financial Action Task Force (FATF) set up by the G-7
countries in 1989 to lead global counter-measures against money
laundering, money laundering takes place in three main stages.
The first of these is when means are found to place funds obtained
illegally into the financial system. There are innumerable ways in
which this has been done over the years. Business activities that
handle a lot of cash make this relatively easy, for example, retail,
entertainment shows and casinos. This stage is called 'placement.'
After the funds have been 'placed' into the financial system, the
second stage seeks to engage in a series of worldwide transfers and
conversions to hide the original source of the funds. This part of the
process is called 'layering.' The third and final stage is to secure
the funds in the legitimate economy after placement and layering.
This is done through established and reputable financial institutions.
This stage of the process is called 'integration.' From this point the
funds can then successfully be invested legitimately in such items as
financial assets, real estate or business ventures (retail, forestry,
mining and so on).
Next week I shall continue to discuss other aspects of money laundering.
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