Money laundering has significant effects on a country’s macro economy. The effect can be direct or indirect.
Direct effect of money laundering on economy could be:
• Tax Evasion,
• Low-quality investments, and
• Decrease or stability in a country’s economic growth.
Laundered money would enter the economy with no official records, thereby evading taxes. Money launderers would not pay tax on their ‘earnings’. As a result, economic growth of the country will suffer. Investments would decrease because of the lack of economic growth stability. Investors prefer more profitable countries to meet their earnings expectations.
Money laundering can also affect indirectly the macro economy. For example, some banking transactions involve multiple sides including domestic and abroad. These activities can be completely legal. However, financial institutions are less likely to prefer these transactions because its structure makes money laundering possible.
Money laundering involves numerous economic activities within a country. Studies of macroeconomists claim that underground economy, and profitable activities unreported for evading tax, could be measured by measuring money laundering activities in a country. Indeed, if taxes are high in a country, the attempts for evading taxes would also be high.
• Australia: 4%-12%
• Italy: 10%-33%
• Germany: 2%-11%
• Japan: 4%-15%
• United Kingdom: 1%-15%
• United States of America: 4%-33% (Quirk, 1997).
GDP represents the value of products and services provided in the market. Therefore, the countries above have developed underground economies related reflecting their currency and money demand. Quirk also states that in the 1980-90 period, increase in money laundering activities is related to a considerable drop in annual GDP growth rates.
From the financial markets’ point of view, money is laundered as:
• Smurfing: Money is laundered by multiple cash transactions smaller than the maximum transferring cash transaction of a country that requires reporting.
• Creating artificial invoices: Money is laundered by false export and import invoices, L/C‘s (letter of credits), and custom declarations.
• Trading: Money is laundered by exchanging properties in and out of the country.
• Parallel Credit Transactions: Money is laundered by avoiding formal economy by purchasing legally marketed goods or services with dirty money.
• Interbank wire transfers: Money is laundered by the help of the employees of a financial institution. Bank officials can conceal the sources or the transactions’ values. This illegal activity results in corruption in work places.
• Imitating transactions: Money is laundered by using company’s trading opportunities to benefit the situation as concealing some illegal activities within the company.
According to the Economist (2001), corruption occurs more in private banking systems than in public systems. Clients in private financial institutions are mostly wealthy and prefer that their transactions occur in discreet conditions. Those clients seem to prefer banks asking fewer questions. Consequently, thia situation may generate more money laundering activities.
Offshore centers also create an opportunity of corruption and money laundering opportunities. According to the Economist (2001), as of 1998, there were 4,000 licensed offshore banks including:
• 44% in the Caribbean and Latin America,
• 28% in Europe,
• 18% in Asia,
• 10% in the Middle East and Africa.
The most difficult version of offshore banks to control money laundering activities is shell banks with no physical presence.
Corruption is the offering, providing, obtaining, and asking for directly or indirectly of anything with value to influence inappropriately the actions of another party.1
Corruption includes wider type of criminal activities than money laundering. However, money laundering activities are related to corruption and anti-money laundering activities can help preventing fraud.
Reasons to achieve AML regulations to fight corruption are as follows:
• International anti-corruption requires achieving international AML standards, and
• Application of those standards in both developing and developed countries. (Sharman, 2009).
Despite of AML systems’ expenses, countries should adopt AML laws and regulations and international standards to prevent organized crime, drug smuggling, financing terrorism, and corruption activities.
Financial company managers should consider:
• Monitoring: Managers should inform employees about the document policies in financial institutions. Communicating in all levels of the workplace is vital for both financial institutions and employees to implement the strategies correctly. To achieve the perfect solution out of communication, managers should monitor the processes. Monitoring improves the quality of the work and keeps the employees ready for new policies and regulations.
• Reducing the Risk: Managers and directors of a company aim to reduce the risk of document retention by using technology such as: backing up e-mails daily, storing documents properly aligned with regulations, controlling the methods of recovering data, and improving data searching techniques.
According to ‘Corporate and Criminal Fraud Accountability Act’ criminal and civil penalties associated with artificial document protection are as follows:
• Knowing any damage, alteration, or falsification in federal research and bankruptcy could result in imprisonment of up to 20 years.
• Knowing and destruction of companies’ audit records could result in imprisonment of up to 10 years.
1According to the Uniform Framework for Preventing and Combating Fraud and Corruption released in 2006 by The International Financial Institutions Anti-Corruption Task Force,