It may be easy to understand the impact of money laundering on the initial victims – those who have lost funds as a result of the predicate crime – but there can be an even deeper, longer-lasting effect on society as a whole.
While some fear that anti-money laundering (AML) efforts could have a detrimental effect on trade, especially in developing countries, let’s look at a few ways money laundering hurts us all. We will focus on emerging countries as their influence can be magnified to extreme proportions.
The first and most obvious effect is the increase in corruption and crime. In many jurisdictions that are havens for successful laundering, there is often little concern from government and/or regulators – few predicate crimes, little or no reporting, enforcement, penalties or forfeiture provisions, etc. These conditions can encourage government bribery. and bank officers, lawyers, accountants and others. Once that base is established, it is not long before bribery diverts attention from other, even violent, crimes.
Another impact (valid in any jurisdiction) is on legitimate businesses. If the launderer uses a front to hide his illegal funds, it is possible, even likely, that the operations of the shell company are being subsidized. This can allow the shell company to sell products at or below cost, driving out their legitimate competition and opening the door for shell company expansion. As the front company grows, it provides a greater opportunity for the launderer to move even more illicit funds. In a developing country it wouldn’t take long for a criminal/launderer to take control of an entire industry.
However, it must be emphasized that a launderer does not share the same goals as legitimate business owners, who seek to maximize their returns through the profitable, ongoing operations of their businesses. The launderer’s first concern is not his return, but the successful concealment of the origin and ownership of the funds he controls.
It is this disregard for normal business practices that leads to another area of concern – economic distortion. Launderers often invest their money in assets or activities that are not economically beneficial to the countries where the funds are located. For example, right now, in a world where real estate prices have fallen sharply in the last few years due to the bursting of the mortgage bubble and other global pressures, real estate prices in Nairobi, Kenya are rising – up 2-3 times in the last 5 years. And are there miracles? With lax money laundering laws and a 500-mile border with Somalia, it’s easy to guess where much of the ransom money from Somali piracy has gone. This has taken home ownership away from many hardworking Kenyans.
Such distortions can in turn lead to governments misinterpreting economic data. Without insight into the true economic trends of their country, leadership tends to make decisions that are not in the best interest of their country.
When conditions change at one of these places, the launderer will get his money out as quickly as possible, often without or without regard to any losses he may incur. In an economy powered or sustained by laundered money, the ripple effects throughout the community when this “capital flight” suddenly disappears can reach tsunami proportions. A good launderer will not expose only his own money when he can use the money of financial institutions and other investors. When capital disappears, values fall, loans default, and banks fail. Investigations and lawsuits follow. The country’s reputation is tarnished at best. Legitimate investments go elsewhere. In the end, even the government may not survive.
There are other risks, but those are reserved for more serious money laundering scholars and for another day.