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Money Laundering: The Basics.

When Al Capone debuted his money cleaning methods, little did he know that he would leave a legacy and a term named after him. Al Capone was a famous American gangster in 1930 who used laundry marts to clean ill-gotten money. He would obtain the money illegally, then use legitimate businesses, such as Laundry marts and restaurants that accepted cash only as fronts to launder the money. Hence the term money laundering. Money laundering has evolved since his time, and criminals are adopting even more sophisticated tools to clean their illegal gains.

So rampant is the vice such that one study estimates that perpetrators launder approximately USD 2 trillion per year. The ease in laundering money, coupled with other factors such as complicit financial institutions and technological innovations has prompted the rise in money laundering schemes. It is safe to argue that if money laundering were non-existent, there would be no crimes; This is because criminals would not have the means of cleaning the money. Yet, day in, day out, we get exposes and scandals such as the fin cen files, Panama papers, among many others.

If money laundering were non-existent, there would be no crimes

Elvis

Fruits of the poisonous tree

Unfortunately, criminal enterprises neither obtain the money from legitimate businesses nor do they help the society. The backbone of the criminal underworld is full of torment and suffering. They traffic human beings, sell drugs, and do prostitution. The Economist in an expose, for example, showed that traffickers in Canada would use young girls to fund their proceeds. These criminals would lure a girl with gifts, make her do despicable things, and film the entire thing. They would later blackmail the girl that they would leak the video on social media unless the girl acceded to their requests. The girl, being fearful of the consequences, would comply, and they would use her to prostitute and have the money wired to her account. The traffickers would then withdraw the money and launder it; the cycle would then continue. Their actions would torture the girl both physically and psychologically.

Despite technological advancement, the basics of money laundering have never changed. The criminals obtain money either through drug sales or corruption. They then acquire businesses such as restaurants in which they disguise the money in legitimate customer sales. Next, they transfer the money to a bank account and allege it comes from their legitimate businesses. They later incorporate shell corporations in which they send fictitious invoices to the bank for non-existent transactions. The bank will then wire the money to “settle the invoice.” Finally, the mastermind would live free and expensive by claiming that they became rich by starting a taxi business with only one wheel.

Image credits. Pixabay.

Please tell me “when you find out”

The process seems easy, and the question that lingers is: why then don’t governments catch them? Many factors contribute to these worrying statistics. To begin with, banks have become complicit in money laundering transactions. The statute requires banks to report any “suspicious transactions,” and a depositor must file a wealth declaration form. The provisions seem astute. However, many have argued that the reporting schemes appear voluntary and do not elicit compliance. Many factors contribute to this argument. They include the number of daily transactions that the bank handles might make it impossible to flag a suspicious transaction. Also, banks are in the business for profit. As such, they must balance competing interests. The impact of reporting a client and losing them on the one hand, with the effects on their share price and customer numbers on the other hand. As a result, many opt to keep quiet. Indeed, American authorities have fined several multinational banks for their complacency in money laundering. They fined one of the banks’ USD 1.9 Billion; It recovered the money within five weeks of trading.

Banks must balance between competing interests when faced with a suspicious transaction.

Elvis

Other factors include the inadequate and poorly remunerated staff of the financial reporting agencies. Some banks have reported that despite filing notifications with financial reporting agencies, they have been slow to act. Many governments do not adequately staff and remunerate these officials. As a result, they are dis-incentivized to work hence less action. Furthermore, technology has led to an increase in money laundering too. One commentator argued that advances in technology mean that the criminal is always one step ahead. The use of cryptocurrency and anonymity online allows criminals to enter and leave the financial system without a trace.

Advances in technology mean that the criminal is always one step ahead.

Anonymous

As such, unless we act, the poor will lose, and the rich will grow even wealthier. Money laundering serves as a surety to criminals that there exists a system for cleaning their money. The corrupt will continue to steal unless we seal the laundering holes. Indeed, one study estimates that the aid that comes to Africa is directly proportional to the illegal money that leaves our continent. Therefore, unless we reign on the criminals, the pilferage will continue to eat our people.

Welcome to this journey: In our next post:

This article introduces a three-part series on money laundering

A basic introduction of the concept, which we have covered today.

Next, we shall examine the law on money laundering and the place of data protection law in combating money laundering.

Finally, an expert perspective on the role of technology and artificial intelligence in countering money laundering.

2 Comments

  1. Mellanie Mellanie

    This is an informative and thought provoking post counsel, am looking forward to reading more of your posts

    • Dear Melanie,

      Thank you so much for your feedback. We will keep you updated!

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