Money laundering – The darker side of the world’s financial matrix

Published : 23 Mar 2021 07:56 PM | Updated : 24 Mar 2021 01:50 AM

The High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI) has identified this as a crime being perpetrated on a global scale.

In this context it has also been pointed out that this offense is affecting the global future and needs to be understood as such by the relevant authorities. It has also been remarked that closing the loopholes that permit money laundering, corruption and tax abuse, wrongdoing by bankers, accountants and lawyers need to be stopped for the desired transformation of the global economy for universal good and achieving   sustainable development. One needs to add here that such an effort will be desirable at all levels starting from individual countries to regions. Financial analysts have suggested that as much as 2.7 percent of the global gross domestic product (GDP) is laundered annually, while corporations shopping around for tax-free jurisdictions cost governments up to US Dollar 600 billion a year.

This illegal process has assumed dire implications at a time when billionaires’ wealth according to FACTI has soared by 27.5 percent, even while more than 130 million people have been pushed into poverty due to the COVID-19 pandemic. Such hiding of the world’s wealth in offshore financial assets is also preventing governments from collecting their fair share of taxes- that is required for socio-economic development and attaining the UN’s 17 Sustainable Development Goals.

In this regard, attention has been drawn to the fact that in Bangladesh, a lower income developing country, such tax avoidance and evasion is creating large losses to public exchequers and not allowing it to expand its social safety net to 9 million more of the elderly. Consequently, in most low income countries this has become a significant challenge to development, particularly in the areas of crucial public services, such as education, healthcare, and infrastructure.

Some critics have also pointed out that that principal beneficiaries in this unwholesome matrix have been many of the richest families in most developing nations and they have used discreet political support to carry out their non-acceptable transfer of resources. The global corruption mafias from the United States and the United Kingdom, whose financial institutions and oligarchies are the world’s most powerful, have been significantly associated with this exercise of non-accountability and corruption on a devastating scale.

One needs to note here that some countries render obfuscation of money sources as constituting money laundering, whether intentional or by merely using financial systems or services that do not identify or track sources or destinations. Other countries define money laundering in such a way as to include money from activity that would have been a crime in that country, even if the activity was legal where the conduct occurred.

Placing "dirty" money in a service company, where it is layered with legitimate income and then integrated into the flow of money is a common form of money laundering. Through this method, money laundering helps in the conversion or transfer of property; the concealment or disguising of the nature of the proceeds; the acquisition, possession or use of property. These measures are adopted knowing very well that required steps for the movement of funds will be associated with criminal activity which will have a veneer of artificial legitimacy.

According to the United States Treasury Department money laundering is the process of making illegally-gained proceeds (i.e., "dirty money") appear legal (i.e., "clean"). Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are secretively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean".

The process of money laundering is mostly carried out by two forms of businesses- those which are cash intensive and those which are trade based.

In cash-intensive businesses, a large proportion of its revenue comes in as cash and it is then used as a facilitator for deposit of criminally derived cash. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash. In such cases the business will usually claim all cash received as legitimate earnings and it is difficult to detect discrepancies between revenues and costs.

On the other hand, the method within the paradigm of trade-based laundering is new and also a complex form of money laundering. This involves under- or over-valuing invoices to disguise the movement of money. Scrutiny of the pricing structure from initial supply to wholesalers and then to retailers have revealed how middle-men have used their presence to assist in the money laundering process within the Readymade Garment Industry. Similarly, the art market has also been accused of being an ideal vehicle for money laundering due to several unique aspects of art- associated in the subjective value of art works as well as the secrecy of auction houses about the identity of the buyer and seller.

Reverse money laundering is another process that disguises a legitimate source of funds that are to be used for illegal purposes. It is usually perpetrated for the purpose of financing terrorism but can be also used by criminal organizations that have invested in legal businesses and would like to withdraw legitimate funds from official circulation. Unaccounted cash received via disguising financial transactions is not included at that time in official financial reporting and could then be used to evade taxes, hand in bribes and pay "under-the-table" salaries. The problem of such fraudulent encashment practices has become acute in Russia and some other countries of the former Soviet Union. The Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) has recently reported that the Russian Federation, Ukraine, Serbia, Kyrgyzstan, Uzbekistan, Armenia and Kazakhstan have encountered a substantial shrinkage of tax base and shifting money supply balance in favor of cash. These processes have complicated planning and management of the economy and contributed to the growth of a shadow economy.

An effective Anti-money laundering (AML) program requires a jurisdiction to criminalize money laundering, giving the relevant regulators and police the powers and tools to investigate; be able to share information with other countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities. Strict background checks are also necessary to ensure that money launderers do not escape by investing through complex ownership and company structures. Banks can do that- but proper surveillance is also required on the government side for its reduction.

It would be pertinent at this point to refer to an important institution created in 1989 by G7 countries. Known as the Financial Action Task Force on Money Laundering (FATF), this intergovernmental body, based in Paris, has the task of developing and promoting an international response to combat money laundering and also the financing of terrorism. It is a policy-making body that brings together legal, financial, and law enforcement experts to achieve national legislation and regulatory directives. 

FATF works in collaboration with a number of international bodies and organizations. It has developed 40 recommendations on money laundering and 9 special recommendations regarding terrorist financing. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions. In this regard the primary functions of the FATF include monitoring how countries associated with that institution are implementing anti-money laundering measures and undertaking countermeasures.  

In Bangladesh, we need to have a more pro-active effort in resolving this dark side that has generated severe criticism within our economy.

The first anti-money laundering legislation in Bangladesh was the Money Laundering Prevention Act, 2002. It was replaced by the Money Laundering Prevention Ordinance 2008. Subsequently, the ordinance was repealed by the Money Laundering Prevention Act, 2009. In 2012, the government again replaced it with the Money Laundering Prevention Act, 2012.

In terms of Section 2, of the Act, "Money Laundering means – (i) knowingly moving, converting, or transferring proceeds of crime or property involved in an offence for the following purposes:- (1) concealing or disguising the illicit nature, source, location, ownership or control of the proceeds of crime; or (2) assisting any person involved in the commission of the predicate offence to evade the legal consequences of such offence; (ii) smuggling money or property earned through legal or illegal means to a foreign country; (iii) knowingly transferring or remitting the proceeds of crime to a foreign country or remitting or bringing them into Bangladesh from a foreign country with the intention of hiding or disguising its illegal source; or (iv) concluding or attempting to conclude financial transactions in such a manner so as to reporting requirement under this Act may be avoided;(v) converting or moving or transferring property with the intention to instigate or assist for committing a predicate offence; (vi) acquiring, possessing or using any property, knowing that such property is the proceeds of a predicate offence; (vii) performing such activities so as to the illegal source of the proceeds of crime may be concealed or disguised; (viii) participating in, associating with, conspiring, attempting, abetting, instigate or counsel to commit any offences mentioned above."

What needs to be done is very clear. Banks and financial institutions have primary responsibilities and they need to undertake these with seriousness. We need to understand that we must achieve a better reputation about our fiscal and monetary paradigm as we move upwards out of the LDC group into the Middle Income Developed countries list. Otherwise, we will continue to suffer in the international arena as being susceptible to corruption and lack of good governance. That is unacceptable. This will then affect the chance of foreign direct investment in our country. We need to get our act together.

Muhammad Zamir, a former Ambassador, is an analyst specialized in foreign affairs, right to information and good governance