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Global Money Laundering

Global Money Laundering

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Published by: sukumarnandi@hotmail.com on Oct 26, 2009
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07/19/2010

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GLOBAL MONEY LAUNDERING − THE SILENT FLOW OF MONEY Sukumar Nandi
Money laundering is now a widelycirculated phrase and manygovernments are worried about thisphenomenon. Money laundering (ML)refers to all activities and systemsintended to camouflage the identity of money earned from activities that arestrictly not legal, by the legal systemof the country and this is done tocreate the impression that the moneyin circulation has a legitimate source.ML is the transactional processing of illicitly obtained funds towardsdisguising its source, nature,ownership or intended destination. The desired outcome of this process is‘clean’ money (or money is laundered)and it can be legally accessed throughlegitimate financial institutions.
The Origin
 The process of ML is driven by acriminal imperative, aimed atgenerating profits in an illegal fashion.Such funds generated throughorganized crime or frauds remain‘outsidethe formal and legitimatefinancial system. The LM process aimsto camouflage such funds by passingthem through multiple accounts andshell companies
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towards either totallyobscuring the original source, ortowards associating the funds with asource that seems to be legal. Oncethe process is complete, such money
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A shell company is often a company created as afront company to do business when required.Generally this type of companies do no business andremain on paper, but they are used to cover many business operations.
is invested formally in legitimateactivities. The opportunities for generatingprofits through illegitimate meanscome for the following factors:(i)Existence of a largeunorganized or informaleconomy,(ii)The porous and ill-defined legal system, andpoor record of itsimplementations,(iii)Existence of systemiccorruption, and(iv)Lack of propergovernance The size of unorganized sector inmany developing countries is verylarge. In India, the importance of unorganized sector in the grossdomestic product is above 40 percent
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and the situation is along similarlines in many countries. Sincedocumentation is absent, taxauthorities are denied tax revenue andillicit transactions are difficult toidentify. The transactions in thissector are hardly recorded, and thisfacilitates the use of so-called blackmoney in regular business. The legal systems in many developingcountries are not sufficiently full-proof 
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Poonam Gupta and Sanjeev Gupta, Estimates of theUnreported Economy in India, Economic andPolitical weekly, 17 ( 3), January 1982. This study puts the figure slightly below 50 per cent in 1980itself.1
 
and as a result, many suspect moneytransactions remain beyond the armsof law. This aspect of inefficient legalsystem is associated with systemiccorruption in many developingcountries. This sort of legal vacuumcreates a space for the growth of aculture in which money power drawscertain respect in the society and thatmakes people believe in a type of system, where people think in termsof the following dictum:
We live by the golden rules. Peoplewho have the gold make the rules” 
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.
Effective governance is a luxury manyless developed countries cannot affordand the result is that rule of law doesnot reach in all regions of countrieslike Afghanistan, Mongolia, manycountries in Africa and also in someregions of Eastern Europe. As a result,private money power is more powerfulthan state power in those regions. Taking advantage of the vacuum of effective governance interestedparties can pursue semi-politicalambitions in the guise of some popularissues and that is facilitated by moneypower. For this reason, it is saidsometimes:
The invisible money power is workingto enslave mankind. It financeCommunism, Fascism, Marxism, Zionism and Socialism
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Stages of Money Laundering
 There are three primary stages in themoney laundering cycles:(i) The placement stage(ii) The layering stage(iii) The integration stageFirst, during the placement stage, thehard money generated by the illicitactivities (like drug smuggling, sale of illegal arms and other type of cross-
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A quote by Buzzi Bavasi
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Quoted in American Mercury Magazine
border trade that has no legalsanction) needs to be placed safelyand it is generally deposited in aninstitution of business, or invested inexpensive assets. The whole operationbecomes an informal affair and thus,remains beyond the scanning of lawenforcing institutions.Second, in the layering stage, theagents try to separate illegallygenerated funds from the originalsource and this is done by creatinglayer upon layer of transactions. Thelatter take the form of movements of money between different accounts,and/or between businesses throughbuying and selling of assets on aglobal basis. This goes on until theoriginal source of funds virtuallybecomes untraceable. Third, upon completion of the layeringprocess the illegal funds areintroduced in the financial system inlegal way as payments of servicesand/or against transaction ocommodities. At this stage moneybecomes legal and laundering iscomplete. The three processes described abovecan be explained through an exampleso that modus operandi of the wholemechanism becomes clear.In the
golden crescent 
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bordering Pakistan, Afghanistan andIran, illicit opium cultivation is an opensecret. The result is illegal drugdealing. The money generatedthrough sale of drugs is invested in aposh hotel, frequented by travellersfrom all over the world. Now theproceeds from the drug deals are usedfor payments related to this legalbusiness, along with other regulartrading incomes. The launderer now
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This mountainous region bordering three countries,Pakistan, Afghanistan and Iran is a huge space that isfamous for illegal opium cultivation and known asgolden crescent in Asia.2
 
opens up other supply companies toserve the business of the hotel. Thesecompanies now issue invoices that thehotel settles through chequepayments. The increased amount of such transactions and movement of money along with this make asmokescreen, so that the criminalorigin of money is effectivelyobscured. The whole processcontinues for the enrichment of thepersons involved.
The Global Infrastructure: theOffshore Centres
 The large number of so-called tax-haven offshore centres gives enoughfacility to keep money in numberedaccounts, while keeping the trueownership of money anonymous to theoutside world. The existence ooffshore finance centres (OFC) is aweak spot in the global financialsystem, as the regulation of thefinancial transactions in OFC is seldomeffective because of its nature of operations. There are more than one hundredoffshore finance centres spread allover the world. Prominent amongthese are located in Hong Kong, Thailand, Tahiti, Macao, Philippines,Singapore in Asia and Pacific, Andorra,Cyprus, Dublin, Liechtenstein, London,Switzerland in Europe, Bahrain, Israel,Lebanon in Middle East, Bahamas,Belize, Cayman Islands, St. Lucia,United States in Western Hemisphere.International banks in OFCs acceptdeposits in multiple currencies andconduct banking operations on behalf of clients and they maintain secrecy.In fact, it is the secrecy andconfidentiality that is their mainproduct and these banks charge theirclients for that.Many small countries encourage thegrowth of offshore financial services,as these attract large volume oforeign capital and that is invested forlocal development. In lieu of that OFCprovides certain services like;(i)maintenance of secrecyand confidentiality,(ii)no exchange control,(iii)absence of any taxburden,(iv)the facility of disguisingthe ownership ocorporate vehiclesthrough the use onominee directors,(v)no reportingrequirements forcompanies like annualreports,(vi)no system of supervisionof companies such asannual general meetings.In essence, it is the absence of state(in the form of rules and regulations)that is the main attractions of moneyflowing to the offshore centres. Theabove features are ideal for disguisingthe true origin of money and also trueownership. As a result, OFC hasbecome favourite medium for moneylaundering. The geography is notimportant, as same international bankin New York can maintain offshoreoperations in a separate table, alongwith normal banking in the branch.Offshore banking services include theborrowing of money from non-residents and lending to non-residents. This may assume the formof lending money to corporates,funded by liabilities to the offices of lending banks elsewhere. Some of these transactions are captured in thestatistics published by Bank forInternational Settlements (BIS). Butsignificant volumes of funds aremanaged by such institutions at therisk of investors, and such off-balancesheet activity is not reported. The OFCin tax-haven zones are often theconduit of capital flight and moneylaundering.
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