Economic Consequences of Money Laundering and Financial Crimes
Every year, huge amounts of funds are generated from illegal activities such as drug trafficking, tax evasion, people smuggling, theft, arms trafficking and corrupt practices. These funds are mostly in the form of cash so we should look for Economic Consequences of Money Laundering and Financial Crimes.
The criminals who generate these funds need to bring them into the legitimate financial system without raising suspicion. The conversion of cash into other forms makes it more useable. It also puts a distance between the criminal activities and the funds.
‘Money laundering’ is the name given to the process by which illegally obtained funds are given the appearance of having been legitimately obtained.
By some estimates, more than USD1.3Trillion of illegal funds are laundered worldwide each year!
This is more than the total output of an economy the size of the United Kingdom. Of the world-wide total, an estimated USD100Million (Kshs.8.3Billion) is laundered in Kenya.
Why do criminals launder money and what are the consequences?
There are several reasons why people launder money. These include:
- hiding wealth: criminals can hide illegally accumulated wealth to avoid its seizure by authorities
- avoiding prosecution: criminals can avoid prosecution by distancing themselves from the illegal funds
- evading taxes: criminals can evade taxes that would be imposed on earnings from the funds
- increasing profits: criminals can increase profits by reinvesting the illegal funds in businesses
- becoming legitimate: criminals can use the laundered funds to build up a business and provide legitimacy to this business
Economic and social consequences of money laundering
- undermining financial systems: money laundering expands the black economy, undermines the financial system and raises questions of credibility and transparency
- expanding crime: money laundering encourages crime because it enables criminals to effectively use and deploy their illegal funds
- ‘criminalising’ society: criminals can increase profits by reinvesting the illegal funds in businesses
- reducing revenue and control: money laundering diminishes government tax revenue and weakens government control over the economy
Record Keeping in fight against Money Laundering
Under the AML Act, a reporting entity must make and retain a record of its applicable customer identification procedures.
The records must be retained for seven years after the end of the reporting entity’s relationship with the relevant customers.