Impact of Money Laundering
Money laundering causes reputational damage to the financial systems of the country. The Financial Action Task Force (FATF) evaluates the countries on various parameters. It lays down the frameworks to protect the world financial system from money laundering. Many agencies apply sanctions on individuals and companies. In certain cases even countries face sanctions. The US Foreign Assets Control Office is a critical organization in the fight against money laundering.
FATF Grey List
Additionally, FATF adds the countries to the blacklist or grey-list if the country fails to comply with global AML standards. Banks are the backbone of the economy.
A country like Pakistan, when it was added to the grey list faced a severe loss of credibility in the international market. Its image as an unsafe country prevents many businesses and investments in that country. Various cricket teams have refused to play in Pakistan because of security concerns. Every cricket match generates huge revenues for the country from its ticket sales, hotel bookings, and travelers. The government collects taxes from these.
But when the country is added to the grey list then impact of money laundering was seen on the collection of direct or indirect taxes or duties. It decreases tax revenues and causes a serious negative impact on the economy.
Historically, the economies of the country like Nauru flourished due to money laundering, but later the country collapsed. In many other cases, money laundering left a bitter taste in the economy. Indian economy is losing $15 billion to money laundering every year as per the estimates of Indiaforensic in 2020. Though this amount is an eye-opener, the report further predicts that banks are the ultimate losers in this process.
Impact of Money Laundering on Banks
For example, if the bank on-boards the drug dealing organization then drug money is circulated through banks. This can in turn result in more demand for drugs leading to more crimes and more violence. When the terrorists are on-boarded, then the bank indirectly supports the terror funding activities which leads to the loss of lives.
Emerging markets that are always in the need of capital always face the risk of Money laundering. Laundered funds can help the banks to sometimes meet the demand for capital. When the flow of the money is found to be unidirectional then the value of the currency also changes. When the same capital leaves the country it creates pressure on downward pressure on the currency.
Laundering kills competition
When organized criminals infiltrate financial institutions, they acquire controlling stakes in strategically important companies. They fund investments through dirty money. They can offer bribes to public officials to have the policies in their favor.
When the dirty money from criminal activities flows into legitimate businesses they can kill the business. This money can be used for activities like advertising, marketing, or for reducing the prices for the end customers.
This helps to transfer financial power to criminals. For example, if the auto manufacturer is selling the car for $4000 he is earning $400. However, the money launderer when starts manufacturing, sells it below the cost of the competitor. He can sell it below $3500 disrupting the market. Buyers start buying the cars from the money launderer and the transfer of economic power further increases crimes and corruption.
The worst impact of money laundering is that it also damages the development of the legitimate private sector. Money launderers have different calculations and may offer their products even below production cost. It sounds odd. But the fact is that they don’t have to make a profit with their products. Their primary goal is to launder the funds as they have already made a cut with criminal activity. This makes it very difficult for legitimate activities to compete, eventually forcing them to go out of business.
Reduce Negative Impact of Money Laundering
Creating awareness and providing education is one of the most important aspects of controlling money laundering activities. Educating more bankers helps to dilute the impact of money laundering on the economy. The certification programs like Certified Anti-Money Laundering Experts have proven that there is a significant impact of awareness on combating money laundering crimes.
Emerging economies often find it difficult to fight corruption due to the relaxed anti-money laundering (AML) framework. They pay a high cost for corruption. Every Indian citizen, on average, pays Rs. 2000 as a bribe and imagine there are billions of them. This corruption money gets into the money laundering cycle. To handle this cycle effectively, education and awareness are critical. Just before the mutual evaluation of India by FATF, the Certified Anti-Money Laundering Expert became a program of national significance.
