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The negative impacts of money laundering on economic development
Keywords: Money laundering, developing countries, economic development, government, policies.
Money laundering is a global problem. Measuring its impact is tough, as it takes place behind everyone’s eyes and it apparently is a victimless crime. Yet the damage it does can be devastating to the financial sector and economy’s ‘real’ and ‘external’ sector, especially in case of a developing country. By contrast, effective anti-money-laundering policies can reinforce a range of good-governance policies. This in result helps the country to sustain economical growth particularly by making the financial sector stronger.
There has been little research into the effects of money laundering on the economic growth, particularly in a developing country. Most of the researchers and their works were focused on measuring the amount and usage of money-laundering. Hence the majority of this vast subject has remained unstudied. Therefore the developing countries, which are the prime channels for international money-laundering, are suffering from the need for the guidelines to stop the erosion of the long-term economic growth caused by this problem.
In a developing country’s economy the role of the financial institutes such as- banks, non-bank financial institutes (NBFI), equity market-are critical. They help to sustain the economic growth by concentrating the domestic savings, even the overseas funding. For all these gaining customer trust is vital. Money laundering erodes these institute and affects the customer trust as this is interrelated with other criminal activities that is performed by the workers in financial sector or government. Besides that, money laundering facilitates domestic corruption and crime which results depressed economic growth. It also diverts the resources to less productive activity.
In the light of discussion above, the questions I want to work on are as follows.
- What is money laundering?
- What are the negative effects of it on economic growth?
- How does it harm the developing countries?
Aims and objective
The purpose of this study is to analyse different harmful effects of the money laundering on the economic growth of a developing country. Because of the weaker economy, lack of strong policies and comparatively easy regulations the developing countries become an open market for such activities. Therefore those countries have scope to improve their policies, regulations and laws. The objectives of the proposed study are:
- To know what sectors are mostly being affected.
- What is the extent of the damage?
- What can the developed economic community do?
- What kinds of policies or regulations are being implemented?
- What kinds of policies or regulations can be improved?
International money laundering information bureau defined it as the process by which large amounts of illegally obtained money (from drug or human trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. Criminals use this process to give their assets, properties or other valuables which are obtained through illegal means to give a legitimate look. Though this crime does not have any immediate victim and looks less like a crime in plain sight, it possesses a huge threat on economy and the people, both domestically and globally. Elizabeth V Mulig and L Murphy Smith (2004) determined that the most serious aspect of money laundering is not the crime itself; it is the fact that criminals will have access to the proceeds of criminal endeavour and facilitates them with more criminal activities. Mulig and smith (2004) also stated that while large sized funds are deposited in the financial institutes, they also disappear just as they come. This can result liquidity problem. Besides, government losses revenue on the laundered money, which may often mean higher tax-rates for general law-abiding citizen. The impact on the economic growth is another problem. Brent L. Bartlett (2002) concluded that allowing money laundering activity to continue without any challenge is not a sound economic-development policy as it damages the financial institutes that are critical to economic growth, reduces productivity in the economy’s real sector by diverting resources and encouraging crime and corruption, and can distort the economy’s international trade and capital flows to the detriment of long-term economic development. In order to achieve long time economic growth the affected countries especially those with a developing economy should adopt or implement sound anti-money-laundering policies, regulate their domestic and international financial sectors or seek help from appropriate regulators from developed economic community.
Theoretical framework and hypothesis
As the time advanced, money laundering business has also evolved by keeping pace with the time. Technology has made it more undetectable. The businesses are booming and consequences are visible. But regulatory bodies are also taking necessary steps. They are tightening their borders, educating people, creating awareness. Still these are not enough for the countries affected. Most of the time, they don’t have enough resources to divert to that sector. As a result they are bleeding internally. Therefore we can assume the following:
- Most of the economic damage done by money laundering through its developing country channel is at the expense of the developing economy.
- The weaker regulations and policies are the more liberty a money launderer gets. Therefore they need to strengthen themselves, with the help of others if necessary.
For the proposed study, a variety of methods will be used. Collection of data will mainly be from the secondary sources. Primary sources will also be used. Where appropriate, interviewing of the related experts will take place. Besides, a range of selective and extensive reading will also help to gather, formulate and analyse the statistics and all the necessary data. This, by definition, will be a quantitative research.
The countries with the developed economy have sufficient resources, therefore options to fight this particular crime. But in case of the developing economies, if not handled in time, it can distort investment, encourage crime and corruption and increase the risk of macro-economic instability. Through this study some solutions may be found, or at least the gravity of the danger ahead.
To undertake such a vast subject in such a short time to fulfil the wish of our supervisor to check our efficiency might be a challenge. Arranging and holding formal interviews might be difficult as well. Besides, this study will generate a considerable amount of data which has to be processed in time too.
- Steel, Billy. (n.d.). Definition of money laundering. International money laundering bureau. [Online]. Available from: http://www.imlib.org/page2_wisml.html/ [accessed at 17th Nov, 2009]
- Bartlet, Brent L. (2002). The negative effects of money laundering on economic development. The Asian Development Bank. Regional Technical Assistance Project No.5967.
- Mullig, Elizabeth V and Smith, Murphy. (2004). Understanding and Preventing Money Laundering. Internal Auditing.Vol 19. No.5.pp 22-25.
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