Money laundering is one of the biggest financial crimes in the world economy. A Big amount of Black money and suspicious capital flows are conducted in the financial service industry, there are alternative methods of moving currency and avoiding detection by government agencies. One such technique is through the manipulation of import and export prices in international trade transactions.
The word “launder” means a large amount of cash illegally earned by gambling, prostitution or extortion etc. Basically money laundering is the money basically obtained by drug trafficking, extortion, prostitution, terrorist activity & other serious crimes.
The money laundering process involves three basic steps. Those are placement, layering & integration. This is one of the biggest financial crimes and that is very harmful for the society. Basic steps in the money laundering process are showing below,
Placement: In this step large amount of black money placed into the financial system, used to buy high dollar goods or smuggled out of the country. This idea is to transform the cash as quickly as possible into other types of assets and thus avoid detection. Cash deposited into bank (often with complicity of staff or mixed with proceeds of legitimate business. In placement process cash are physically transported out of the country. Cash is used to buy high value goods, properties or business assets.
Layering: This step is performed to hide the source of illicit funds. Layering is the part where funds are transferred abroad, often to shell companies In this steps deposits made in overseas banking system or closely held bank. Previously purchased goods and assets are sold to obtain cash.
Integration: In this step finally money laundering integrates the newly laundered money into legitimate business operations. At this step future use of the money will further hide its original source. False loan repayment and forged invoices used as cover for black money. Both domestic and international complex web of transfers makes detecting original source of money virtual impossible. After that income from property or legitimate business assets appears clean.
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Firstly money launderers build Privet Corporation in different countries and route the money to these corporation. These foreign companies provide loans to the money launderers back in the home country. Secondly Phoney invoices are created in import export business. Then the export import business company gives them the good value to the export goods and when the invoices are paid the cash is transferred its included the laundered money as well. Thirdly money launderers purchase an offshore bank. Illegally earned money are deposited in the new bank and then transferred via EFT to a legitimate bank.
New technologies in the area of payment allow electronic transactions without any restriction by legal or by state controls. Prepaid or smart cards storing money electronically, white cards since no account is necessary and its proceeded completely anonymously, the transaction volume and the number of cards per person, additionally a card assignment to an authorized account is needed.
Online banking created worldwide financial transaction in the Internet, money laundering at the same time can be stopped if orders carried out by the internet depending on legitimized accounts.
E-Cash (internet cash) the only possibility to identify virtual money is given when the change of real cash into virtual money. By paying with cyber money there is no linking to an account.
John McDowell & Garry navies (May 2001) stated that, in economic prospective, state that money-laundering present the world community with a complex & dynamic challenge. It means the nature of the problem calls for global standards and international cooperation to reduce the ability of criminals to launder their proceeds and carry out their criminal activities.
In my opinion I should say strict the law to prevent money laundering. Its like a disease in our world. Secondly, we should follow law and order. Thirdly I can say there should be a strong monitoring system in every country.
The side effect of legal authorities’ effort to combat the criminality via punishment and anti-money laundering policy. The agent who is eligible for being involved in both illegal and legal activities, based on an adapted concept of “legal-criminal economy” (Araujo and Moreira, 2005). In the “legal-criminal economy” there are agents belonging to some kind of criminal organization that are specially devoted to illegal economic activities, but who may also engage in the production of legal goods and services.
Money laundering is one of the major issues in the world economy market. Money laundering provides illegal cash money to the criminals. We have to prevent money laundering to have a safer nation that’s why I have chosen this topic.
Must be an environment conductive to fair & open reporting to prevent money laundering. Legal authorities, politicians, general public must be supportive to decrease this problem. Be able to utilise the best practice methods for anti money laundering.
MacDowell and Novis, 2001. Stated that this process is critical to the effective operation of virtually every form transactional and organized crime. Anti-money laundering efforts, which are designed to prevent or limit the ability of criminals to use their ill-gotten gains, are both a critical and effective component of anti-crime programs.
Money laundering has negative side effects in the development of a country. It stops the economic growth of a country. It increased the outflow of capital & exchange rate fluctuation. : The professional skills & internal auditors Suit for the war against money laundering. Anti money laundering policy has become a important issue in the world. All countries cooperate to fight against money laundering. The theoretical model shows (1) the probability to be caught for money laundering.(2)the sentence for money laundering.(3)the probability to be convicted for the predicate crime and (4)the transaction cost of money laundering are negatively related to the amount of crime. Under this assumption those factors are all positively influenced by a anti money laundering policy.
Becker’s (1968) studies the microeconomic determinates of (ML) focusing on criminal demands for (ML).
In my research there are some outcomes at end of the day. We can point out what money laundering is and how we can prevent it to help our nation. We can use AML (anti money laundering) policy to reduce crimes.
A specialized, independent and administrative authority is claimed to be the most likely to exhibit the two “optimality” features mentioned (Masciandaro 2005), especially when it is subordinated to the Minister of Finance, to the Banking Supervisory authority or, like in Italy, to the central bank.
The United Nations (UN) has not concentrated its attention on the negative tax
Implications with regard to foreign investors depositing funds in offshore financial institutions. Although the U.N. has been intensely involved in anti-corruption and anti-bribery activities.
I collected my data from different kind of journals and text books. After that I designed my study. Qualitative explore and understand people’s beliefs, experiences, attitudes, behaviours and interactions. It generates non- numerical data on the other hand Quantitative research designs are either descriptive or experimental. A descriptive study establishes only associations between variables. An experiment establishes causality. So it can be both qualitative and quantitative.
Masciandaro, stated that In the “legal-criminal economy” there are agents belonging to some kind of criminal organization that are mainly devoted to illegal economic activities, but who may also engage in the production of legal goods and services. Agents of the legal sector, by their turn, can be occasionally involved in illegal production.
The estimation of capital flight have been developed in four conceptually distinct approaches to the measurement of capital flight
- The hot money approach
- The residual approach
- Dooley method
- Trade misinvoicing
The hot money method calculates privet money flows by taking the errors and private short term accounts from the balance of payment. The use of the amount of payments account, adopted by Cuddington in 1986 and Consea in 1987 assumes the error.
Cuddington(1986) find the causes of currency flight for Argentina, Mexico, Uruguay,
And Venezuela by adding the error and omission entry to the short time currency flight.Cuddington finds in the case of Mexico there exists a strong relation among capital flight. Capital flight in Argentina and Uruguay is only affected by the real effective exchange rate while Venezuela’s capital flight is affected by foreign interest
Accountants and internal auditors can play a vital role in combating money laundering. There are some programs are listed below:
- Development of internal policies
- Controls to prevent money laundering
- Should have more designation compliance officer
- Training programme for awareness of money laundering
- Should have more independent auditors to prevent money laundering.
Conesa (1987) estimates a similar model but uses the level of government external borrowings and reserves as proxies for overvaluation instead. The author finds that there exist six major causes of capital flight: lack of economic growth in the source country, an overvalued exchange rate, a high US interest rate, local inflation, an excessive fiscal deficit, and low real local interest rate.
The third method is Dooley(1986) method. This method finds to measure the stock of privately held foreign properties or assets that do not generate income reported to the domestic authorities by calculating the difference from the year of the stock of privately held foreign assets adjusted to capture unreported capital flows.
The fourth approach involves the measurement of the under or over invoicing of exports or imports goods. According to Bhagwati(1964) and Bhagwati et al.(1974) who defined black money flight as an illegal transaction via the falsification of trade documents. it is not impossible to estimate capital flight caused by the under invoicing of exports and over invoicing of imports by using partner-country trade data comparison.
Gulati(1985) uses partner country trade data to estimate capital flight. The author detected that many developing countries were under invoices of imports as well.
Gulati (1986), in a later study, stated that under invoicing of imports outweighs the
Under invoicing of export in most cases while the current account deficits are underestimated.
We should stop money laundering to help our developing countries. It will help us to build a more strong economical country as well.
The money laundering ultimately consists in bring black money to legal light to transform a powerful purchasing power. Money laundering both domestically and internationally challenges the authority of our national government. Globalization has increased the scope and extent of money laundering.
The professional skills and expertise of internal auditors suit them well for the war against money laundering. Audit expertises are needed to help fight this disease.
It is the responsibilities of all nations to prevent money laundering to make a safer society. Due to high Tec global environment we should put our best efforts to stop this disease.
- 1. Araujo, Ricardo Azevedo and Moreira, Tito Belchior S.(2005) “An Inter-Temporal Model of Dirty Money”, Journal of Money Laundering Control – Vol.8, No.3, March, pp.260- 262.
- 2. Becker G.S. (1968), “Crime and Punishment: an Economic Approach”, Journal of Political Economy, March-April, No. 2, pp. 169-217.
- 3. Conesa, Eduardo R. (1987), the Causes of Capital Flight from Latin America. Washington Inter-American Development Bank.
- 4.Cuddington, John T. (1986), Capital Flight: Estimates, Issues, and Explanations, Princeton Studies in International Finance, Princeton, New Jersey, No. 58, December 1986.
- 5.Dooley, Michael, W. Helkie, R. Tryon, and J. Underwood (1986), “An Analysis of External Debt Positions in Eight Developing Countries through 1990,” Journal of Developing Economics, Vol. 21, No. 3, May, pp. 283-318.
- 6. Gulati, Sunil K. (1985), “Capital Flight through Faked Trade Invoices: 1977-1983,” New York, Columbia University, May 11, unpublished manuscript.
- 7.Gulati,Sunil K.(1986),” A Note on Trade Misinvoicing,” Paper presented at a conference on Capital Flight and Third World Debt, Institute for International Econimics,Washington,D.C,October 2-4,1986
- 8. MacDowell, John and Novis, Gary (2001), “The Consequences of Money Laundering and Financial Crime”, Economic Perspectives – The Fight against Money Laundering, Vol.6, No.2, May, pp.6-8.
- 9. Masciandaro, D. (2000), “The Illegal Sector, Money Laundering and Legal Economy: A Macroeconomic Analysis”, Journal of Financial Crime, Vol.4, No.2, pp.103-112.
- 10. Masciandaro D. (2005), “Financial Supervision Unification and Financial Intelligence Units: a Trade-off?” Journal of Money Laundering Control, pp. 354-70.
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