Effect of money laundering on social economic environment

This article examines the impact of money laundering on the social economic environment:
The tax impact Economic and financial crimes generally deny the people and the government the benefits of channelling the nation's resources towards the common good of the society. Smuggling is one of the worst forms of economic and financial crimes. The act of importing and exporting of goods secretly or clandestinely without payment of duty, illegal and unofficial trade in contraband goods by individuals or organised crime syndicates amounts to defrauding the state of the revenue most needed for national security, social and economic development.
Taxation is an old institution through which the government raises revenue to finance and support its primary socio-economic and political responsibilities. Aside from smuggling, tax evasion as an economic crime has the tendency to defeat the fiscal policy of a country, which is to transfer part of the excess resources from private hands to the government. Revenue from tax can be used to provide better security, social amenities and better welfare packages for the generality of the people. It is a home truth that most people in developing countries do not pay or pay inadequate taxes. The effect of this anti-social behaviour is that it leads to substantial loses of internally generated revenue or income from taxes thus incapacitating the government in discharging its constitutional responsibilities. It is not the case that countries are lacking in adequate tax legislations but tax evasion in developing countries is often facilitated by complexities of tax legislations itself which afford tax consultants and professionals like lawyers and accountants to devise means of paying lesser tax without violating the law. The tax regime in developing countries suffers as a result of poor tax administration and enforcement. It is not possible to give an estimate of the amount lost to tax evasion or avoidance.
Social, political and economic impacts Money laundering impacts financial behaviour and macro-economic performance in a variety of ways including policy mistakes due to measurement errors in national account statistics; volatility in exchange and interest rates due to unanticipated cross border transfers of funds; the threat of monetary instability due to unsound asset structures; effects on tax collection and public expenditure allocation due to misreporting of income; misallocation of resources due to distortions in asset and commodity prices; and contamination effects on legal transactions due to the perceived possibility of being associated with crime.
It is known, for instance, that in the early 1990s an influx of tainted money into several banks in the Baltic states resulted in their collapse due to the high number of withdrawals triggered by the customers' knowledge of dirty deals and lack of consumer confidence.
Loss of control of the national economic policy Michael Camdessus, the former director of the International Monetary Fund (IMF), once estimated that the magnitude of money laundering is between 2% and 5% of world Gross Domestic Product (GDP) or $600,000 million. That some emerging market countries stand the risk of losing control of their domestic economic policy as these illicit proceeds from laundering and other economic and financial crime activities have the capacity to dwarf government budgets and as well corner the domestic markets.1
Money laundering and currency manipulation as forms of financial crimes can adversely undermine currencies and interest rates particularly in developing economy like Nigeria with no convertible currency of its own. Many developing countries depend on the purchase of other currencies for the purpose of meeting their international obligations in order to satisfy local needs. Unchecked money laundering activities anywhere can adversely affect currencies and interest rates through reinvestment of funds where the schemes will be relatively secured from suspicion than where the rates of returns are higher. Since profit is not the motivating factor for investing the illicit proceeds of economic crimes in any business, it is always convenient for money launderers to move the funds around as the situation may demand.
The economic implication here is that such "irrational" movement of funds creates inexplicable changes in monetary demand and increases volatility of international flows, interest and exchange rates. A situation of this nature will no doubt militate against sound national economic policy and implementation.
Economic distortion and investment instability Diversion and redirection of funds from sound to low quality investments or from one economic activity to another without rational economic reasons are common practices by money launderers. This is a conscious and continuous attempt to disguise and hide the true source of the illicit proceeds from their criminal activities. As earlier reiterated, profit generation is never the primary reason for engaging in any form of investment by money launderers and many other economic and financial crime offenders. They are more interested in any investment, regardless of its low profit yield, which could clad the proceeds of illicit crime with better legitimacy. In taking investment decisions, money launderers ostensibly pay high premium on investments that could afford the proceeds of the illicit funds better protection from suspicion. It is not surprising therefore, that economic crime offenders invest their illicit funds in economic activities that are not viable. Those who wish to launder money are not looking for the highest rate of return but for investment that easily allows the recycling of the illicit funds even if it requires accepting a low rate of return.2
The movement of funds or investments "may be in direction contrary to those that would be predicted on the basis of economic logic. Money may move from countries with good economic policies and higher rates of return to countries with poorer economic policies and low rates of return, thus seeming to defy the law of economics"3 The inherent economic implication of these criminal practices is that it creates unnecessary confusion for the economic policymakers of the affected countries. Such mass redirection of investments can lead to problem of efficiency of economic policy.
A further explanation of how the activities of economic crime offenders and particularly money launderers, could cause economic policy distortions and instability was given by Vito Tanzi. According to Vito, at the national level, large capital inflows or outflows artificially accentuated laundering process would negatively affect exchange rates and interest rates. This will fundamentally influence the process of particular assets towards which the money is invested, such as land and houses.4 That when the exchange rate is allowed to fluctuate unhindered, the inflow of large amounts of capital into a country would result in its appreciation and to an expansion of the country's money base due to capital inflow which as a result would increase the demand for domestic money which would be satisfied by the monetary authorities of the affected states.5 The appreciation of the exchange rate, according to Vito Tanzi, would create a situation whereby traditional exports would relatively lose its competitiveness to imports while domestic prices would logically rise upwards due to the pressure from the country's monetary base.
An economic situation of this nature which Vito described as the "Dutch disease", would prompt the country's economic policy makers to "tighten its fiscal policy in order to create a budgetary surplus to use to sterilise the money effects of the capital inflows."6 Vito further submitted that a country experiencing a capital outflow would have opposite effects of the above explanations.7 In practical terms, the artificial inflow and outflow of capital and investments from one country to another would have destabilising effects on the international financial markets due to its integrated nature. A distortion of this nature means that financial difficulties arising from one centre can easily spread to other global financial markets and therefore create global economic instability.
Loss of needed revenue for development However, the above efforts and reforms are now being currently threatened by economic and financial criminal practices. It is common knowledge that the on going privatisation exercised has been hijacked by individuals and corrupt public office holders with financial wherewithal to outbid legitimate and prospective purchasers of formerly state owned enterprises. Furthermore, while deregulation and privatisation policy initiatives are often economically beneficial in term of efficiency, better services delivery, job creation and so on, the policies if not properly monitored, can also serve as a venue to accommodate and integrate illicit drug funds and ill-gotten wealth from corruption and embezzlement of public funds.
Between 1999-2004, Nigeria has been competing with Bangladesh for the first and second position as the most corrupt nation in the world based on the Transparency International Annual Corruption Index.8 The past and most recent scandals, involving political leaders, ministers and top public servants, send negative signals to the outside world which is capable of tarnishing the nation's reputation.9 It is important to note that international market and investors respond to all kinds of information, be it positive or negative and investors will only be willing to invest in an economic environment which is "investor-friendly". Nigeria today is faced with the enormous task of creating an investor-friendly economic environment devoid of market manipulation, insider trading, money laundering, advance fee fraud, insecurity and other forms of corruption and financial abuse practices. Thus the preponderance of economic and financial crimes in Nigeria is partly responsible for the decrease in foreign inflow of investments and the continuous denting image of Nigeria as a nation.
The social and political consequence of the these problems, especially corruption among other forms of economic and financial crimes, is that running the government transparently in developing countries is becoming a real problem or almost impossible. As of today, many federal and state government projects are plagued by corruption and the menace is gradually becoming well-ingrained in the national psyche.
The negative effects of economic and financial crime on governance and political stability especially corruption, is summarised as the bane of political instability and development in developing countries. The unfortunate corrupt practices by shameless and unbridled state plunderers, which is so prevalent in the country today, represents the greatest human tragedy that has shackled progress. This situation is at the very heart of the rule of the law crisis and the political quagmire in developing countries today. Furthermore, the political landscape of these countries in the past and most recently is steeped in gross violation of the rule of law and corrupt practices at the highest level of governance perpetuated with impunity. The consequential result of this state of affairs is the near total disregard for the rule of law and constitutional supremacy as recently experienced in developing countries.10
1. John Mc Dowell. (2001). Senior Policy Adviser, and Gary Novis, Programme Analysis, Bureau of International Narcotics and Law Enforcement Affairs, US Department of State "The consequences of Money Laundering and Financial Crimes" in Money Laundry : Economic Perspectives ,.
2. Vito Tanzi, (1997). "Macroeconomic Implications of Money Laundering" in Responding to Money Laundering, International Perspectives, edited by Erenest U. Savona, (Malaysia: Harwood Academic Publisher, 1997- 96).
3. Ibid.
4. Ibid, 97.
5. Ibid.
6. Ibid.
7. Ibid.
8. See Transparency International Corruption Index 2002: www.transparency.md/Docs/TI_CPI2002_en.pdf, Transparency International Corruption Index 2004 www.investinestonia.com/pdf/CPI_2004.pdf>, Accessed on May 28,2008.
9. The present democratic administration in Nigeria assumed power on 29th May, 1999. Since then, three Senate Presidents had been removed from office on the allegations of forgery and corruption. The removed past Senate Presidents were; Chief Onwerem (1999), Late Chief Chuba Okadigbo (2000) and most recently Chief Wabara. The Nigerian "419 Scammers", drugs and human traffickers are not completely given up. These scenarios are greatly drawing negative global attention to Nigeria.
10. The spate of politically motivated impeachment of elected governors without compliance with the rule of law and constitutional requirements, corruption scandals almost on daily basis, political assassinations almost throw one into wilderness whether Nigeria could not go the path of many African states who were once regional great power like Zaire - whose enormous wealth and riches were shredded to ground zero by Late Mobto Seseseko.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)