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Economic Crime

Economic crime is a preponderant and progressive threat to all forms of businesses and industries existing in the United States in contemporary times. It has a straightforward relationship with insufficient economic policies, the lack of agility in privatization, and lack of strength on legal support to curb such activities. It is being effectively bred and emphasizes the shadow economy (Anderson, 1997). It is through the entry of criminal money yielded through various illegal means that this phenomenon has developed into maturity.

In fact, an economic crime research undertaken in 2005 asserts that at a minimum, there is a 25% proportion of American organizations who will be experiencing economic crimes, particularly money laundering in the next five years or so (Global Economic Crime Study, 2005). This shows how confident these businesses are with their control systems, despite the fact that at twice as much as these had been victims of economic crime in the past. Definition of Money Laundering It is critical to have a profound understanding of the process of money laundering.

Denotatively speaking, money laundering is the ‘conversion or transfer of property, knowing that such property is derived from criminal activity, with the intention of hiding the illegal nature and the roots of the property from the pertinent authorities (Billy’s Money Laundering Information Website, 2006). So any crime that generates significant profit may possibly create a need for money laundering. Typically, money is laundered by physically or electronically moving it from one country to another and hiding its origin through creating complicated financial transactions.

The concept of money laundering is such a wide one, covering a lot of areas — from the financial, social, up to the political arena. The metaphor of money laundering is ‘cleaning of money. ‘ It involves the practice of engaging in specific financial transactions, done with the purpose of hiding the identity, source and/or destination of money. This now becomes a main operation of underground economy (Bartlett, 2002). Historical Background It all started in the conviction of Al Capone for tax evasion in 1931. Following this, mobster Meyer Lansky transferred funds from the New Orleans slot machines to some accounts abroad.

Right after the approval of Swiss Banking Act of 1934, which gave birth to the practice of bank secrecy, Lansksy purchased a Swiss Bank to make possible the displacement of money through a complicated route of shell groups, holding companies, and offshore accounts, all put into one (Billy’s Money Laundering Information website, 2006). Again, the term ‘money laundering’ was not derived in itself, but rather from the story of Capone, who also perfected the concept of capital flight, transferring illegal funds from one place to another.

The term was also referred to during the Watergate scandal. Then US President Richard Nixon took illegal campaign contributions and transferred the money to Mexico. Then he silently brought the money back to the country through a company in Miami. Britain’s Guardian newspaper disclosed the act and termed it as laundering. While the money laundering process has been an area of contention for global economic groups of late, the practice has been long ago present. This even dates back to the time of the presence of pirates in the European seas.

However, it was only in 1920 that these kinds of activities have been referred to as money laundering (Bartlett, 2002). Process of Money Laundering Source: http://www. unodc. org/images/odccp/money_laundering_scheme_big. jpg The process of money laundering occurs in three basic stages: (1) Placement; (2) Layering; and (3) Integration. Placement is the first point where funds are entered into. Such cash are traced from criminal activities or may represent physical disposal of cash.

In the process, hot money is deposited in banks or channeled through seemingly legal business dealings. At times, the money is also used to buy goods, services or even properties, which are later sold to other people. With e-money laundering, the cash may be deposited in an unregulated financial institution. Placement may be easily achieved just by using a smart card. Next to placement comes layering. This is now the creation of complex networks of transactions, which tries to conceal the relationship between the first point of entry and the last phase of the laundering process.

Money launderers will try to disguise the origin of the funds by attempting to leave a complicated paper trail. They oftentimes wire the money deposited in the bank and transfer it to different offshore accounts. This now becomes very hard to trace. Some launderers choose to transfer the money in foreign banks wherein limited foreign legal intervention and strict secrecy law exist. Traditionally, this stage involves wire transfer of deposited cash, conversion of deposited cash into monetary instruments (e. g. bonds, stocks, traveler’s checks), and resale of high-value goods.

In a layering stage, electronic money system can be made possible through the use of a personal computer, and still leaves no audit trail. The last stage of integration is the return of funds to the legitimate or mainstream economy for later extraction, which by then makes it so hard to differentiate if the source is legal or not. This makes the wealth derived from crime appear legitimate (1997 International Narcotics Control Strategy Report, 1998). Source: trac. syr. edu/… /cri_trends/moneylaundering. html Effects of Money Laundering

The activity of money laundering has a great effect on the financial sector institutions, which prove very critical to economic growth. However, these effects are quite difficult to quantify. Basically, it reduces the productivity of the real sector by diverting resources for the purposes of crime and corruption. This in turn slows down the economic growth and destructs the capital flow on both national and international capital trade (Lester, 1998). Economic analyses-wise, banks and non-bank financial institutions are all very critical to the economic growth of a specific country.

These groups all emphasize capital that are sourced from both local and global savings. The degree of efficacy of the allotment of these resources to investment initiatives is a determinant of the country’s economic development. Question is, why then does money laundering destroy or hinder the development of these two financial institutions? There are two reasons for this as stated in Bartlett’s article on Countering Money Laundering in the Asia and the Pacific Region. First, money laundering erodes the financial institutions themselves.

Second, it weakens the financial sector’s role in economic growth. The increasing risk of these financial institutions to fraud and corruption becomes an impediment for depositors and investors from trusting their money to the specific bank or company. Aside from its negative impact to the economic growth through the financial sector, it more so negatively affects the economic growth through the real sector. Diverting resources to less productive activities and facilitating domestic corruption and crime further depresses the economic growth (Bartlett, 2002).

Money laundering can also impair the country’s economic growth through the country’s trade and international call flows. It can also be related to the noticeable distortions to a country’s imports and exports. Many times, laundered money or funds are used to purchase luxury goods. These imports do not actually generate domestic economic activity, nor does it create jobs for people. And is some cases, it can even reduce or depress economic prices, thus reducing the possible profit that can be derived from economic enterprises (Quirk, 1996).

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