Money Laundering

Money laundering refers to the processes of turning money earned from criminal activity into untainted, innocent money that bears no traces of its illegitimate origin. Laundering money hides untaxed and otherwise illegitimate income from tax collectors and law enforcement. It transforms the profits from crime into legitimate investments. More recently, the term has been applied to money secretly channeled into financing terrorist activity. Money laundering makes it more difficult to trace the origin of terrorist activity.

The age of computer networking and liberalized capital flows opened new opportunities for money launderers. As late as 1989, Columbian police, after shooting dead a Columbian drug lord, unearthed his stash of millions of dollars. He had buried it because sneaking it into the financial system unnoticed was too difficult (Economist, July 1997). According to some experts, now it is much easier. Rapid growth in the number of cross-border transfers played into the hands of those needing to hide ill-gotten gain. In addition, the multiplication of sophisticated financial instruments has aided and abetted the work of money launderers. On one case, money launders fabricated a profitable options trade to account for the sudden appearance of a hefty sum of cash in a bank account. Russian crime-lords have gone so far as to buy a whole bank.

Money laundering is service that can be purchased by those who know where to look. By one estimate, the going rate for cleansing drug money is Britain is between 5 and 10 percent (Economist, May 2006). Britain has some of the world’s toughest laws against money laundering.

About three quarters of laundered money probably originates from the profits of illicit trade. Estimates of the total amount of criminal money cleansed through the global financial system ranges as high as $1.5 trillion per year (Economist, April 2001). The total amount of criminal money in the global financial system could easily run into the trillions. Some even suspect that flows of criminal money inflate and deflate financial markets. In the 1990s, both Mexico and Thailand underwent currency crises. Although economic mismanagement existed in each case, it was also true that both countries were centers for money laundering.

Aside from criminals themselves, the main culprits in money laundering are the off-shore banks, particularly the “shell” or “brass-plate” banks. The shell or brass-plate banks have no physical presence in any location. In one case, U.S. investigators discovered that illegal drug money has been wired to a bank account outside the United States. After getting the government in the bank’s country to assist in the investigation, investigators discovered that the bank and bank account to which the money was wired actually resided in another country. Officials in this last country discovered that the bank had no buildings or branches. It turned out the shell bank had an account in a correspondent bank in New York. That was where the money was found.

In 1986, the United States enacted the Money Laundering Control Act, the world’s first law specifically directed against money laundering. As the War on Terror became a major concern after September 11, 2001, the United States strengthened its stance against money laundering, levying heavy fines against offending banks. In both the United States and Britain, banks are obligated to report suspicious transactions. The problem of money laundering resembles the problem of global warming in that effective action requires cooperation of all countries.

So far, an international consensus has not emerged on what bans should exist on money laundering. Some remember the experience of Jews in Germany who violated capital controls to get money out of Germany and into Swiss bank accounts. Bans on money laundering could interfere with the legitimate needs of oppressed people to move assets to a safe haven.