Money Laundering Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

Money laundering is the process by which criminal organizations manage substantial and recurring illicit revenues to bring these monies back to the legitimate economy. It is traditionally understood as a three-step cycle: (1) the placement, in which the illicit funds are distanced from the crime that produced them and enter the financial system; (2) the layering, in which the origins of the funds are hidden through generally complex financial transactions; and (3) the reintegration, in which the money comes back to the economy appearing legitimate. Although it is particularly difficult to quantify the amount of money laundered around the world, an often-cited estimate from the International Monetary Fund (IMF) in the late 1990s suggested that 2 to 5 percent of global GDP is laundered yearly.

Traditionally, the banking sector has been the vector of most illicit financial activities. Other industries such as the securities sector, insurance and reinsurance, payday lenders, and currency exchanges are particularly vulnerable to illicit finance. Advances in technology such as Internet banking and trading have facilitated the process of washing the proceeds of crime. The continued existence of offshore finance is said to represent a major hurdle in combating illicit financial activities.

Governments around the world started to pay attention to the issue of money laundering in the context of the war on drugs. The United States adopted the Money Laundering Control Act in 1986, legislation that criminalized the laundering process. States around the world have now adopted similar legislation. The objectives of governmental intervention are both to minimize the threat from organized crime and to safeguard the integrity of financial markets. Public sector efforts rely on the participation of financial intermediaries, which must provide reports on large and suspicious transactions to financial intelligence units (who in turn may transmit relevant information to law enforcement agencies).

There is a large international regime that has been built to counter money laundering. This regime is particularly important, because it is generally assumed that one of the main reasons states have had difficulty in tackling this issue is the lack of collaboration among countries. The United Nations’ Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances in 1988 outlawed money laundering and mandated mutual legal assistance across states.

The Financial Action Task Force (FATF), an offshoot of the Organization for Economic Cooperation and Development (OECD), has become central to the regime against money laundering and is composed of more than thirty member states. The FATF has elaborated forty recommendations, revised in 1996 and again in 2003, that direct national legislation against illicit finance. The FATF ensures compliance through self and peer assessment, a process that led in the new century to a blacklist of uncooperative countries and territories.

Other important international organizations in the fight against money laundering include the IMF, the World Bank, the Bank for International Settlements, and the Egmont Group (whose members are financial intelligence units). The private sector created the Wolfsberg Group of Banks to establish anti–money laundering principles. Since September 11, 2001, domestic and international efforts against money laundering have been reinvigorated as a result of states’ attempts to limit terrorism financing.

The fight against money laundering has been controversial. Critics of stringent anti–money laundering programs argue that measures infringe on individuals’ privacy rights and that they impose a high cost of compliance on financial intermediaries. Morally, it is quite clear that criminals should not profit from the proceeds of their activities. Yet, it can be argued that transactions involved in the laundering process actually represent the appropriate use of the financial system, to make more money, and as such should not be criminalized.

The legitimacy of state action has also been contested. It has, for instance, been argued that the United States has used the international regime against money laundering to bully smaller states with lax financial systems.

Finally, the fight against money laundering has not always led to tangible results, raising questions about the efficiency of such programs. After all, as is usually the case when states attempt to target organized crime, the innovative criminal is always one step ahead of the authorities.

Bibliography:

Beare, Margaret, ed. Critical Reflections on Transnational Organized Crime, Money Laundering and Corruption. Toronto, Ont.: University of Toronto Press, 2003.
Gilmore,William C. Dirty Money: The Evolution of Money Laundering Countermeasures. Strasbourg, France: Council of Europe, 1999.
Masciandaro, Donato, ed. Global Financial Crime: Terrorism, Money Laundering and Offshore Centers. Aldershot, U.K.: Ashgate, 2004.
Naylor, R.T. Wages of Crime: Black Markets, Illegal Finance, and the Underworld Economy. Montreal: McGill-Queen’s University Press, 2002.

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