The Scale of Problem

According to a 1996 IMF estimate, money laundered annually amounts to 2-5% of world GDP (between 800 billion and 2 trillion US dollars in today's terms). The lower figure is considerably larger than an average European economy, such as Spain's.

The System

It is important to realize that money laundering takes place within banking system. Big amounts of cash are spread among numerous accounts (sometimes in free economic zones, financial off shore centers, and tax havens), converted to bearer financial instruments (money orders, bonds), or placed with trusts and charities. The money is then transferred to other locations, sometimes as bogus payments for "goods and services" against fake or inflated invoices issued by holding companies owned by lawyers or accountants on behalf of unnamed beneficiaries. The transferred funds are re-assembled in their destination and often "shipped" back to point of origin under a new identity. The laundered funds are then invested in legitimate economy. It is a simple procedure - yet an effective one. It results in either no paper trail - or too much of it. The accounts are invariably liquidated and all traces erased.

Why is it a Problem?

Criminal and tax evading funds are idle and non-productive. Their injection, however surreptitiously, into economy transforms them into a productive (and cheap) source of capital. Why is this negative?

Because it corrupts government officials, banks and their officers, contaminates legal sectors of economy, crowds out legitimate and foreign capital, makes money supply unpredictable and uncontrollable, and increases cross-border capital movements, thereby enhancing volatility of exchange rates.

A multilateral, co-ordinated, effort (exchange of information, uniform laws, extra-territorial legal powers) is required to counter international dimensions of money laundering. Many countries opt in because money laundering has also become a domestic political and economic concern. The United Nations, Bank for International Settlements, OECD's FATF, EU, Council of Europe, Organisation of American States, all published anti-money laundering standards. Regional groupings were formed (or are being established) in Caribbean, Asia, Europe, southern Africa, western Africa, and Latin America.

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Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, United Press International (UPI) and eBookWeb and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

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