Drug dealers reinvesting their criminal activity’s revenues into a legal business. Tax evaders partially hiding their income. Corrupted civil servants accepting bribery. These are just some of the unlawful activities that generate money laundering (ML).
The ABC of money laundering
ML is a serious financial crime whereby the proceeds of unlawful activities are disguised and employed in a legitimate business. The term originates from Al Capone’s practice of using the money obtained through its illegal activities to run a legal chain of laundromats.
The three stages of ML are placement, layering, and integration. The unlawfully obtained money is first transferred into a legal business cash-flow, then blended with legitimate money. Once it is made legal, money returns to their owners.
How does ML impact our economy and society?
From the economic perspective, one example is the loss of government tax revenue. States see their tax revenues dwarfed when unlawful proceeds remain untaxed. This generally entails a tax increase, and in turn harms honest taxpayers.
ML also threatens private companies’ market competitiveness. Unlawful businesses can offer their products or services at very low prices, putting legitimate businesses at a competitive disadvantage.
Drug trafficking is an example of ML’s social cost. It is a lucrative activity that perpetuates drug use, crime, violence and overall disintegration of society.
Is AML legislation doing enough?
Anti-Money Laundering (AML) refers to the laws, regulations and procedures aimed at combatting ML. It requires obliged entities (OEs)* to monitor institutions with which they do business, verify the sources of large sums, and report on suspicious financial transactions to the competent authority.
The rapid technological advancement, and globalisation of the financial services sector are making ML easier to carry out. This is why the current EU AML legislation needs to be improved to implement more consistent rules and stronger supervision.
OEs, supervisors, and policymakers must collaborate, moving from reactive to proactive risk management to ultimately achieve effective AML risk mitigation. Our recent publication Building an effective Anti-Money Laundering ecosystem outlines recommendations on how to successfully reach this objective.
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* OEs are grouped in financial entities such as banks and insurers and non-financial such as auditors, external accountants, lawyers. They are required by the EU AML legislation to have procedures in place designed to assess and mitigate ML risks.