What is Money Laundering?


In This Article

What are the risks of money laundering, both for individuals in a society and for businesses? Furthermore, what are the negative effects of money laundering, both economically and socially? Answers to these questions will be provided in this article. Contact us at infomalta@kyprianou.com | +356 2016 1010 for your tailored legal assistance.

What Are The Risks and Negative Socio-Economic Consequences of Money Laundering?

Money laundering and terrorism financing are at the very top when it comes to negative socio-economic effects on society and the running risks to businesses and jurisdictions. Where jurisdictions are weak, badly equipped or lenient toward anti-money laundering (AML) and counter-terrorism financing (CFT), criminal activity can thrive.

Increased exposure to organised crime and corruption

Leniency towards money laundering is the perfect breeding ground for criminals. Jurisdictions in which money is easily laundered will inevitably attract more and more dirty money to launder. This creates a vicious cycle in which firms and companies can quickly fall prey to ‘placement’ flows of laundered money whilst government officials and financial professionals are taunted with accepting bribes and shutting an eye to (or directly be involved with) these operations.

Undermining the legitimate private sector

The private sector takes an immense blow as a result of money laundering activities. This is often the case when fraudulent persons use ‘front’ companies. Since ‘fronts’ often have an immense flow of illegal-gotten cash, they are often at a financial and competitive advantage over legitimate businesses, especially in times of economic recession, in which they are better equipped to incur heavy losses. They can also easily disrupt markets by subsidising products and services, to be sold at below-market rates.

Disrupting markets and Economies

Illegitimate businesses can get so big that they monopolise a large part of the market or wholly control an industry within a sector or a country. In turn, monetary and economic instability can easily spread due to the misallocation of resources from artificial distortions in asset and commodity prices. Moreover, this instability is a breeding ground for tax evasion, further depriving a country of revenue, which is especially detrimental to developing countries and emerging markets.

Weakening financial institutions

Money laundering negatively affects the stability of individual banks and financial institutions (securities firms, insurance companies, etc.). The formation and maintenance of an efficient AML/CFT programme is usually part of a financial institution’s charter to operate; noncompliance may result in significant civil money penalties, possibly followed with the loss of its charter.

Dampening effect on foreign investments

When a jurisdiction is perceived to be a safe haven for organised crime and money laundering, foreign investors are less likely to invest in its commercial and financial sectors.

Losing control of economic policy

When large amounts of assets are convoluted within money laundering processes, these illicit proceeds may dwarf government budgets, create volatility in exchange rates and adversely affect currencies. This concoction of manipulation may also result in the loss of control of economic policy by governments or in policy mistakes due to measurement errors in macroeconomic statistics.

Economic distortion and instability

Money launderers care about hiding their gains, not on how to benefit the economy. Their investments are thus often economically unbeneficial to a country, providing unnecessary products and services.

Loss of tax revenue

Tax evasion directly reduces government income and consequently takes advantage of honest taxpayers. This is at the centre of economic difficulties in many countries, and correcting it is the primary focus of most economic stabilisation programmes.

Risks to privatisation efforts

Money laundering hinders constructive economic reforms, sometimes manifested in inside deals, with which corrupt government officials may award public contracts to organised crime leaders who control an industry.

Reputation risk for the country

A jurisdiction which is repudiated to offer a safe haven for money launderers will inevitably be avoided by honest businesses and attract further fraudulent persons and/or criminals, thus hindering further the economic growth of a country.

Risk of international sanctions

Nations and institutions will often impose sanctions against jurisdictions, entities or individuals,

terrorist groups and drug traffickers in order to protect their financial system from money laundering activities.

Consequently, countries subject themselves to comprehensive or targeted sanctions. Whilst comprehensive sanctions prohibit all transactions with a specific country, targeted sanctions forbid transactions with specified industries, entities or individuals listed on OFAC’s Specially Designated Nationals and Blocked Parties List.

This is why compliance is so important to your business, since failure to comply may result in criminal and civil penalties. The Financial Action Task Force (FATF) calls on its members to implement countermeasures against jurisdictions and entities to apply enhanced due diligence to business relationships and transactions with natural and legal persons in order to improve a country’s AML/CFT command.

Further Social costs

Countless undesirable social impacts surge from such a concoction of risks due to money laundering. From increased violence and gang activity, relating to drug/human trafficking and other organised crime, to loss of profitable business for the honest people of a society, not to mention loan losses. Furthermore, funding for healthcare and education are inevitably impacted with the funding of investigations and the reduced revenue from tax.

How We Can Help

If you have any questions regarding how to make your organisation more compliant and avoid unnecessary legal and financial risks, you can get help from our professional Advocates at Michael Kyprianou Advocates – Legal Consultants. We keep abreast of all relevant updates and procedures, making us an ideal choice in assisting your business. Contact us on infomalta@kyprianou.com | +356 2016 1010 .