Daily Times

Money laundering as a process ‘to make the ill-gotten money look clean’ has turned out to be a monstrous global problem. International economy sustains an annual loss of billions of dollars through money laundering practices of corruption, structuring, trade-based laundering, gambling, smuggling, human trafficking, terrorist financing, off-shore banking and tax evasion etc.In a report by Global Financial Integrity, per annum illicit financial outflows have been estimated to be $ 139 billion from China, $ 104 billion from Russia, $ 52.8 billion from Mexico, $ 51 billion from India and over $ 10 billion from Pakistan. The menace of this financial crime is all the more grim for developing and emerging countries like Pakistan

A lot of information can be found on the concept and practice of money laundering. But in order to disseminate seriousness of the problem, we draw a special attention to the socio-economic effects of money laundering, as under:

n Loss of tax revenue is the natural macroeconomic effect of money laundering. Consequently, the meager government revenues bring fiscal deficit leading to domestic and foreign debt. The government is left constrained in carrying out its welfare and development projects. Such situation indirectly hurts honest tax payers who are subjected to higher tax rates.

n Legitimate private sector of the economy is a major causality. Money-launderers are used to disguise the crime proceeds by commingling with the legitimate revenues of the front companies. This enables them to subsidize the product and services for selling even below the market price. Legitimate private sector mainly relying on the funds borrowed from the banks, is unable to compete with these front companies. In certain countries, whole industries and sectors can be controlled with money laundering proceeds.

n Money laundering and terrorist financing have weakened and failed many financial institutions due to non-compliance with anti-money laundering and counter-terrorist financing programmes. Riggs Bank, European Union Bank and the First Internet Bank had to be closed after loss of charter due to AML/CFT compliance violations. Financial institutions are backbone of the economy but the trouble starts when they are made conduits for money laundering practices.

n With money laundering rampant in an economy, foreign investment is hard to attract. Foreign capital is shy of rushing to an economy where commercial and financial sectors are influenced by the organized crime of money laundering. Therefore, economic growth is stultified without foreign direct investment. Even the monetary tools of the central bank become ineffective in getting the desired impact on economy.

n When billions of dollars are involved in the money laundering, the budgets of the governments are dwarfed especially in the emerging countries like Pakistan. Assets and commodity prices reflect artificial distortions because of laundered money. As a result, monetary instability and misallocation of resources is faced. Hence, loss of control in economic decision making is experienced and the desired macro-economic effects are not achieved.

n Strategic deficiencies of money-laundering and terrorist financing cause adverse publicity and reputation risk for the country. The resultant enhanced due diligence and extra scrutiny starves out legitimate opportunities like GSP Plus and MFS for the country.

n We are in the era of inter-dependence, regional cooperation and global village. There is global consensus against the financial and economic crimes. United States, European Union and UNO have structured frameworks to safeguard world financial system from the acts of money laundering and terrorist financing. The individuals, entities and jurisdictions violating AML/CFT regulations are imposed with targeted and comprehensive sanctions leaving them with severe economic difficulties. US Office of the Foreign Assets Control (OFAC) and Financial Action Task Force (FATF) are the watchdogs for this purpose. Currently, Pakistan is making its best efforts to get out of the grey list of FATF by developing legal and institutional structure as per FATF-40 Recommendations. Economic cost of being on the FATF grey list or black list is too high.

n Social implications of extensive money launderingare disastrous just like rise in criminality, fraud, embezzlement, corruption, cyber-crime, brain-drain, loss of talent and enterprise besides low rating on Human Development Index (HDI).

In nutshell, all above socio-economic consequences of money-laundering as an organized crime by the political and powerful elites are being faced by Pakistan. Our economy is so much disabled that in order to pay the installment of foreign debt, we have get more debt. Present government is at pains to reclaim the damage to economy by implementing the prescribed measures of FATF to secure an exit from grey list. Then, efforts are also on to recover the laundered money from the culprits. The world has started to realize the meaningful measures of our government against money laundering and terrorist finance.This augurs well, as Moody’s rating for Pakistan has also changed from negative to stable.

The writer is Country Manager JSC Subsidiary Bank National Bank of Pakistan in Kazakhstan