Money laundering is the process by
which large amount of illegally obtained money from drug trafficking, terrorist
activities or other serious crimes and giving the appearance of this money
originated from legitimate source.
Effects on interest and exchange rate:
Effects on Economic growth:
Few steps taken by financial institutions to curb the money laundering
The main action of these acts is to curb the money laundering in the initial stage i.e. placement stage (entry of cash into the financial system) where the launderer is most vulnerable to detection.
Reference:
If Money laundering
activity completed successfully it allows the criminals to maintain control
over there proceeds and ultimately to provide legitimate cover for their source
of income. Money laundering plays a fundamental role in facilitating the
ambitions of drug trafficking, terrorists, the insider dealer and the tax
evaders.
Money laundering is the
crucial step in success of drug trafficking and terrorist activities. So many
organizations around the world are trying to curb the Money laundering activities.
Because of successful money laundering in so many countries illegal terrorist
activities are rising day by day.
How
Money laundering works:
Most common players in the money laundering are drug
traffickers, embezzlers, corrupt politicians and public officials.
The basic money laundering has following steps
(i)Placement
(ii)Layering
(iii)Integration
(i) Placement:
At this stage launderer saves the illegal
money into legitimate financial institution. This will be like cash bank
deposits and this is the most risky and toughest stage of laundering process. Because
of large amount of cash and high value transaction should be reported by banks
to their central bank.
(ii)Layering:
Layering involves
sending the money through various financial transactions to change its form. Layering
consists of several bank to bank transfers between different accounts in
different names in different countries. Making deposits and withdrawals to
continually vary the account of money in the accounts. Changing the money
currency and purchasing the high value items to change the form of money .This
layering helps in making the dirty money to legitimate money as hard to trace
as possible.
(iii)Integration:
At this stage money re-enters the main stream economy in the legitimate form. It appears in the way as it came from a legal transaction. This may involve final bank transfer into the account of local business. It is very difficult to catch the launderer during the integration stage.
At this stage money re-enters the main stream economy in the legitimate form. It appears in the way as it came from a legal transaction. This may involve final bank transfer into the account of local business. It is very difficult to catch the launderer during the integration stage.
How
money laundering affects economy:
Money laundering is a threat to the good functioning
of a financial system; however, it can also be the Achilles heel of criminal activity.
The negative effects of money laundering on economy are hard to put into numbers.
Money laundering not only damages financial institutions but also countries
productivity in its various economic sectors.
·
In view of socio cultural, successful
money laundering means criminal activities in the country will be increasing
.Success of money laundering encourages criminals to grow their illicit schemes.
·
Laundering money is usually untaxed
meaning the rest of us ultimately have to make up the loss in the tax revenue
·
Major part of the money laundering is drug trafficking and
terrorist organization
Effects on interest and exchange rate:
Money laundering has
adverse consequences on the interest rates and the exchange rate volatility
particularly in developing nations and dollarized nations. It complicates the
government effort to manage economic policies. It affects the income
distribution contaminating the legal transaction thus reducing the GDP growth.
Effect
of money laundering on cost of capital:
When money laundering
takes place the capital is reduced due to which the supply curve of capital is
reduced due to which the supply curve of capital moves towards the left. In
this case due to the scarcity of the capital then central bank infuses cash in the
financial system due to which the cost of capital increases. Because of money
laundering there will be huge gap between capital and productivity.Effects on Economic growth:
Prevention
of money laundering:
Below are the points where money laundering can be
detected
·
Entry of cash into the financial system
·
Transfers to and from the financial
system
·
Cross border flow of cash
Few steps taken by financial institutions to curb the money laundering
·
Financial institution or intermediaries
have to maintain records in detail about the nature and value of transaction
whether such transaction comprise or single transaction or series of connected
transaction.
·
Information on transaction to be informed
to the central bank
The main action of these acts is to curb the money laundering in the initial stage i.e. placement stage (entry of cash into the financial system) where the launderer is most vulnerable to detection.
International cooperation is essential in
identification, tracking and prosecuting of illegal proceeds of crime. In 2002
the parliament of India passed act called prevention of money laundering act
2002 the main objective of this act is to prevent money laundering as well as
to provide for confiscation of properties either derived or involved in money
laundering. The Prevention of Money Laundering Act 2002 provides for mutual
legal assistance in India by making enabling provisions for agreements with
foreign countries to enforce this act, assistance to a contracting state in the
investigation of an offence, reciprocal arrangements for processes and
assistance for transfer of accused persons and attachment, seizure and
confiscation of property in a contracting State or India. To eradicate the
Money laundering completely all countries should come to one agreement and they
should cooperate with each other.
India has to fight against money laundering it
should take proper anti money laundering measures and enforce the m strictly.
Though money laundering cannot be eradicated permanently proper checks and
balances will ensure India rise as economic power house and future development.
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