Guyana and the wider world

Last week’s column intimated that at least three items we have been discussing for some time now, are directly related to the significant roles played by two of the World Economic Forum’s “problematic factors,” namely, “crime and theft” and “corruption” in the poor results obtained by Guyana in the 2007-2008 Global Competitiveness Report. These are 1) the extensive role of the underground economy 2) the significant role of organized crime in it (phantom economy) and 3) the scale, scope, and impact of money laundering on the economy and wider society. In earlier columns I have already dealt at length with the first two items. Today I take up the issue of “money laundering.”

Definition

Let me begin with a strong word of caution. When considering money laundering one must be very clear on what is fact and what is fallacy. The first fallacy to note is that money laundering is not, as is commonly believed, the exclusive domain of organized crime. In fact it is the domain of all types of crime, organized or unorganized. Whenever the proceeds of activities that generate gains are not reported and/or occur outside of legal formal markets, money laundering is the inevitable consequence. To take a case in point, all individuals, firms, business organizations and other enterprises, that seek to evade taxes, can only successfully do so if they hide and do not report and then subsequently launder the wealth or income they obtain. The definition of money laundering below highlights this. It is taken from the Lectric Law Lexicon, which is based on US legal provisions:

“Conduct/Acts designed in whole or in part to conceal or disguise the nature, location, source, ownership or control of money (currency or its equivalents [cheques, electronic transfers]) to avoid a transaction reporting requirement under state or federal law or to disguise the fact that the money was acquired by illegal means.”

The second fallacy is that the “money” referred to in the term, money laundering, refers to cash and bank deposits (the traditional definition of “broad” money). In fact other financial instruments (for example, electronic transfers) as well as commodities (gold, other precious metals, high-valued artefacts) are used as means of money laundering. To limit money laundering only to cash and bank deposit transactions would be incorrect.

A third fallacy lies in failing to recognise that money laundering is directly linked to the operations of the entire underground economy, which as we know refers to all economic transactions that take place outside of formal and legal markets. As we saw in our earlier analysis of Guyana, organized crime, while a substantial part of the underground economy, is not the whole of it. Criminal activity not linked to organized crime also takes place in the underground economy. Here individuals, organisations and business units with proceeds from all types of criminal activities, (for example, fraud, tax evasion, and ordinary theft) also contribute to money laundering in the underground economy as their proceeds and ill-gotten gains must be laundered, if they are not reported.

‘Victimless crime!’

Fourth, where there is money laundering the underlying activities that initiate it are always criminal wrongdoings. However, because of its nature and operation analysts believe many persons perceive money laundering as a ‘victimless crime.’ That is, unlike an ordinary theft or a fraud perpetrated against a person or organization the victim is not immediately apparent. Yet, as we shall see, all law-abiding citizens, the government, and the society as a whole ‘pay’ for these criminal wrongdoings.

Have no doubt about it, we hurt ourselves and our country when we go soft on money laundering. Indeed, many persons feel that in Guyana we facilitate money laundering both actively (by not passing and enforcing appropriate legislation) and passively (by turning a blind eye to its existence).

A fifth fallacy is that money laundering takes place only through banks, which as we know are the principal institutions dealing with money. It occurs, however, through all types of financial institutions and their assets. The truth is that if money laundering is confined solely to banks, financial intelligence operatives can reconstitute the source of the funds by deconstructing the deposit-withdrawal-conversion trail through bank records.

This, however, does not deny that money laundering, in seeking to ‘legitimize’ the proceeds of criminal wrongdoings, sees legitimate banks as prime targets.

Process

A sixth fallacy is to interpret money laundering as a single event or episode. It is usually a very intricate and complex process. Thus, according to the Financial Action Task Force (FATF) set up by the G-7 countries in 1989 to lead global counter-measures against money laundering, money laundering takes place in three main stages.

The first of these is when means are found to place funds obtained illegally into the financial system. There are innumerable ways in which this has been done over the years. Business activities that handle a lot of cash make this relatively easy, for example, retail, entertainment shows and casinos. This stage is called ‘placement.’

After the funds have been ‘placed’ into the financial system, the second stage seeks to engage in a series of worldwide transfers and conversions to hide the original source of the funds. This part of the process is called ‘layering.’ The third and final stage is to secure the funds in the legitimate economy after placement and layering.

This is done through established and reputable financial institutions. This stage of the process is called ‘integration.’ From this point the funds can then successfully be invested legitimately in such items as financial assets, real estate or business ventures (retail, forestry, mining and so on).

Next week I shall continue to discuss other aspects of money laundering.