As has been emphasised in this column money laundering is associated with all types of illegal activities, not only those arising from organized crime. As long as income and wealth are not reported, as the law requires, they are hidden and illegal. In Guyana the best proxy for the size of all types of such illegal activity is the size of the shadow or underground economy. The portion of it due to organized crime is what I have already labelled as the phantom economy.
Estimated shadow or
underground economy
A 2003 IMF publication provides the most recent estimates of the underground or shadow economy for the period 1964 to 2000. The average size of this economy during the last decade (1991-2000) was 47% of the official GDP. In providing the estimate the IMF was concerned with estimating the amount of tax evasion. In a recent column (SS, September 30, 2007) I argued that:
“There is every reason to believe that this estimate could not have varied much in recent years. Allowing however for a margin of error of plus and minus 10%, the current estimate could therefore range between 42.3% and 51.7%, rounded off as 42% and 52% respectively. Using the GDP estimate of US$731 million for year 2006 this would yield an estimated shadow economy of US$307 million to US$380 million.”
Presently, I am engaged in an economic study to estimate the underground economy in Guyana for the period 2000-2007. Previously, I had undertaken a study of this for the period 1982-1986 (Foreign Currency Black Markets: Lessons from Guyana, Social and Economic Studies).
Estimated phantom
economy
In the SS column referred to above, I had proposed three different scenarios as the basis for estimating the size of the ‘phantom economy’ portion of the underground or shadow economy. As previously noted this can be attributed to organized crime. The estimates were 25, 50 and 75 per cent of the underground economy. My own judgement is that the lowest estimate (25 per cent) is too low. I base this largely on the fact that the economy is liberalised and the unorganized illegal section of it does not generate as much as one-quarter of the official GDP. All the major illegal activities have organised groups insinuated in them from fuel and alcohol smuggling to trafficking in persons. On this basis I pointed out: “we get estimates ranging from (77, 154, 231 million US dollars) to (95, 190, 285 million US dollars). For a small poor economy like Guyana this represents a considerable amount of economic wealth.”
A key question that arises from all this is: In the present dispensation: what are the key sectors where organized crime has established a presence?
Metamorphosis
By any standard the underground or shadow economy in Guyana remains huge. Its metamorphosis from being a product of commandist authoritarian rule by the PNC in the 1980s with its severe and obsessive restrictions on private markets for local and imported goods, services and foreign currency into a vehicle for organised crime after the late 1990s, particularly narco-trafficking, is a widely recognized reality by the citizenry at large in Guyana. Its expansion into various sectors of the economy has been rapid and tumultuous over the last decade. At last count at least 10 sectors of the economy seem to have been noticeably affected by this portion of the underground economy. These are:
* retail (including fuel)
* travel and entertainment
* construction (housing)
* forestry
* land development and
real estate
* hotels and accommoda-
tion
* finance
* import-export
* printing and publica-
tions
* miscellaneous services
(storage and warehousing,
security)
Others can no doubt add to
this list.
Countering money
laundering
In the context of Guyana, how can money laundering be addressed? Experience worldwide has shown that, at a minimum, there are several legislative, administrative, and monitoring measures, which are absolutely essential to any successful containment, let alone eradication of money laundering. One of these is that bank secrecy cannot be used to defend the sanctity or privilege of funds held in legitimate banks that are illegitimately sourced with or without the knowledge of the bank itself. Swiss banks had for long been strict adherents of this bank secrecy principle, but changes in global conditions and the spread of funds held by criminal enterprises in their banks, resulted in a strict literal interpretation of bank secrecy being abandoned in favour of rooting out criminally sourced funds.
A second key measure is that the physical location of the crime that generates the funds to be laundered must remain immaterial to its criminality in Guyana, the jurisdiction where the money laundering takes place. The law should make this abundantly clear.
A third key feature is that banks as well as other financial institutions must be required to perform due diligence when acquiring funds. As professionals, bank staff cannot plead ignorance of law-breaking by their customers as an excuse, if due diligence is not exercised in the acquisition of all deposits. The implication of the above is that it is the duty of banks to know their customers. The mechanical acceptance and disbursement/ transfer/conversion of funds can no longer be acceptable professional practice.
Indeed, banks and other financial institutions have a duty to notify the specified authority of all transactions that may be potentially associated with money laundering. This reporting should be to the national reporting body and/or any self regulating agency the banks and financial institutions may establish. This means that intra-country, regional, hemispheric and global cooperation is necessary for all legitimate banks. This cooperation in particular should be extended to all financial intermediaries given the range of institutions through which money laundering can potentially take place.
Finally, the law should make for strict the enforcement and application of punitive confiscatory provisions and fines, whenever money laundering is legally proven.
Next week I shall wrap up this assessment of money laundering.
