Published on International Journal of Economics & Business
Publication Date: May 3, 2019
Umar Lawal Aliyu
Faculty of Management, Department of Business Administration
LIGS University Hawaii, USA
Journal Full Text PDF: Effect of Money Laundering (A Case in Nigeria).
The term money laundering is the process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions. Money laundering is illegal because it allows criminals to profit from crime, and it usually involves more than one illegal step to take place. One problem of criminal activities is accounting for the proceeds without raising the suspicion of law enforcement agencies. Thus the money launderer tries to make illegally gained proceeds (i.e., “dirty money”) appear legal (i.e., “clean”). Among its other negative socioeconomic effects, money laundering transfers economic power from the market, government, and citizens to criminals. In addition, the high volume of proceeds or money accrued by criminals through money laundering can have a devastating and corrupting effect on all elements of society. It will be good to note that if money laundering and financial crime is not greatly checked, it can have a corrosive effect on a country’s economy, government, and social well-being. The research study has noticed that the money from the criminal activity is dirty, and the criminals “launder” it to make it look clean. The research recommends that policy makers should pay attention to money laundering in order to stop the process of disguising the proceeds of crime and integrating it into the legitimate financial system.
Keywords: Crime, Criminal, Corruption, Economy, Government, Money Laundering, Proceeds.
Money laundering is common terms that describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have been derived or processed from a legitimate source. Money laundering has also been defined as the “concealment of the source, nature, existence, location and disposition of money and/or property obtained illegally or from criminal activities such as embezzlement, drug trafficking, prostitution, corruption and large scale crime. The funds involved in money laundering are increasing rapidly and the most recent estimate provided by the FATF suggests that the aggregate size of global money laundering is between 2% and 5% of world economic output, or between $590 billion and $1.5 trillion, most of which is gained from illicit drug trafficking, but also from corruption, fraud and organised crime.
In Nigeria, the Money Laundering (Prohibition) Act 2011 states that any individual, who is transporting cash or negotiable instruments in excess of US$10,000, or its equivalent must be declared to the Nigerian Customs Service. Money laundering is defined in the Money laundering (Prohibition) Act of 2011 (As Amended) as “when a person in or outside Nigeria directly or indirectly conceals or disguises the origin or; converts or transfers, removes from the jurisdiction; acquirers, uses, retains or takes possession or control of; any fund or property, knowingly or which he/she should reasonably have known that such fund or property is, or forms part of the proceeds of an unlawful act.”
The effects of Money laundering and in fact economic crime in general can be very damaging and devastating than what analysts often describe especially in a developing country like Nigeria. Money laundry has caused economic shock to growth of economy of countries all over the world irrespective of their economic and political policies such that it drags the wheel of governance and economic development of a country to drain. In fact, it is a terror threatening the growth of the economy.
Money laundering and financial crime will have a corrosive effect on a country’s economy, government, and social well-being if not curtailed. It is in this regard that an Anti-money laundering guideline was put into prominence globally after the September 11, 2001 attacks and the subsequent enactment of the Patriot Act in the United States and the establishment of the Financial Action Task Force on Money Laundering (FATF). By 2010, many jurisdictions globally required financial institutions to monitor, investigate and report transactions of a suspicious nature to the financial intelligence unit in their respective country.
2. LITERATURE REVIEW
2.1 Theoretical Framework
The UN defines it as “Money laundering is a process which disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. It is a dynamic three-stage process that requires: first, moving the funds from direct association with the crime; second, disguising the trail to foil pursuit; and third, making the money available to the criminal once again with the occupational and geographic origins hidden from view”. United Nations Global Programme Against Money Laundering. Money laundering plays a fundamental role in facilitating the ambitions of drug traffickers, terrorists, organised crime syndicates, inside dealers, tax evaders as well as many others who need to avoid the kind of attention from authorities that sudden wealth brings from illegal activities, (Ronojit Banerjee).
Money laundering is illegal because it allows criminals to profit from crime, and it usually involves more than one illegal step to take place; from Placement to Layering and to Integration. Placement is the movement of cash from its source, while Layering is essentially the use of placement and extraction repeatedly, using varying amounts each time, to make tracing transactions as hard as possible. On the other hand, the final Integration is getting the money out so it can be used without attracting attention from law enforcement or the tax authorities.
Money laundering is indeed a global phenomenon, with devastating and dangerous effect, which undermines the economic and political stabilities of countries all over the world. This is to say that associated to money laundering is a very high significant social costs and risks and among its other negative socioeconomic effects, money laundering transfers economic power from the market, government, and citizens to criminals. Therefore, money laundering is an essential task carried out by all organised crime groups, and therefore if treated and analysed properly could be the tool with which authorities could prosecute organised crime syndicates.
2.2 History of Money Laundering
Money obtained from certain crimes, such as extortion, insider trading, drug trafficking, and illegal gambling is “dirty” and needs to be “cleaned” to appear to have been derived from legal activities, so that banks and other financial institutions will deal with it without suspicion. Money can be laundered by many methods, which vary in complexity and sophistication. Merchants who hid money they made from legitimate businesses from greedy kings traced money laundering back to 2000 years ago. They invested their money in villages but because they failed to declare their wealth to the government, they committed the crime of not paying tax. Hence, the act of hiding money and failing to pay tax constitute the crime of money laundering.
Laws against money laundering were created to use against organized crime during the period of Prohibition in the United States during the 1930s. Organized crime received a major boost from Prohibition and a large source of new funds that were obtained from illegal sales of alcohol. The successful prosecution of Al Capone on tax evasion brought in a new emphasis by the state and law enforcement agencies to track and confiscate money. Furthermore, when criminals launder ill-gotten money and successfully succeed it means that they have succeed and the crime pays and this makes criminals to commit more crimes to bring in more money. A notable leader of a gang Meyer Lansky started modern money laundering. He laundered monies by granting loans to fellow criminals through his bank in a bid to legitimize the source of his wealth.
However, the British Guardian newspaper was the first to use the term “money laundering” while reporting the Watergate Scandal, to show how a company in Miami moved dirty money from United States to Mexico and back to US, for donation to the Committee handling the re-election bid of President Nixon. In the 1980s, the war on drugs led governments again to turn to money-laundering rules in an attempt to seize proceeds of drug crimes in order to catch the organizers and individuals running drug empires.
2.3 History of Money Laundering in Nigeria
Battling Money laundering in Nigeria starts with the laws accessible to battle the threat. In the 1980s, there was recharged concern on account of the effect of opiates and psychotropic medications on people and national improvement. Nigerian government issued the first legislative Act against money laundering. It was Nigerian NDLEA Decree 48 in 1989. … Later, National Assembly adopted the Money Laundering Prohibition Act (2011), and after signing by the President, it became the present Nigerian anti-money laundering law.
Thus, the International community made efforts to stop movement of hard drugs and the rules were agreed by countries all over the world to fight and stop money laundering all over the world; of course Nigeria was not an exception to this general rule. Recommendations agreed for each member nation to pass a law to criminalize are as follows:
Conversion or transfer of property for the purpose of concealing or disguising the illicit origin of the property
Conversion or transfer of property once they know that such property came from a drug related offence
Helping any person who commits such an offence or offences to evade the legal consequences of his actions
Hiding or covering the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property came from drug trafficking or an offence related to it.
However, Nigeria signed the agreement on March 1, 1989 and approved it on November 1, 1989. The Money Laundering (Prohibition) Act 2011 states that any individual, who is transporting cash or negotiable instruments in excess of US$10,000, or its equivalent must be declared to the Nigerian Customs Service.
2.4 Methods and Stages of Money Laundering
Money laundering is a crime that must be dealt with if the country wishes to grow its economy, kill corruption and uphold law and justice in the land, and hold its head high among other nations. However, Placement, layering and integration are the three (3) stages involved in money laundering.
Placement: This is the movement of cash from its source. Launders always disguised or misrepresent their bad and illegitimate gotten money. The criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have been derived or processed from a legitimate source. This is followed by placing it into circulation through financial institutions, casinos, shops, bureau de change and other businesses, both local and abroad. The process of placement can be carried out through many processes including:
a. Asset Purchase: The Launder purchase assets with the ill-gotten money all with a view and intention of changing the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.
b. Bank Complicity: This is when a financial institution is owned or controlled by criminals. They connive and use the financial institution launder money and these makes the process easy for the launderers. The complete liberalisation of the financial sector without adequate checks also provides leeway for laundering.
c. Blending of Funds – The best place to hide cash is with a lot of other cash. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions.
d. Bureau De Change: Lauders also use Bureau De Change to launder money and this makes the process easy for the launderers. They use all forms of black markets to disguised or misrepresent their bad and illegitimate gotten money.
e. Currency Exchanges – In a number of transitional economies, the liberalisation of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies.
f. Currency Smuggling – This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail FATF 1996-1997 Report on Money Laundering Typologies.
g. Securities Brokers – Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds.
Layering: Layering is essentially the use of placement and extraction repeatedly, using varying amounts each time, to make tracing transactions as hard as possible. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies. The known methods are:
a. Cash converted into Monetary Instruments – Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and money orders.
b. Material assets bought with cash then sold – Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize.
Integration: On the other hand, the final Integration is getting the money out so it can be used without attracting attention from law enforcement or the tax authorities. This is the movement of previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. The known methods used are:
a. Property Dealing – The sale of property to integrate laundered money back into the economy is a common practice amongst criminals.
b. Front Companies and False Loans – Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction.
c. Foreign Bank Complicity – Money laundering using known foreign banks represents a higher order of sophistication and presents a very difficult target for law enforcement. The willing assistance of the foreign banks is frequently protected against law enforcement scrutiny. This is not only through criminals, but also by banking laws and regulations of other sovereign countries.
d. False Import/Export Invoices – The use of false invoices by import/export companies has proven to be a very effective way of integrating illicit proceeds back into the economy. This involves the overvaluation of entry documents to justify the funds later deposited in domestic banks and/or the value of funds received from exports.