Money laundering

Money laundering is a serious threat to any country’s financial system. The loss of financial and moral integrity is a given but the magnitude of its damage extends to a larger dimension in the form of loss of sovereignty, and, to an extent, the degradation of a country’s image. Money launderers tend to seek out countries or sectors in which there is a low risk of detection due to weak or ineffective Anti-Money Laundering programmes, putting countries like Nepal in a vulnerable position.

Money laundering is the process of illegally converting black or dirty money into “white” or legal money. Dirty money does not have legal sources.

Instead, it comes from illegal activities such as drug trafficking, terrorism, organised crime, murder or fraud. Money launderers make such money appear clean by processing it through several legal transactions though multiple financial institutions. In other words, they cover up illegal sources through legal processes.

Money laundering is generally carried out in three steps: placement, layering and integration. First, the illegal wealth is deposited in shell companies, banks or casinos.

The second stage concentrates on separating the proceeds from criminal activity through the use of various layers of monetary transactions, say layering. Then, finally, the laundered money is brought back into the mainstream financial system by paying taxes to legitimise wages, thus giving the money a “legal” source. Across the world, a huge amount of money obtained through terrorist financing, drug and human trafficking is laundered annually.

In 1996, The Financial Action Task Force (FATF) and International Monetary Fund (IMF) stated that the aggregate amount of laundered money in the world could be somewhere between 2-5 percent of the world’s GDP.

Since the very first stage of money laundering, placement, occurs at banks and financial institutions, it is vital for such institutions to be extra vigilant while performing financial transactions.

It is especially so in Nepal as our financial system is still predominantly ruled by cash-based transactions or transactions emanating from non-account holders.

Money laundering can have a huge negative impact not only on a country’s economic and financial stability but also on political development in developing countries.