Money laundering: Time for better intelligence gathering

Money laundering is a process of converting illegally obtained financial resources into legitimate sources and/or activities. In other words, a process of converting black money/assets obtained/generated through illegal means into white money is money laundering. Illegal money can be made within the domestic territory or transferred to other countries even by offering negative interest rates/commissions by money launderers to the converters in the form of financial /real assets.

The major sources of illegal money are drug trafficking, organised criminal activities like extortion, gambling, terrorism, human trafficking, fraud, theft, homicide, sexual assault. Similarly, supermarkets, hotels, casinos are common agencies for collecting and converting large amounts of cash. In this process, electronic fund transfer is being used as an easy and safe channel at present. The mafia-type professional groups make use of sophisticated software in the form of option/swap derivatives.

The banking and financial sector was made responsible for controlling money laundering generated from criminal activities. The formation of a Committee by the US House of Representatives in 1985 was the first step in that direction. In 1989 the Paris Convention of G7 constituted the Financial Action Task Force (FATF). By following the FATF, 29 industrial nations agreed to treat money laundering as crime.

Financial secrecy is the core of money laundering, in which the final users of illegal money are the connected persons of the dealers. Money laundering include depositing money at local banks and financial institutions as well as money transfer both to and from foreign and domestic countries and electronic transfer of money to those countries where financial secrecy prevails, such as Switzerland and Panama.

Most of the countries have either adopted the Anti-Money Laundering Act (AMLA) or are making efforts to prepare it. In order to check illegal activities, most countries have either developed a system of reporting by the banks and financial institutions to the central bank or have introduced a system of disclosure of income source at the time of depositing money, and also while dealing in real estate and/or luxurious consumption activities beyond a set limit. Similarly, a system of reporting at the time of withdrawal from the deposited money to the bank authority over and above a prescribed limit has been implemented in many countries. For example, all banks in the US have to submit the currency transaction report in the case of deposit of $10,000 and above, whereas they have to report to the Federal Bureau of Investigation in case of withdrawal of any amount within the limit. In many countries, including India, where the AMLA is yet not enacted, know-your-customers (KYC) and deal accordingly programmes are being practised effectively as part of due diligence. For obvious reasons, the system of income disclosure for a sizable transaction in the form of deposit and/or consumer durables together with the requirement of authenticated evidences for currency conversion no doubt can help control money laundering. Nevertheless, banks and financial institutions should keep a close watch on customers’ contacts and should have knowledge about customers’ environment through third-party information like newspapers and the internet.

A number of empirical studies in estimating the size of money laundering are available together with the ranking order of the countries in terms of origins and destinations of money-launderers. As such, more than $1 trillion a year is transacted in money laundering. Money laundering adversely affects macro-economic management resulting in unpredictable demand for money, prudential risk to the soundness of financial transaction, volatility of capital flows and unstable exchange rates due to cross-border transfers.

Looking at the developing stage of the financial markets and the free flow of capital to and from India due to unlimited convertibility and open border, the structural constraints of Nepal may remain problematic in future, which can be compensated for through an amicable policy persuasion. Similarly, one cannot rule out the case of illegitimate money transfer to foreign banks from Nepal as has been happening commonly in many countries. However, because of small quantum of potential flow of money for laundering purposes, Nepal is exempted from the list of countries resorting to such activities in the international field. But being a member of the Asia Pacific Group of 26 countries of anti-money laundering, Nepal has to homogenise its so-called token symbol of declaration at the customs points. Setting up an efficient mechanism for financial intelligence unit as elsewhere will help keep a record of the big money-players. Income source disclosure for the big deals, as has been implemented in many countries, cannot be denied in Nepal.

Dr Paudel is ex-economic advisor, NRB