Macroeconomics of money laundering: effects and measurements

Author:Nella Hendriyetty, Bhajan S. Grewal
Position:Victoria University, Melbourne, Australia
Pages:65-81
SUMMARY

Purpose The purpose of this paper is to review studies focusing on the magnitude of money laundering and their effects on a country’s economy. The relevant concepts are identified on the basis of discussions in the literature by prominent scholars and policy makers. There are three main objectives in this review: first, to discuss the effects of money laundering on a country’s macro-econom... (see full summary)

 
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Macroeconomics of money
laundering: effects
and measurements
Nella Hendriyetty and Bhajan S. Grewal
Victoria University, Melbourne, Australia
Abstract
Purpose The purpose of this paper is to review studies focusing on the magnitude of money laundering
and their effects on a country’s economy. The relevant concepts are identied on the basis of discussions in the
literature by prominent scholars and policy makers. There are three main objectives in this review: rst, to
discuss the effects of money laundering on a country’s macro-economy; second, to seek measurements from
other scholars; and nally, to seek previous ndings about the magnitude and the ows of money laundering.
Design/methodology/approach In the rst part, this paper outlines the effects of money laundering
on macroeconomic conditions of a country, and then the second part reviews the literature that measures the
magnitude of money laundering from an economic perspective.
Findings Money laundering affects a country’s economy by increasing shadow economy and criminal
activities, illicit ows and impeding tax collection. To minimise these negative effects, it is necessary to
quantify the magnitude of money laundering relative to economic conditions to identify the most vulnerable
aspects of money laundering in a country. Two approaches are used in this study: the rst is the capital ight
approach, as money laundering will cause ows of money between countries; the second is the economic
approach for measuring money laundering through economic variables (e.g. tax revenue, underground
economy and income generated by criminals) separately from tax evasion.
Originality/value The paper offers new insights for the measurement of money laundering, especially
for developing countries. Most methods in quantifying money laundering have focused on developed
countries, which are less applicable to developing countries.
Keywords Tax evasion, Macroeconomics, Money laundering, Underground economy, Capital ows
Paper type Literature review
1. Introduction
Money laundering is a global concern, as it becomes a crucial link in tracing criminal funds,
especially from organised crime. Criminals try to conceal their proceeds of crime by
laundering money in nancial systems, international trade or through other efforts. Actions
to conceal these proceeds, or funds derived from criminal acts, are intended to conceal the
origin of the property, that is, to make it appear legitimate.
Many studies have focused on the criminalisation of money laundering to reduce the level
of crime in a country. However, there is limited literature analysing the economic impact of
money laundering on a country, and this literature mostly does not provide empirical
evidence. Furthermore, most research related to money laundering focuses on developed
countries. There is a lack of evidence-based research that examines the magnitudes of money
laundering in developing countries. Therefore, to redress the gap, this paper will attempt to
elaborate the economic impact of money laundering and seek alternative measurements in
quantifying the level of money laundering, especially for developing countries. The results
can be used to identify money laundering risks and vulnerability in a country.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
Money
laundering
65
Journalof Financial Crime
Vol.24 No. 1, 2017
pp.65-81
©Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2016-0004
2. Macroeconomics of money laundering
The obvious direct effect of criminalisation of money laundering is that law enforcement
agencies (LEAs) have more power and opportunities to catch criminals because they not only
have the power to prosecute them for the predicate offences but also can bring them to court
for money laundering offences, which the offender can defend through the “reversal of the
burden of proof” (Stessens et al., 2000, p. 66). Unlike the conventional prosecution that uses
the presumption of innocence that places a legal burden upon the prosecution to prove all
elements of the offence to law enforcement, money laundering prosecution places the legal
burden of proof on the suspects to provide adequate evidence about the source of the
suspected funds or assets.
Currently, the discussion of effects of money laundering on the economy is limited in the
literature. Mostly, the literature discusses the indirect effects on the economy in the long run,
but does not provide empirical evidence (Ferwerda, 2013). Conversely, Quirk (1997) contends
that money laundering signicantly impacts the macroeconomy, despite the limited
economic literature on this issue, which is referred to as the hidden (or underground)
economy or tax evasion.
2.1 Money laundering affects the scope of the shadow and underground economies
The term “underground economy” was used by the economists in the 1980s to describe illicit
transactions, such as tax evasion, which have similarities with money laundering activities
(Quirk, 1997). Furthermore, Buehn and Schneider (2007) coined this term to distinguish it
from “shadow economy”.[1] Shadow economy involves legal activity but tax is not paid,
whereas underground economy involves illegal activities related to money laundering
(Schneider and Windischbauer, 2008).
Both terms are crucial for the success of the money laundering process. As Blum et al.
(1999, p. 22) explain, one of the ten fundamental laws of money laundering is that:
[…] the more the business structure of production and distribution of non-nancial goods and
services is dominated by small and independent rms or self-employed individuals; the more
difcult the job of separating legal from illegal transactions.
Self-employed workers and small rms are not registered in developing countries, and
therefore run informally; thus, they fall under the shadow economy. Business entities in the
informal sector are used by the money launderers are misused by money launderers as
channels to conceal their proceeds of crime in the initial steps of money laundering. As Blum
et al. (1999) explain, underground activities are either illegal or informal activities that
interact with legal business at many levels. For example, a sweatshop with illegal workers
brought in from human smuggling groups deal with banned or restricted goods. To nance
their activities, they get funding from loan sharks who may acquire money from drug
activities and lend money for laundering purposes, often in cooperation with truck
companies owned by transnational organised crime. Ultimately, this type of syndicate has
respectable retail outlets that serve the public with quality products at cheaper prices. This
example illustrates the initial steps of their money laundering process; the launderers tend to
use the shadow or informal economy to conceal their funds and mix “clean” money from
crimes with the money from legal activities.
The shadow economy usually stems from small and independent rms or self-employed
individuals. They tend to keep their businesses small to avoid government scrutiny that will
require them to register in the formal economy. These numerous small and independent
rms will therefore expand the shadow economy, used by money launderers to embed their
illegal activities to make them look legal. Therefore, the bigger the shadow economy, the
JFC
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