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 signicantly 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”. 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
difcult 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