The United Nations International Drug Control Program (UNDCP) estimates that the illegal drug trade generates retail sales of about $400 billion a year, nearly double the revenue of the global pharmaceutical industry or about ten times the sum of all official development assistance.1
Riding on the wave of globalisation and liberalisation, organised crime syndicates and enterprising individuals are taking advantage of open borders, privatisation, free trade zones, weak states, offshore banking centers, electronic financial transfers, smart cards and cyber-banking to launder millions of dollars in drug profits each day. International wire transfers number about 700,000 a day, at the end of which some $2 trillion has criss-crossed the globe. The International Monetary Fund (IMF) estimates that about 2 percent of the global economy involves drug trafficking.
Money-laundering can be done from anywhere, and criminals pick those countries where the laws are either non-existent or they are lax or the police efforts are not strong enough to catch them. Mexico did capture headline news with stories of drug money laundering. According to the International Narcotics Control Board (INCB), which monitors compliance with anti-drug treaties, new measures in Mexico have led to the arrest of over 11,000 persons, including high-ranking government and military officials for drug trafficking and related criminal activities, including money laundering.
In countries of the former Soviet Union, the privatisation of state-owned enterprises and deregulation of banking system has facilitated the laundering of drug profits. An expert on Russian affairs who testified before a US Congressional Committee said, "Privatised property is bought up by foreign and domestic criminal organisations to launder and hide illegal profits. Mobsters launder their ill-gotten gains by investing in gambling, luxury car dealerships in European cities like Budapest, and banks, marinas, and resorts in the Caribbean Basin."
Concern over the impact of money-laundering Organised crime, tax evasion and gang wars lead to underground economy and the underworld takes over the functions of the government through corruption terrorism and money transfers. These activities threaten the fabrics of society and an organised government. An event like September 11, 2001 can destroy an organised state thereby creating chaos and uncertainty. In order to avoid such rogue elements, developed nations are concerned about the effects of money-laundering.2
Money-laundering has adverse effects on society, institutions and government. The crime leads to smuggling, gun running, and terrorism. The criminals involve themselves in crimes and acts of terrorism. For example, see the impact of drug mafias in Columbia, Italy, Spain, South Africa and Russia.
Money-laundering leads to tax evasion, corruption and increases the size of black economy. Resultantly, state loses revenue, and productivity is affected, nation and its institutions earn a bad name. Society suffers due to distortion in the economic system. The graph of equity and equality stands jeopardised, and it affects the employment, markets and jobs.
The act of terrorism affects the economy of a country, and destroys the existing economic and financial fabric of society, and it leads to a parallel government in a society where criminals try to overtake the resources of state for their own negative motive.
The effects of underground economy There are reasons aside from those related to national accounts statistics that call for the study of the underground or shadow economy. The presence of an active shadow economy may reflect the degree to which various existing economic policies are inappropriate or inefficient. Oppressive tax and regulatory regimes (or increases in the tax burden or the degree and/or complexity of regulation over time) appear to drive economic agents from the official sector into the unregulated shadow economy.3 Rational actors move to the shadow economy to escape the high entry costs to legality, such as license fees and registration requirements, and the high costs of taxes, red tape, labour and/or environmental regulations.4 The size of the shadow economy, then, may provide governments with indicators of potential policy flaws. It is unlikely that the optimal level of taxation and regulations will minimise the shadow economic activity.
One role of the state is to provide public goods, such as law and order-including contract enforceability, these actions are funded by tax revenue. But shadow economic activity escapes taxation, and, as a result, state's tax revenues are lower than they could be. This in turn limits the ability of the state to provide such public goods and the quality of such goods suffers. There is a recursive component to this dilemma: as the provision of public goods suffers, fewer agents will have the incentive to remain in the official sector (not least of all because those who remain will shoulder an increasing percentage of the tax burden). As the official sector shrinks, so will government revenues, driving more agents to the shadow economy.5 Oppressive tax and regulatory regimes drive agents into the shadow economy and these happenings will likely erode the size of tax rolls, thus hindering the provision of public goods. Even those non oppressive business or tax environments which have active shadow economies also face the challenge of providing public goods with insufficient government revenues. All of this has further ramifications for the state, because without the rule of law (which includes the legal enforcement of contract obligations), access to capital is limited.6 The recorded economic statistics tends to misrepresent the true economic status of the country's economy.
Terrorism, as its main objective, is designed to intimidate a population or to compel a government to do or abstain from doing any act. Terrorists attempt to intimidate or coerce persons, governments, and civilian populations through the use of force or violence, real or threatened, to achieve political or social objectives. While drug traffickers and organised criminals are organised around deriving financial gain from their activities, the objectives terror groups' are publicity, legitimacy, and influence. Like all entities, however, terrorist groups build and maintain infrastructure and operate to achieve their objectives. Money is required to attract and retain personnel, to support their activities, and to pay for training facilities, firearms, explosives, media campaigns, political influence, and even to support social projects such as schools and hospitals in order to further their ideological objectives. Terrorists often live modestly, a characteristic in contrast with that of drug traffickers and organised criminals. Although the international banking system is required for successful terrorist activities, funding requirements for the organisation may be relatively small by comparison. The small nature of the transactions makes the investigation similar to looking for a needle in a haystack.
Two primary sources of terrorist financing are state sponsorship and revenue generating from legitimate and illegitimate activities. Iran, North Korea, Syria, and others are often denoted as state sponsors of terrorism. Each of these countries, for different reasons, awards resources to active terrorist organisations.
Charities may be an additional source of terrorist funding. Examples include the Holy Land Foundation in Texas (now disbanded), and the Al-Aqsa Foundation in Germany. Each of these has been investigated for funnelling donations to terrorists. In many cases, the donors to these "charities" do not know that they are funding terrorist activity.
Terrorists also obtain funds from both legitimate and illegitimate revenue generating activities; by mixing funding from legal business activities and unlawful acts, terrorist organisations appear similar to other criminal organisations. Related to criminal behaviour, terror organisations support themselves with kidnapping, extortion, and protection money. For example, terrorist organisations such as FARC (Revolutionary Armed Forces of Columbia) and the AUC (United Self-Defence Forces of Columbia) in Columbia are characterised by the kidnapping of both governmental and non-governmental persons for ransom. FARC and AUC also enforce the payment of "taxes" on cocaine production. Criminal activities by terror organisations have been observed in the United States and include large-scale identity theft, smuggling, fraud, theft, robbery, and narcotics trafficking. Consistent with other criminal organisations, funds from legitimate sources are commingled with those from illegitimate sources. Legitimate sources of income may include donations, membership dues, sale of publications, cultural and social events, and solicitations and appeals to wealthy individuals with similar ideological beliefs.
When a criminal activity generates income, like other criminal organisations, terror groups find a way to position the money for its intended use without attracting attention to the terrorist organisation, the persons involved, or the underlying unlawful behaviours. Criminals do this by money-laundering: disguising the sources, changing the form, and moving the funds to places where they are less likely to attract attention. In addition, terrorist groups have been known to utilise less restrictive overseas banks, to use informal banking systems such as hawala, to smuggle cash, to structure banking transactions to sufficiently small amounts, and to use travellers' checks and money orders.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)
1. Money-Laundering, UN General Assembly's special session feature, 'World Drug Problem', 8 to 10 June 1998.
2. In USA, The Us Patriot Act was enacted by the congress in response to the September 11, 2001, terrorist attacks. The law amended and strengthened Bank Secrecy Act. It imposed a member of AML obligations under Section 352 read with 31 USC 5318 (g), 31 CFR 1023.210, and NASD Rule 3011.
3. Simon Johnson, Daniel Kaufmannand Pablo Zoido-Lobatón,. Regulatory Discretion and the Unofficial Economy. The American Economic Review, No 88 (May 1998) p. 391.
4. Id.
5. Jonathan E. Turner, Money Laundering Prevention, John Wiley & Sons Inc (2011).
6. Id. n5.
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