ARE WE TAKING MONEY LAUNDERING SERIOUSLY?  PART III

Money Laundering and Its Effects

by Annette Severin-Lestrade

Consequences of Money Laundering 

According to Marcus Pleyer in his article Lead by Example, “Money laundering is not a victimless crime, and the ramifications of ineffective action are real”. In previous articles, we discussed the meaning and process of Money Laundering, Terrorist Financing and Proliferation Financing (ML/TF/PF) and we gave examples of the various forms that money laundering can take. Let us look now at the possible impact of Money Laundering in particular, on those three areas: people, the environment, and the economy and forge the link with Terrorist Financing and Proliferation Financing.

How does money laundering affect people?

Modern-Day Slavery is the term used to describe what is, (next to drug trafficking and trade in counterfeit goods), the third largest source of criminal profits worldwide. These profits, from ill-gotten gains, have to somehow make their way through the banking system and cleansed thereby. Money laundering perpetuated through Modern-Day Slavery is said to generate about USD 150 million annually. According to the International Labour Organization (ILO,) some 40.3 million people were enslaved in 2016, including 24.9 million subjected to illegal forced labour. 

The term Modern-day Slavery encompasses forced labour, debt bondage, chattel slavery and human trafficking. It is any situation where one is held against his/her will and fears for his/her life due to threats received, violence and deception. It is said that women and children are the largest demographics affected by human trafficking. 

A 2019 Trafficking in Persons Report (TIP) Report designated Trinidad and Tobago as a tier 2 country and said traffickers operating there “are increasingly targeting vulnerable foreign young women and girls between the ages of 15 and 21.”  According to reports, boats transporting sex trafficking victims to T&T earn between US$3,000 and US$12,000 per trip.”  The Trinidad and Tobago Guardian reported recently that 30 cops were under investigation for human trafficking violations. According to the article “A source who requested anonymity said the traffickers often pay police officers to transport their illegal human cargo.”

The thought that this could happen in the Caribbean is scary. “Sixty-nine people ranging from the ages of 19 to 70 have been found locked away in cages at a church located along the Eastern Main Road in Arouca ….  “These people, both men and women, are believed to be victims of ‘modern day slavery’ and ‘human trafficking’ according to Commissioner of Police Gary Griffith who spoke to the Guardian… “ 

Based on a recent US Government trafficking profile for St Vincent and the Grenadines, that country does not meet the minimum standards required to protect its human resources from human trafficking and as such remains flagged.  While Antigua & Barbuda has made significant strides in updating its human trafficking laws, they too still remain a “monitored country”.  A 2019 (U.S Department of Labor) report on Dominica reveals that its laws do not provide adequate protection from child labor, forced labour or child abuse. DNO recently reported on a case of child abuse in Dominica where the assailant was fined EC$800.00 or nine months in prison for “child cruelty” involving a washing machine. Even the magistrate, in reprimanding the defendant, “lamented that the law is too lenient for this type of crime”. 

So while the comments regarding child labor in our small islands do not necessarily relate to money laundering, the non-existence or non-enforcement of child protection legislation may provide an opening for money launderers as the islands may be seen as possible targets for crimes such as child prostitution and consequential laundering of the proceeds.  .

How does money laundering affect the environment?

Environmental crimes, also known as green crimes, are becoming a serious issue across the world. They are now among one of the most profitable criminal activities generating roughly $250 billion a year. 

Crimes that negatively affect flora and fauna, wildlife, and the atmosphere are considered to be environmental crimes. Environmental crimes can take the form of deforestation, poaching of endangered species, trafficking of wildlife, pollution of the air or waterways, when these are done unlawfully. The idea is that if the proceeds from these illegal activities are significant, these funds would need to be laundered in order for them to enter the country’s economy. Ill-gotten gains from environmental crimes are often comingled with other legitimate business incomes to disguise the origin of the funds. 

These crimes tend not to feature in the Caribbean in a big way and may therefore be perceived as not having huge Caribbean relevance but are mentioned here for the sake of completeness. 

How does money laundering affect the economy? 

An ineffective AML/CFT programme can have severe repercussions on banks and other financial service providers. When financial service providers have not adequately assessed their risk, implemented a robust training plan, put in place effective internal controls, and regularly held internal audits, they put themselves at serious risk of loss of licenses, significant fines, termination of correspondent banking facilities, stock devaluation, among other financial and reputational risks. The financial sector institutions are critical for economic growth. The effect of noncompliance is to weaken the financial sector and by extension the economy.

The consequences of noncompliance are far-reaching. The inability to trade due to loss of corresponding banking arrangements, the blacklisting that affects the country’s reputation, the inability to attract reputable investors, are among some of the consequences.

Quite apart from the effects on the financial sector, money laundering also affects the legitimate private sector.  The business sector is probably at the highest risk of being undermined by these criminal actors who appear like legitimate businesses while they undermine the legitimate businessman through better pricing.  The launderer funds his business with illicit funds and so has the ability to trade at much better prices and therefore undercuts the legitimate business owner who depends on bank financing which comes at a cost. Illegitimate businesses operate through shell companies or by investing in legitimate companies. In fact, “money laundering proceeds can be used to control whole industries or sectors of the economy of certain countries. This increases the potential for monetary and economic instability due to the misallocation of resources from artificial distortions in asset and commodity prices. It also provides a vehicle for evading taxes, thus depriving the country of revenue.”

According to experts on the subject, ML can have specific negative effects on a country’s economy, in particular on:

1. The country’s money in circulation and money supply, and therefore the integrity of the Central Bank’s management of the money supply. 
2. The country’s economic growth — investors will not be inclined to do business in a country struggling with money laundering issues that could adversely affect their profitability, thus stunting economic growth.
3. Tax revenues — a large chunk of our country’s revenue is generated from taxes, but money launderers do not contribute to these revenues. Thus, the legitimate taxpayer may have to bear an unfair share of the tax burden. 
4. Threat of Sanctions — comprehensive or targeted sanctions could arise from the United States, European Union, United Nations and other governing bodies. These can severely restrict trade and financial transactions, and economic activity. 

When a country is seen as a perfect destination for money laundering, that country can become a haven for money launderers and terrorists or terrorist supporters and enablers. A quote in an article on Dominica News On-Line (DNO) which referenced the US International Narcotics Control Strategy Report (INCSR), Volume Two, dedicated to money laundering, for the year 2018, reads as follows: “the Government of Dominica indicated early on that narcotics and cybercrime are the major sources of illicit funds.” This is probably the most common form of money laundering evident on the island. No surprise as “the country’s geographical location and porous borders (increase the chances) of narcotics trafficking,” the report continues. It has also become evident that scammers, mostly foreign nationals, exploit security deficiencies using automated teller machines in Dominica to skim money from European bank accounts.

Some red flags that attract the launderer are when a) there are limited numbers of predicate crimes (in the legislation) that will permit the jurisdiction to press criminal charges, b) when the law does not adequately address all potential offenders, c) when enforcement of the laws is weak, d) when there is inadequate capacity among regulators to effectively monitor and supervise the AML laws and regulations in the jurisdiction. When this is predominant, the opportunity for corruption increases. 

Conclusion

So, while we may think that our country is immune to some forms of money laundering today, we must consider that the overall effect of money laundering, while perpetrated by a few, can have devastating effects on the entire country, people and the environment. This is truly an instance where Peter may have to pay for Paul. So just a few bad apples can spoil the whole lot. Take a look at this quote from a white paper Five ways to help combat money-laundering: “All it takes is for one bank to falter and fraudsters gain a new portal to launder money. That one bank’s weakness could affect the whole industry, bringing greater regulatory scrutiny down upon all financial institutions”. It is therefore incumbent on all of us to play our role, no matter how small, to ensure that we combat money laundering and terrorist financing, and protect our Caribbean islands from financial, social, economic and reputational risk.

I hope that the series of articles has shed some light on three financial crimes and how they can impact us. Our final article will focus on actions that we can take to combat money laundering and demonstrate that we are serious about this.