“Money Laundering” has become a liberally-used term post January 8, 2015. ”Money Laundering”, “Terrorism” and “Narcotics” are inter-related. Sri Lanka is a country that had to endure terrorism of an extreme nature. Add narcotics and bootlegging operating outside the mainstream economic activity. It is regrettable to note the lacka daisical attitude demonstrated at a policy-making level. [...]

The Sunday Times Sri Lanka

Effects of money laundering on economic progress


“Money Laundering” has become a liberally-used term post January 8, 2015. ”Money Laundering”, “Terrorism” and “Narcotics” are inter-related. Sri Lanka is a country that had to endure terrorism of an extreme nature. Add narcotics and bootlegging operating outside the mainstream economic activity. It is regrettable to note the lacka daisical attitude demonstrated at a policy-making level.

Global money laundering:
Globally, Money Laundering is estimated to be around US$2.50 trillion: accounts for approximately 2-5 per cent of the global economy. Anti-money laundering is becoming a daunting task given the development of technology.

At the touch of a button millions of currency can be sent beyond borders without an audit trail. Technology that facilitates global monetary transaction so much easy also facilitates money laundering operations. ”Cyber payments” and “E-Money” that helps legitimate commercial transactions also attract those with criminal intent.

Informal Value Transfer  System (IVTS):
Prior to these technologies being introduced, in a primitive world of finance existed the “Informal Value Transfer Systems”. To-date these systems are active and being used by a growing number of people. These underground informal value transfer systems to name a few that are being predominantly used by certain ethnic communities are “Hawala”, “Chop” and Hundi” system.
These are based on trust and money travels to any remote part of the globe.

The very existence of the process in this day and age stands testimony of the process viability.

Local money laundering:
A key player in the Sri Lankan capital market failed in the recent years wiping out the savings put aside for the Golden years. This financial crisis was predicated by an investor who was politically exposed redeeming the “investment” and resulting in a run on the bank. This could have been averted if a proper Anti-Money Laundering (AML) framework was in place and strictly enforced. It is critical that deposit taking institutions have a Know-Your-Client (KYC) review and approval process. KYC as a process is the most important “choke-point” to avert a financial institution inadvertently accepting funds (criminal proceeds) and eventually gets exposed and risk investor money and reputation.

When and if the person is a politically exposed person, then it is imperative that ‘Enhanced Due Diligence’ is done and such accounts subject to risk based monitoring on a regular basis.

“Black Money” and “Dirty Money”:
Circumventing exchange control, tax evasion, bribery and kickbacks fall in the black money category while drug trafficking, fraud, smuggling and ransoms are referred to as dirty money.

What is money laundering?
Money laundering is a process/mechanism to obscure the origins of proceeds of crime. The primary intention is to blur the trail and footprints. Money laundering is linked to a chain of other crimes referred to as “Predicate Offences”. Predicate Offence is an offence that triggers another offence.

Predicate offences cover a wide range of activity from narcotics, smuggling, bribery, tax evasion, capital market trade manipulations to ransoms: This list is endless and interestingly we have them all and more in Sri Lanka.

Money laundering if goes uncontrolled run the risk of contaminating the national financial system and reputation of the market players. Hence, before we attract Wall Street and focus on roadshows to attract investors we must pay serious attention not to attract ‘Money Launderers’ to Sri Lanka.

Unfortunately, what we read in the media is alarming. Sri Lanka is the base for a thriving drug trade: The extension thus paves the way for a thriving Money Laundering operation as well.

Wilful blindness does not negate nor goes to prove the absence of money laundering in Sri Lanka.
Three stages of money laundering:
1. Placement
2. Layering
3. Integrations

Money Laundering, Economy and Capital Market
From an economic and capital market standpoint, the most crucial stage in the three stage process is the Placement stage. Placement stage is the depositing of criminal proceeds (cash) from illegal activities into the legitimate financial system. This stage is further broken down. The more Anti-Money initiatives are introduced the more creative the criminal mind gets. They resort to:
Smurfing – breaking down large deposits to smaller amounts to divert attention and suspicion

  • Co-Mingling – Criminal proceeds mixed up with legitimate deposits and remittances
  • Bribery – Deposit-taking institutions are bribed not to report the deposit of suspicious proceeds
  • Smuggling – Sent to countries that provides a safe haven for illegal proceeds using informal channels

Middle East Worker Remittances:
Among the above four mechanisms, from a Sri Lankan standpoint where we are vulnerable is in the “co-mingling” process. As an economy, we depend on our Middle East worker remittances. Remittance can be taken advantage of by the criminal minds to co-mingle illegal proceeds with legitimate proceeds and subsequently withdraw. Criminal minds can smell the regimes with loose Anti-Money Laundering framework. I am not suggesting that ours is a weak legal framework in terms of monitoring money laundering and countering but we need to exercise extreme caution.

Financial System Reputation:
As a nation if we fail to be pro-active in countering money laundering but focus on attracting FDI and other investors then what we are demonstrating is lack of vision and contingency planning. This will attract investment on the short term but not the real investors on a sustainable long term basis to support the utopian social economy, as the objective of the money launderer is only to clean the money (legitimise, transform and integrate) and withdraw. This operation -a vicious cycle over a period of time – will bring a bad reputation to the financial system and will lead to zero investor on the long term.

Anti-money laundering measures:
Once a proper framework is in place to detect, deter and prosecute, it is essential to take a risk-based proactive approach that will be an effective counter measure.

All deposit-taking financial institutions must have a proper KYC suitability and review process and an Anti-Money Laundering compliance regime. Merely talking about FDI will lead to open the floodgates to illegal proceeds flowing their way to Sri Lanka.
The Anti-money laundering process must involve:

  • Appointment of a Chief Anti-Money Laundering officer
  • Document Anti-Money compliance monitoring process
  • Periodically review / audit the effectiveness of the AML process
  • On-going updates to the policies in place as developments warrants and train the staff
  • Name and shame those found guilty (not committed but even attempted and suspected of Money Laundering)

In order to attract FDI to support the utopian Social Economic policy we must have a work force that is free of substance abuse. We cannot attract new industry and investors with a workforce of “pulverised stuff sniffers”.
Today our workforce is made up of sniffers and not of skilled workers.
We need a complete turnaround. Money laundering is predicated by the narcotics. Once the narcotics supply routes are severed then money laundering will die with it.

(The writer is a Canadian-based, financial advisor.  He could be reached at atupularunajith@gmail.com)

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