An Economic Analysis of Money Laundering
| Date | 01 February 1997 |
| Published date | 01 February 1997 |
| DOI | https://doi.org/10.1108/eb027132 |
| Pages | 154-164 |
| Author | Kris Hinterseer |
| Subject Matter | Accounting & finance |
An Economic Analysis of Money Laundering
Kris Hinterseer
Journal of Money Laundering Control — Vol. 1 No. 2
The reader will find a bibliography at the end of
the article which lists some current writing on
money laundering.
INTRODUCTION
In 1984 the world was running a current account
deficit with itself of US$100bn.1 The World Bank,
the International Monetary Fund (IMF), the
Organisation for Economic Co-operation and
Development (OECD), and the US Federal
Reserve have all confirmed this observation. Given
that world trade forms a closed system, the ques-
tion arises of what caused the indicators that
measure this trade to become so inaccurate. The
observation that in the early 1980s the narcotics
trade surpassed the petroleum industry to become
the world's largest business activity by gross turn-
over provides a partial answer. Noting that the
growth in the narcotics trade is merely one aspect
of the unprecedented growth in organised crime
and the illegal economy over the last two decades
leads to a more complete answer. The implication
is that criminal economic activity, which by its
nature seeks to evade capture in statistics, accounts
for a significant portion of global economic activity
missed by standard accounting practices.
Associated with this growth has been an increase
in the demand for money-laundering facilities.
Money laundering links the legal with the illegal
economy by allowing criminal entrepreneurial
profits to be cleaned of any taint and invested
without hindrance in the legal economy. In the
words of Blum:
'It could be argued that money laundering forms
a necessary part in the commission of any crime,
where a pecuniary profit is sought; in other
words there would not be an incentive to
commit a crime unless the perpetrator was sure
that, at some state, it would be possible to enjoy
the financial fruits of
his
crime.'2
This statement takes on added significance when
one notes that, according to the United Nations,
each year US$120bn to US$500bn is laundered in
the offshore financial sector.3 The fundamental
problem posed by money laundering is that it
allows money associated with illegal conduct to co-
exist and intermingle with money associated with
legal activity. If economic development is to occur
free of criminal taint, if countries are serious in
their pledge to fight crime, and if the philosophical
and moral foundations of law and society in terms
of 'just deserts' and preventing injustice are to be
honoured, then the economic and legal challenges
posed by money laundering must be addressed.
The purpose of the following is to identify the
limits of the law in combating money laundering
based on an economic analysis of the phenom-
enon. This analysis is developed in two parts. The
first part defines money laundering and outlines
the associated process in order to identify the chal-
lenge posed by money laundering to the law. The
second develops an economic model to explain
why it occurs and to identify the economic prob-
lems with which the law must grapple.
WHAT IS MONEY LAUNDERING?
In answer to this question, many writers have
posed many definitions. The President's Commis-
sion of Inquiry on Organised Crime in the United
States defined it as a 'process by which one con-
ceals the existence, illegal source, or illegal applica-
tion of income, and then disguises that income to
make it appear legitimate'. The Stewart Royal
Commission of Inquiry into Drug Trafficking in
Australia took a similar approach by defining it as
'any technique which is designed to make dishon-
estly and unlawfully earned money appear to have
been derived from honest and legitimate enter-
prise'.4 Michele Sindona, tax lawyer and financier,
perhaps provided the best insight when he noted
that it is an operation that bridges the gap between
the underworld and the rest of society.5 Drawing
on the pertinent ideas advanced in the literature,
money laundering is defined to refer to a process
used by individuals to prevent the origin and
movement of money from being accurately traced
so that the money can be used in the legal eco-
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