A Gateway for Money Laundering? Financial Liberalisation in Developing and Transitional Economies
| DOI | https://doi.org/10.1108/eb027157 |
| Published date | 01 February 1998 |
| Date | 01 February 1998 |
| Pages | 326-328 |
| Author | Shazeeda A. Ali |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 1 No. 4
A Gateway for Money Laundering? Financial
Liberalisation
in
Developing and Transitional
Economies*
Shazeeda A. Ali
In
the
eternal quest
to
launder money, those seek-
ing legitimacy
for
their wealth will transcend
all
frontiers,
be
they technological, geographic
or
indeed legal.
As one
door
is
shut, launderers find
the key
to
new havens
for
their ill-gotten gains.
So
the inevitable backlash
of the
strict anti money-
laundering measures adopted
by the USA and
Western Europe,
for
example,
is
that launderers
have
had to
look
for a
more friendly environment
in which
to
cleanse their funds.
This search could lead
to
countries
in
transition
from
a
state-dominated
to a
market-controlled
economy
and to
developing countries that
are
presently pursuing policies
of
financial liberalisa-
tion
and
deregulation;
and
includes several coun-
tries
in
Central
and
Eastern Europe, Asia, Africa
and
the
Caribbean.
The process
of
liberalisation involves
the
reduc-
tion
of
government control
of the
economy
and
countries pursuing this path
may
institute
one or
even
all of
the following measures:1
— the abolition
of
state controls
on
credit alloca-
tion
and
interest rates;
— the privatisation
of
government owned busines-
ses,
including financial institutions;
— the elimination
of
restrictions
on the
flow
of
capital into and
out of
the country;
— the development
of the
securities
and
money
markets
as
alternative sources
of and
deposi-
tories
for
funds.
Development through investment
is the
objective
of liberalisation
but the
unfortunate failure
of
some governments
to
install
the
supporting mone-
tary
and
legal infrastructure
in
tandem with these
changes could expose their economy
to
'free flow-
ing' illicit wealth.
CONSEQUENCES OF HASTY
LIBERALISATION
Uncontrolled
or
'runaway inflation' could leave
the domestic population incapable
of
investing
in
the new capital markets. Foreign sources
of
financ-
ing are then targeted, often capturing criminal pro-
ceeds.2
So
instead
of
serving
as
bastions
for
local
savings, emerging financial institutions become
mere reservoirs
for
dirty money generated abroad.
The privatisation
of
government owned enter-
prises with inadequate safeguards
for
screening
purchasers presents another golden opportunity
for
launderers. After
all,
ownership
of a
bank
is
undoubtedly
'the
ultimate laundering machine'!
Perhaps
the
most chilling example
of
infiltration
of
criminals into
the
banking industry
is
Russia,
where increasingly powerful organised criminal
groups have acquired control
of
several hundred
of
the country's banks; openly using violence
and
corruption
as
aids
to
acquisition.3
In
a
deregulated economy individuals have
greater discretionary powers
in the
decision-
making process, hence there
is
more scope
for
corruption
to
permeate
all
levels
of
state bureauc-
racy;4
but
corruption also represents
an
insiduous
threat
to the
private sector
as
successful money
laundering depends
on the
complicity
of
those
in
the financial services industry.5
Income from corruption
in
turn gives rise
to
indigenous wealth requiring laundering.6 Such
'hot' money may
be
rinsed locally first
but it
even-
tually flows
out to
foreign financial systems,
thereby adding
to
that great peril
of
emerging
economies: capital flight. Using another example
from Russia
the
flight
of
capital representing
the
proceeds
of
corruption
and tax
evasion
are
esti-
mated
at a
staggering $2bn every month.7 Capital
flight
is
indeed aggravated
by low
confidence
in a
financial system,
and
such confidence would
be
*This article
is
based
on a
paper presented
by the
author
at the
15th Annual Cambridge International Symposium
on
Economic Crime 14th-20th
September,
1997.
Page 326
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