Where does a nation’s wealth go? Evidence from a third world country
| Pages | 426-476 |
| DOI | https://doi.org/10.1108/JMLC-01-2017-0005 |
| Date | 02 July 2018 |
| Published date | 02 July 2018 |
| Author | Wahaj Ahmed Khan,Syed Tehseen Jawaid,Imtiaz Arif |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
Where does a nation’s wealth
go? Evidence from a third
world country
Wahaj Ahmed Khan
Branch Operations, Bank Al Habib Ltd, Karachi, Pakistan
Syed Tehseen Jawaid
Applied Economics Research Centre, University of Karachi, Karachi, Pakistan, and
Imtiaz Arif
IQRA University, Gulshan, Pakistan
Abstract
Purpose –This paper aims to determine the preferabledestinations of money laundered from Pakistan by
using the Walker’sGravity Model and to estimate the amountof money laundered through 156 countries.The
research aims to facilitate policymakers and regulators to provide more efficient guidelines to counter the
problem of moneylaundering.
Design/methodology/approach –This study uses a descriptiveand quantitative approach. This study
uses the Walker’s Gravity Model updated by Unger et al. (2006)to measure money laundering in Pakistan;
Walker’sGravity Model was first developed by John Walker in 1994.
Findings –The results indicatethat Pakistani money launderers preferred countries having large financial
sectors and politicalstability to hide their illegal money. In addition, the study estimatesthe amount of money
launderedand shows that Pakistan has lost bulk of funds.
Research limitations/implications –The major limitation is the non-availability of reliable data as the
activity is hidden. Reliable data is either not available officially or scattered. Available data only reflect aspects that
are reported. Non-availability of statistics for all years and countries resultedin the omission of some countries.
Practical implications –The study helps legislators and policymakers, including the Ministry of Finance,
State Bank of Pakistan, Securities and Exchange Commission Pakistan, and other regulators, including law
enforcement agencies and financial institutions, in formulating effective policies, regulations and internal control.
Originality/value –The study helps to identifythe need of estimating the amount of money launderedto
fight the problem effectively. Very few efforts have made to determine the size and the amount of money
laundered, and this is the first study to determine the amount of money flowing out of Pakistan with the
purpose of laundering.
Keywords Money laundering, Illegal money, Money laundered, Walker’s Gravity Model
Paper type Research paper
1. Introduction
Developing countries lose US$2.02tn each year because of the illicit outflow of ill-gotten
funds generated from organizedcrimes, such as extortion, kidnaping, frauds, landgrabbing,
The author is grateful to Dr Joras Ferwarda, Assistant Professor at Utrecht University School of
Economics in the Netherlands, for his time and help. His guidance on the research approach enabled
the author to proceed further and accomplish this research. The author is also thankful to the
Department of Management Sciences, Iqra University, for their support and cooperation.
JMLC
21,3
426
Journalof Money Laundering
Control
Vol.21 No. 3, 2018
pp. 426-476
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-01-2017-0005
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
drug trafficking, human trafficking, smuggling, corruption and tax evasion (ONE, 2014).
Money laundering helps crime to be meaningful in terms of cost and benefits and gives the
control of financial and economic policies in the hands of criminals. A trouble-free money
laundering process encouragescriminals to conduct more crime as the offense they perform
will pay them off witha good sum of profit in a less troublesome manner.
Money laundering erodes the financial sector in such a way that financial institutions
highly rely on ill-gotten funds, and as the funds return back to their source destination,
financial institutions cannot withstand such liquidity shortfall, leading to disintegration[1].
In present-day world, no country or financial institution can work in isolation; therefore, a
financial institution associated with money laundering activities will and definitely attract
repercussions. Money laundering grinds down the real sector of a country by allocating
resources to less profitable and productive sectors of the economy. The phenomenon of
money laundering also distorts economic development and undermines legitimate financial
sector as it results in policy blunders[2]. There is instability in exchange and interest rates
because of unexpected cross-border transfers of funds. The risk of monetary unsteadiness
due to flawed asset composition has negative consequences on tax collection and public
expenditure. One of most severe microeconomic impacts is on the legitimate private sector
as upfront organizations using illegal funds flop the legitimate private sector because such
legal entities cannot surviveowing to competition[3].
Recently reported details from the Panama Papers also revealed the magnitude of illicit
flow of funds generated from wrong doings such as corruption, kick bags, tax-evaded
revenues and other organized crimes. According to leaks, around 214,000 offshore entities
are established in 21 jurisdictions spreading over from Nevada to Hong Kong and British
Virgin Islands[4]. Panama Papers exposed world’s fourth largest services provider, a
Panamanian law firm Mossack Fonseca, which provides different services including those
for incorporate offshore companies[5]. Not all clients of the Panama-based firm are
associated with illegal activities, but many of them have linkswith illicit money generation.
According to The Guardian, Panama Papers reveal that the firm helped criminals in
laundering proceeds generated from illegal and criminal activities, including Brink’s-Mat
gold bullions robbery in 1983 and a banned arms dealer identified as one of cronies of the
Zimbabwean President Robert Mugabe. The firm even aided Iranian oil firms, despite
international sanctions.Around 128 politicians, including 12 world leaders, are identified as
being associated with offshore entities. These politicians belong to developing or third-
world countries, and, in general, already have an image of corrupt regime, for example,
Pakistan, Zimbabwe, China, Russia and other countries from Africa and Central Asia.
Panama Papers highlight the importance of the identification of destinations preferred by
money launderers and others associated with the incorporation of offshore entities to avoid
tax payments in their homeland. After the revelation by International Consortium of
Investigative Journalists, the importance of the identification of offshore money laundering
destinations and the estimation of the amount being associated with the activities has
increased as these offshoreentities help numerous politicians, businessmen andcriminals in
hiding their wealth from regulators, tax authorities, law enforcement agencies and
intergovernmental organizations. Almost in all cases, it is yet to be decided whether the
source of funds is genuine or funds are generatedthrough corruption, tax evasion and other
financial crimes.
Panama Papers revealed the names of many Pakistani nationals who acquired services
of Mossack Fonseca for establishing offshore entities, including politicians and their
relatives, businessmen, media house owners and other governmental and judicial officials.
The most highlighted case is of the companies owned by the familymembers of the current
Where does a
nation’s wealth
go?
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Prime Minister Nawaz Sharif.However, it is not the only case to be questioned, as mentioned
by Byren (April, 2016).Saifullah family, with a vast political background,owned majority of
offshore entities. Furthermore, people closely associated with politicians are also named in
Panama leaks. Former and current judicial officials are also named in those leaks[6]. As
mentioned previously, corruptionand tax evasion are nearly state-sponsored in the country.
It is interesting to observe that Osman Saifullah, whose family owns majority of offshore
companies, is a member of the tax reform commission formulated to identify tax leakages
and to increase tax revenue[7]. Panama Papers conform the leakage of already scared
resources of Pakistan through the outflowof funds from Pakistan, and if this situation is not
handled accordingly, it willimpact future foreign investments as potential investors willbe
vary of investing because officialsand stakeholders responsible for better economic and law
and order situations are not placingtheir investments and wealth in their own country. This
will greatly harm the confidenceof foreign investors.
Money laundering is not a new slogan and became crime in 1980[8], but the importance
of money laundering increased after9/11 when countries, including USA, EU and different
intergovernmental organizations increased emphasize on tracking the funds acquired
through illegitimate sources or used in terrorist activities. After 9/11, intergovernmental
organizations such as FinancialAction Task Force (FATF) became more effective in such a
way that their reports and analysis are more highlightedin policy making on the global and
regional levels, as well as the impact on the country level related to trade embargoes, bans
and restrictions[9].
The aforementioned discussion emphasizes why money laundering should be
understood to comprehend the illicit flow of funds out of developing countries. This study
determines the most attractive destinations for criminals to transfer their illegally obtained
funds for the purpose of laundering and the estimationof money laundering.
1.1 Money laundering
Money laundering is not the oldest offense on the planet but certainly the closest; the
practice of covering up of proceedsacquired illegally can be traced back to thirteen century
BC[10]. The term money laundering was derived in 1920 when gangster Al-Capone used
launderettes toconvert his illegally acquired funds to legitimateassets[11].
No particular definition is available for money laundering; however, many countries
subscribe to description given by United Nations Convention Against Illicit Trafficin
Narcotic Drugs and PsychotropicSubstances (1988) (Vienna Convention).
Vienna Convention(1988) defines money laundering as:
The conversion or transfer of property, knowing that such property is derived from any [drug
trafficking] offense or offensesorfromanactofparticipationinsuchoffenseor offenses, for the purp ose
of concealing or disguising the illicit origin of the property or of assisting any person who is involved in
thecommissionofsuchanoffense or offenses to evade the legal consequences of his actions.
The concealment or disguise of the true nature, source, location, disposition, movement, rights
with respect to, or ownership of property, knowing that such property is derived from an offense
or offenses or from an act of participation in such an offense or offenses.
The acquisition, possession or use of property, knowing at the time of receipt that such property
was derived from an offense or offenses or from an act of Participation in such offense or
offenses[12].
FATF, which is recognized as an international standard setter in anti money laundering,
defines the same as: “The processing of criminal proceeds to disguise their illegal origin in
order to ‘legitimize’theill-gotten gains of crime”[13].
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