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Money laundering is affecting institutions worldwide. According to the United Nations Office on Drugs and Crime (UNODC), it is estimated that 2–5% of the world’s GDP, or $800 billion to $2 trillion, is laundered internationally every year.

The prevalence of this fraudulent act paves the way for terrorist schemes and can even lead to the distortion of markets. In 2020, financial institutions paid $10.4 billion in global fines and penalties related to Know Your Customer (KYC), data privacy, anti-money laundering (AML), and Markets in Financial Instruments Directive (MiFID) regulations.

In light of these risks, additional regulations such as The Anti-Money Laundering Act of 2020 were implemented. However, to successfully prevent more cases, you must know how money laundering works and what the economic consequences are. 

How Does Money Laundering Work?

Money laundering is a technique by criminals to try and hide the ownership and source of their money acquired through illegal means. They will try to convert the proceeds of their crimes into funds with an apparent legitimate origin. If done successfully, the money controlled by criminals gains legitimacy.

Laundering often involves two stages: placement and layering. The launderer introduces the illicit profit into the financial system during placement. In the layering stage, the launderer converts or moves the money in various ways to separate it from its source. A third stage called integration may also happen. This is when the funds are returned to the launderers from what appear to be legitimate sources.

The Economic Consequences of Money Laundering

Money is vital in running a country’s economy, and money laundering’s effects can be severe and extensive if not addressed and prevented. It can impact local and global businesses, disrupting not only the economy but the society as well. So, what does it mean if the money circulating is “dirty?”

1. Unstable money demand

For money launderers, the cash inflow and outflow are simple. Expenditure rates rise due to the country’s unchecked and rapid money flow. However, there may be major increases in exports, imports, foreign payments imbalance, inflation, interest rates, and unemployment rates. The monetary policy will be negatively impacted by these varying demands for money brought on by black money. 

The international aspect of these fraudulent activities impacts the stability of markets, and financial crises in one country can affect others. Whether or not the demand for money is predictable determines how central banks’ monetary policies are impacted. Failure in central banks’ policies might be seen as a result of black money’s influence on money demand. 

2. Loss of government revenue

Money laundering makes it difficult for the government to collect tax revenue from related transactions. The reduction in tax revenue also means an overall reduced government income.

For institutions such as public hospitals that rely on government funds, the government’s loss of revenue can be detrimental. Tax income makes up the largest portion of all public revenue. If the income is low, there is a great chance that public revenue may fall short of public expenditures, possibly resulting in budget deficits.

3. Market distortions

With the supply of goods at prices below the cost of production, the growth of the private sector is hampered. To launder their money, criminals may change once-productive businesses into sterile ones. Ultimately, this makes it challenging for corporations and enterprises to compete, affecting the economy’s productivity.

Furthermore, money laundering can result in erratic shifts in the demand for money and significant volatility in global capital flows and exchange rates. 

4. Unstable financial institutions

Financial institutions that inadvertently participate in money laundering run the danger of having their assets and obligations shift suddenly. The public authority is alerted by the news of money laundering at certain banking institutions, putting them under more scrutiny for their auditing and harming their reputation.

5. Corruption

If illicit funds obtained through criminal activity are made legitimate, they can be used to fuel criminal enterprises. Money laundering has socio-economic repercussions. It transfers economic power from the market, government, and populace to criminals, encouraging crime and corruption. 

Get Protection from Money Laundering 

Money laundering has serious economic, governmental, and financial repercussions. If these schemes are not spotted and addressed properly, they can successfully disrupt a whole country’s system beyond the point of recovery.

In your organization’s case, protection from money laundering also ensures the safety of your company’s resources and clients. Considering the grave economic consequences of money laundering, you need a tight and reinforced AML program to bolster your security infrastructure successfully. If you require experts to curate a solid AML program for you, Q5id’s services can help your firm steer clear of fraud. Inquire about Q5id’s identity and access management solutions and see how they can help you create a robust system. Contact us today!

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