How Fake Money Would Ruin The Kenyan Economy

It is estimated that money launderers scrub as much as $2 trillion (Sh201.5 trillion) or five per cent of the world’s Gross Domestic Product (GDP) every year. On the socio-cultural end of the spectrum, successfully laundering money means that criminal activity actually does pay off.  Here are the effects of money laundering according to Financial Intelligent Unit.

1. Economic distortion

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Money laundering impairs the development of the legitimate private sector through the supply of products priced below production cost, making it difficult for legitimate activities to compete.

Criminals may also turn enterprises, which were initially productive, into sterile ones to launder their funds leading ultimately to a decrease in the overall productivity of the economy.

Furthermore, the laundering of money can also cause unpredictable changes in money demand as well as great volatility in international capital flows and exchange rates.

2. Erosion of the financial sector

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While the financial sector is an essential constituent and component in the financing of the legitimate economy, it can be a low-cost vehicle for criminals wishing to launder their funds.

Consequently, the flows of large sums of laundered funds poured in or out of financial institutions might undermine the stability of financial markets. In addition, money laundering may actually damage the overall reputation of financial institutions involved in the scheming resulting in a loss in trust and goodwill.

3. Social implications

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Money laundering makes crime worthwhile. It allows drug traffickers, smugglers, and other criminals to expand their operations.

This drives up the cost of governance due to the need for increased law enforcement and healthcare expenditures to combat the serious consequences that follow.  It also transfers economic power from the market, government and citizens to criminals.

4. Risks to privatisation

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Money laundering threatens privatisation. Criminal organisations have the financial wherewithal to outbid legitimate purchasers for formerly State-owned enterprises. While privatisation initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals have been able to purchase marinas, resorts, casinos and banks to hide their illicit proceeds and further their crime.

5. Reputation risk

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Confidence in markets and in the signalling role of profits is eroded by money laundering and other financial crimes such as fraud, insider trading and embezzlement. The negative reputation diminishes legitimate global opportunities and sustainable growth while attracting international criminal organisations with undesirable reputations and short-term goals. Once a country’s financial reputation is damaged, reviving it is very difficult and expensive.

6. De-legitimising the private sector

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Money launderers often use front companies, which co-mingle the proceeds of illicit activity with legitimate funds, to hide the ill-gotten gains. In the US, for example, organised crime has used pizza parlours to mask proceeds from heroin trafficking. These front companies have access to substantial illicit funds, allowing them to subsidise front company products and services at levels well below market rates.

7. Losing control of economic policy

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The International Monetary Fund estimates the magnitude of money laundering is between two and five per cent of world GDP, or at least $600,000 million (Sh60.5 trillion). In some emerging market countries, these illicit proceeds may dwarf government budgets, resulting in a loss of control of economic policy.

The sheer magnitude of the accumulated asset base of laundered proceeds can be used to corner markets or even small economies. Money laundering can also adversely affect currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher.

8. Fiscal instability

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Money laundering can increase the threat of monetary instability due to the misallocation of resources from artificial distortions in asset and commodity prices. In short, money laundering and financial crime may result in inexplicable changes in money demand and increased volatility of international capital flows, interest, proceeds, widespread financial fraud, insider trading and embezzlement.

9. Raising government expenditure

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The cost implication of managing this vice for any government is enormous on average; sometimes running into millions of dollars. This is primarily because of the watchdog role, especially from law enforcement, to rein in the perpetrators of illegal trade. Sensitisation campaigns and healthcare expenditures for treatment of drug addicts for example costs a pretty buck.

10. Gives criminals leverage

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Money laundering provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and others to operate and expand their criminal enterprises. Crime has become increasingly international in scope, and the financial aspects of crime have become more complex due to rapid advances in technology and the globalisation of the financial services industry.

It is necessitated by the requirement that criminals disguise the origin of their money to prevent prosecution. Money laundering is critical to the effective operation of virtually every form of transnational and organised crime.

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