Euro notes with different value hanging on a line for drying
IMPACT OF MONEY LAUNDERING ON FINANCIAL MARKET
Money laundering is the process of obscuring the originals of illegally-obtained cash, so that it appears to be legitimate. Also known as smurfing or structuring, it is considered to be the conversion or transfer of proceeds from crime, disguising or concealing it and integrating it into the legitimate financial institution so it cannot be traced.
Financial Market on the other hand simply refers to any marketplace where financial assets or securities are traded including the stock market, bond, forex, derivative market, etc. For long term finance it is known as capital market and money market for short term finance. The financial market of a country helps to finance the economy of that country.
From the above definition of what money laundering and financial market is, we see that the activities of one (i.e if money laundering is dominant in a country) affects the other (financial market) and the policies of the financial institutions can prevent or reduce activities of money laundering.
How is Money Laundered?
Money laundering involves three steps: Placement, Layering and Integration.
- The first is introducing money into the financial system by means of placement through deposits or wire transfers
- Then carrying out financial transactions to conceal the illegal source of the cash
- And finally acquiring wealth generated from the transaction of the illegal funds.
In addition, criminals manipulate financial the financial systems. They launder through currency exchange houses, stock brokers, insurance, construction and trading companies, etc. this is because they invest in existing financial systems and operations.
Money Laundering’s Impact on the Financial Market of a Country
Money laundering is generally unaccepted that is why it is done hideously and this act has potentially devastating economic impacts especially as it concerns the economy of a nation. Impacts such as:
- Economic Instability: Those who launder money are not interested in profit generation from their investment but rather in protecting their illegally obtained cash so it cannot be traced. In some countries, for instance, industries like hospitality and construction have been invested in not because of actual demand but because of the short term interest of money launderers. These money launderers when no longer interested abandon the business causing these sectors to face economic losses.
- Also, sometimes these money launders invest in that are not economically beneficial at that time but just to quickly cover up, they go ahead thus, making economic growth suffer.
- It can also have adverse effect on currencies and interest rates as launderers reinvest funds where their tracks can be covered and not really where the interest return rates are higher.
- Loss of Integrity: Money laundering can erode the integrity of a nation’s financial institution. Confidence in the financial market of a nation can go down as financial crimes and activities such as laundering, embezzlement and financial fraud can diminish legitimate global opportunities and growth while attracting international criminal organizations thereby resulting in diminished economic growth.
Money laundering transfers economic power from the market, government, and citizens to criminals. If the integrity of a country’s financial market is eroded, reviving it will be difficult and so to total avoid this, the government should ensure proper anti money laundering controls.