The views expressed in this paper are strictly personal and not official Fund position. The author benefitted a lot from conversations with the Managing Director of the IMF, Mr. Michel Camdessus. I owe to him the idea behind the proposal outlined in Section V. I also benefitted from the assistance of Mr. David Nellor on an earlier draft. An earlier version of this paper was presented at the “International Conference on Preventing and Controlling Money Laundering and the Use of the Proceeds of Crime: A Global Approach,” organized by the International and Professional Advisory Council of the United Nations Crime Prevention and Criminal Justice Program (ISPAC) in cooperation with the Italian government and under the auspices of the Crime Prevention and Criminal Justice Branch of the United Nations Office in Vienna. The conference took place at Courmayer Mont Blanc, Italy from June 17-21, 1994 and was attended by representatives of 56 countries. This earlier version, together with several other papers presented at the conference, will be published in Responding to Money Laundering: An International Perspective, edited by Ernesto Savona (UK: Hardwood Publishers, 1996).
During the deliberations leading to the North American Free Trade Association (NAFTA) among Canada, Mexico and the United States, some opponents to the agreement called attention to this factor especially in relation to the drug trade. Some newspaper articles have attributed to NAFTA the growing importance of Mexico in the drug trade.
The FATF was set up following the 1989 Paris meeting of the G-7. The FATF has developed recommendations related to financial transactions (deposit in cash, banking secrecy, etc.) that member countries are advised to follow.
Especially bribes related to large government projects.
There is thus a kind of life-cycle character to these “incomes”. Their earning is more concentrated in time than the consumption based on them.
The golden rule of investing, that it is better not to put all of one’s eggs into one basket, applies also to money laundering.
The peasants who produce the coca leaves used to produce cocaine generally spend the money they receive. They have no need to launder their earnings. This may apply also to the “foot soldiers” who distribute the drugs in the streets.
As a supporting bit of evidence, on May 9, 1996, an article by Robert Graham in the Financial Times (page 3) reports that “anti-mafia investigators in Sicily … froze U.S. $640 million of assets in a crackdown on suspected laundered drug money.” Some of the captured shipments to the United States have had street values of hundreds of millions of U.S. dollars.
See for example, William C. Gilmore, Dirty Money, The Evolution of Money Laundering Counter-Measures (Council of Europe Press: 1994).
The measurement problems extend beyond the lack of statistics. They cover also conceptual questions such as when money that has been laundered in the past stops being considered “laundered”.
See Chapter XI (pp. 89-95) of the Report on the Measurement of International Capital Flows (IMF, September 1992).
Recently some small countries have almost advertized their willingness to accept laundered money.
International money laundering on a large scale requires a technical preparation and a sophistication that relatively few individuals have.
With increasing frequency, cases have been discovered in which employees of legitimate institutions such as banks, foreign exchange offices, investment houses and real estate agents have lent their services to money launderers in exchange for large payments.
As of now, most countries are still not members of the Financial Action Task Force. Furthermore, not all the countries that are members have equally effective controls. For example, many countries still do not require the reporting of large cash transactions.
It has been reported that some banks in these countries are in the hands of criminal groups; thus, they facilitate the process of money laundering.
The professionals, when engage in money laundering activities, are likely to be well informed about these controls.
For example, a large proportion of the assets controlled by the Colombian drug lords is likely to be invested outside of Colombia and a large proportion of the assets controlled by Russian criminal elements is invested outside Russia.
Some reports have indicated that the privatization of public enterprises has attracted some of the money to be laundered.
The same conclusion has often been reached for some regions such as Sicily.
These transactions are normally conducted with the use of cash. Thus they lead to an increase in the demand for dollar bills.
As a report by the United States General Accounting Office has put it: “Smuggling currency out of the country is relatively easy.” See Money Laundering, U.S. Efforts to Fight It Are Threatened by Currency Smuggling (March 1994), p. 3. This report outlines the efforts by the U.S. government to control currency smuggling. However, these efforts are unlikely to be very successful. The use of dollar bills in these transactions has led to greater demand for large denomination bills because they are easier to carry.
See Richard Porter, “Foreign Holdings of U.S. Currency,” in International Economic Insights, November/December 1993. See also Vito Tanzi, “A Second (and More Skeptical) Look at the Underground Economy in the United States” in The Underground Economy in the United States and Abroad, Vito Tanzi, editor (Lexington, Massachusetts: Lexington Books, 1982), pp. 103-118.
The experience with the Bank of Credit and Commerce International (BCCI) raised some questions about the effectiveness of the supervisory role of central banks.
This may have already happened in some countries.
I owe to Mr. Camdessus the basic idea outlined in this section. However, some details have been added with which he may not necessarily be in agreement.
For details on money laundering counter-measures, see William Gilmore, Dirty Money.
In a Pigouvian world, this negative externality would justify a punitive tax on the country that generates it.
For similar ideas related to the tax area, see Vito Tanzi, Taxation In An Integrating World (Washington, D.C.: The Brookings Institution, 1995).
See Gary Becker, “Crime and Punishment: An Economic Approach,” Journal of Political Economy, Vol. 76, No. 2, 1968, pp. 169-217.