How Money Laundering affects Economy and why it Needs to be Prevented

In our previous post “Money Laundering is still a growing issue in Canada”, we discussed what money laundering is and how, despite the efforts to battle it, it is still an ever growing problem.

But why, one might ask, is it such a big problem? What bad can it possibly cause if money is laundered by means of continuous transfers through different countries? And more specifically, what exactly are the negative effects of money laundering on various sectors of the economy?

To answer this question is not an easy task.

Having reviewed various sources of information, we can now offer answers to these and other questions in an attempt to help you understand the potential severity of the whole money laundering problem in Canada.

The negative effects of money laundering on economy are hard to put into numbers. However, it is clear that such activities damage not only the financial institutions (which damage is direct), but also country’s productivity in its various economic sectors, such as real sector, international trade sector and capital flows, among others (as indirect damage).

How is Financial Sector Affected?

Financial sector includes financial institutions such as banks, non-banks financial institutions, such as private lenders, and equity markets. These institutions are important because they represent the concentration of capital resources for the country and their allocation by means of investments which in turn generate self-sustainable economic development.

The effect on financial sector is rather indirect. When money laundering takes place in a financial institution, this most likely means that an employee is involved, either unknowingly or knowingly, and the latter would mean that the affected financial institution is prone to corruption from within, which damages the institution itself. Once money laundering happens in a financial institution, and it becomes known to its customers, customer trust is damaged as the perceived risk grows and the institution is now viewed as corrupted. Once customer trust is gone, the financial institution becomes victim of its own reputation and its whole purpose for existence is shaken because it becomes unable to effectively collect and invest capital resources.

How is Real Sector Affected?

The Real sector deals with things other than those in financial sector. Things like real estate, goods such as automobiles, arts and anything else that can be called “goods” fall into this sector of the economy.

It is often the case when money is laundered through the real sector of the economy, and most of the time the real estate channel is utilized. When real estate is purchased with laundered funds, it creates artificial demand, which can falsely trigger supply and thus saturate the real estate market. Further, real estate value suffers as a result of money laundering because its prices are usually artificially determined and are below the fair market value.

How is External Sector Affected?

The External Sector holds in itself things like trade (imports and exports) and international capital flows. These become affected when proceeds from an illegal activity are used to purchase imported luxury goods with the intention to launder funds. When imports are purchased with these funds, economy suffers because no fair economic activity is generated: employment is not created and competition is not supported due to usually artificially set prices for the purpose of laundering, etc. Such activities, therefore, can depress domestic prices, damage natural competition between domestic and international companies, and reduce profitability of domestic companies.

Money laundering is an activity that potentially has a lot of negative effects on most countries in the world. But it can and should be prevented. Canada has “Know Your Client” regulations that dictate that financial institutions and law firms must verify identity of their potential clients before accepting them or on existing clients before proceeding with certain financial activities at clients’ requests.

ESC makes becoming compliant with the “Know Your Client” regulations easy. We will help your firm or organization obtain the necessary identification documents on your clients or potential clients. Our services are fast and secure and are done either online or by directly contacting our customer service team:

Toll free number: 1.800.668.8208  
Office telephone number : 416.595.7177
Fax: 416.595.1268
Email: searchandreg@eservicecorp.ca

Visit our website for more information.

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