Banking is a simple process in which money from depositors are collected and are loaned out to the ones who need money to start a business, to build a house or to fund their child’s education and for so many other reasons.
When such a simple process happens in a large scale (indeed a very large scale), the whole process becomes very much complicated that unravelling its knots could be a daunting task to understand the nitty-gritties.
But one thing is for sure. The basic element in which the whole process of banking hinges on is trust. People trust the banking authorities and the government that regulates the banking industry with their money and the fairness of transactions involved, to make the banking system work seamlessly, which is very much essential for the world economy to be stable.
As the process of banking involves and reaches far beyond transnational boundaries, there are more possibilities of money being inappropriately handled, making the industry murkier in the process of breaking peoples’ trust that has been the very fabric for its formation.
Big mammoth international organizations and institutions have closer ties with the banks worldwide.
We are not going to take a deep dive in the whole mechanism of international banking and finance, as it would be a tedious one, but would try and understand how this mechanism has become more sophisticated and intricate that it could favour the wrong hands disturbing the balance of the society, without a need for much effort.
One such process in which the genuineness of the source of money is disguised during its transaction to make it look more legitimate is money laundering.
Drug trafficking includes a lot of money laundering as the cartels involved deal with stashes of cash that are not possible or extremely difficult to be moved around by distracting the attention of law enforcement officials.
International Monetary Fund estimates that nearly 5% of the world’s total Gross Domestic Product or $1.5 trillion is laundered every year.
The anti-social elements not only just include drug traffickers and religious fundamentalists, but even corrupt politicians as well.
The entire process begins and ends in three stages.
The first stage in which the dirty money is placed by depositing it in bank accounts, is the riskiest of all the stages as a huge amount of money deposited would catch the attention of authorities. Hence, the amount will be deposited in various accounts as a lesser sum of money to avoid getting caught.
The second stage is the layering of the deposited money in which there will be a lot of transactions to and fro between various accounts so that the source becomes hard to be traced.
During this stage, a certain portion of the money will be invested in insurance policies, mutual funds or will be used to purchase expensive items like cars, houses, paintings, etc.
The final stage is the integration process in which the money that entered the financial system as dirty becomes clean and is used for the purpose it meant for.
Colombian peso exchange black market is a typical example in which the Colombian traders who want to sell goods in the US seek the help of black market to bye-pass paying money to the government and make the whole transaction much cheaper than when done through a transparent process.
Overseas banking is another way to launder money as many countries follow secretive banking policies protecting the name of the account holder.
Extremist organizations make use of money laundering processes to fund and carry out their operations. In the wake of 9/11, the United States passed the US Patriot Act to stifle the finances of extremist organizations, which is one among many other reasons.
In Northern Ireland, legitimate businesses like pubs, taxi services and hotels are used to launder money and fund political activities by paramilitary groups. Iran tops the list of countries that run high risks of money laundering as per the Annual Index of Basel Institute of Governance.
There are nearly 70,000 wired transactions that happen every day, and hence it has become a daunting task to monitor every transaction for traces of dirty money. Moreover, it needs international co-operation to prevent this process of cleaning money, as different countries have different policies towards money laundering.
As the network of international financial transactions has grown with technology, it is simple for criminals to look for another country to launder money if the policies are stringent in their home country.
Financial Action Task Force (FATF) is an international institution aimed at preventing money laundering with 34 member states and two international organizations, the Gulf Co-operation Council and the European Union.
As of now, the IMF, the World Bank and the UN are observer organizations. FATF has laid out forty recommendations to the banking institutions including stringent background checks, internal task force to inquire clues and many other special recommendations to avoid financing of terror activities.
Despite the stringent measures, it still continues to happen.
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