ABSTRACT
In recent years, and especially since the events of
September 11, 2001, World wide efforts to combat money laundering and economic
crimes have assumed heightened importance. Money Laundering and economic crimes
are global problems that not only threatened security, but also compromise the
stability, transparency, and efficiency of financial systems, thus undermining
economic prosperity. The success of a criminal enterprise is based on its
ability to sanitize its ill-gotten gains by moving them through lax or corrupt
national financial system. The laundering allows criminals and terrorist to
operate freely, using their financial gains to expand their criminal pursuits
and fostering illegal activities such as corruption, drug trafficking, arms
trafficking, smuggling and financing of terrorism. Money laundering and
economic crimes can have devastating economic and social consequences for
countries, especially those in the process of development and those with
fragile financial systems. The economy, society and ultimately the security of
countries used as money laundering platforms are all imperiled.
Money laundering and other types of illegal activities
have significant socio-economic development and financial costs. This is true
of illicit activities, which usually compromises growth and development. We
need to access the links between the complexity in grand corruption, money
laundering, corruption in government, the political class, and corruption in
procurement, and the challenges in a country's financial sector. Does it favour
development or discourage it.
CHAPTER ONE
INTRODUCTION
1.1 OVER-VIEW
OF THE STUDY
In the past few years, there
has been an increased awareness in Africa and indeed Nigeria, of the crime of
Money Laundering. This increase in awareness has arisen because of the step-up
in the activities of agencies and governments involved in the monitoring,
prevention and punishment of money launders and their activities. This in turn
increased for two main reasons; first is the realization by the Nigerian
government that money laundering has debilitating consequences on the economy
and society. The second reason is that Nigeria, like other developing
countries, have come under increased pressure by the developed world
particularly after the September 11, 2001 incidence in America, to plug the
holes in her systems that allow money laundering. This increased pressure had
been tied among other things to aids, technical assistance and the channelling
of foreign direct investment.
The Nigerian financial services sector consists of Banks, the Stock Exchange,
the Securities and Exchange Commission, the Insurance companies and the
Discount houses. The challenges in each country's financial sector are unique
depending on the country's conditions. In any economy, the financial system is
the hub of productive activity, as it performs the vital role of financial
intermediation, the primary provider of payment services and the fulcrum of
monetary policy implementation. The author tries to put together the approaches
to address money laundering within our comprehensive governance framework.
These include the main hypothesis which challenges such myths and orthodoxies
about money laundering and economic crimes, the stages of the development and
governance framework. The various types of activity and sources of profits and
funds, which may be legal or illegal. The funds may or may not be channeled
through money laundering transactions. The types of financial transactions and intermediations.
The ultimate impact of the activity, does it favour development or discourage
it?
The illegal and extra legal
activities that generate funds for laundering vary from country to country and
from region to region. Among the legal activities are good governance, legal
business concern, legal financial transactions through bonafide financial
institutions, legitimate consumption, investment and development use of funds.
These activities are pro-development. The illegal activities are drug
trafficking, arms trade, prostitution, corruption in government and in the
political class, corrupt public officials and in procurement, regulatory and
state capture by corporate and banks, insider trading, stock market, X-Rate and
Trade prices manipulation, organized crime, racketeering, extortion and
gambling, transfer pricing and tax evasion, charities and other front
companies.
There are two basic types of
money laundering. The first type occurs through banks and other formal
financial institutions.
It is the
most common type, or at least the most commonly covered in the press. Funds are
placed, layered and integrated. Electronic funds transfer, or e-banking, plays
an important role in money laundering and economic crimes. Growing in
importance is money laundering through non banking financial institutions
(NBFIs) -through real estate transactions, security brokers, derivatives, the
exchange rate market, leasing, insurance companies and others.
The second type of money
laundering occurs through haw alas and other informal financial institutions,
which in some parts of the world play a very important financial role. As the
government enhances enforcement, supervision, and institutional development,
notice should be taken of the substitutes to the formal financial sector. If
the holes represented by those substitute are not plugged, they will grow in
importance.
Laundered money is put to
many uses, among them terrorist activity, where laundered funds supplement
financing received
from legal commercial activities and from state sources. A similar pattern can
be seen in illegal political campaign funding. Funds that may well have been
generated legally go through laundered transactions. When financial activity is
legal it is quite likely to contribute to growth and development. The opposite
is true of illicit activity, which usually compromised growth and development.
Money laundering and other types of illegal activities have significant
socio-economic development and financial costs. In addition, the complex links
among grand corruption, money laundering and economic crime needs to be better
understood. They vary from setting to setting.
The work is divided into five
chapters. Chapter one contains the introduction. In chapter two, we review the
available literature on the subject matter. Chapter three discussed the
methodology of the research as well as management of money laundering and
economic crimes in the Nigerian economy and the effects in the financial
services sector. Chapter four contains
the analysis of new methods to launder money and illicit financial flows, their
effects on financial institutions and the economy of the host country. Chapter
five contains the summary findings, conclusion and recommendations.
Nigeria finds herself at the
verge of being sanctioned by the Financial Action Task Force (FATF) for lack of
seriousness in the fight against money laundering. The truth is that money
laundering is injurious to the global economy and the damage it does to the
economy can easily spread to other economies. Besides, money laundering is
capable of undermining the efficacy of a country's monetary policy through
arbitrary changes in money supply and distortion of resource allocation in the
economy. The enormity of the resources involved in money laundering calls for
serious concern. Armed with the purchasing power acquired through illegal
activities, the money launderers are capable of penetrating perceived obstacles
or hurdles in an effort to hijack economic, social and political power. They
mobilize their ill-gotten wealth to penetrate both the law enforcement and
judicial systems with incredible ease. They have access to the most advanced
technological equipment in perpetrating their nefarious activities.
Such activities undermine public confidence in the judicial system and this in
turn projects a negative image of the country to the outside world-a
disincentive to prospective foreign investors.
There is no doubt that money
laundering activities can corrupt parts of the financial system and undermine
governance of the banks. If bank managers are corrupted by the sizeable sums
involved in money laundering, unethical behaviour can spread and that can
create risks for the safety and soundness of the banks in general and indeed
the economy.
The main objectives of this
study is to appraise the economic costs of criminal abuse of financial systems,
particularly money laundering and economic crimes in the financial services
industry. The practical means of sustaining economic development and financial
market integrity in the face of such threats. What are the current challenges
for regulators.
What is the appropriate
institutional structure for Nigeria in implementing an effective program to
fight money laundering and economic crimes.
1
There is a strong relationship
between money laundering and economic crimes.
2.
There is no relationship between
money laundering and economic crimes.
3.
Laundered money is put to many
uses.
4.
Laundered money is not put to many
uses.
5.
Legal financial activity is quite
likely to contribute to growth and development.
6.
Legal financial activity is not
likely to contribute to growth and development.
7.
The country needs assistance from
International Organizations to fight money laundering and economic crimes.
8.
The country does not need
assistance from International organization to fight money laundering and
economic crimes.
After the September 11, 2001,
attack on the world Trade Centre, United States of America, the global efforts
at surveillance increased, with the financial Action Task Force (FATF) setting
guidelines for identification, monitoring and tracking anti-money laundering
activities. The FATF and the United States Department of Treasury's financial
crimes Enforcement Network (FINCEN) came up with detailed strategies for
addressing the menace.
Based on these facts, the
author provided a broad definition of money laundering and X-rayed the numerous
manifestations and verifications of the phenomenon. The existing legislations
and other legal instruments that relate to financial crimes in general and
money laundering in particular in Nigeria. He also identified the major
institutions whose activities have a direct bearing on the phenomenon of money
laundering as banks, insurance companies, discount houses and savings and loans
syndicates, the securities and exchange commission and the stock
exchange. Similarly, the author identified the police, the Nigerian Drug Law
Enforcement Agency (NDLEA), the judiciary and the Economic and Financial Crime
Commission (EFCC) as the major agencies and instruments for the enforcement of
anti-money laundering laws and initiatives.
Almost any business
organizations is susceptible to money laundering but financial services
industry is most vulnerable for obvious reasons. Due to the fact that the
soundness and confidence of the financial system as a whole could be seriously
jeopardized if perceived to be laundering criminal proceeds, the extent of
risks faced by it can only be imagined. Financial institutions in general and
banks in particular are thus the focal point for anti-money laundering
initiatives. Individual financial institutions are often at risk when they
intentionally or non-intentionally launder money. Financial institutions
implicated in money laundering are most likely to face costs associated with
the subsequent loss of business, legal costs and lack of confidence. In the US
and EU, the legal onus of
reporting suspicious transactions is placed on banks' Directors. Flouting this
not only lead to the right of take-over of the affected institutions operations
by the US authorities but also imprisonment of Directors and imposition of
fines on the institutions. E-money transactions literally could be carried out
anywhere in the world as Cyber Systems offering instant onerous transfer of
funds over a network that is not subject to any jurisdictional restrictions. In
effect, with the aid of just a personal computer, the three basic traditional
steps of money laundering, i.e., placement, layering and integration can be
completed at an incredible speed.
1.6 SCOPE AND LIMITATIONS OF THE STUDY.
The study of the effects of
economic crimes and money laundering in the financial services sector Nigeria
is an attempt to analyze the new methods to launder money and their effects on
a country's economy. We have, however, chosen Nigeria for our analysis. All
references therefore, relate to Nigeria and some efforts of the board of the
World Bank and
International Monetary funds (IMF). Relevant data from the Central Bank of
Nigeria, the World Bank and IMF Global Dialogue series will be used for
comparative analysis where necessary.
In the course of this study
.practical constraints that limited its scope and analysis included:
a)
Time constraints: The time limit
allowed for this study constrained to the extent that collection of data from
Central Bank of Nigeria, NDLEA & EFCC, especially in Lagos and Abuja was on
appointment basis which would last one to two months for each appointment.
b)
Financial constraints: This study
was bank rolled from only the wage earnings of the researcher which consequently
constrained the researcher's ability to run trial analysis to improve on the
significance of models.
C} Paucity of Research Materials: Books,
reports were consulted and discussions on the subject matter gathered together
from relatively old materials.
To
ensure that this study was not marred by the above mentioned
problems, the following were put in place to allow for
a detailed and thorough
study:
a} A lot
more time out of the researchers employment hours were devoted to this work to
complement the six-hour requirement.
b} The
researcher had to look out for cheaper out fit to run the analysis and the use
of official computer to typeset this thesis.
The major limitations to this
study is the unavailability and near absence of the necessary data to back up
the claims of the author. This is majorly due to the fact that the Nigerian
economy is cash transactions based which makes it difficult to keep tracks of
dubious data and transactions. Cash transactions enable fraudsters and money
launderers to erect a parallel cash economy independent of the official
recognized financial system. Closely related to this is the lack of adequate information
technology infrastructure in the country. These almost
hampered and made data collection difficult.
MONEY LAUNDERING: Simply
defined, money laundering implies hiding, moving and investing the
proceeds of criminals' conducts.
Rigorously defined - Money
laundering generally involves a series of multiple transactions used to
deceive government authorities as to the origin, existence, application of
illicit sources of income and the eventual processing of such income to give it
a Tog of legitimacy. Financial Action Task Force (FATF) on money laundering
defines money laundering as "The Conversion or transfer of property
knowing that such property is derived from a criminal offence for the purposes
of concealing or disguising the illicit origin of the property or assisting any
person who is involved in the commission of such an offence or offences to
evade the legal consequences of their action.
The
concealment or disguise of the true nature, sources, location, disposition,
involvement, rights with respect to or ownership of property knowing that such
property is derived from a criminal offence. The acquisition, possession or use
of property at the time of receipt that such property was derived from a
criminal offence from an act of participation in such offence.
PLACEMENT: This
is the stage where the bulk cash is disposed off in such ways as to
avoid detection by law enforcement agents and government officials. The
proceeds at this stage enter the financial system with small amounts being
placed in several accounts to avoid detection. Instruments such as travelers'
cheques, drafts, etc can also be bought and in some cases single premium life
assurance policy.
LAYERING: This
is a situation in which series of transactions are designed to distance
the money from the initial criminal activity. It may involve multiple
transactions, multiple transfers,
purchases and sales of stocks and shares. Layering entails conducting series of
financial transactions which in their frequency, volume and complexity resemble
legitimate transactions. This is done to distort the appearance and origin of
the initial cash lodgments.
INTEGRATING :- Integration
allows money to be used as though legally earned. This may involve sale
of property purchased with criminal proceeds, securing credit facilities
through criminally funded asset and even redemption of life policy. The funds
at this stage appear to be derived from a clear honest and legitimate
livelihood.
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