All you ever wanted to know about money laundering
(but were afraid to ask)
Stabroek News
March 19, 2004
Money laundering might not be so malevolent a crime as drug smuggling or gunrunning. But it actually poses as much, if not more of a danger, given that it provides an environment for such activities to flourish and can by itself severely distort fragile developing economies.
In the case of Guyana the US State Department in its International Narcotics Control Strategy Report (INCSR) for 2003, stated that the country "is neither an important regional financial centre nor an offshore financial centre, nor does it have any notable offshore business sector. The scale of money laundering, though, is thought to be large given the size of the informal economy, which is estimated to be at least 30 per cent of the size of the formal sector. Money laundering has been linked to trafficking in drugs, firearms and persons, as well as corruption and fraud."
It notes that the Govern-ment of Guyana (GOG) made no arrests or prosecutions for money laundering in 2003.
What is money laundering?
In other words, as the name suggests, dirty money, which can come from any kind of illegal activity, be it drug dealing to tax evasion, is cleaned so as to make it look like it came from legitimate business.
So how do criminals do this?
Have you ever marvelled at the amount of money found by police authorities when when making a single drug bust? A recent one in New York grabbed a total of US$400,000 in cash. That's because drug trafficking and other illegal activities, including people smuggling, organised prostitution and gambling are strictly cash businesses. People do not pay for drugs or illegal guns with cheques or credit cards for obvious reasons. That means huge amounts of cash are generated. Even criminals would prefer to have their money safe in a bank rather than under a mattress or in a hole in the back garden. They also want to move money around, and going to pay for a house in Miami with a suitcase full of cash will more than likely get you held at the airport answering some awkward questions.
This is where money laundering comes in and while a white-collar crime, its effect on an economy such as Guyana's can and most likely has already been very damaging.
Among the areas it can subvert is the banking system. While the economy contracted last year and has barely grown in the last five, the increase in bank deposits has been more reflective of a booming business environment.
From 1998 to December 2003 private sector deposits have gone up by $56.4B to $86.8B, an increase of 53%. At the same time private sector loans that are supposed to generate profits have gone down from $48.8B to $38.5B, a 22% decline.
While banks generally welcome deposits, if these are generated by money laundering, they become a potentially unstable source of funds given that they can be wired overseas at any moment for various purposes. The taint a bank can acquire by accepting dubious funds may hurt their legitimate business. And the cost to legitimate depositors is obvious. A bank with growing deposits and lower loan activity has to lower its interest rates. The excess liquidity caused by all this illegal money in the system has also meant the Bank of Guyana has been issuing more and more treasury bills to mop it up. Banks are snapping these up at rates as low as 3.9% because there are few loan opportunities out there. But many observers feel the prevailing rate in no way reflects the country's financial position.
Other red flags that money laundering is big business in Guyana is the relatively stable exchange rate despite a persistent balance of payments deficit.
The recent drug bust in New York documented an alleged ring, said to have revenues of US$75M per year, which according to NY law enforcement was remitting funds to Guyana to be laundered. To put that in perspective the total value of rice exports in 2003 was only US$47M.
With those quantities of US dollars flowing in it is not surprising the Guyana dollar has only edged lower against the US dollar over the last few years, barely reaching G$200 to US$1.00.
While this may actually help control inflation by keeping the costs of imports down, exports have suffered. And economists would not recommend an exchange rate policy that relies on money laundering to support the local currency.
But perhaps the most distorting aspect is on the private sector. Money launderers target cash-based businesses. An article in the July 2003 Jamaica Gleaner identified areas which are most amenable for them to conduct operations. Remittance services and cambios are how illicit money from overseas can first enter the country. It can be used right away to buy assets such as luxury vehicles and to buy or construct houses for cash. But these are illiquid assets. To clean the money and still have it in liquid cash it has to be washed through a business. The article notes that among the areas favoured are dances and stage shows "where the promoters make all the necessary announcements so that people are aware they are having the show... But the shows are not regulated and as it is a cash event they can use this to introduce large sums of cash into the financial system."
Stores as washing machines
Other favourable areas are automobile dealerships, auto spare parts, jewellers, and hotel operations. In these cases the illegal money is often commingled with the legitimate revenue stream and then deposited into the bank. It can then be used domestically or sent overseas.
Meanwhile retail outlets operating as fronts are akin to big washing machines. A popular technique is to price goods even below their cost, driving legitimate retailers out of business.
That's because ultimately the money launderer is not interested in profits but only in cleaning up his funds by passing it through a front.
One long standing diamond dealer has complained that competition for gems is on the increase, with prices not in line with the principles of the industry, suggesting money launderers may have invaded the sector.
But in all cases a legitimate company will be at a disadvantage because while they will be borrowing money at commercial rates, a money launderer will get his funds much cheaper.
Money laundering can also distort the macro economic picture given that operators prefer to enter areas where they are less likely to be detected rather than make investments based on cost advantages of a particular country. Generally the operations are cash and import-based and require little technical expertise. They can actually drive a legitimate local producer out of business with cheap imports.
What must the banks do?
The Money Laundering Act sets out various guidelines banks must use.
These require financial institutions to put in place systems to determine the true identity of customers and recognise and report "suspicious transactions" to the not yet functional Financial Intelligence Unit (FIU). But the mantra long spoken by regulators to the commercial banks is "Know Your Customer."
This is echoed in a recent article in the Caribbean Account 2003, a magazine of the Caribbean Association of Indigenous Banks. Joan Underwood writes that a decade ago a customer could walk into a bank with a photo ID and open an account. Now the customer needs a passport or driver's licence and birth certificate. They would also have to complete a source of funds declaration if the deposit exceeds US$5000.
The article, written for the industry, notes that many legitimate customers resent the onerous paperwork and it is up to banks to convince them and employees of the importance of co-operation. The article goes further to suggest banks have a responsibility to monitor their employees' accounts for signs of suspicious activity.
The article also notes that St Kitts and Nevis, Grenada and St Vincent and the Grenadines have all made progress in fighting money laundering. In St Kitts the FIU had received 82 suspicious transaction reports with 44 referred to the police. In Grenada the FIU's staff of five employees had received 29 reports as of December 2002.
One local banker in Guyana says potential business customers must be asked what level of revenues they expect to generate. If they are depositing $3M a week and suddenly this shoots up to $10M, this should be a red flag which must be queried.
While the banks have produced their own internal guidelines there are no indications, that these are having any effect. With the advent of the FIU some progress may begin. But the rather awkward question is whether Guyanese authorities have the stomach to really crack down on money laundering given the financial disruption that might ensue.