Money Laundering and Tax havens

There is increasing trend in the use of money laundering and abusive tax havens in the global markets. These activities have been identified to contribute to many negative social and economic consequences. Regulations are required to ensure the global economies are protected against the activities which cost great losses to the countries affected. Legislators and accounting professional bodies have been required to establish better systems of regulating the financial and economic systems to prevent these activities. The paper focuses its attention on money laundering and tax havens.

It establishes the regulatory measures which have been put in place and the possible solutions to the problems facing the global communities. Factors cause money laundering and abusive tax haven activity Money laundering is defined by the United Nation (2005, pg. 1) “as the process by which a person conceals or disguises the identity or the origin of illegally obtained proceeds so that they appear to have originated from legitimate sources. ” The globalization of financial markets has provided loopholes for criminals to use technology to conceal the source of illegal money acquired through illegitimate activities.

The criminals use a variety of techniques to hide the original sources of funds by the use of, for example, corporate vehicles, transferring money from one country to another (United Nation 2005). Money laundering hinders economic growth and development of the international economies. It also hinders the establishment of freedom and competition in the global markets. The activities cause instability of the interest rates and the financial exchange rates and has been identified to contribute to inflation in many international markets.

Unfair competition in the markets where the criminals operate is experienced and this may cause a crisis in the countries involved in the international trade. The demand for money increases when money laundering activities prevail in the country. In addition, the market transactions are distorted and the entire economy may collapse if control measures are not put in place. Small and developing countries are more susceptible to activities of money laundering. The criminal organizations have economic power which enables them gain more advantage over small countries (United Nation 2005).

The use of tax havens has been in existence for a long period of time. The Internal Revenue Service (IRS) has been concerned about the increase in cases of tax havens in the U. S. substantial resources have been used by IRS to identify the people conducting the criminal tax practices to avoid and evade tax in U. S. The existence of foreign banks has increased the tax havens. The existence of poorly developed tax systems encourages the practice of tax havens. Criminals avoid operating tax havens activities in countries with developed tax systems (United Nation 2005).

Tax havens are categorized into two: those which are motivated by the tax systems and those which are not. Gordon (2002, pg. 6) is of the opinion that “one of most common tax motivated but legal uses of a tax haven subsidiary is to shift United States source income to foreign source income to increase the amount of foreign taxes paid by a United States taxpayer that can be credited against, and thus reduce, United States taxes otherwise payable by the taxpayer. ” Example of tax havens are the Shell banks founded in St. Vincent which have been used by criminals to defraud banks in US and other businesses.

The international trade has complicated the tax systems in US and criminals can use the loopholes in the systems of tax to evade or avoid taxes (Gordon, 2002). Literature review According to Reuter and Truman (2004, pg. 3) “money laundering is conventionally divided into three phases: placement of funds derived from an illegal activity, layering of those funds by passing them through many institutions and jurisdictions to disguise their origin, and integration of these funds into an economy where they appear to be legitimate. ” There are several objectives of conducting anti-money laundering activities.

Some of these objectives are reduction of criminal activities, preservation of the integrity of the financial systems and to control the activities of terrorists. In addition, the objectives aim at reducing and eradicating corruptions and prevent the occurrence of failed states in the global scene. Various business people, professionals, politicians and other prominent people in the government propagate the money laundering activities. Drug traffickers conceal the original sources of the money they acquire by creating a complicated network of secretive activities and individuals.

These activities are very hard to identify since some government leaders are involved (Reuter & Truman, 2004). Examples of money laundering activities have been categorized into five divisions by Reuter and Truman (2004, pg. 4) “drug trafficking, other ‘blue-collar’ crimes, white-collar crimes, bribery and corruption, and terrorism. ” There are different amounts of money involved in each of the types of money laundering. Different social impacts are experienced by each of the kinds of practices. The policies created by the law makers may have different impacts on the different categories of money laundering activities.

The money laundering activities in a country costs a lot of loss to the economy. The gross domestic product of the countries where money laundering has been very active is affected and this can cause failure in many economic activities (Reuter & Truman, 2004). Multinational organizations have a tendency to use tax havens by using weak tax systems in the countries they operate from. For example, Foreign Portfolio Investments (FPI) which involves investment across the borders of U. S. by individuals or by organizations tends to locate their businesses in tax havens to benefit from the weak taxation systems.

The Treasury International Capital (TIC) of the United States provides data which indicates that 21 percent of FPI are based in tax havens. Evaluation of tax evasion practices by individuals is complicated especially when many economic activities are taking place in an economy. The increase in efforts to globalize many economies has complicated the financial systems such that regulating the tax systems becomes very complicated (Dharmpala, 2008; Levin, 2009). The Bank of Credit and Commerce International (BCCI) was involved in money laundering saga in 1991.

The management of the bank was involved in dubious practices which led to the failure of the bank. Many employees lost their jobs while customers lost their bank deposits. The Bank of England is another example of an organization which was involved in money laundering activities. The auditing by the Price-WaterhouseCoopers was not adequate enough and the management of the banks conducted the dubious activities and concealed them. The auditing firms were not effective enough to prevent the occurrence of the activities.

The independence of the auditing firms was compromised and the banks were involved in bad financial practices (Hemraj, 2005). The increase in terrorism activities has been supported by some countries and institutions which fund the terrorists. The September 11, 2001 on the U. S. created a lot of concern about the institutions funding the terrorists. The war against terrorism was initiated by assessing the institutions funding the terrorists. The money laundering institutions were the main supporters of the terrorist and stopping them would create a great success towards fighting terrorism.

Before the occurrence of the September 11 attack many countries had established measures to stop terrorism and money laundering activities. The Financial action Task Force (FATF) had been created to monitor the financial transactions in the global markets and to combat money laundering activities. In addition, the Egmont Group of Financial Intelligence Units (FIUs) was established to review the terrorism financial activities. In 1997 U. S. reported that 30 foreign institutions were supporting the terrorist organizations. Latter in 1998 the federal government seized money and property worth $1. 4 million which belonged to terrorists.

The FATF and the federal government identified the link between the funding of the terrorists and the hawala as well as other value transfer systems which were informal (Reuter & Truman, 2004). The connection between terrorism and political activities hinders the efforts to combat terrorism activities. Some politicians finance the terrorist organizations and use government machinery to conceal the deals. This makes the efforts to conceal the dubious deals more complicated since most politicians are government leaders. The funding of terrorism involves very small amount of money compared to money laundering activities in the past.

To combat small amounts of money may be difficult since the government will spent a lot of money. In addition the deals are concealed to an extent that the perpetrators escape without notice. There is very high level of secrecy in the money laundering and terrorism activities and it is very hard to identify the participants (Reuter & Truman, 2004). Regulatory reforms The United Nations has been in the frontline towards eradicating bad financial practices in the global markets. Through UN the international community has created systems to control and regulate the monetary activities in the global markets.

UN Convention Against Corruption was created to reduce the corrupt financial deals which have become hard for individual countries to combat. The UN has encountered several challenges in its efforts to combat financial crimes due to the complexity of the systems involved in financial crimes. The World Bank has been involved in the fight against corruption and establishing good financial systems in the global economies. These organizations have been actively involved in regulating the financial systems as well as combating money laundering and tax havens in the global markets (Reuter & Truman, 2004).

In U. S. the federal government established the Bank secrecy act in 1970 to prevent money laundering activities in the country. The Act covered domestic deposit institutions but it has been restructured the growth in the international activities taking place in the country. The increase in terrorism has encouraged the government to install several policies to combat the crime. Many institutions are regulated by the Act to enhance good financial practices in the economy.

The establishment of the anti-money laundering Act was criticized by many banking institutions due to the excess control that the government had on the institutions. The banking institutions and their customers felt that they were being inconvenienced by the Act and they proposed its removal. The banks have learned to accommodate the restrictions imposed by the government. The international community has joined efforts to combat money laundering activities. The banking industry has been regulated to a great extent to prevent poor financial activities (Reuter & Truman, 2004).

The increase in money laundering activities by the banking systems requires the establishment of independent banking regulators to avoid the dubious financial practices by these organizations. In Australia the Task Force Wicken by and Operation Gordian has been established to regulate the financial systems and to overlook the activities taking place in the market systems of the country (The Financial Action Task Force 2009). In United States the Operations Capstone and Meltdown has been established to prevent the occurrence of dubious monetary transactions by individuals and organizations (Reuter & Truman, 2004).

The countries operating in the global markets should collaborate to create a system of controlling the financial crimes being done by individuals and institutions in the global scene. The global tax systems should be harmonized to prevent the misuse of the poor tax systems existing in some countries. The developed countries should help the developing countries fight against money laundering activities since some criminal institutions have powerful economic systems compared to those of some small and developing nations.

The international law should be amended to include all crimes being committed in the global markets and to provide the law the power to stop some dubious financial activities (Reuter & Truman, 2004). Reuter and Truman (2004, pg. 8) are of the opinion that “scholars are inclined to emphasize the importance of research, but in the case of money laundering and finding ways to combat it, the need for greater research is particularly acute. ” The systems of law as well as the regulatory measures should be well fabricated to accommodate the changing financial environment.

New technologies are being developed and criminals are coming up with advanced methods of conducting money laundering and misuse of tax havens. Researchers should be engaged on the daily systems of the economy to keep up-to-date records about dealing with the crimes (Reuter & Truman, 2004). Conclusion Criminal financial activities have increased with the increase in globalization. Individuals and organizations which are involved in money laundering activities use illegal systems to gain profits by concealing the origin of the funds.

Money laundering organizations have gained more economic power than the small developing countries by generating profits through their global networks of criminal activities. Tax havens utilize the weaknesses in the tax systems of a country. People may use tax havens to avoid or evade taxes imposed upon them. The increase in globalization activities has increased the dubious financial activities. Most practices of money laundering and the use of tax havens are complicated by the existed of multinational organizations and the global trade.

Individuals and institutions use loopholes in tax systems to defraud the government by avoiding or evading taxes. Terrorism activities have been linked with money laundering activities by various regimes. The attack on the U. S. created awareness about the effectiveness of the money laundering activities as well as the increasing terrorism in the global scene. The global governments should establish better systems of counterchecking the financial data to ensure the activities involved in financial transactions are authentic. Bibliography Levin C 2009, Stop Tax Haven Abuse Act.

International Association of Risk and Compliance Professionals (IARCP). Washington D. C. Reuter, P, & Truman, E, 2004, Chasing Dirty Money: The Fight against Money Laundering, Institute for International Economics, USA The Financial Action Task Force (FATF), FATF Members and Observers, accessed 1/6/2009, <http://www. fatf- gafi. org/document/52/0,3343,en_32250379_32237295_34027188_1_1_1_1,00. html> Hemraj, M, 2005, “The Regulatory Failure: The Saga of BCCI”, Journal of Money Laundering Control, Vol. 8, No. 4; pp. 346-354. Dharmpala, D, 2008, “What problems and opportunities are created by tax havens?

”, Oxford Review of Economic Policy, VOL. 24, No,4, pp. 661-679. Gordon, Richard A. (2002), Tax Havens and Their Use by United States Taxpayers – An Overview, accessed 3/6/2009. <http://books. google. com. au/books? id=qLKd-a7Rse4C&pg=PA94&lpg=PA94&dq=abusive+tax+havens&source=bl&ots=DMSxxvNA_v&sig=0J5fYpwozPYpUNSgfbLpqERlwp4&hl=en&ei=u4wiSriYKZL6kAX8r92PBQ&sa=X&oi=book_result&ct=result&resnum=3#PPP1,M1> United Nation: Office for drugs and Crime, 2005, Model legislation on money laundering and financing of terrorism, accessed 26/5/2009. <http://www. imolin. org/pdf/imolin/ModelLaw-February2007. pdf>