https://www.hindustantimes.com/analysis/money-laundering-causes-distortion-in-the-economic-statistics/story-7x8K75aOWUmFx8ss7OLHbO.html

The money laundering industry thrives on the art of trickery. Money launderers make it difficult to detect the origin of illegitimate money. The risks of money laundering go beyond the financial sector and impact the economy in its entirety. It is difficult to assess the exact monetary impact of money laundering activities on a country’s economy. However understanding the direct and indirect impact on law-abiding citizens, various sectors and country, is the first step towards shaping stronger anti money laundering policies.

Law violators spend or invest the illegitimate money not to gain profit but to conceal the source. They are fully capable of investing in a loss-making business. On the contrary, any businessman with legitimate money invests to earn profit. When the products of two types of business models compete in the market, certainly the business with the illegitimate money would survive and flourish but the law-abiding citizen will likely fail. This concept is explained by Gresham’s Law: “bad money drives out the good money”.

Once that money has been legitimised or cleansed, it would not be able to compete in business due to thriving black money in the country. This results in capital flight from the country as the money launderers then move that white money to countries or jurisdictions with stronger anti money laundering laws — because white money can compete with white money only.

Countries having lax anti money laundering laws attract illegitimate money from foreign jurisdictions. Such countries face a high risk of losing their reputation internationally. Financially, these countries may be evaluated and tagged as high risk nations and, therefore, loans to those countries will come at a higher rate of interest. The Financial Action Task Force (FATF) does a mutual evaluation of most countries at regular intervals (India’s mutual evaluation is due in 2020). Countries found with lax anti money laundering law can be put on the list of “Non-cooperative Countries and Territories” (NCCT), leading to international shaming and financial problems for them. Recently, FATF found Pakistan lax in implementing anti money laundering and anti terror financing laws and put it on the grey list of NCCT. Pakistan is facing the music from international financial institutions and has been asked by FATF to improve itself.

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Money laundering also causes distortion in the economic statistics. People tend not to pay tax on all their incomes, resulting in the generation of black money and inadequate assessment of national income and less tax collection. The government requires revenues for development work and therefore the tax liability is transferred from law-breakers to honest taxpayers. This ultimately results in higher taxes.

It is a known fact that international hawala operations is one of the methods of money laundering. It has a major impact on the policy decision making of central banks (like the Reserve Bank of India) of nations. Foreign exchange transactions are monitored as the demand and supply of currency remains the main factor in deciding the exchange rate of any currency. But the central bank can assess demand and supply in the upper world and is not able to assess the same transactions taking place in the grey market.

It has been seen that there is a “spillover effect” of money laundering activities. Criminals first send their ill-gotten wealth for changing the colour to tax havens. Further, they start visiting that country and indulge in criminal activities in that jurisdiction also. Therefore, jurisdictions that do not implement anti money laundering laws are prone to international criminal activities.

Money laundering further causes corruptive penetration of the upper world. With illegitimate money seeping into the system, and the ease with which it can be converted into white money, the chances of government servants becoming corrupt goes up. Middlemen and mafia take hold of the system. The poor citizens suffer while the corrupt and criminals enjoy the fruits of development.

In India, money laundering is also practised through the sale and purchase of real estate. It increases the demand in this sector, resulting in skyrocketing of rates of properties.

These are just some of the impacts of money laundering on the economy of any country. It is a vicious cycle, and hard steps need to be taken to tackle this.

It can be concluded from above facts that money laundering adversely affects the development of the society and is a grave national risk. Adverse impact of money laundering is of immense concern for nations across the globe.

Institutions and governments across the world are committed to eradicate this menace and terminate the practice of money laundering, which is eating away the nation from inside. But we need complete devotion to ensure that the development of the country is not hindered due to vested interests and corrupt elements in the society.