FINANCE - 16 DEC 2015

Money Laundering Matters II

Money Laundering Matters II
Ministry of External Affairs India

This article is Part II of a Series. Read Part I here

Sambo Dasuki, national security adviser under Goodluck Jonathan, has become the new face of money laundering in Nigeria. In December 2015, along with four others, Dasuki was charged with 19 counts of fraud and money laundering in relation to over ₦13 billion of state funds. While unfortunate, recent revelations of state looting remind Nigerians of an activity that has become part and parcel of public service.

The business of money laundering in Nigeria stretches far beyond looted public reserves and dirty money channelled towards election campaigns. Such stories grip the public consciousness while underplaying the true economic costs imposed by money laundering. The rhetoric around plugging leakages has illustrated the fiscal difficulties imposed by such fraud, but there are a number of other unchecked effects which prove just as harmful to Nigerians, and the wider economy.


Society’s Mind

The psychological effects of money laundering are endemic. As enforcement levels continue to fall below the levels needed for deterrence and the proceeds of crime continue to be paraded brazenly, the sentiment that “crime pays in Nigeria” becomes reinforced. Over time, successful money laundering incentivises public officials, financial practitioners etc to participate, on the assumption that it brings “easy money”. Such reasoning becomes self-perpetuating in society and feeds into even the most trivial transactions, a reality keenly felt by many Nigerians.

The difficulty in the situation is the opportunity cost that arises from money laundering, often most keenly felt by innocent parties. Fraud of this nature deprives those in greatest need of the opportunity to benefit from public services. Consequently, a false sense of success is attached to the practice of laundering, which manifests in low scale operations such as “419” and cybercrime. The main difference between the diverting launderers and local scammers is the scale of their actions.

And yet the problems persist in other ways.

In a nation where the citizenry is already desensitised to underperformance and public inefficiency, the corruption of private sector institutions poses a grave reputational risk to our economic system. Nigeria’s reputation for corruption and money laundering makes our financial markets (private sector) and government initiatives (public sector) a no-go area for many foreign investors. The interconnectedness of global financial markets means foreign investors may shy away from Nigerian linked investments in order to protect the reputation of their portfolios and financial institutions. While it is hard to place a direct estimate on this, the sensitivity of foreign investors to Nigerian markets can be gleaned through international regulation. For instance, under the UK Proceeds of Crime Act 2002 and Money Laundering Regulations 2007, regions like Nigeria are regarded as suspect territories, which international investors are expected to avoid to maintain the integrity of their portfolios.


Uphill Battle

At the fiscal level, money laundering deprives the Nigerian state of tax revenue and damages the ability of small businesses to compete in certain markets. Due to the criminal nature of laundered funds, funds are maintained outside the legal economy and consequently, escape the Inland Revenue Services.  

Additionally, concealing laundered funds through small, cash-intensive businesses has a concentrated effect on certain local industries and business ventures. Some launderers place and layer their funds by trading in certain goods – automobiles, white goods, furniture, pharmaceutical products etc. Once these are sold and the launderers liquidate these assets, they can access the underlying laundered money. These laundering businesses act as fronts, without legitimate models or targets other than to integrate criminal proceeds back into the system. As a result of this, they can afford to undercut competition by selling goods cheaply, subsidising their products and effectively using predatory pricing to make their returns. This is possible because their bottomlines are padded by illegal cash streams as opposed to actual revenue. This affects local industries and traders who vie with the apparent ‘competition’ without realising the business models they are up against.

On the policy front, economists and planners require accurate data to outline their future policies. Laundered money running through the system significantly increases the amount of “noise” in the data and it becomes less representative of the true nature of the market. This may result in ineffective economic policy. Additionally, laundered money distorts the process of economic development because investment is channelled towards business ventures which are unresponsive to market demands. As the businesses have profit generating motives, money launderers invest in similar business ventures, unduly saturating the market and crowding out legitimate competitors. 

These economic and social effects are disturbing for a nation trying to build a reputation as a hub for new and innovative businesses. There is no doubt that the greatest cost of money laundering to our society is the alternative uses the funds could be channelled to within the legal economy. Yet the subtle effects outlined here may remain a permanent fixture of Nigerian business if not tackled at all. Because money laundering is a sophisticated crime, Nigerians must become equally sophisticated to tackle it.

This article is Part II of a Series. Read Part I here


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Timeyin Preston Ideh

Timeyin Preston Ideh

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