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.
PREFACE
The Nigerian economy had witnessed a serious jump in the
level of financial crime since 1986, with the liberalization
of the financial sector that accompanied the
implementation of the structural Adjustment program
(SAP). The SAP was initially planned for two years, during
which it was projected that all the structural problems of
the economy would have been addressed. This, clearly,
was too short a period in which to achieve any significant
results. The SAP ran through the 1990s, when it was
variously adjusted to fit the political agenda of the different
military regimes. The extensive liberalization of the
economy that has been undertaken since then encouraged
economic crimes in general and financial crime in
particular, especially of the “white collar” type.
Consequently, and in an effort to implement the 1988
United Nations Convention against illicit Traffic in Narcotic
Drugs and Psychotropic Substance (The Vienna
Convention), Nigeria Criminalized white collar crimes,
through the following pieces of legislation. The failed
Banks Recovery of property Act of 1994, Advance Fee
Fraud, and other Related Offences Act 1995, Money
Laundering Act 1995, Money Laundering Act 2003, and
the Money Laundering (Prohibition) Act 2004.
The author believes that money laundering poses a great
danger to the health and existence of not only individual
banks but to the entire banking system and an emerging
economy like ours. It is quite hard to establish a hard
statistics of casual relationship between money laundering
and economic performance in Nigeria, but we can draw
from the experience of some Latin American Countries,
which were
notorious for drug trafficking, as compared to those of
Malaysia and Singapore, two countries with the most
stringent drug and money laundering laws and very
resilient and stable financial systems.
The work is divided into five chapters. The first chapter is
introductory analysis comprising of over view of the study,
statement of the problems, objectives of the study while
chapter two focuses attention on the empirical literature
as it relates to the study. Research design and
methodology in chapter three The methodology was treated
under the following sub-headings, the sources of data,
description of data and procedure of the data collection.
Chapter four treats the analysis of the new methods to
launder money and illicit financial flows, their effects on
the financial institutions and the economy of the host
country.
Summary of research findings, conclusion and
recommendations drawn from the findings are treated in
chapter five.
CONTENTS
TITLE PAGE ……………………………………………………i
CERTIFICATION PAGE ………………………………………..iii
DECLARATION……………………………………………………iv
DEDICATION PAGE……………………………………………..v
ACKNOWLEDGEMENT…………………………………………vi
ABSTRACTS………………………………………………………vii
PREFACE………………………………………………………… viii
CHAPTER ONE:
INTRODUCTION
1.1 OVERVIEW OF THE STUDY……………………………. 1
1.2 STATEMENT OF PROBLEM………………………………2
1.3 OBJECTIVES OF THE STUDY…………………………..9
1.4 STATEMENT OF HYPOTHESIS…………………………10
1.5 SIGNIFICANCE OF THE STUDY………………………..11
1.6 SCOPE AND LIMITATIONS OF THE STUDY…………13
1.7 DEFINITION OF TERMS………………………………….17
CHAPTER TWO
LITERATURE REVIEW 20
2.1 HOW ILLICIT FINANCE FLOWS CAN AFFECT THE
ECONOMY AND INSTITUTIONS
OF A HOST COUNTRY…………………………………………
2.2 ACTIVITIES PRONE TO MONEY LAUNDERING……24
2.3 USES OF LAUNDERED MONEY………………………………….26
CHAPTER THREE
3.1 RESEARCH DESIGN AND METHODOLOGY………..28
3.2 SOURCES OF DATA ……………………………………..29
3.3 DESCRIPTION OF DATA……………………………………………30
3.4 POPULATION……………………………………………….31
3.5 PROCEDURE………………………………………………..
CHAPTER FOUR:
4.1 BUSINESS ACTIVITIES AND SOURCES OF
PROFIT IN MONEY LAUNDERING……………………………33
4.2 GLOBAL SCOPE OF MONEY LAUNDERING………..34
4.3 METHODS USED IN MONEY LAUNDERING……….34
4.4 ECONOMIC AND SOCIAL COSTS …………………….
OF MONEY LAUNDERING……………………………………..
4.5 ECONOMIC COST…………………………………………37
4.5 SOCIAL COSTS…………………………………………….38
4.6 REGULATIONS TO CURB MONEY LAUNDERING
4.7 DOMESTIC MEASURES………………………………….40
4.8 TRAINING AND EDUCATION ………………………….40
4.9 INFORMATION SHARING AND RETENTION……….41
4.10 SECRECY LAWS………………………………………….41
4.11 IDENTIFYING NEW BUSINESS OPPORTUNITIES FOR
MONEY LAUNDERING………………………………………..42
E-MONEY LAUNDERING…………………………………….43
4.12 SCRUTINISING AREAS IN AN ORGANISATION….44
CHAPTER FIVE
5.0 SUMMARY, OF FINDINGS, CONCLUSION ………46
AND RECOMMENDATION
5.1 FINDINGS ……………………………………………….46
5.2 CONCLUSION…………………………………………..50
5.3 RECOMMENDATION………………………………….51
BIBLIOGRAPHY ……………………………………….54
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.
1.2 STATEMENT OF PROBLEM
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.
1.3 OBJECTIVE OF THE STUDY
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.
1.4 STATEMENT OF HYPOTHESIES
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.
1.5 SIGNIFICANCE OF THE STUDY
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.
1.7 DEFINITION OF TERMS
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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