Money laundering is a crime that many people consider irrelevant to them. If a problem at all, they consider it a problem only for banks. That is far from true. Money laundering has massive effects not only on financial institutions, but also on governments, industries, economies and all individuals.

What are the effects of these widespread crimes that fly under the radar of much of the population? And why are these effects so massive?

Understanding the economic cost

Itโ€™s hard to pin down a dollar amount for what money laundering costs the global economy. Normal economic activity measurements canโ€™t track funds generated by activities that go to great lengths to remain hidden from public awareness.

That hasnโ€™t stopped organizations that fight these crimes, however, from making estimates. And those estimates show immense impact. Aย 2009 report by the United Nations Office on Drugs and Crimeย assessed that yearโ€™s proceeds from criminal activity at USD 2.1 trillion. That amount is equal to an astonishing 3.6% of that yearโ€™s global GDP.

The Financial Action Task Force (FATF), an intergovernmental agency tasked with establishing global standards to combat money laundering and terrorist financing, once compared the amount of funds diverted from the global economy into the hands of money launderersย to the GDP of the entire economy of Spain. The impact of money laundering on the global economy is staggering.

Recognizing the social costs

So, how does money laundering, a crime that many people think doesnโ€™t affect them, have such a huge impact? First, the fact that it is so often successful in making illicit funds freely spendable for the criminals that generated them makes those criminal acts safer for criminals to commit, and therefore more attractive to them as a way of achieving wealth.

The criminal acts that money laundering facilitates rip vast amounts of money out of the economy. They pull funds out of productive activities that could grow the economy and benefit many people Instead, they divert those funds into a complex system of empty financial transfers that benefit only the few perpetrators of the original crimes. The loss to the economy greatly increases honest taxpayersโ€™ share of the load, while simultaneously reducing the services they receive.

Those criminal acts also increase demand for law enforcement resources to fight the violent and personal crimes that money laundering facilitates. This diverts further tax revenues. Instead of spending that could boost the economy and provide more jobs and services for people, the government must spend more to fight both the original crimes and the financial crimes that make the original crimes profitable.

Healthcare costs rise because of violence and drug addiction spawned by the original crimes. And social costs are staggering, in terms of lives either ruined or lost through the commission of them.

In addition to increased violence and the human costs associated with crime, money laundering and the crimes it facilitates also increases government corruption and corporate crime, as money launderers reach beyond financial institutions in their quest to turn tainted money into clean money.

They seek regulators who will turn a blind eye to money laundering schemes in return for a payoff. They leverage decision-makers in businesses to run tainted funds through their books and provide those funds with a paper trail that makes them look like legitimate revenues and expenses.

In doing so, money laundering can cause businesses to fail and workers to lose their jobs. It makes businesses that agreed to serve as money laundering conduits dependent on tainted cash inflow for survival. Then, as soon as the business draws unwanted attention from law enforcement, money launderers pull out, move on to create new conduits leave their front businesses to fold.

The effect of money laundering on businesses extends beyond just the compromised businesses. Front companies used by money launderers often operate the legitimate parts of their businesses at a loss, because their profits from money laundering outweigh profits they could make from legitimate business. This places their competitors at an economic disadvantage. Legitimate competitors are reliant on legitimate revenues to survive. When compromised businesses consistently undercut legitimate businessesโ€™ prices, the legitimate businesses are squeezed increasingly toward collapse.

This squeezing out of legitimate competitors often is part of the money launderersโ€™ plan. By eliminating or buying out failed competitors, money launderers can take over entire industries in a country. That gives them a virtual monopoly where, in addition to using compromised businesses for money laundering, they can also drive up prices that businesses in other industries must pay to use the compromised industryโ€™s services.

This kills productive economic activity that normally occurs in competitive environments and diverts even more money into the pockets of money launderers. And, as it did with businesses driven to failure in the compromised industry, it extends the threat of business failure and job loss into other industries that need the services of industries that money launderers control.

The damage doesnโ€™t stop there, either. Eventually, governments recognize the criminal influence over compromised businesses or industries and act to bring those racketeers to justice. But those behind such schemes have no stake in the businesses and industries they control, other than the money laundering conduit that they provide. So, when facing potential legal action, money launderers simply pull out their funds and start over somewhere else. This leaves those businesses or industries that were propped up by illicit funds to collapse, with consequent loss of jobs and widespread damage to surrounding businesses.

Money laundering also affects the financial community. The more tainted money that runs through a financial institution, the more volatile that bankโ€™s holdings will be. That volatility can threaten the safety of honest depositorsโ€™ money with the possibility of bank failures, as has occurred in some countries.

Even entire developing countries can be at risk. Where money launderers can use their influence to manipulate exchange rates to their advantage, they will do so. This often costs developing nations their foreign currency reserves and stifles economic opportunities.

Conclusion

Clearly, the impact of money laundering is far greater than many people think. Far from being a victimless crime, it supports and enables the damage that violent crime inflicts on society, and it has massive economic impact from government to industries to businesses to individuals. Money laundering is essential to address in government, in law enforcement and in financial institutions.