Economic Policy Issues

The IMF released statistics some time ago that gave an estimate of the amount of money laundered along with the estimated value which this amount would tag. The scope of the amount laundered is roughly between 2 and 5 percent of the worlds gross domestic product, 600,000 million, or roughly the worth of the economy of Spain. Most of the money that is unaccounted for would normally go to governmental bodies in the form of tax or seizure, however there is a decrease in aggregate governmental revenue and therefore a smaller budget for the government to work with. This leads to a deficiency of governmental policy implementations due to lack of funding. The economic policies that a government sets forth have to be funded somehow, however when they have such a large decrease in revenue it becomes increasingly difficult. This in turn leads to a struggling economy.

An emerging economy is a great situation for a launderer, as with a large amount being invested banking regulations can become relaxed. An open door for foreign investment however places the country on a crutch, and whenever it is stripped of the crutch the economy will in turn fall.

In this sense, there is both a positive and negative effect for an economy. If there is constant positive investment in a country, there is of course a positive outcome. Banks will be able to make commercial business loans and investment in many industrial and businesses sectors will bloom, among other beneficial outcomes. If a significant laundering operation is set forward, there can be adequate funds to support a small to medium sized economy. This can cause the economic blooming in a country which is budding. Conversely, if the perpetual investment is ever pulled, it is clear that the economic and financial sectors would collapse, and there would be long-term economic consequences.

Interest rates can also be affected, as there is no concern on RIO (return on investment), so investment is more often than not put into the more discrete, short-term projects. The money is not circulated through the body that would need the funds the most in order to feed a growing economy, crafting a false sense of genuine investment.

There is also an evident situation with allocation. Clearly, it is possible for a party to purposefully alter prices in the asset and commodity market during laundering. This can lead to an allocation of resources that is not most efficient, causing there to be larger scale economic issues and monetary instability.

In short, money laundering and financial crime may result in inexplicable changes in money demand and increased volatility of international capital flows, interest, and exchange rates. The unpredictable nature of money laundering, coupled with the attendant loss of policy control, may make sound economic policy difficult to achieve.