Turning black into whiteMoney laundering entails masking the original source of funds and letting money fly into the market in secrecy. People involved in money laundering depend on key elements such as expected revenues, laundering costs,
Money laundering entails masking the original source of funds and letting money fly into the market in secrecy. People involved in money laundering depend on key elements such as expected revenues, laundering costs, likelihood of being caught, and magnitude of the sanctions. Money launderers are concerned with anything of unregistered and untraceable economic value.
Nepal’s Money Laundering Prevention Act was introduced only in 2008, by which time money laundering had already taken its toll on the market. The number of offshore bank accounts holding Nepali money had already undergone rapid growth. The anti-laundering Act has given a general definition of the practice of money laundering in order to establish it as an offence, thus lending to the probability that people could be held liable for the offence even in a small market. However, when the law’s primary target is serious large scale laundering, trying to prosecute small scale yet numerous laundering acts becomes near impossible.
Small steps in a large game
We cannot deny the fact that Nepal has tried to control small and informal means of value transfers, such as the Guthi system. While systems like Hawala in the Gulf countries have been grand arenas for money launderers, Nepal has shown that it is trying to control similar kinds of traditional informal money transfer systems; this is commendable. However, small scale, hidden transfers of money remain impossible to discover in companies that are duly registered but where no actual business is carried out.
Nepali laws are primarily concerned with cash that is generated through criminal activities, where the profits are then laundered through various shell companies and deposited into offshore banks. The government is also concerned with tax evasion, which is controlled through the enforcement of tax and financial laws of the country. While all companies have to disclose their taxes and financial information, it is still easy for them to keep most transactions hidden. The transfer of money through companies, no matter how small the amount, should be made more transparent. With this transparency, dishonest companies will be deterred from evading taxes and will be encouraged to stay within ethical lines.
Countries like Nepal run on huge cash-based economies; in this context, it is fairly easy to launder money. The conventional three-phase process of placement, layering and integration of money may be skipped to a certain limit in such economies. Hence, by the time the money enters into the proper banking channel, the money could have already been laundered. The use of this cash-in-hand transaction system rather than the cash-through-bank transaction system means dealings are rarely recorded in the account books, and so they will not be visible to tax officers.
The problem is that money can be laundered via numerous methods, thus putting the government authorities at a risk of suffering from a considerable lack of knowledge. The existence of illegal money changers who exchange different currencies further sustain the practice of money laundering and make it even more difficult to trace the illegal source of money.
Washing the dirt out
People involved in money laundering commonly use legitimate businesses that provide high turnovers; they legitimise the cash by injecting it into these businesses. In Nepal, restaurants, bars and retail outlets are generally used for laundering activities. Additionally, the cash is also used to purchase real estate and goods including gold, diamond and silver; these purchases hold a high market price value in spite of having low government valuation.
The practice of underground banking further fuels money laundering; interbank transactions and transfers require less processing and documentation. Such transactions avoid the exchange control restrictions imposed by the Nepal Rastra Bank.
Corruption has also played an important part in promoting money laundering in Nepal. While ‘cleaning’ the laundered money by spending on corruption is itself a problem, corruption also plays a huge part in enabling money laundering in the first place.
Additionally, in certain cases, governments are unable to trace the cause of money laundering. The cases of laundering may arise due to excessive tax burdens, social security contributions, and inflexible labour markets, among others. If the causes of money laundering are not addressed, the problem may grow massively. Controlling this issue is only possible if laws are properly implemented. It should be emphasised that cash transactions have to be duly recorded in the account books. This is done by improving the performance of banks and checking the flow of money in the small market. Wide-ranging policy, and legal and institutional frameworks are needed to control acts of money laundering. In spite of having laws in place to control money laundering, the government currently lacks an active role in the implementation mechanism of these laws and policies.
The difficult part lies in addressing issues to ensure transactions are being carried out through proper banking channels. In economies such as Nepal’s, gaining sufficient information on a customer is difficult; the government should act pragmatically to direct each person to proper banking channels. If the process of controlling money laundering doesn’t begin immediately, the use of underground banking systems will certainly leave a huge hole in the country’s economy in the long term. Promoting effective methods to increase transparency, such as the Nepal Rastra Bank’s push to implement the Know Your Customer (KYC) program will greatly help mitigate money laundering. Also, the biggest problem of all—corruption—has institutionalised impunity with vigour. This vigour needs to be silenced through financial transparency.
Rijal and Kharel are licensed corporate lawyers and partners of the law firm Associates Hub