Money Laundering in the EU


Methods and Stages

The explosion of money laundering

Macroeconomic Consequences

The Risks to Financial Institutions

The Risk to the Financial System

The Euro and Money Laundering

Money Laundering as Tax Evasion

Social and Political Costs

International Conventions

EU Directives on Money Laundering

The Achilles Heel

Bibliography and some useful links

Macroeconomic Consequences of Money Laundering

The integrity of the banking and financial services marketplace is heavily reliant on the perception that it functions within a framework of high legal, professional and ethical standards. A reputation for integrity is perhaps one of the most valuable assets of a financial system and institution. Therefore, on a macro level, money laundering poses a risk to confidence in the financial system and its institutions. "The soundness and confidence in the financial system as a whole could be seriously jeopardised thereby losing the trust of the public…" if the financial system is caught laundering criminal proceeds (Gordon Brown, speech on money laundering on 28 November 2000). The Bank of England is making a concerned effort to ensure that the City of London upholds its reputation as a ‘clean’ financial centre. Given the emphasis on name and reputation in attracting and maintaining business in the finance world, it would not be difficult to imagine the decline of a reputable financial centre were it to become synonymous with laundering criminal proceeds. Hence, the importance of confidence and the need for transparency in the financial system should not be understated, especially as in the case of the City of London; it makes a significant contribution to certain country’s Gross Domestic Product (GDP).

Other potential macroeconomic consequences of unchecked money laundering have been cited by the International Monetary Fund as inexplicable changes in money demand, contamination effects on legal financial transactions and increased volatility of international capital flow and exchange rates owed to unanticipated cross-border asset transfers. The latter point is especially important and poses a big risk to the EU financial system as money laundering has a direct effect on the Foreign Exchange Market (FOREX) of an economy. The FOREX market is vulnerable owed to the volume of cash involved in the trade. The apparent fund movement, especially from illegal sources, from one jurisdiction to another is capable of exacerbating the exchange rate volatility. This can be devastating especially when there is no corresponding increase in production: hence the domino effect on regulating cash flow and inflation.

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