Mains- Answer writing practice: Money Laundering #169

Mains- Answer writing practice: Money Laundering

What is money laundering? Explain its impact on developing countries. (200 words)

Model Answer

Money Laundering is the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence. It is done through various measures such as misinvoicing of trade, using tax havens, shell companies etc. According to estimates by an IMF study, the quantum of money laundered is approximately 2-5 % of global GDP.

Impact on developing countries:
Weakens social fabric: Money laundering gives impetus to criminal activities, like smuggling, corruption, drug trafficking, tax evasion, insider trading etc. and leads to deterioration of collective ethical standards, threatening the peace and prosperity of the society.
Undermines democracy and rule of law: It transfers purchasing power and market dominance in the hands of the criminal elements which can acquire control of large sectors of the economy through investment, or offer bribes to public officials and governments.
Undermines welfarism: Laundering for reasons such as tax evasion leads to diversion of the resources, which could have been used by the government to further the implementation of welfare schemes for citizens.
Affects economy and its development: It undermines the integrity of the financial markets of the nation and the associated criminal activities leads to loss of revenue, economic distortion and instability in the market. The perception of increased risk also keeps investors at distance.

Concerted effort need to be taken at both national and international level to curb the menace of money laundering.

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