Download ECONOMIC EFFECTS OF MONEY LAUNDERING – THE IMPACT

ECONOMIC EFFECTS OF MONEY LAUNDERING – THE IMPACT FOR KAZAKHSTAN GLOBALIZATION
PROCESS
Piotr Brudnicki
PhD Candidate Warsaw University of Life Sciences
In recent ten years, the phenomenon of money laundering became a problem perceived by both
theorists and practitioners especially those who are responsible for the financial security of economic
turnover. In the era of globalization, this problem should not be limited only to seek regulatory solutions
at national and international level. Progressive changes in economies require action to improve the
detection efficiency gains transactions related to money laundering at the level of individual countries
and their financial systems with regard to international relations. The problem should be taken as
important especially in countries like Kazakhstan which has just opened their economy for foreign direct
investments (FDI). Kazakhstan – economy growing trend Kazakhstan is growing very fast and the
changes that have taken place recently in its economy stimulated absorption of the capital into this
market. makes Kazakhstan one of the most interesting markets for European Union Countries.
Kazakhstan is a Eurasian country, since 12% of the country lies in Europe and the remaining part of it is
in Asia. Kazakhstan is a young state, which resulted from the disintegration of the Soviet Union in 1991.
Kazakhstan has now become a very popular country recognizable by the companies on the investments‘
map, due to increasingly stronger position and wealth of the country. It is estimated that the GDP of
Kazakhstan every year increases by approximately 5-7% and the sheer size of FDI only in 2013 amounted
to 129 billion USD [1]. Many entrepreneurs forget about Kazakhstan, because Russia is the first on their
mind when they are thinking about the East. While Kazakhstan, next to Russia, has the highest income
per capita among the Commonwealth of Independent States (CIS countries), it is characterized by
increased domestic demand, as well as easy and fast access to the Russian market. The rapid economic
growth of Kazakhstan can be a great business for foreign investors, because the conditions that are
offered by the government encourage to the increase of expenditure. Especially promises to turning the
Republic of Kazakhstan into an economic power by the end of 2030 seems to be the most interesting
from the perspective of foreign companies [2]. Rapid and significant profits make the direction very
lucrative, but from the perspective of the young Kazakhstan there is a great threat to the security of the
financial system. The problem seems to be the primarily high level of corruption and the risk of money
laundering. In particular the problem of money laundering is a major threat to the further economic
development of the Republic of Kazakhstan. The impact of these practices can have negative effects in a
slowdown of GDP growth in the future. It is therefore important to already properly diagnose areas of
the economy that have to be protect from practices of money laundering. If Kazakhstan wants to carry
out efficient processes of globalization it is necessary to eliminate this type of pathology of the financial
system. The impact of money laundering for the economy Money laundering has a negative impact on
the area of legal and social system, but above all it adversely affects the financial system. According to P.
Quirk, legalization of money from illegal activity carries many risks for financial systems [3]. On the other
hand, J. Strachan, S. Smith and W. Beedels in their studies show that money laundering and related
consequences have a negative impact on the real economy and lead to negative changes noticeable by
both the economy at micro and macro side. It seems reasonable to analyze the dangers of money
laundering and the impact on the real economy and the entire financial sector in the Republic of
Kazakhstan. A wider analysis of the direct impact will show the negative consequences of this practice,
but 22 now the implications are presented to illustrate the challenges which should meet the regulators.
This requires, above all, efficient and effective detection, reporting and control of illegal transactions.
This applies in particular to the police, treasury, courts, prosecutors offices‘ and departments of the
Ministry of Finance. The estimates regarding the losses made by the individual national and
international organizations show that problem exists. However, credible estimates of where several
factors influence is difficult to define, and reporting systems of individual countries differ from each
other. Many problems regarding money laundering have also social dimension and the ability to
estimate the opportunity cost to society and the economy, as counting the cost of alternative solutions
and their impact becomes, tangible only when it is expressed in monetary value [4]. The most important
effects of money laundering are presented in Table 1. Table 1. The most important effect of money
laundering Possible effect Type of problem Influence for sector Term Economic Social Political Real
Financial Public Short term Long term Distortion of consumption    Distortion of investment and
savings    Prices increase    Unfair competition    Changes in import    Changes in export 
  Economic grow fluctuation    Unemployment    Revenues for the public sector   
Privatization threats     Higher capital inflows/outflows     Changes in interests and exchange
rates    Availability of credit    Changes in the demand for money    Changes in foreign direct
investments     Risk for the financial sector (ex. liquidity)     Profits for the financial sector  
 Reputation of the financial sector     Notes: Own , base information with data from Research
Handbook on Money Laundering, Brigitte Unger, Daan van der Linde, Utrecht University School of
Economics, 2015, p. 34-38 23 As we can observe the list of negative effects is long. The first and most
obvious problem arising from money laundering to the economy of country like Kazakhstan is the loss of
the good image and reputation of the banking and financial institutions. Most customers, in case of the
information about the involvement of a bank or financial institution for money laundering, almost
immediately decide to end the cooperation. Not only investors and the depositaries, but also borrowers
are willing to give up, even with the best services available in the financial market. The mere suspicion of
involvement in money laundering, can lead to the exclusion of the financial institution market. In order
to maintain its reputation among other institutions, so far they decided to refrain from any business
contacts, so as not to be in the circle of suspicion. Loss of customers, investors and help of other
financial institutions can lead to rapid loss of liquidity which ultimately results in a problem of insolvency
and consequently into the fall. Status and position of each of the financial system depends on trust and
perception of its participants. Revealed irregularities or fraudulent transactions may result in many
investors‘ concerns arising from the increasing risk of loss of the invested money. Lack of transparency
in the financial system and rapidly operating mechanisms evolve into a complete lack of confidence [5].
It should also be mentioned that the public financial system at the current stage development of
investment in Kazakhstan depends also on the operation of the financial market system. Numerous
institutions and public organizations entrust their money to the specialists who, through appropriate
investment decisions tend not to earn as much as maintain the appropriate time value of money.
Another real problem in emerging economies is not only corrupt but also intimidated employees, that
faced threats are ready to execute all commands criminals.. Often, employees execute suspicious
transactions do not register border amounts and not notify such transactions and suspicious customers.
Their actions can be dictated by their own benefits or intimidation on the part of interest groups seeking
to accomplishment illegal process. Abuses made by staff are dangerous, because due to the
presumption of innocence employees are more difficult to detect money laundering problem. Money
laundering has many negative effects on countries like Kazakhstan because even though it leads
immediately into increase in consumption, investment and savings, in the long run may result in
distorted prices and the destruction of fair competition. Also regarding financial trading, money
laundering can have negative effects in the form of an increased risk of insolvency and illiquidity of the
financial sector. Additionally, this problem generates significant financial costs arising from the need to
implement systems to prevent money laundering and opportunity costs as loss of reputation and
customers. Money laundering can also interact indirectly on the economy contributing to the changes in
GDP, inflation, instability of the financial system and the improper allocation of resources. As we can see
the problem of money laundering is much larger than it seems to be and must be prevented on many
different levels and areas of the economy The anti-money laundering systems – recommendation for
each country Technological advances that occurred in the last thirty years, causing numerous problems
for the safety of the financial system. The previous point presents the danger of this title in countering
money laundering and the opportunities in recent years have gained criminals. The government must
find effective and sufficient solution, unfortunately modern technology not always have to be
unfavourable for preventive action. . Skilful use of the possibilities offered by modern computer‘s
systems and databases may prove crucial in the analysis of suspicious transactions [6]. Nevertheless, in
order to gain an advantage over the technology used by criminals it is necessary that all the following
conditions: constant investment in tools and technologies dedicated for AML; creating interstate
database on the safety of the financial system with regard to the universality of software; cooperation
with financial institutions regarding control authorities and entities involved in economic security; full of
originality and authorization of digital evidence. It seems important to show all of the above, the
fulfilment of which could lead to increased security of the financial system. The first and most important
condition is to have the latest technology in the field of money laundering. All units involved in the state
financial assistance should have access to more advanced technology than groups of international
financial fraudsters. Having the right tools is not everything, it is important that these tools allow
cooperating all parties responsible for the safety of the financial system in each country. Especially such
institution like police, Ministry of Finance and fiscal control authorities should cooperate together and
fight against money 24 laundering. Money laundering and its negative impact on the economy shows
that there are some loops in the law system. Implementing new technologies could help to secure
financial trading and combat the adverse effects for the whole economy. Due to the fact that foreign
investments are being increased each year, it is important to understand the scale of problem. Adoption
of legislative initiatives by the Republic of Kazakhstan will help to develop appropriate patterns of
behaviour, which will take care on the specificity of economic and could make possible to achieve the
highest economic growth in the future. The most important factor is to implement regulation and
advanced technology as soon as possible.
List of references
[1]http://www.money.pl/gospodarka/wiadomosci/artykul/zwolnienie-z-podatku-izwrotkosztow,108,0,1637740.html [reading: 08.04.2016].
[2] http://www.osce.org/astana/208281 [reading: 08.04.2016].
[3] P. Quirk, Macroeconomic Implications of Money Laundering, International Monetary Fund, Workig
Paper 96/66, 1996.
[4] Z. Dach (red.), Microeconomics, Economic Academy in Cracow, Cracow 1995, p.154.
5] S. van Wijnbergen i N. Budina, Inflation Stabilization, Fiscal Deficits and Public Debt Management in
Poland, Tinbergen Institute Discussion Papers 99/022/2.
[6] ACAMS & Ernst & Young, Introduction of the Global AML Insights Series, ACAMS & Ernst & Young
2010.