Laundered money is never clean! In fact it is dirtier than before. Money laundering allows the criminals to disguise the origin of money, which came from illegal or criminal activities. More technically put, it is “an organized process that introduces direct proceeds from criminal activities or cash derived from suspicious transactions into the formal financial system”. It is performed through placement (introduction), layering (disguising) and integration (inclusion) of monies into the financial spheres of the world. The process is age old and was not identified by the name money laundering although used by noted mobsters such as Al Capone using speakeasies and casinos, and teamsters like Jimmy Hoffa using the cover of trade unions. The purpose is to rid the money of its tainted nature and to give it an appearance of legitimacy. Banks and financial institutions are often key targets for money laundering, with disastrous results in the end. One such event is the BCCI banking fiasco.
Does microfinance provide a soft underbelly that could be exposed to money laundering? The answer lies in the purist vision surrounding microfinance, which is empowerment of the poor and eradication of poverty. Due to the magnanimity of this vision, microfinance industry always needs a large influx of seed money from numerous donors and financiers. Often these financiers appear in the form of venture capitalists, most other times they represent the middle class investor community. The threat of money laundering begins with this; a possible inclusion of criminally acquired funds in the great melting pot of microfinance industry.
Could money-laundering suspicions thwart the goals of MFIs? Yes it could. Due to lack of adequate screening or lapses in the regulatory mechanisms of countries, MFIs provide vast opportunities to the money launderer to siphon tainted money into formal financial sector (introduction). The numerous projects undertaken by MFIs provide the ideal foil for money launderers to structure the ‘dirty’ money in such a way as to disguise its true origin (layering). Once these steps were successful, the returns obtained after a time through recognized banking/financial institutions provides the last building block of the money laundering process (integration). If successfully done, the monies received would not only have lost its tainted nature, cleansed by the rinse cycles of microfinance programs, but also increased due to the interest earned as the time value of money!
The MFIs are keen to prevent money laundering, as it directly affect the integrity of the industry and hence the future of microfinance. Stringent screening and Know Your Customer (KYC) policies, such as the Nigerian example may at present seem adequate for hard currency. But is this approach sufficient in view of the increasing technological advances made in the financial sector and the rapid spread of mobile commerce? How do we approach this issue?