Hot Laundered Money

I have a friend who calls me in the evenings to tell me stories that reveal
my white-picket-fence innocence. My friend spends his time dealing with
fraud and other criminal activity in Canada, the likes and scope of which
the average Canadian has no idea. He's one of the good guys.

He tells me about tax fraud, really nasty upstanding businessmen, drug
running, bribery, police officials who won't take complaints. In Canada,
understand. It leaves me shaking my head. In the end, I always ask the same
question, "What's to be done?"

And he always gives me the same answer, "Attack the money."

Money is the lifeblood of organized crime. Stop the flow, seize the
proceeds, track the movement. Do any of these things and you hit organized
crime where it is vulnerable.

Money Laundering

Estimates from the International Monetary Fund put money laundering - the
process by which dirty money from criminal activities is transformed into
respectable cash - somewhere between two and five per cent of the world's
GDP. That roughly translates into something at least as big as the entire
Canadian economy (or at least that part of the Canadian economy that is
reported). In round figures, we're talking about a trillion U.S. dollars or
more.

The G-7's Financial Action Task Force on Money Laundering says the process
typically involves three stages: 1. Placement - get the cash into financial
system; 2. Layering - tangle up the money trail, make it difficult to
follow; and 3. Integration - use the once-again-respectable cash for
legitimate purposes.

My friend, who never uses two words when three expletives can be added,
says, "Don't make it so #%@*! complicated." Create a paper trail, set up a
phony office, exchange phony invoices, change cell phones often.

In essence, make it too complicated to follow. The business of money
laundering likes nothing better than an over-worked, under-staffed and
under-funded police force. Another key, of course, is a jurisdiction that
doesn't cooperate with money-laundering investigations . . . and there are
lots of those.

The Damage Done

If we could successfully 'attack the money', we'd be delivering a serious
blow to organized crime. That, in itself, would be worthwhile. There would
be other benefits, however.

Money laundering involves an enormous flow of money across borders, and that
money is 'hot' in two senses. 'Hot' because it comes from criminal
activities, but 'hot' also in the sense that it moves quickly. If you think
of some of the slackest banking systems - some Asian countries come to
mind - and combine that with the destabilizing impact of hot money - the
Asian meltdown comes to mind - then you'll have an idea of money
laundering's macroeconomic potential.

On another economic level and closer to home, suppose that Canada is an
average country of organized crime - my friend tells me that we're well
above average (in the wrong sense) - and that the equivalent of two to five
per cent of our GDP is moving through the phases of money laundering. If we
could successfully 'attack the money', sections of the Criminal Code say
that any property derived from organized criminal activities may be
forfeited to the government. Two to five per cent of GDP, forfeited by
criminals, would eliminate the federal debt in 12 to 20 years.

In other words, taxing organized crime at the rate of 100 per cent could
sure give a break to other taxpayers in this country. Even if, according to
my friend, Canada integrated its narcotic investigations more fully with its
investigations of criminal tax fraud, there'd be a big payback to
governments. And some of that money could go to better funding for police
forces.

The Real Cost

Of course, if Canada really did 'attack the money', organized criminal
activity in Canada would be severely impaired. That's okay because, as fat
and juicy as the extra government revenue looks, the biggest cost to Canada
is the social damage caused by organized crime.

That's why my friend is increasingly frustrated with governments in Canada.
He says they turn a blind eye or lack any understanding for the problem, and
he says that from first hand experience. He still fumes about how, in 1980,
the Clark government turned down the opportunity to participate in Operation
Northstar, an international plan to track large deposits through the banking
system as a step against money laundering.

Money laundering is a murky area. And Canadians have the idea that it
happens somewhere else in the world, like Italy or New York. That's why
Canadian governments are not pushed to do as much as they can. It's time for
Canadians to leave behind their 'white-picket-fence' mentality and demand
that governments take more action.

'Attack the money' sounds like an essential part of that action.

Author/economist Tim Whitehead operates an economic consulting firm, Left
Bank Economics Inc., near Paris, Ontario.