Money laundering will lead to the violation of the established procedure for carrying out economic activities and promotes the development of illegal business.
Also, the presence of illegal money in the economy leads to an increase in corruption, which has a negative impact on the welfare of the population and the level of the economy in the country.
For foreign investors, a country with a high crime rate in the field of legalization is also not attractive, as investments will always be associated with high risks.
As with any social phenomenon, money laundering is connected with a conflict of interest: on the one hand, the individual interests of persons who are oriented to the illegal receipt of income, and on the other hand, the economic interests of society, which are protected by the authorized bodies. At the heart of the contradiction between the term "laundering" is the mismatch between economic reality, which allows for a certain profit to be derived from illegal transactions, and rights as a measure of due diligence.
It should be noted that for the majority of the population the risks of money laundering are not obvious, and this leads to underestimation of AML/CFT measures. At the same time, the harm caused by money laundering is quite significant. There are a number of aspects that are affected by money laundering:
1) State aspect. Money laundering leads to an increase in crime, which in its turn forces the state to increase the funding of law enforcement and authorized bodies in order to prevent the onset of negative consequences. This has a negative impact on the financial situation of the country. In emerging economies, there may be a situation where illegal revenues are many times higher than national budgets, and then the government may lose control over economic policy.
2) Economic dimension. The infusion of large amounts of illegal income is a threat to the economic security of the country. The chosen financial policy may not be effective, which will lead to financial difficulties for the state and economic entities, which may become bankrupt in the future.
Also, money laundering operations reduce the tax revenue of the government, so the state sets higher tax rates to avoid budget deficits than the normal situation where illegal income would be legal and taxed. And thanks to the financial resources, criminal organizations and companies have a competitive advantage over law-abiding organizations.
In microeconomics, the laundering of illegal funds has a negative impact on all economic agents. If a company takes on an unreliable customer, provides a service or is otherwise indirectly related to ML/TF, it automatically takes on reputational risk, which in turn negatively affects business development and can lead to a breakdown of business relationships and outflow of customers.
Financial and non-financial institutions involved in the money laundering process, whether consciously or unconsciously, also bear quite high risks.
Potentially, any financial and non-financial institutions may be involved in money laundering if they do not comply with AML/CFT standards, and therefore the above risks may also be realized.
3) Social dimension. Typically, illegal proceeds are accumulated in a narrow circle of individuals who are in greater wealth, which means that an increase in money laundering operations will lead to even greater stratification between segments of society.
Laundering of criminal proceeds has a negative impact on ordinary citizens.
4) The international political dimension. From a macroeconomic point of view, the IMF highlights the following possible negative effects of money laundering:
- Deterioration of the quality of assets of financial institutions;
- Contamination of legal transactions of enterprises operating in the criminal environment;
- Fluctuations in exchange rates and interest rates;
- Fluctuations in capital demand that do not correspond to real changes in the economy
- Growth of securities market volatility;
- Mistakes in fiscal and monetary policy due to distortions in economic situation assessments;
- Distortion of asset prices.
It should be noted that the implementation of AML/CFT measures can also serve as an effective instrument of political and economic pressure on countries. For example, if a country is included in the list of states that do not cooperate with the FATF, i.e., it does not implement AML/CFT measures, then the measures applied to clients registered in this jurisdiction are automatically toughened, resulting in outflow or reduction of the share of foreign investments. As a result, reputational risk may be realized at the state level, which will have a negative impact on the subsequent economic development of the country.