Money Laundering and Financial Risk Management in Latin America
Money laundering is one of the reasons that affect the financial stability of Latin America. To know how to manage the financial risk in Latin America, first, we need to understand what money laundering actually means and understand it in the context of Latin America.
So, let’s jump right in.
What is Money Laundering?
Money laundering means hiding or concealing the nature, location, origin, ownership, or control of illegally obtained money or assets. It involves introducing money or other assets of illicit origin into the economy while giving them the appearance of legality through lawful activities. Thus, money laundering allows criminals and criminal organizations to disguise the illegal origin of their assets without endangering their source.
Money laundering takes place in three phases. In the first phase, the product of illicit transactions is incorporated well into the financial system. It can be the money from selling drugs, trafficking humans or arms, tax evasion, corruption, etc.
The second phase involves transferring the money to different accounts and jurisdictions to conceal the origin and location where the original infraction was committed. The third and last phase consists of giving illegal money the appearance of originating from legal sources.
Money Laundering in Latin America
Latin America faces severe challenges like drug trafficking, violent crime, economic inequality, and public corruption. But if one looks closely, all these have one thing in common: money laundering.
Though the international efforts to combat money laundering were strengthened with the Vienna Convention in December 1988 and the Convention of the European Council in 1990, the scenario has not changed much for Latin America.
In fact, it is money laundering that has helped gangs in Brazil expand their criminal networks into neighboring countries of Paraguay and Bolivia. In Venezuela, money laundering has resulted in the theft of public resources, making it the most impoverished economy in the region.
Through money laundering, Latin America’s transnational criminal organizations and guerrilla groups got access to funds derived from their illicit operations. It further ensured their continued dominance and growth.
Money laundering has also allowed criminal groups and many corporations to profit from illegal mining and logging quickly. As a result, many nations in Latin America were robbed of their critical natural resources, because of which there are severe environmental repercussions.
Because of money laundering only, corrupt officials throughout the Western Hemisphere can deftly conceal bribes and stolen public funds, degrading economic opportunity and the public’s confidence in their leaders.
Financial Risk Management in Latin America
Money laundering and providing funding to terror organizations may adversely affect the financial stability of Latin America. Why? Because both the acts create distortions in the allocation of resources in such a way that investment decisions depend less on factor prices and profit return calculations and more on criminal or illicit pressures.
It is because of money laundering and terror funding that the financial institutions of Latin America can be eroded. The banks and financial institutions can be defrauded by employees that are linked to laundering operations or because organized crime takes control over the financial entity. Though there are many countries in Latin America where banks are not entirely eroded, there are some countries like Venezuela where due to money laundering and disastrous steps by their President, their economy is in shambles, making them the poorest economy in Latin America.
Money laundering has weakened public confidence in banking and non-banking financial institutions. Not only that, it has negatively impacted the reputation of banking entities, slowing down their ability to attract capital. As a result, the economic growth in Latin America has been affected along with its market value.
How to Bring Financial Stability in Latin America
While some countries in Latin America are doing well economically, others lag behind. To maintain financial stability in Latin America, it is essential to prevent money laundering and reform the financial system. The successful reform of the financial system in Latin America depends on sustained increases in depositor and investor confidence. It can only happen when people can trust banks, and for that to happen, money laundering needs to stop.
But money laundering is not something that one can put an end to in just a few weeks or even months. No one can put a full stop to money laundering, especially in Latin America, where it has helped gangs gain prominence and grow exponentially. What can be done instead is countries can try to put stricter regulations to keep money laundering in check. Another way to maintain stability is to put an end to the funding that goes to terror organizations.
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