Thy Neighbor's Laundry
March 02, 06 by Chaim Even-Zohar
Two countries – two different worlds. In the past we have noted the absurdity of the fact that a diamond transaction that is illegal in Belgium is totally legal a few kilometer’s north in the Netherlands. A specific example is the provision in the Belgian anti-money laundering law prohibiting the settlement in cash of any business transaction exceeding 15,000 euro. In the Netherlands that is quite alright. We all remember that in the 1950’s the Dutch diamond industry, arising out of the ashes of the Holocaust, moved to Belgium because, among other reasons, the Belgian fiscal and business environment was more attractive to the diamond industry.
So far, this is nothing new. What is new is that this week the Dutch Ministry of Finance released a document that highlights the benefits to the Dutch economy of money laundering.
The study first estimates the amount of money annually laundered in the Netherlands. “Our results,” says the report, “indicate that there is 8 to 14 billion euros from crime generated in the Netherlands of which 44 percent will stay in the Netherlands for laundering. This means that money laundering from crime in the Netherlands amounts to 3.2 to 4.2 billion euros per year, with the most likely estimate to be 3.8 billion euros. The remaining Dutch criminal money will be placed somewhere else. In addition, criminal money from abroad will also flow into the Netherlands. There is also an additional 14 to 21 billion euros that flows into the Netherlands from the top 20 origin countries of generated money for laundering. This means that the amount of money laundering with which the Dutch have to deal accounts for about 18 to 25 billion euros, hence about 4 percent of the Dutch money demand, or about 5 percent of the Dutch Gross Domestic Product (GDP).”
The study, conducted by faculty members and staff of the Utrecht School of Economics, notes that “Growth effects from money laundering are in principle positive for the Dutch. One billion of additional money laundering leads to about 0.1 percent more growth. As long as the Dutch can profit from being a transit country of criminal activities and criminal financial flows, they will most likely rather profit than suffer from these activities. The same most likely will hold true for employment, especially in the financial services sector.”
Of course, the study lists the negative impact as well. Indeed, it stresses the need to measure the damage caused by crime versus the benefits from the laundering. The report states clearly “if money laundering attracts more crime, the growth effect will turn negative. If money laundering leads to an increase in one million more crime cases, then growth will fall by about 0.3 percentage points.”
But the “trick” is to take the laundering but stay away from the crime that resulted in the illegal funds. “As long as a country takes the benefits from crime, by accepting the money from laundering but keeping the crime abroad, it free rides on crimes committed in other countries. This may not be a particularly moral position, but economically speaking, it carries no disadvantages.” Wow, this is quite an intriguing proposition.
So does the Netherlands wants to be a laundering haven or would it prefer to keep the bad money out of the country? The report recognizes that criminal money will eventually attract crime. “Even if the acceptance, or tacit approval of money laundering seems like a smart short term strategy for rich countries in order to attract additional capital inflows, increased government revenues, a more buoyant business sector, employment and growth, it is a ticking time bomb in the long run. Criminal money attracts crime. Criminals come to know a country, create networks and eventually also locate their criminal activities there. For the Netherlands,” says the study, “we estimated that the money laundering multiplier is 1.1 to 1.2. This means that if one million of additional proceeds from crime will be laundered and partly reinvested into further illegal activities, this will increase laundry related crime by 10 to 20 percent resulting in 1.1 to 1.2 million euros of money laundering.” Of course, there are some additional spill-over effects. Money laundering always needs some assistance from local third parties such as lawyers, notary publics and corrupt officials – “the generous customs officer who discretely overlooks the suitcase full of cash, the friendly bank clerk who is not that diligent with proof of identity documentation or fails to report suspicious transactions. Generally speaking, money laundering always necessitates third party involvement from oversight to outright bribery and corruption. However,” concludes the report, “the latter end of the spectrum of third party involvement – bribery and corruption – is rare in the Netherlands.”
The Ministry of Finance is, of course, interested in sharing the conclusions of the 187-page report with the general public and has put the study on its website. The report concludes that “the Netherlands is still in the privileged position of having the choice to fight money laundering more fiercely or to wait, see and enjoy the benefits from money laundering until something serious happens.”
Heaven knows what they mean with “something serious.” Why am I even writing about this – as it has nothing to do with diamonds? I was intrigued by the confirmation that money laundering has become a growth industry, involving a large number of non-governmental, multilateral, intergovernmental and supranational organizations leading to “a plethora of bilateral and multilateral rules and agreements that have made effective regulation a challenge. …and has contributed to jurisdictional arbitrage whereby money launderers can take advantage of multiple rules and conflicting agreements.”
The lack of harmonization among compliance systems has always bothered me – and I have written about this for years. The Belgian diamond industry has asked its government to adjust the Money Laundering Law and the regulations adopted in January and April 2004 to bring the regulations in line with best industry practices. There are many precedents for this. Recently the British regulations were amended to give accountants, for example, protection when they deal with clients who consult on tax planning measures.
The Belgian government, which has adopted some of the most stringent anti-money laundering laws in Europe, should take note of the Dutch report. Sometimes, history reverses itself. When well intended laws (such as the anti-money laundering laws) become disruptive to business – especially when the risks associated with that business are exceedingly low – this may lead to “jurisdiction shopping.”
Colleagues in the compliance business are seeing the publication of the Dutch report as an “invitation” to come to the Netherlands. Launder here – but commit the crime elsewhere. It is scary that this takes place so close to the Belgian diamond industry in a supposedly decent country, which was once this writer’s homeland. The Belgian government should see the Dutch report as a reason for expediting the changes in Belgian laws. Even after the requested changes are implemented – the Belgian diamond sector will still operate in a far stricter compliance regime than any other European country.
Looking for the “economic benefits” to be derived from laundering is immoral, indecent and appalling. It is, however, a part of the world we live in. Holland is probably not alone. At least it displays the decency to say so loudly and clearly.
Have a wonderful weekend.