The Use of OFCs in Money Laundering
Offshore financial centers are recognized for their capacity to keep financial privacy. Consequently, they can be corrupted by criminals and used for a variety of financial crimes including money laundering. While the intentions of offshore financial centers are in most cases legal, the applications for which they are used can never be ascertained to be legal (Monetary and Exchange Affairs Department, 2000). For instance, such centers are subject to criminal financial conspiracies such as money laundering, which requires high confidentiality and secrecy. The characteristics of OFCs such as limited regulations, protection from political systems, and unrestricted access make them easily applicable in money laundering. The ownership of OFCs is also so complex that tracing their roots can be challenging (Garcia- Bernado et al., 2017).
Furthermore, those who engage in money laundering activities are in most cases driven by the desire to conceal their financial information from the regulations. That is, they seek financial institutions that provide as much privacy as possible. Also, the objective of money laundering activities is to conceal and re-introduce proceeds from illegal activities into the economy without suspicions. OFCs provide an opportunity for this to be done by accepting deposits regardless of the sources of financing. The deposits can also be made either legally or illegally without restrictions. Lack of regulation also makes it possible for money launderers to take advantage of the OFCs since the funds can be withdrawn and invested in other businesses at any given time.
Due to the ease of use of OFCs for money laundering activities, they can be used in various circumstances. For money launderers dealing in large and small sums, OFCs provide a perfect scenario for cover up. For instance, money can easily be laundered through structuring, whereby a variety of OFCs could be used to accept cash from illegal proceeds in small amounts. Similarly, money can be smuggled across jurisdictions and then deposited in OFCs beyond regulations and without any restrictions. Without rigor in financial regulations, the only restrictions to smuggling of funds into OFCs can be the border controls. Where corruption is rife, border controls cannot be a hindrance to money laundering, especially when there are several OFCs available. It is through such activities that money has been laundered before via OFCs.
When money is laundered through OFCs, those centers used have no obligation to provide information to regulators since they act within their mandate in maintaining financial confidentiality and privacy. In the past, OFCs have been used to make payments to corrupt officials from illegal proceeds, to transfer finances from illegal proceeds into the legal financial system for use in investment, and for selling investments made from illegal proceeds (Zabyelina, 2015). An example is whereby a money launderer buys real estate using illegal funds then uses the OFC to sell the property to an unsuspecting buyer. Back salaries could also be paid through OFCs in money laundering schemes. This can happen when a company using unregistered staffs pays them from dirty money via OFCs. Reverse money laundering could also be done through OFCs whereby clean money is used in illegal business deals (Zabyelina, 2015).
Garcia- Bernado, J., Fitchner, J., Takes, F.W. and Heemskerk, E.M. (2017). Uncovering offshore financial centers: Conduits and sinks in the global corporate ownership network. Scientific Reports, 7(6246). Retrieved from www.nature.com/articles/s41598-017-06322-9
Monetary and Exchange Affairs Department (2000). Offshore financial centers IMF background paper. International Monetary Fund. Retrieved from www.imf.org/external/np/mae/oshore/2000/eng/back.htm
Zabyelina, Y. (2015). Reverse money laundering in Russia: clean cash for dirty ends. Journal of Money Laundering Control,18 (2): 202–21. Retrieved from www.emeraldinsight.com/doi/abs/10.1108/JMLC-10-2014-0039