Can offshore financial centers be used for money laundering? Please explain how and under what circumstances?
Offshore Financial Centers and Money Laundering
Money laundering refers to the process of legitimizing assets generated or obtained through criminal activities such as drug trafficking or terrorism funding. For many years, such events have been associated with offshore financial centers due to the favorable circumstances available in these centers. According to Davis (2008), offshore financial centers (OFCs) are zones whose financial sector is separated from major regulatory authorities. The separation enables them to operate differently form onshore financial centers making them favorable destinations for laundered assets. This paper discusses how offshore financial centers can be used for money laundering as well as conditions that favor financial crimes in such centers.
Conditions under Which Offshore Financial Centers can be used for Money Laundering
Stringent observance to client secrecy (Ispas, 2009). Since the primary objective of laundering assets and funds is to hide their sources, confidentiality is the ultimate circumstance for laundering activities and other financial crimes. Offshore financial centers offer secrecy, and anonymous numbered banking to their clients making advantageous for money launders.
Lax banking and financial regulations. When an offshore center has no or lax laws, they can be used for money laundering. For example, such laws do not necessitate verification of customer identity or anonymous account holders making it favorable for money laundering.
Favorable tax treatment to financial investors and businesses (Ispas, 2009). Offshore financial centers can only be used for money laundering if they offer the perpetrators favorable tax treatment.
Absences of any arrangements to share financial information with other financial centers is another condition necessary for using offshore centers for laundering funds and assets. Launders wants to remain anonymous, and sharing of information may be detrimental to their activities.
How OFCs can be Used in Money Laundering Process
Globalization and the advancements in communication and technology have made financial crimes multinational in both conception and realization. Due to the conditions mentioned above, offshore financial centers are preferred in the laundering process. According to Wardle (1999), money laundering process involves three major stages; placement stage where the money is deposited in a bank account to hide its illegal source; dispersion stage, where complex financial transactions are undertaken to make the cash appear legal; and lastly, integration stage where money is invested in the legitimate economy. Offshore financial centers are used right from the first stage of this process. During the placement stage, funds are smuggled offshore using financial institutions or foreign corporations whose owners are anonymous.
Once the illegal funds are deposited in an offshore financial center, additional measures are taken to ensure that the source of the funds remains hidden. This can be done by dispersing the criminal proceeds through one or multiple laundering cycles (Ispas, 2009). Here, the money is transferred to numerous legitimate businesses and bank accounts across several countries. In this second stage, offshore financial centers play a crucial role by offering anonymous, protected accounts with fictitious beneficiaries to the launders so that the sources of the funds remain a secret. At the integration stage, offshore financial centers are used to establish a mirror-image transaction scheme. Here, launders purchase contracts while selling the same number of contracts from a different account so that any loss or profit is effectively offset (Ispas, 2009). At this stage, an offshore corporation is first contracted to legitimate funds and later illegal money in the form of products from a legal transaction.
Davis, M. B. (2008). Gray Areas of Offshore Financial Centers.
Ispas, R. (2009). Money laundering through offshore areas. Annals of the University of Petroşani, Economics, 9(2), 57-66.
Wardle, R. (1999). Money Laundering: A Prosecutor’s Perspective. Journal of Money Laundering Control, 3(2), 125-127.