Why the wanton spending at NYS smells of money laundering scam

Opinion and Analysis

A man counts bank notes. Illegally obtained proceeds of crime should be traced, confiscated and returned to the government. PHOTO | FILE 

By MERCY BUKU

In Summary

• The nature and magnitude of the transactions was such as to warrant suspicion.

The National Youth Service (NYS) scandal epitomises money laundering in all its forms.

The term money laundering refers to the process of “making dirty money clean”; the dirty money being proceeds of crime derived from illegal activities, which is then disguised — normally through deposits in banks or other financial institutions — so as to appear as if it has been derived from legal activities.

Under the Proceeds of Crime and Money Laundering Act, 2009, the offence carries a penalty of 14 years imprisonment and, or, a Sh5 million fine for individuals.

Corporates pay a fine of Sh25 million or the value of the property involved, whichever is higher. For money laundering to occur, there must be an underlying offence such as fraud, corruption, or any other economic crime or criminal activities from which proceeds of crime are derived.
The offence is committed in three stages; placement, layering and integration.

Under placement, the dirty money is transferred in cash to either legitimate financial institutions or used to buy high-value things such as land, cars, houses, or insurance policies. The deposits can also be made by cheque.

The money is then transferred from the account through various financial transactions, such as multiple transfers, to external accounts and currency exchanges to change its form and make it difficult to follow. This is called layering. Finally, the money is re-introduced into the mainstream economy in a legitimate-looking form. This is integration.

This may involve setting up a business, buying and selling capital assets such as machinery and property, redemption of investments bought in the layering stage, and trading in securities.

The proceeds can also be used to fund further criminal activity; including terrorism. Money laundering and other underlying offences can negatively impact society and a country’s economy and reputation in various ways.

These include enhancing criminal activities such as bribery, corruption and tax evasion, which subject legitimate businesses to unfair competition.

Money laundering can also cause grave investment losses due to stock market manipulation at the layering stage, and mega economic crime scandals such as the Goldenberg case.

It can also cause distortion of the economy and loss of control of economic policy, which also impacts a country’s reputation.

In the NYS case, the core offence was fraud on a grand scale; perpetrated through falsification of invoicing data to inflate payments to the suspects who are alleged to have set up various companies to receive the payments (proceeds of crime).

Depositing the funds in accounts opened in suspect companies’ names at local banks formed the placement stage.

The funds were immediately withdrawn or transferred. This is the layering stage.

The whereabouts of the funds in the integration stage are still under investigation; but it would not be surprising to discover that they were used to buy property or make major capital investments, or to fund further criminal activity.