A new form of illicit finance

Political money-laundering is a relatively new form of money-laundering that refers to the use of “dark money” to subvert or destabilize democracy. As such, it differs from ordinary money-laundering, which is the process by which criminals disguise the origins of the proceeds from criminal activity and make them appear as legitimate. Ordinary money-laundering is associated with crime, corruption and tax evasion. As such, it is known to have adverse economic and social consequences. Political money-laundering, on the other hand, can have deleterious consequences for democracy, in addition to any social and economic consequences. Not only can it affect election or referendum outcomes but it can also sponsor political extremism and divisive rhetoric, thereby undermining the functioning of democracies. The rise of “populist” parties and politicians in western Europe and the United States is now widely believed to have been associated with political money-laundering (e.g., see Barnett & Sloan 2018). In the case of Europe, such parties and politicians have used anti-European rhetoric. Their growing popularity represents a significant threat to the future of the euro. This chapter explains how the vulnerabilities in regulation have allowed political money-laundering to flourish and makes recommendations for how these weaknesses can be addressed.

From illicit financial flows to the financing of terrorism and subversion

Illicit financial flows are usually defined as the transfer of financial capital out of a country in contravention of national or international laws. Such flows generally arise from illegal or corrupt practices, but that is not always the case. The source of funds can be legal but the transfer itself may be illegal, as is the case, for example, with tax evasion. The use of funds could also be legal (e.g. private consumption), or illegal (e.g. terrorist financing, fraud or bribery). Illicit financial flows often involve highly complex schemes or criminal networks that establish multilayered, multi-jurisdictional structures that hide the ultimate ownership of the funds. At the opposite end of the spectrum, they can be simple private transfers of funds to offshore accounts intended to evade taxes.