Aveneu Park, Starling, Australia

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The trajectory of financial activities established various theories that established money laundering dated to the days of classical economies of The Wealth of the Nation by Adam Smith and the regulated regimes of Keynesian economic theory. This leads to the agency theory and the gradual development of transparency and accountability theory arising from the need for more governance.

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Theories specific to money laundering from “Crying Wolf Theory”, the Game theory, System theory of Anti-Money Laundering (AML), and the theory of financial crime all explain the risk of economic failure arising from the activities of money laundering. This paper will focus on the theory of financial crime to explain the framework of criminal conduct and behaviour of the corporate institutions in perpetrating corruption and economic crimes using corporate entity to pass on dirty money.

Generally, a financial crime is used to refer to certain activities related to the financial market or to the handling of the proceeds of a crime. The activities or form of misconduct, including the misuse of information, involved can be characterised as dishonest or fraudulent. The IMF, however, has defined financial crimes as non-violent crimes the consequences of which entail loss. They embrace crimes such as money laundering and tax evasion. The concept of financial crime was first introduced by Edwin Sutherland in 1935 when he used it in association with white collar crimes. However, traces of financial crimes can be noted as far back as two thousand years ago during the eras of Byzantine and the Romans, both of which had encountered problems relating to forgeries and counterfeiting.

The classic theory often used to explain financial crimes is the rational choice theory, which was first conceptualized by sociologist George Homans. It is anchored on the idea that criminals, in this case financial criminals, are rational beings who are capable of calculating or weighing options before arriving at decisions. The gist of the rational choice theory is that the offender usually decides by weighing two options, – the benefits of the criminal act, on one hand, and the probability of getting caught and convicted for doing such act multiplied by its penalty, on the other. If in the view of the actor, the first option weighs more than the second option, then he will commit the criminal act. This is called rational choice theory because it uses reasoning, flawed as it is, in determining the choice of actions. It is grounded on the natural presumption that human behaviour naturally chooses from among a set of preferences that give him the most optimal or maximized utility. Despite the loopholes or weaknesses that this theory sometimes reveal when used in explaining financial crimes, it, nonetheless, remains a very popular choice among economic and criminal theorists. 

The rational choice theory of financial crimes seems to be an appropriate theory in explaining the rationale behind money laundering because of its specific focus and the mindset behind the crime. The crime of money laundering entails not only clever deviousness, but also extensive knowledge of financial markets and financial schemes. In other words, the crime necessarily requires the capacity and the use of higher intelligence. The rational choice theory, on the other hand, focuses on the micro-level aspects of the crime – the individual behind it and the decision-making process. Moreover, the significance of the theory to the crime is also increased by the fact that the theory permits the possibility of engagement in cost-benefit analysis that takes into consideration risks, efforts and future rewards. In solving financial crimes, such as money laundering, employing the rational choice theory authorities need to focus on the cost benefit and make it less enticing to the potential criminal. This does not mean, however, that all offenders make the same assumptions or look at choices from similar perspectives, because even the rational choice theory understands that crimes are offender-specific. The only common ground here that the authorities must realize is that this theory assumes the involvement of purposive and deliberate decision-making that takes into consideration various options. 

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