"Money laundering and the financing of terrorism are financial crimes with economic effects. They can threaten the stability of a country's financial sector or its external stability more generally. Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse. Action to prevent and combat money laundering and the financing of terrorism thus responds not only to a moral imperative, but also to an economic need." – Min Zhu, Deputy Managing Director of the IMF
Money laundering is a process by which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity. Terrorism financing involves the raising and processing of funds to supply terrorists with resources to carry out their attacks. While the phenomena differ in many ways, they often exploit the same vulnerabilities in financial systems that allow for an inappropriate level of anonymity and nontransparency in the execution of financial transactions.
In 2000, the IMF responded to calls from the international community to expand its work in the area of anti-money laundering (AML). After the tragic events of September 11, 2001, the IMF intensified its AML activities and extended them to include combating the financing of terrorism (CFT). In 2009, the IMF launched a donor-supported trust fund to finance technical assistance in AML/CFT. In 2011, the IMF’s Executive Board reviewed the effectiveness of the Fund’s AML/CFT program and gave strategic guidance for the work ahead.
A threat to economic and financial stability
The international community has made the fight against money laundering and terrorist financing a priority. The IMF is especially concerned about the possible consequences money laundering, terrorist financing, and related governance issues have on the integrity and stability of the financial sector and the broader economy. These activities can undermine the integrity and stability of financial institutions and systems, discourage foreign investment, and distort international capital flows. They may have negative consequences for a country’s financial stability and macroeconomic performance, resulting in welfare losses, draining resources from more productive economic activities, and even have destabilizing spillover effects on the economies of other countries. In an increasingly interconnected world, the negative effects of these activities are global, and their impact on the financial integrity and stability of countries is widely recognized. Money launderers exploit both the complexity inherent in the global financial system as well as differences between national anti-money laundering laws and systems, and they are especially attracted to jurisdictions with weak or ineffective controls where they can move their funds more easily without detection. Moreover, problems in one country can quickly spread to other countries in the region or in other parts of the world.
Strong AML/CFT regimes enhance financial sector integrity and stability, which in turn facilitate countries’ integration into the global financial system. They also strengthen governance and fiscal administration. The integrity of national financial systems is essential to financial sector and macroeconomic stability both on a national and international level.
International standards guide effective AML/CFT regimes
The Financial Action Task Force on Money Laundering (FATF), a 36-member inter-governmental body established by the 1989 G-7 Summit in Paris, has primary responsibility for developing a worldwide standard for AML and CFT. It works in close cooperation with other key international organizations, including the IMF, the World Bank, the United Nations, and FATF-style regional bodies (FSRBs).
In order to identify steps that national governments should take to implement effective AML/CFT regimes, the FATF issued a list of recommendations which set out a basic, universally applicable framework of measures covering the criminal justice system, the financial sector, certain non-financial businesses and professions, and mechanisms of international cooperation. In February 2012, these recommendations were revised and updated (The FATF Recommendations). In February 2013, the FATF adopted the new Methodology for Assessing Technical Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems. The work of the FATF, as well as the IMF’s in AML/CFT efforts, has been supported by the G-7 and the G-20, most recently in the context of initiatives to address the 2008–2009 international financial crises and the aftermath.
The IMF’s role in AML/CFT efforts
During the past 13 years, the IMF’s efforts in this area helped shape international AML/CFT policies, and included over 70 AML/CFT assessments, involvement in Article IV and input into the design of AML/CFT-related program measures, a large number of technical assistance, and research projects. The IMF’s broad experience in conducting financial sector assessments, exercising surveillance over members’ economic systems and providing technical assistance to its member countries has been particularly helpful in evaluating countries’ compliance with the international AML/CFT standard and in developing programs to help them address identified shortcomings.
In line with a growing recognition of the importance of financial integrity issues for the IMF, the AML/CFT program has evolved over the years. In 2004, the Executive Board agreed to make AML/CFT assessments and technical assistance a regular part of IMF work. On June 1, 2011, the Executive Board discussed a report reviewing the evolution of the IMF’s AML/CFT program over the past five years and provided guidance as to how to move forward in this area. The key outcomes of the discussion can be found here. On December 14, 2012, a Guidance Note on the inclusion of AML/CFT in surveillance and financial stability assessments (FSAs) was issued. It provides a framework to deal with cases where money laundering, terrorism financing, and related crimes are so serious as to threaten domestic stability, balance of payments stability, the effective operation of the international monetary system—in the case of Article IV surveillance, or the stability of the domestic financial system—in the case of FSAs.
In April 2009, the IMF launched a donor-supported trust fund—the first in a series of Topical Trust Funds (TTF)—to finance technical assistance in AML/CFT. Switzerland, Norway, the United Kingdom, Canada, Kuwait, Qatar, Saudi Arabia, Japan, Luxembourg, the Netherlands, Korea, and France have committed to collectively provide US$27.3 million over five years to the financing of the TTF to contribute to the strengthening of AML/CFT regimes worldwide using the IMF’s proven expertise and infrastructure. The TTF has begun its fourth year of operations and plans to implement approximately 40 technical assistance projects in over 30 countries this year. In light of the success of the program, and in light of continuing high demand for technical assistance in this area, a new five-year phase of the TTF is currently under discussion for the period 2014-2019.