Address by Michel Camdessus
Managing Director of the International Monetary Fund
at the Plenary Meeting of the Financial Action Task Force
on Money Laundering
Paris, February 10, 1998
The statement at the October 1996 Annual Meetings in Washington D.C. of the IMF’s
Interim Committee—its highest decision-making authority—featured money
laundering as one of the most serious issues facing the international financial community.
This is a confirmation, if at all needed, of our wish to develop our relationship with you as
the main body for dealing with money laundering, and this is also why I wished to come here
today to honor your remarkable work, which has been most impressive in its scope and the
speed with which it has been geared up. Let me do so by putting this question before you:
why is money laundering viewed as such a serious threat to the global monetary system? And
if it is a threat, what is the role that the IMF can play in assisting the work of the FATF? How
can we limit this threat, which can take on such proportions that it undermines the
effectiveness of macroeconomic policy?
* * * * *
Macroeconomic impact of money laundering
I hardly need say that the IMF regards the anti-money laundering actions advocated by the
FATF as crucial for the smooth functioning of the financial markets. While we cannot
guarantee the accuracy of our figures—and you have certainly a better evaluation than
us—the estimates of the present scale of money laundering transactions are almost
beyond imagination—2 to 5 percent of global GDP would probably be a consensus
range. This scale poses two sorts of risks: one prudential, the other macroeconomic. Markets
and even smaller economies can be corrupted and destabilized. We have seen evidence of this
in countries and regions which have harbored large-scale criminal organizations. In the
beginning, good and bad monies intermingle, and the country or region appears to prosper,
but in the end Gresham’s law operates, and there is a tremendous risk that only the
corrupt financiers remain. Lasting damage can clearly be done, when the infrastructure that
has been built up to guarantee the integrity of the markets is lost. Even in countries that have
not reached this point, the available evidence suggests that the impact of money laundering is
large enough that it must be taken into account by macroeconomic policy makers. Money
subject to laundering behaves in accordance with particular management principles. There is
evidence that it is less productive, and therefore that it contributes minimally, to say the least,
to optimization of economic growth. Potential macroeconomic consequences of money
laundering include, but are not limited to: inexplicable changes in money demand, greater
prudential risks to bank soundness, contamination effects on legal financial transactions, and
greater volatility of international capital flows and exchange rates due to unanticipated
cross-border asset transfers.
Moreover, I should add that while, from the viewpoint of the Fund as a financial institution, I
emphasize the economic costs, we must also remember the social and political dimensions of
crime and related money laundering—the suffering of the victims and the overall
weakening of the social fabric and collective ethical standards. All of this lends urgency to
anti-laundering efforts, which attack criminal activity at the most vulnerable
point—where its proceeds enter the financial system.
But does this mean that we should abandon the liberalization of the financial markets? This
high-minded argument is often raised by those of our critics who believe that the IMF should
halt its efforts to move its members away from control-based, towards market-based,
financial systems because such systems open up possibilities for money launderers. Some
have argued that keeping in place centralized credit allocation and foreign exchange control
systems is necessary to identify money launderers—even if we now know that such
systems are inimical to economic growth. However, I am reassured that Recommendation 22
of the FATF’s 40 Recommendations is very clear on this point: "Countries
should ... monitor the physical cross-border transportation of cash and bearer
instruments—without impeding in any way the freedom of capital movements."
Information, rather than control of the transactions, is the key to the basic "know your
customer" approach of the FATF. More generally, the value of adequate information to
guide the supervision of financial markets has been made very clear by recent events in
South-East Asia. It is not just free financial markets that the IMF advocates, but also modern
financial markets—in which there is a good measure of transparency and prudential
regulation to ensure the fairness, soundness, and legality of the systems. Adoption of the
FATF’s recommendations is an important part of that aspect of market development.
On the other hand, controls of all kinds and state interventions do not have an impressive
record in avoiding money laundering, while they frequently create opportunities for
corruption. Does this still hold true in a context of globalization?
Globalization and money laundering
Globalization of financial markets is one of the most important contemporary developments.
What are its implications for the fight against money laundering? Clearly, globalization
implies that the prevention strategies must be universally applied. All countries must
participate—and participate enthusiastically—or the money being laundered will
flow quickly to the weakest point in the international system. It is in this respect that the
FATF plays an especially important role. It has developed a comprehensive and authoritative
set of international standards for anti-money laundering policies, and procedures for their
application and enforcement. Through its so-called "typologies" exercises, the
FATF has pooled the intelligence of its members regarding financial instruments and
institutions used by the money launderers, and this is reflected in its standards. The FATF has
also been energetic in spreading its message beyond its own membership, which is comprised
largely of the industrial countries. Like the IMF, it has found the "mission"
format, by which groups of FATF experts visit nonmember countries, to be valuable in
disseminating and promoting its policies. But this process is even more effective when the
countries concerned are members of the FATF group—and can enjoy the immediacy,
"ownership," and self-evaluation that come with membership. It is therefore a
significant achievement that the FATF has established, within the few years since its own
formation, two regional offshoots—the Caribbean FATF, and very recently, the
Asia/Pacific Group on Money Laundering. These regional bodies will play an important role
in promoting the "modern" financial markets that I referred to
earlier—taking into account the special features and state of development of the regional
systems.
Good governance
Much has been accomplished, but much remains to be done—on your part and our own.
Our efforts and your efforts cannot be separated from the global strategy of improving
governance. The IMF is increasingly incorporating governance issues within its overall
mandate. The IMF’s Interim Committee, at its meeting in Washington in September
1996, adopted a declaration which identified "promoting good governance in all its
aspects, including ensuring the rule of law, improving the efficiency and accountability of the
public sector, and tackling corruption" as an essential element of a framework within
which economies can prosper. Particularly in countries where there is significant participation
of government institutions or officials in illegal activities—which yields proceeds that
must then be laundered—the adoption of anti-laundering policies can have far-reaching
effects on governance. In such countries, the IMF is actively using its available leverage to
persuade the authorities to take the necessary steps. The global nature of the IMF’s
surveillance and technical assistance activities offers opportunities for raising awareness of
the need for a robust international anti-money laundering system—pointing to the need
for governments to adopt effective anti-laundering legislation, and to contact the FATF for its
expert assistance in developing detection and enforcement capabilities. An important step
toward full international coverage of this system will be the creation of further regional
FATFs—notably for the transitional economies of Europe, and in the African and
Middle Eastern regions.
Role of banking supervision
Another area of the Fund’s work that has a close association with the fight against
money laundering is that of banking supervision. The Core Principles for Effective Banking
Supervision, approved by the Basle Committee in September 1997, state that "Banking
supervisors must determine that banks have adequate policies, practices and procedures in
place, including strict ‘know-your-customer’ rules, that promote high ethical
and professional standards in the financial sector and prevent the bank being used,
intentionally or unintentionally, by criminal elements." The IMF provides extensive
policy and technical assistance to central banks and other national institutions around the
world in building up their supervisory capabilities. This assistance has been framed around,
and in fact has contributed to, the core principles. Recent developments have shown an acute
need for actions to strengthen the infrastructure for prudential supervision in some countries
that otherwise have relatively advanced financial markets, but where inadequate supervision
remains an "Achilles heel." Top priority must be given to developing supervision
of financial sectors. Such supervisory frameworks will also constitute an important means of
generating close adherence to the FATF’s principles. They are in the best interest not
only of the international system, but also, and first and foremost, of the individual countries
concerned.
In the context of banking supervision, I would like to say a special word about offshore
banking centers. With the widespread elimination of exchange controls and the emergence of
domestic derivative finance, the traditional role of the offshore centers has diminished.
However, the proliferation of smaller offshore centers offering "tax and regulatory
services," including secrecy and confidentiality, is a cause for concern. Some of the
offshore centers feature prominently in international discussions of serious money laundering
problems. Even with the government’s best will—and that is sometimes not
present—very small countries or territories tend to lack the expert resources needed to
supervise large numbers of offshore banks. Caution thus dictates that licenses to operate
offshore facilities in such countries should be granted only to proven institutions that are
adequately supervised in their respective countries of origin. I am not sure that this is always
the case, and the question is whether the international community can continue to tolerate
these weak links in its organization.
Other related work of the IMF
What other aspects of the IMF’s activities bear on the money laundering
problem?
- First, in many countries, the IMF provides technical and policy assistance to members in
drafting new central bank and commercial banking laws. This provides a good opportunity to
remind countries of the need for anti-laundering provisions, such as the obligation to verify
the identity of customers and to report suspicious transactions to the police or similar
enforcement groups. Model laws, which draw together expertise of other countries, can
provide a very useful start to this process.
- Then there are the IMF’s research and statistical functions. It
probably does not surprise you to know that IMF staff have been active in researching
underground economies and the closely related money laundering problem for almost two
decades now. Good analysis is necessary to determine the scope and form of the money
laundering problem, and to help direct enforcement resources efficiently to the key aspects of
the problem. Good data are also necessary—money laundering is by definition a hidden
activity—and therefore indicators must be drawn from a wide range of economic and
social data. Although not directly usable to identify money laundering, extensive international
financial and cross-border data compiled by the IMF have been used in a number of
economic studies of money laundering. In fact, money laundering is now an important
consideration for compilers of international data because it creates global asymmetries in the
data.
- Finally, there is the IMF’s work on fiscal issues, and on tax
evasion in particular. Although some members’ anti-money laundering
legislation does not apply to the proceeds of tax evasion, there are inevitably close linkages
between the two. Money that has evaded taxes must be disguised, and laundered money must
be kept hidden from the tax authorities. The IMF’s policy and technical work to help
its members improve their tax collections therefore assists the fight against money
laundering—directly or indirectly, depending on the relevant legislation in the
individual country.
* * * * *
I will conclude by emphasizing once again that there is no conflict between free, competitive
markets and anti-money laundering regulations. On the contrary, there is considerable
synergism between the two. The same oversight and supervision mechanisms that operate to
ensure the smooth functioning of the market-oriented financial system make a strong
contribution to the information base and the general environment of integrity that supports
the FATF policies. Conversely, money-laundering seriously undermines the functioning of
markets, with a consequent negative impact on economic growth. It is true that the regulatory
policies to achieve both sets of aims are by necessity those of sovereign nations and cannot
simply be imposed on them. But unquestionably, they deserve the support of all—the
international financial and enforcement communities, as well as the individual banks,
nonbank intermediaries, and regulators in each of the countries. And we as international
bodies must ensure that the policies are
perceived as being in the
self-interest of all. It need hardly be said that the quality of our cooperation will only add to
the strength of our common message!