February 10, 1998
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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?
