## _121412a - EXECUTIVE SUMMARY

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### Purpose and scope
- Provides guidance on the inclusion of AML/CFT issues in surveillance and Financial Stability Assessments (FSAs), and a framework for when ML/TF and related predicate crimes are so serious as to threaten:
  - domestic stability;
  - balance of payments stability;
  - the effective operation of the International Monetary System (IMS) in Article IV surveillance; or
  - the stability of the domestic financial system in FSAs.
- Document date: December 14, 2012.
- Prepared by the Legal Department in consultation with other Departments; approved by Sean Hagan.

### Key definitions and relationships
- Money laundering (ML): activities intended to conceal or disguise the origins of proceeds of crime by transforming illegal inputs into apparently legitimate outputs.
- Terrorism financing (TF): raising and processing of funds to supply terrorists with resources to carry out their attacks.
- Predicate crimes (predicate offenses): the underlying crimes that give rise to money laundering (list reproduced in source).
- Close nexus: ML is often inseparable from predicate crimes; TF operations are closely connected to the terrorist acts they enable.
- AML/CFT controls, when effectively implemented, mitigate risks arising from predicate crimes and promote integrity and stability in financial markets.

### Principal findings on economic and financial impacts
- ML, TF, and predicate crimes can undermine domestic financial stability and broader macroeconomic performance through:
  - destabilizing the domestic financial system (loss of depositor confidence, bank runs, bailouts);
  - causing important inward or outward spillovers that affect balance of payments positions and global stability; and
  - corrupting the information base for policymaking when illegal transactions are large enough to distort official statistics.
- Left unchecked, ML, TF, and predicate crimes enable criminals to amass wealth, power, and influence, undermining the rule of law and corrupting society and the economic system.

### Illustrative country cases (verbatim figures and impacts)
- Afghanistan:
  - Over $900 million—or more than 5 percent of the country’s GDP and 50 percent of the government’s budget—diverted from Kabul Bank through interest-free loans to insiders and politically-connected parties and invested in foreign real estate.
  - Deposit outflows: depositors withdrew more than $200 million in a bank run.
  - Central bank bailout to date: $825 million.
- Antigua and Barbuda:
  - Collapse of Stanford’s Ponzi scheme: Antigua’s GDP shrank by 10.7 percent in 2009.
  - Government injection to resolve Bank of Antigua: resources amounting to 3 percent of the country’s GDP.
  - Resulted in a request for a $118 million Fund-supported program in 2010.
- Dominican Republic:
  - BANINTER fraud bailout cost: 21 percent of the country’s GDP.
  - Rapid depreciation of the peso by approximately 65 percent, very high inflation, erosion of real incomes.
  - Social impact: 1.5 million Dominicans (about 16 percent of the population) fell below the poverty line; 670,000 fell into extreme poverty.
- Greece:
  - Estimated unreported income for 2009 for the self-employed: a lower bound of €28 billion.
  - Comparison: GDP for 2009 of €235 billion and a tax base of €98 billion.
  - At the tax rate of 40 percent, foregone tax revenues would have accounted for 31 percent of the budget deficit shortfall in 2009.

### Legal and policy basis for surveillance inclusion
- Guidance follows Board discussion on the AML/CFT program in June 2011 and subsequent staff-management exchanges; Board endorsed staff approach for coverage of AML/CFT and related predicate crimes in FSAs and bilateral surveillance.
- The Integrated Surveillance Decision (ISD), adopted July 18, 2012, informs mandatory inclusion circumstances; ISD applies to Article IV consultations completed by the Executive Board on or after January 18, 2013.
- The ISD requires Fund bilateral surveillance to assess whether a member’s exchange rate policies promote balance of payments stability and whether domestic economic and financial policies promote domestic stability.
- A member’s AML/CFT framework includes both domestic policies (e.g., controls on domestic banking operations) and external policies (e.g., rules governing payments and transfers to financial institutions abroad) that fall within Article IV, Section 1 obligations.

### When to include ML/TF in Article IV reports
- Staff should address ML, TF, or predicate-crime effects in Article IV reports when:
  - (i) in bilateral surveillance, they undermine the member’s domestic or balance of payments stability; or
  - (ii) in multilateral surveillance, they give rise to spillovers that may significantly influence the effective operation of the IMS, including by undermining global economic and financial stability.
- Where included, staff will provide authorities with policy advice on measures to address the identified threats.
- Surveillance should be evenhanded, focused, and selective; staff should apply judgment and a risk-based approach to determine when the problem reaches a sufficient threshold to warrant coverage.

### Impact of ML, TF, and predicate crimes on domestic or balance of payments stability
- Actual or perceived failure to deal effectively with ML or TF can result in loss of access to global financial markets, with potentially negative consequences for financial stability and the economy as a whole.
- National supervisors increasingly prohibit their banks from dealing with financial institutions from countries with weak AML/CFT frameworks or subject such transactions to stricter conditions; this practice is contemplated in the FATF standard and has been called for by fora including the G20 and the FATF’s International Cooperation Review Group (ICRG).
- Financial institutions in some countries may be reluctant to deal with banks from jurisdictions where ML or TF is a major concern.
- Destabilizing inflows and outflows:
  - ML or TF activities may generate significant levels of criminal proceeds or “hot money” flowing into and out of individual financial institutions in ways that are destabilizing.
  - Such inflows/outflows can be cross-border or domestic and, when large relative to the formal sector, can affect the entire financial system and have cross-country or global effects.

### FATF standard and the ICRG process (summary points)
- The FATF’s 40 Recommendations constitute the international standard for AML/CFT and are recognized by the IMF and the World Bank.
- FATF standards cover regulation of financial and certain nonfinancial services, cross-border currency movements, transparency of legal entities, criminal law, institutional capacity, sanctions, and cooperation.
- FATF requires periodic mutual evaluations (peer reviews) of implementation; results are published and followed up.
- The ICRG process identifies and engages jurisdictions that pose significant risk to the international financial system, applies to FATF members and nonmembers, and can lead to public statements and calls for counter-measures.
- In June 2011, Directors supported Fund collaboration with the FATF and ICRG; staff should participate, provide information with consent of the member, and refrain from coercive aspects.

### Transmission mechanisms and effects outside the banking system
- “Hot money” flows:
  - Criminal proceeds placed in a country’s financial system may remain or be transferred abroad; large injections from corruption, tax evasion, or drug trafficking can create volatile inflows/outflows threatening banking stability.
- Impact of terrorism and terrorist financing:
  - Terrorism or TF can undermine financial stability either via history of incidents or a single significant event, rendering sectors (e.g., tourism, transportation) vulnerable and threatening stability of individual banks.
- Effects outside the banking system (especially in countries with rudimentary banking):
  - Illegal transactions conducted in cash may never enter the banking system, impeding banking development and formal intermediation, thereby impeding economic growth.
  - Problems with economic policymaking: a sizable illegal sector and cash-based proceeds can make official data on employment, consumption, and FX transactions misleading, complicating sound policy formulation.
  - Adverse effects on growth: grand corruption harms fiscal balances, FDI, and growth; narcotics production diverts resources from productive activity; illegal logging and environmental crimes destroy natural-resource wealth; large illegal sectors impose deadweight losses and can threaten state functions and rule of law.

### Cross-border spillovers and global stability
- ML, TF, and predicate crimes can produce spillovers:
  - Extensive criminal activity in one country can cause illicit transfers from and large short-term capital flows to another country with destabilizing effects.
  - Availability of ML services in one jurisdiction may facilitate tax evasion in neighboring countries, harming their fiscal positions.
  - Spillovers may transmit via non-balance-of-payments channels (e.g., market contagion from financial fraud triggering interbank defaults) and can be large enough to affect global stability.

### Criteria and guiding questions for mission teams
- Impact of the act of ML/TF on financial sector stability:
  - Is the country’s access to global financial markets vulnerable to AML/CFT-related sanctions and blacklisting? (Main source: the FATF website, complemented by FATF-style regional bodies and recent AML/CFT assessment reports.)
  - What amount of proceeds of crime can be estimated to be laundered in the country’s financial sector? Is this amount large relative to the overall size of the financial sector? Are any systemic financial institutions at risk of abuse as instrumentalities for ML or TF?
  - Are the ML/TF-related weaknesses in the financial sector a potential source or amplifier of domestic or balance of payments instability? Do they have the potential to significantly affect global stability?
- Impact of predicate crimes on financial sector stability:
  - Are criminal elements indicated to own, control, or hold a significant proportion of financial sector assets or significant equity in key financial institutions?
  - Are there indicia of possible regulatory capture by criminal elements or weaknesses in regulatory and criminal justice systems hampering effective supervision?
  - Does a recent terrorist attack or threat undermine stability of key sectors (e.g., banking, tourism, transportation, foreign investment) or otherwise threaten domestic financial stability?
  - Are there risks of financial sector fraud of magnitude to undermine domestic financial stability? (Estimate via Ponzi-scheme indicators such as unduly high interest rates on deposits or returns unaffected by market fluctuations.)
  - Are these elements a potential source or amplifier of domestic or balance of payments instability? Do they have the potential to significantly affect global stability?
  - Are there elements indicating tax crimes may significantly affect government revenue or subject the financial system to volatile “hot money” flows?
- Adverse effects not involving the financial system directly:
  - What is the significance of corruption by government or elected officials relative to the economy or government budget?
  - Are there indications that macroeconomic policy formulation is impaired by unaccounted economic transactions from informal or illegal sectors?
- Adverse effects of developments and policy actions in other countries (inward spillovers):
  - Are criminal activities in other countries likely to impact the member’s domestic or balance of payments stability?
  - Are ML/TF weaknesses or legal changes in other countries likely to affect the member’s domestic or balance of payments stability?
- Spillover effects on the stability of other countries (outward spillovers):
  - Does the level of abuse of financial institutions as instrumentalities for ML or TF pose risks of outward spillovers large enough to cause disruptive exchange rate movements or significantly affect global stability?
  - Is there significant risk of fraud or other crimes of such magnitude as to cause disruptive exchange rate movements or significantly affect global stability through external transfers?

### Inclusion in Article IV consultations and operational roles
- Mandatory discussion:
  - Issues arising from ML, TF, or related predicate crimes that may significantly influence domestic or balance of payments stability of a member, or undermine global stability, should be discussed during the Article IV consultation and covered in the related staff report.
- Voluntary discussion:
  - The Fund’s legal framework permits discussion of AML/CFT issues in Article IV consultations outside the mandatory scope, contingent upon the member’s agreement.
  - Such voluntary discussions constitute a form of “policy advice” under Article V, Section 2(b) of the Fund’s Articles.
  - Coverage on a voluntary basis will not be systematic; staff may discuss AML/CFT-related issues when this could assist the member in addressing emerging ML/TF-related concerns and the member agrees.
  - Typical example: a country identified by the FATF as a jurisdiction with strategic AML/CFT deficiencies where voluntary discussion could assist in addressing concerns at an early stage.
- Role of LEG and country teams:
  - LEG is monitoring on an ongoing basis member countries’ conditions in light of the factors outlined above and dedicating desk-based resources to analyze member countries’ economic developments from a financial integrity perspective on an ongoing basis.
  - For countries where major ML/TF-related concerns are identified, LEG will provide regular updates to country teams.
  - When significant risks for domestic or balance of payments stability or global stability are identified, or when voluntary coverage is appropriate, LEG will provide the Article IV team with a background note to assist in the preparation of the Policy Note.
  - LEG’s diagnostic tools include: analysis of ML/TF-related threats and vulnerabilities based on the most recent AML/CFT assessment, TA reports, information received from the country team, statistics on predicate crimes, press and literature reviews, research, and cross-country comparisons.
  - LEG staff will provide comments on Policy Notes and participate in Policy Consultation Meetings, and will stand ready to provide HQ-based support to the country team during its mission.
  - If AML/CFT-related issues are particularly complex or require specialized knowledge, LEG staff would normally join the Article IV on-site mission.
- Staff report and Board preparation:
  - Following the mission, when AML/CFT-related issues were discussed (mandatory or voluntary), the staff report should include:
    - A discussion of the member’s ML/TF risks.
    - A discussion of the actions being considered by the authorities to mitigate those risks.
  - These elements should be included both in the policy discussion and in the staff appraisal.
  - Staff will provide advice on measures needed to enhance the member’s AML/CFT regime in light of existing threats.
  - AML/CFT issues will generally be discussed under financial sector issues, but may be relevant to fiscal issues or structural reforms.
  - LEG will assist country teams in formulating AML/CFT policy recommendations for the staff report, as necessary.
  - LEG staff stands ready to assist the Article IV team in relation to Board members’ questions on AML/CFT-related issues, and could attend the Board meeting as appropriate.

### Examples of policy advice addressing criminal behaviors in Article IV (high-level)
- Corruption:
  - AML/CFT-related policy advice: Implement measures to detect politically-exposed persons (FATF R.12).
  - Other Fund policies: Put in place an anti-corruption agency (1997 Guidance Note on the Role of the Fund in Governance Issues).
- Tax evasion:
  - AML/CFT-related policy advice: Ensure that financial institutions report suspicions of tax evasion to the authorities (FATF R.20).
  - Other Fund policies: Implement relevant tax policy and revenue administration measures.
- International drug trafficking:
  - AML/CFT-related policy advice: Enhance mutual legal assistance in cases of drug trafficking (FATF R.37).
- Corporate fraud:
  - AML/CFT-related policy advice: Ensure entity transparency (FATF R.24 and R.25).
- Insider abuse in financial institutions:
  - AML/CFT-related policy advice: Prevent criminals or their associates from being the beneficial owners of a financial institution (FATF R.26).
  - Other Fund policies: Promote effective systems of internal management and risk control (Basel Core Principles).

### Decision guidance (Article IV decision tree)
- Key decision points:
  - Are ML/TF or predicate crimes significant in relation to domestic or balance of payments stability or global stability?
  - Is Fund member interested in voluntarily discussing ML/TF or predicate crimes issues raised by staff?
  - Are ML/TF or predicate crimes particularly complex?
- Possible outcomes:
  - No inclusion of ML/TF-related issues in the Article IV consultation.
  - Inclusion and LEG staff to support the country team as appropriate from HQ.
  - Inclusion and LEG staff to join the Article IV mission.

*Source: EXECUTIVE SUMMARY and paragraphs 10, 18–21, AML/CFT Guidance Note, International Monetary Fund, December 14, 2012.*

### EXECUTIVE SUMMARY

### _121412a - EXECUTIVE SUMMARY

### Purpose and scope
- Provides guidance on the inclusion of AML/CFT issues in surveillance and Financial Stability Assessments (FSAs), and a framework for when ML/TF and related predicate crimes are so serious as to threaten:
  - domestic stability;
  - balance of payments stability;
  - the effective operation of the International Monetary System (IMS) in Article IV surveillance; or
  - the stability of the domestic financial system in FSAs.
- Document date: December 14, 2012.
- Prepared by the Legal Department in consultation with other Departments; approved by Sean Hagan.

### Key definitions and relationships
- Money laundering (ML): activities intended to conceal or disguise the origins of proceeds of crime by transforming illegal inputs into apparently legitimate outputs.
- Terrorism financing (TF): raising and processing of funds to supply terrorists with resources to carry out their attacks.
- Predicate crimes (predicate offenses): the underlying crimes that give rise to money laundering (list reproduced in source).
- Close nexus: ML is often inseparable from predicate crimes; TF operations are closely connected to the terrorist acts they enable.
- AML/CFT controls, when effectively implemented, mitigate risks arising from predicate crimes and promote integrity and stability in financial markets.

### Principal findings on economic and financial impacts
- ML, TF, and predicate crimes can undermine domestic financial stability and broader macroeconomic performance through:
  - destabilizing the domestic financial system (loss of depositor confidence, bank runs, bailouts);
  - causing important inward or outward spillovers that affect balance of payments positions and global stability; and
  - corrupting the information base for policymaking when illegal transactions are large enough to distort official statistics.
- Left unchecked, ML, TF, and predicate crimes enable criminals to amass wealth, power, and influence, undermining the rule of law and corrupting society and the economic system.

### Illustrative country cases (verbatim figures and impacts)
- Afghanistan:
  - Over $900 million—or more than 5 percent of the country’s GDP and 50 percent of the government’s budget—diverted from Kabul Bank through interest-free loans to insiders and politically-connected parties and invested in foreign real estate.
  - Deposit outflows: depositors withdrew more than $200 million in a bank run.
  - Central bank bailout to date: $825 million.
- Antigua and Barbuda:
  - Collapse of Stanford’s Ponzi scheme: Antigua’s GDP shrank by 10.7 percent in 2009.
  - Government injection to resolve Bank of Antigua: resources amounting to 3 percent of the country’s GDP.
  - Resulted in a request for a $118 million Fund-supported program in 2010.
- Dominican Republic:
  - BANINTER fraud bailout cost: 21 percent of the country’s GDP.
  - Rapid depreciation of the peso by approximately 65 percent, very high inflation, erosion of real incomes.
  - Social impact: 1.5 million Dominicans (about 16 percent of the population) fell below the poverty line; 670,000 fell into extreme poverty.
- Greece:
  - Estimated unreported income for 2009 for the self-employed: a lower bound of €28 billion.
  - Comparison: GDP for 2009 of €235 billion and a tax base of €98 billion.
  - At the tax rate of 40 percent, foregone tax revenues would have accounted for 31 percent of the budget deficit shortfall in 2009.

### Legal and policy basis for surveillance inclusion
- Guidance follows Board discussion on the AML/CFT program in June 2011 and subsequent staff-management exchanges; Board endorsed staff approach for coverage of AML/CFT and related predicate crimes in FSAs and bilateral surveillance.
- The Integrated Surveillance Decision (ISD), adopted July 18, 2012, informs mandatory inclusion circumstances; ISD applies to Article IV consultations completed by the Executive Board on or after January 18, 2013.
- The ISD requires Fund bilateral surveillance to assess whether a member’s exchange rate policies promote balance of payments stability and whether domestic economic and financial policies promote domestic stability.
- A member’s AML/CFT framework includes both domestic policies (e.g., controls on domestic banking operations) and external policies (e.g., rules governing payments and transfers to financial institutions abroad) that fall within Article IV, Section 1 obligations.

### Guidance to staff on when to include ML/TF in Article IV reports
- Staff should address ML, TF, or predicate-crime effects in Article IV reports when:
  - (i) in bilateral surveillance, they undermine the member’s domestic or balance of payments stability; or
  - (ii) in multilateral surveillance, they give rise to spillovers that may significantly influence the effective operation of the IMS, including by undermining global economic and financial stability.
- Where included, staff will provide authorities with policy advice on measures to address the identified threats.
- Surveillance should be evenhanded, focused, and selective; staff should apply judgment and a risk-based approach to determine when the problem reaches a sufficient threshold to warrant coverage.

### Operational considerations and cross-references
- Threats to stability can stem either directly from ML/TF or from predicate crimes often acting in combination with ML/TF.
- Other Fund policies and external standards may also address these threats (e.g., 1997 Guidance Note on the Role of the Fund in Governance Issues; Code of Good Practices on Fiscal Transparency; Basel Core Principles).
- Transmission mechanisms include destabilization of the financial system, inward/outward spillovers, and adverse effects on macroeconomic data reliability.

*Source: EXECUTIVE SUMMARY, AML/CFT Guidance Note, International Monetary Fund, December 14, 2012.*

### 10.      For the purposes of analyzing the potential impact of these phenomena on domestic

### _121412a - 10.      For the purposes of analyzing the potential impact of these phenomena on domestic

### A. Impact of ML and TF on Domestic or Balance of Payments Stability
- Actual or perceived failure to deal effectively with ML or TF can result in loss of access to global financial markets, with potentially negative consequences for financial stability and the economy as a whole.
- National supervisors increasingly prohibit their banks from dealing with financial institutions from countries with weak AML/CFT frameworks or subject such transactions to stricter conditions; this practice is contemplated in the FATF standard and has been called for by fora including the G20 and the FATF’s International Cooperation Review Group (ICRG).
- Financial institutions in some countries may be reluctant to deal with banks from jurisdictions where ML or TF is a major concern.
- Destabilizing inflows and outflows:
  - ML or TF activities may generate significant levels of criminal proceeds or “hot money” flowing into and out of individual financial institutions in ways that are destabilizing.
  - Such inflows/outflows can be cross-border or domestic and, when large relative to the formal sector, can affect the entire financial system and have cross-country or global effects.

### Box 3: The FATF standard and the ICRG process (summary points)
- The FATF’s 40 Recommendations constitute the international standard for AML/CFT and are recognized by the IMF and the World Bank.
- FATF standards cover regulation of financial and certain nonfinancial services, cross-border currency movements, transparency of legal entities, criminal law, institutional capacity, sanctions, and cooperation.
- FATF requires periodic mutual evaluations (peer reviews) of implementation; results are published and followed up.
- The ICRG process identifies and engages jurisdictions that pose significant risk to the international financial system, applies to FATF members and nonmembers, and can lead to public statements and calls for counter-measures.
- In June 2011, Directors supported Fund collaboration with the FATF and ICRG; staff should participate, provide information with consent of the member, and refrain from coercive aspects.

### B. Impact of Predicate Crimes on Domestic or Balance of Payments Stability
- Financial sector fraud:
  - ML may be associated with broader financial sector fraud (e.g., large-scale “Ponzi schemes”) that can cause bank insolvencies, large capital outflows, and loss of market access due to reputational deterioration.
- Compromised financial sector supervision:
  - If important financial institutions are owned or controlled by criminal elements, authorities may struggle to supervise and address problems before domestic financial stability is undermined.
- Corruption:
  - Corruption generates significant proceeds to be laundered; bribery and governance issues can create reputational risk for recipient financial institutions, threaten offshore centers, and cause destabilizing outflows for source countries.
- Tax crimes:
  - ML associated with tax fraud can undermine financial or macroeconomic activity; significant tax crimes may erode government revenue to the point of severely undermining the fiscal balance.

### C. Transmission Mechanisms
- “Hot money” flows:
  - Criminal proceeds placed in a country’s financial system may remain or be transferred abroad; large injections from corruption, tax evasion, or drug trafficking can create volatile inflows/outflows threatening banking stability.
- Impact of terrorism and terrorist financing:
  - Terrorism or TF can undermine financial stability either via history of incidents or a single significant event, rendering sectors (e.g., tourism, transportation) vulnerable and threatening stability of individual banks.
- Effects outside the banking system (especially in countries with rudimentary banking):
  - Illegal transactions conducted in cash may never enter the banking system, impeding banking development and formal intermediation, thereby impeding economic growth.
  - Problems with economic policymaking: a sizable illegal sector and cash-based proceeds can make official data on employment, consumption, and FX transactions misleading, complicating sound policy formulation.
  - Adverse effects on growth: grand corruption harms fiscal balances, FDI, and growth; narcotics production diverts resources from productive activity; illegal logging and environmental crimes destroy natural-resource wealth; large illegal sectors impose deadweight losses and can threaten state functions and rule of law.

### Cross-border spillovers and global stability
- ML, TF, and predicate crimes can produce spillovers:
  - Extensive criminal activity in one country can cause illicit transfers from and large short-term capital flows to another country with destabilizing effects.
  - Availability of ML services in one jurisdiction may facilitate tax evasion in neighboring countries, harming their fiscal positions.
  - Spillovers may transmit via non-balance-of-payments channels (e.g., market contagion from financial fraud triggering interbank defaults) and can be large enough to affect global stability.

### Cases for inclusion of ML/TF-related issues in Article IV surveillance
- Whenever ML, TF, or related predicate crimes may significantly influence a member’s present or prospective domestic or balance of payments stability, or give rise to external spillovers that undermine global stability, they should be addressed in the Article IV consultation.
- These issues are not expected to be discussed routinely but should be raised when sufficiently serious for bilateral or multilateral surveillance.

### Criteria and guiding questions for mission teams (to identify and prioritize ML/TF-related concerns)
Impact of the act of ML/TF on financial sector stability
- Is the country’s access to global financial markets vulnerable to AML/CFT-related sanctions and blacklisting? (Main source: the FATF website7, complemented by FATF-style regional bodies and recent AML/CFT assessment reports.)
- What amount of proceeds of crime can be estimated to be laundered in the country’s financial sector? Is this amount large relative to the overall size of the financial sector? Are any systemic financial institutions at risk of abuse as instrumentalities for ML or TF? (Estimates derive from analysis of domestic crime and potential laundering of foreign proceeds of crime.8)
- Are the ML/TF-related weaknesses in the financial sector a potential source or amplifier of domestic or balance of payments instability? Do they have the potential to significantly affect global stability? (Focus on real-financial linkages as in the Guidance Note for Article IV Consultations.9)

Impact of predicate crimes on financial sector stability
- Are criminal elements indicated to own, control, or hold a significant proportion of financial sector assets or significant equity in key financial institutions? (Sources: news reports; discussions with supervisory authorities; AML/CFT assessment reports related to fit-and-proper requirements for managers and beneficial owners.)
- Are there indicia of possible regulatory capture by criminal elements or weaknesses in regulatory and criminal justice systems hampering effective supervision? (Sources: news reports; international organizations/NGO reports on corruption and governance; AML/CFT assessment reports on structural elements and supervisory effectiveness.)
- Does a recent terrorist attack or threat undermine stability of key sectors (e.g., banking, tourism, transportation, foreign investment) or otherwise threaten domestic financial stability? (Sources: domestic and international threat assessments, analyzed relative to jurisdictional specifics.)
- Are there risks of financial sector fraud of magnitude to undermine domestic financial stability? (Estimate via Ponzi-scheme indicators such as unduly high interest rates on deposits or returns unaffected by market fluctuations.)
- Are these elements a potential source or amplifier of domestic or balance of payments instability? Do they have the potential to significantly affect global stability? (Focus on real-financial linkages as per Guidance Note for Article IV Consultations.10)
- Are there elements indicating tax crimes may significantly affect government revenue or subject the financial system to volatile “hot money” flows? (Estimate from size of the informal economy, statistical information, changes in legal frameworks, or identification as a non-cooperative jurisdiction, e.g., by the OECD’s Global Forum.)

Adverse effect of ML, TF, or related predicate crimes not necessarily involving the financial system directly
- What is the significance of corruption by government or elected officials relative to the economy or government budget? (Sources: reports by international organizations, NGOs, media; analysis of state and local budgets for indicators of corruption.)
- Are there indications that macroeconomic policy formulation is impaired by unaccounted economic transactions from informal or illegal sectors? (Indicators: size of informal sector, use of cash relative to GDP, contribution of drug production/trafficking to GDP or exports; sources include international organization reports, media, academic papers, statistical and law enforcement analysis.)

Adverse effects of developments and policy actions in other countries (inward spillovers)
- Are criminal activities in other countries likely to impact the member’s domestic or balance of payments stability? (Examples: major banking fraud in an interconnected jurisdiction; changes in proceeds from drug production in an interconnected country affecting the member’s financial system or real estate sector.)
- Are ML/TF weaknesses or legal changes in other countries likely to affect the member’s domestic or balance of payments stability? (Examples: international sanctions on a major trade partner affecting bilateral trade; amendments in an offshore center’s legal framework making it more attractive for proceeds of tax evasion.)

Spillover effects on the stability of other countries (outward spillovers)
- Does the level of abuse of financial institutions as instrumentalities for ML or TF pose risks of outward spillovers large enough to cause disruptive exchange rate movements or significantly affect global stability? (Estimate impact via analysis of jurisdiction vulnerabilities, financial flows, and exposure of jurisdictions with important levels of proceeds of crime.)
- Is there significant risk of fraud or other crimes (e.g., financial sector fraud, tax evasion, currency smuggling) of such magnitude as to cause disruptive exchange rate movements or significantly affect global stability through external transfers? (Estimate via fraud indicators and analysis of direction of financial/trade flows or balance of payments disaggregated by foreign counterpart.)

*Source: _121412a - 10. For the purposes of analyzing the potential impact of these phenomena on domestic or balance of payments stability or global stability (https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_121412a.pdf)*

### 18.       Whenever issues arising from ML, TF, or related predicate crimes may significantly

### 18.       Whenever issues arising from ML, TF, or related predicate crimes may significantly influence the domestic or balance of payments stability of a member, or undermine global stability, they should be discussed during the Article IV consultation with the member and covered in the related staff report.

### Inclusion in Article IV consultations
- Mandatory discussion:
  - Issues arising from ML, TF, or related predicate crimes that may significantly influence domestic or balance of payments stability of a member, or undermine global stability, should be discussed during the Article IV consultation and covered in the related staff report.
- Voluntary discussion (Box 4):
  - The Fund’s legal framework permits discussion of AML/CFT issues in Article IV consultations outside the mandatory scope, contingent upon the member’s agreement.
  - Such voluntary discussions constitute a form of “policy advice” under Article V, Section 2(b) of the Fund’s Articles.
  - Coverage on a voluntary basis will not be systematic; staff may discuss AML/CFT-related issues when this could assist the member in addressing emerging ML/TF-related concerns and the member agrees.
  - Typical example: a country identified by the FATF as a jurisdiction with strategic AML/CFT deficiencies where voluntary discussion could assist in addressing concerns at an early stage.

### Role of LEG and country teams (paragraphs 18–20)
- LEG monitoring and support:
  - LEG is monitoring on an ongoing basis member countries’ conditions in light of the factors outlined above.
  - LEG is dedicating desk-based resources to analyze member countries’ economic developments from a financial integrity perspective on an ongoing basis. (paragraph 19)
  - For countries where major ML/TF-related concerns are identified, LEG will provide regular updates to country teams. (footnote 11)
- Background note and diagnostics:
  - When significant risks for domestic or balance of payments stability or global stability are identified, or when voluntary coverage is appropriate, LEG will provide the Article IV team with a background note to assist in the preparation of the Policy Note. (paragraph 19)
  - LEG’s diagnostic tools include: analysis of ML/TF-related threats and vulnerabilities based on the most recent AML/CFT assessment, TA reports, information received from the country team, statistics on predicate crimes, press and literature reviews, research, and cross-country comparisons. (paragraph 19)
  - LEG staff will provide comments on Policy Notes and participate in Policy Consultation Meetings, when appropriate. (paragraph 19)
- Mission support and staffing:
  - During the mission, the country team will discuss AML/CFT-related issues with the authorities, as appropriate. If necessary, LEG staff will prepare an issues note, talking points, and other supporting material for the Article IV team. (paragraph 20)
  - LEG staff will stand ready to provide HQ-based support to the country team during its mission. (paragraph 20)
  - If AML/CFT-related issues are particularly complex or require specialized knowledge, LEG staff would normally join the Article IV on-site mission. (paragraph 20)

### Staff report and Board preparation (paragraph 21)
- Staff report content:
  - Following the mission, when AML/CFT-related issues were discussed (mandatory or voluntary), the staff report should include:
    - A discussion of the member’s ML/TF risks.
    - A discussion of the actions being considered by the authorities to mitigate those risks.
  - These elements should be included both in the policy discussion and in the staff appraisal. (paragraph 21)
- Advice and sector relevance:
  - Staff will provide advice on measures needed to enhance the member’s AML/CFT regime in light of existing threats.
  - AML/CFT issues will generally be discussed under financial sector issues, but may be relevant to fiscal issues (e.g., tax evasion) or structural reforms (e.g., corruption). (paragraph 21)
  - LEG will assist country teams in formulating AML/CFT policy recommendations for the staff report, as necessary. (paragraph 21)
- Board meeting support:
  - LEG staff stands ready to assist the Article IV team in relation to Board members’ questions on AML/CFT-related issues, and could attend the Board meeting as appropriate. (paragraph 21)

### Examples of policy advice addressing criminal behaviors in Article IV (Table 1 highlights)
- Corruption:
  - AML/CFT-related policy advice: Implement measures to detect politically-exposed persons (FATF R.12)
  - Other Fund policies: Put in place an anti-corruption agency (1997 Guidance Note on the Role of the Fund in Governance Issues)
  - Outside Fund’s policy advice: Reduce military spending
- Tax evasion:
  - AML/CFT-related policy advice: Ensure that financial institutions report suspicions of tax evasion to the authorities (FATF R.20)
  - Other Fund policies: Implement relevant tax policy and revenue administration measures (see BUFF/10/55)
  - Outside Fund’s policy advice: Increase the number of criminal convictions for tax evasion
- International drug trafficking:
  - AML/CFT-related policy advice: Enhance mutual legal assistance in cases of drug trafficking (FATF R.37)
  - Outside Fund’s policy advice: Eradicate drug cultivation
- Corporate fraud:
  - AML/CFT-related policy advice: Ensure entity transparency (FATF R.24 and R.25)
  - Other Fund policies: Disclose capital structures and arrangements (OECD Principles on Corporate Governance)
  - Outside Fund’s policy advice: Encourage settlements with fraudsters in order to recover assets
- Insider abuse in financial institutions:
  - AML/CFT-related policy advice: Prevent criminals or their associates from being the beneficial owners of a financial institution (FATF R.26)
  - Other Fund policies: Promote effective systems of internal management and risk control (Basel Core Principles)
  - Outside Fund’s policy advice: Encourage change of shareholders in a specific financial institution

### Decision guidance (Article IV decision tree)
- Key decision points:
  - Are ML/TF or predicate crimes significant in relation to domestic or balance of payments stability or global stability?
  - Is Fund member interested in voluntarily discussing ML/TF or predicate crimes issues raised by staff?
  - Are ML/TF or predicate crimes particularly complex?
- Possible outcomes:
  - No inclusion of ML/TF-related issues in the Article IV consultation.
  - Inclusion and LEG staff to support the country team as appropriate from HQ.
  - Inclusion and LEG staff to join the Article IV mission.

*Source: AML/CFT Guidance Note, paragraphs 18–21, decision tree.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_121412a.pdf_