Money Laundering: the Importance of International Countermeasures--Address by Michel Camdessus

IMF News, February 10, 1998

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Remarks delivered at the Plenary Meeting of the Financial Action Task Force on Money Laundering, Paris, February 10, 1998.
Speaker: Michel Camdessus, Managing Director of the International Monetary Fund.
Central questions posed:
- Why is money laundering a serious threat to the global monetary system?
- What role can the IMF play in assisting the FATF?
- How can the threat be limited to avoid undermining macroeconomic policy effectiveness?

Estimated present scale of money laundering transactions: "2 to 5 percent of global GDP" would probably be a consensus range.
Two principal types of risk:
- Prudential risks (corruption and destabilization of markets and smaller economies).
- Macroeconomic risks (undermining effectiveness of macroeconomic policy).
Potential macroeconomic consequences include:
- Inexplicable changes in money demand.
- Greater prudential risks to bank soundness.
- Contamination effects on legal financial transactions.
- Greater volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers.
Behavioral observation: laundered funds tend to be less productive and contribute minimally to optimization of economic growth.
Social and political dimensions emphasized: suffering of victims, weakening of the social fabric and collective ethical standards.
Policy framing: anti-laundering efforts attack criminal activity where its proceeds enter the financial system.

Argument addressed: financial liberalization may increase money-laundering opportunities.
Cited FATF Recommendation 22 verbatim principle: "Countries should ... monitor the physical cross-border transportation of cash and bearer instruments—without impeding in any way the freedom of capital movements."
Emphasis on information over transaction controls; "know your customer" approach as key.
Advocacy for "modern financial markets" combining freedom with transparency and prudential regulation.
Assertion: controls and state interventions have poor records in avoiding money laundering and frequently create opportunities for corruption.

Globalization implies prevention strategies must be universally applied; laundered funds will flow to the weakest point.
The FATF's role:
- Developed a comprehensive set of international standards for anti-money laundering policies.
- Uses "typologies" exercises to pool intelligence on instruments and institutions used by launderers.
- Uses mission-format expert visits to disseminate policies to nonmember countries.
Importance of regional FATFs:
- Noted achievements: the Caribbean FATF and the Asia/Pacific Group on Money Laundering.
- Recommendation: creation of further regional FATFs (notably for transitional economies of Europe, and in the African and Middle Eastern regions) to extend coverage and promote regional "modern" financial markets.

IMF Interim Committee declaration (September 1996) 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 essential for prosperity.
In countries where government institutions participate in illegal activities, anti-laundering policies can have far-reaching governance effects.
IMF leverage: use surveillance and technical assistance to persuade authorities to adopt effective anti-laundering legislation and to seek FATF assistance for detection and enforcement capability building.

Referenced Core Principles for Effective Banking Supervision (Basle Committee, September 1997): banking supervisors must ensure banks have adequate policies, practices and procedures, including strict "know-your-customer" rules, to prevent use by criminal elements.
IMF assistance: extensive policy and technical assistance to central banks and national institutions to build supervisory capabilities, framed around and contributing to the Core Principles.
Urgent priorities:
- Strengthen infrastructure for prudential supervision in countries with inadequate supervision even if markets are relatively advanced.
- Top priority to developing supervision of financial sectors to promote adherence to FATF principles.
Offshore banking centers:
- Concern about proliferation of smaller offshore centers offering "tax and regulatory services," including secrecy and confidentiality.
- Small countries/territories often lack expert resources to supervise many offshore banks.
- Recommendation: licenses for offshore facilities in such countries should be granted only to proven institutions that are adequately supervised in their countries of origin.

Legal and institutional assistance:
- IMF provides technical and policy assistance to draft central bank and commercial banking laws; opportunity to include anti-laundering provisions (identity verification, reporting suspicious transactions).
- Model laws can help countries start the process.
Research and statistics:
- IMF staff have researched underground economies and money laundering for almost two decades.
- Good analysis and data are necessary since money laundering is hidden; indicators must draw from a wide range of economic and social data.
- International financial and cross-border data compiled by the IMF have been used in studies of money laundering.
- Money laundering creates global asymmetries in international data.
Fiscal work and tax evasion:
- Close linkages between tax evasion and money laundering: proceeds of tax evasion must be disguised; laundered money must be hidden from tax authorities.
- IMF's policy and technical work to improve tax collections assists the fight against money laundering, directly or indirectly depending on national legislation.

No conflict between free, competitive markets and anti-money laundering regulations; there is synergism.
Same oversight and supervision mechanisms that ensure market functioning support FATF policies.
Money laundering undermines market functioning and negatively impacts economic growth.
Regulatory policies remain sovereign decisions but deserve international support.
Collective responsibility: international financial and enforcement communities, banks, nonbank intermediaries, and regulators should support and implement anti-money laundering measures.
Emphasis on cooperation quality to strengthen the common message and effectiveness of countermeasures.

Address by Michel Camdessus, Managing Director of the International Monetary Fund, Paris, February 10, 1998.