Blow, Bling and Bucks: IMF Work Against Money Laundering and Terrorist Financing

IMF Blog, June 27, 2011

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Drug traffickers, diamond smugglers, and terrorists’ financiers around the world abuse the financial system to “clean” proceeds obtained from illegal work (money laundering) or to transfer funds to achieve destructive aims (terrorist financing).
In the United States alone, profits from these crimes are estimated around $275 billion, excluding tax evasion.
The IMF’s research shows this dark side of the economy has destructive consequences for a country’s financial stability, economy, and governance.

Large-scale financial fraud (for example, fraud or insider trading causing a large bank failure) may:
- Seriously damage the overall integrity of the financial market.
- Cause loss of confidence and currency depreciation, which can result in higher inflation and the erosion of real income and purchasing power for basic goods and services.
Corruption undermines the integrity and stability of markets and governance, as well as confidence in the financial sector.
Tax evasion on a wide scale diverts money destined for governments’ coffers to pay for schools, hospitals and roads.
Terrorist attacks and other forms of crime:
- Cause destruction and death, spread fear, shake confidence, and undermine the tourism industry.
Money laundering helps clean the proceeds from most illegal activity and re-injects it in the legal sectors of the economy, powering a vicious cycle that results in:
- Reduced government revenues.
- Resources diverted from more productive activities.
- Unfair competition.
- Negative impacts on economic activity and growth.
The destabilizing effects can spill over onto the economies of neighboring countries and trading partners.

The IMF has worked with countries to combat money laundering and terrorist financing for over 10 years, mostly by assessing then improving the rules and regulations set up by countries, and by helping to shape international policies in these areas.
The IMF’s check-ups on the health of a country’s financial system, called the Financial Sector Assessment Program, already include anti-money laundering and terrorist financing; together with the World Bank the IMF will keep this up and also dig deeper.
When criminal behaviors pose risks to the financial system or impact the country’s neighbors, the IMF will provide more rational and in-depth coverage of money laundering and predicate crimes in both financial assessments and in the annual IMF check-ups of a country’s economy, known as the Article IV consultation.

Rationale:
- Countries do not face the same risks of money laundering and the crimes that generate the money in need of laundering.
- One size may not fit all; responses must be tailored to specific circumstances and needs to be more effective.
Expected benefits:
- Assessments that are more cost-effective and focused on the issues that matter most for countries.
Next steps:
- The IMF and World Bank will discuss the possibility of moving to a new risk-focused approach with the Financial Action Task Force (FATF), a group of countries that sets international standards in this area.

Legislation to combat money laundering and terrorist financing.
Criminal justice systems capable of prosecuting money launderers and terrorist financiers, and confiscating their assets.
Measures to enable financial and non-financial institutions to identify their customers and verify the information they are providing (customer due diligence).
Supervision of financial and non-financial institutions.
Measures to prevent the misuse of legal persons, such as companies, foundations, and associations, for criminal purposes or criminals from controlling them.
Financial intelligence units.
Domestic and international cooperation.

The effects of Allen Stanford’s fraud on the small Caribbean island of Antigua and Barbuda are cited as an example of devastating effects financial abuses can have on a country’s economy.
The extent to which tax crimes are having an impact on the economic situation of Greece is cited as another reminder of those effects.

Source: Blow, Bling and Bucks: IMF Work Against Money Laundering and Terrorist Financing (Jody Myers, June 27, 2011).

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