Money Laundering Poses a Risk to Financial Sector Stability

IMF Blog, September 4, 2023

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Authors: Pierre Bardin, Antoine Bouveret, Grace Jackson, Maksym Markevych
Published: September 4, 2023

Cross-border threats and scope

Cross-border financial crime is here to stay.
Criminals exploit the globally connected financial system to move illicit funds across borders and evade capture, protecting wealth derived from tax evasion, corruption, and drug trafficking.
No financial institution or country is immune; money laundering scandals caused bank collapses and shocked countries.
Society bears the cost through an erosion of trust in the integrity of the financial system, often leading taxpayers to subsidize failing banks and limiting customer access to credit.
The rise of crypto assets is a parallel borderless trend, offering speedy global transfers attractive to criminals.

IMF partnership and technical assistance

IMF staff partnered with eight Nordic and Baltic countries—Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden—in a first-of-its-kind anti-money laundering technical assistance project.
The project’s findings: combatting money laundering is beyond the capacity of any single nation—and countries must innovate together to find a solution.
IMF staff is constantly expanding the toolkit to help Fund members focus on cross-border illicit flows using machine learning technologies and data analysis.
Examples where this analysis features: Singapore 2022 Article IV consultation and UK 2022 FSAP.

Tracking criminal proceeds and analytical tools

Tools are used to scrutinize financial movements, gain insights into the global landscape, and identify indicators of potential macro-critical money laundering scenarios.
Collaborating with the Nordic-Baltic countries, these tools improved understanding of unusual financial flows warranting scrutiny and enhanced countries' ability to screen potential illicit financial flows and focus on emerging threats.
Collaboration allows countries to identify and connect seemingly disconnected cross-border money laundering and terrorism financing threats.
Following the money includes considering countries chosen by criminals for cleaning illicit gains, enabling anti-money laundering agencies to enhance scrutiny of unusual transactions passing through their financial systems that originate in high-risk jurisdictions.

Financial stability impact and contagion dynamics

Examining data related to regional money laundering cases reveals a telling pattern:
- Banks grappling with financial integrity concerns suffered sharp stock price drops.
- Banks experienced elevated perceived credit risks.
- Banks saw declines in deposits affecting their liquidity.
Money laundering shocks triggered equity price declines and heightened the cost of insuring against a corporate default, as shown by credit default swap prices.
Regional impact: substantial spillover effects affected other key regional banks, indicating a contagion dynamic between the affected banks and their counterparts.
The Fund’s focus on macroeconomics and the link between financial stability and financial integrity risks is well established; the Nordic-Baltic project further expands efforts to better quantify the financial stability impact of money laundering shocks.

Supervisory findings and recommendations

Banks, as main gatekeepers of the financial system, must prevent and detect money laundering; criminals find banks alluring due to their extensive cross-border networks, interbank ties, and products and services that open themselves up to the risk of money laundering.
National anti-money laundering efforts focus primarily on domestic risks and often lag.
Bank regulators play a crucial role, but often don’t make the best use of limited resources, and divergent approaches hamper effective global collaboration.
With a global supervisory mechanism lacking, supervisors need to broaden their perspective, scrutinizing non-resident risks and inter-border laundering countermeasures.
Recommendations at both country and regional levels include:
- Greater cross-border data collection to better understand and mitigate risks.
- Use of technological solutions to analyze cross-border transaction data and create a regional picture for targeted supervisory efforts, including multi-country initiatives.
- Exchange of data on money laundering incidents.
- Deeper examination of the need for banks to bolster capital reserves against associated losses.
- Vigilant monitoring of newer entrants to international finance, such as crypto asset service providers, with risk-adjusted scrutiny and cross-border cooperation.

Policy takeaway

Stronger international collaboration and innovation are required to curb cross-border illicit proceeds.
Continued analysis of financial integrity’s impact on stability can fortify the global financial system against money laundering shocks.
The Nordic-Baltic region’s narrative serves as a cautionary tale: “Invest in preventive and mitigating measures before the scandal is at your doorstep.”
Presently, the commitment to prevent money laundering in the region is a priority at the highest levels of the different governments concerned.

Blog overseen by Chady El-Khoury; reflects contributions from Alexander Malden, Santiago Texidor Mora, and Indulekha Thomas, with assistance from Grant Riekenberg. Pierre Bardin, Antoine Bouveret, Grace Jackson, Maksym Markevych — September 4, 2023.

References

2022 FSAP](https://www.imf.org/en/Publications/CR/Issues/2022/02/22/United-Kingdom-Financial-Sector-Assessment-Program-Financial-System-Stability-Assessment-513442)