## Money Laundering Poses a Risk to Financial Sector Stability _IMF Blog, September 4, 2023_ ## Source details **Canonical URL:** [Money Laundering Poses a Risk to Financial Sector Stability](https://www.imf.org/en/blogs/articles/2023/09/04/money-laundering-poses-a-risk-to-financial-sector-stability) ## Other formats - [Markdown version](/en/blogs/articles/2023/09/04/money-laundering-poses-a-risk-to-financial-sector-stability/index.md) - [Structured JSON version](/en/blogs/articles/2023/09/04/money-laundering-poses-a-risk-to-financial-sector-stability/index.json) - [Bundle manifest](/en/blogs/articles/2023/09/04/money-laundering-poses-a-risk-to-financial-sector-stability/bundle-manifest.json) ## Bibliographic details - 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 - [anti-money laundering technical assistance project](https://www.imf.org/en/Publications/CR/Issues/2023/09/01/Nordic-Baltic-Regional-Report-Technical-Assistance-Report-Nordic-Baltic-Technical-538762?cid=bl-com-1EUREA2023003) - [cross-border illicit flows](https://www.imf.org/en/About/Factsheets/Sheets/2023/Fight-against-money-laundering-and-terrorism-financing) - [Singapore 2022 Article IV](https://www.imf.org/en/Publications/CR/Issues/2022/07/20/Singapore-2022-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-521048) - [Financial Sector Assessment Program](https://www.imf.org/en/Publications/fssa) - [UK 2022 FSAP](https://www.imf.org/en/Publications/CR/Issues/2022/02/22/United-Kingdom-Financial-Sector-Assessment-Program-Financial-System-Stability-Assessment-513442) - [well established across our work](https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/02/04/pp101718-2018-review-of-the-funds-aml-strategy) - [Euro Area Article IV](https://www.imf.org/en/Publications/CR/Issues/2023/07/18/Euro-Area-Policies-2023-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-536724) _Source: https://www.imf.org/en/blogs/articles/2023/09/04/money-laundering-poses-a-risk-to-financial-sector-stability_