Financial Crimes Hurt Economies and Must be Better Understood and Curbed
IMF Blog, December 7, 2023
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Bibliographic details
- Authors: Carolina Claver, Chady El Khoury, Rhoda Weeks-Brown
- Published: December 7, 2023
Overview
- Publication: December 7, 2023
- Authors: Carolina Claver, Chady El Khoury, Rhoda Weeks-Brown
- Core message: Money laundering and terrorist financing impose substantial macroeconomic costs, undermine inclusive and sustainable growth, and require deeper, coordinated policy responses across fiscal, monetary, financial sector, and structural domains.
Key findings and consequences
- Money laundering:
- Is integral to organized crime that spans borders, skews tax systems, funds terrorism, and corrupts officials.
- Reduces inclusivity and sustainability of economic growth, fueling inequality and informality.
- Observed economic and financial impacts:
- AML/CFT deficiencies associated with large drops in stock prices for directly affected banks and declines in share prices of other domestic and regionally exposed banks (Nordic Baltic Region example).
- Direct costs include lower revenues, higher expenditures, sanctions, lost banking services, and increased financial instability.
- Indirect costs are broader and can include boom-and-bust cycles, unaffordable home prices, bank runs, lost foreign investment, volatility in international capital flows, weakened governance, political instability, and erosion of public trust.
- Liquidity patterns: deposit flows deteriorate around financial integrity events for affected banks while other domestic banks may see short-term liquidity benefits from positive substitution effects.
- Global and cross-border dimensions:
- Insufficient AML/CFT frameworks in some countries, including international financial centers, can attract criminal proceeds from abroad.
- Exporting countries of illicit flows experience less opportunity, higher inequality, higher poverty, more illegal immigration, misused resources, and environmental degradation.
- Empirical estimate: illicit financial flows in Africa—"an estimated $1.3 trillion since 1980 has left sub-Saharan Africa"—drain domestic revenues, negatively affect investment rates (notably private investment), and curtail savings rates, with cascading effects on transit and recipient countries.
Gaps in current efforts
- Progress on technical compliance (for example, enacting laws) has outpaced progress on effectiveness; very little laundered ill-gotten proceeds are ever confiscated.
- Historical focus on threats and vulnerabilities is necessary but insufficient; fuller measurement of consequences across fiscal, monetary, financial, and structural channels is required.
IMF response and strategy
- The IMF reviewed its AML/CFT strategy to better assist its "190 member economies" in addressing financial integrity issues.
- The IMF Executive Board has endorsed a plan to:
- Expand the Fund’s data analytics capacity to quantify fiscal, monetary, financial sector, and structural costs of illicit flows.
- Deepen a coordinated approach across IMF surveillance, lending engagements, capacity development, and Financial Sector Assessment Programs.
- Key analytic questions the expanded approach will address:
- Which sectors are most vulnerable for money laundering, from banks and real estate to virtual assets and precious metals?
- What countries export illicit flows, allow them to transit, and what countries integrate them?
- How do these illicit flows affect the economy, including prospects for inclusive and sustainable growth and development?
Policy implications and recommended actions
- Broaden and deepen containment efforts against financial crime, recognizing crime is a moving target.
- Improve cooperation among stakeholders, including governments, international bodies, and civil society.
- Use macroeconomic tools and global reach to:
- Assess impacts of financial crimes and illicit flows on member economies and global financial stability.
- Design and implement policies to safeguard financial sectors and broader economies.
- Rationale: the cost of failure to contain financial crime is "simply too high."
Source: IMF blog post "Financial Crimes Hurt Economies and Must be Better Understood and Curbed" (December 7, 2023).