The Effects of Money Laundering on Economic Development

1. The Effects of Money Laundering on Economic Development A Presentation by

2. Agenda • What is Money Laundering? • Link to Economic Development • Effects on Economic Development • Financial Sector • Real Sector • External Sector • Anti-Money Laundering Efforts • Conclusion Sources : • THE NEGATIVE EFFECTS OF MONEY LAUNDERING ON ECONOMIC DEVELOPMENT, by: Brent L. Bartlett for the Asian Development Bank • www.fatf-gafi.org • www.fincen.gov • www.treas.gov/ofac

3. What is Money Laundering? • Is the movement of illicit funds for the purpose of concealing the true source, ownership or use of the funds • Monetary proceeds derived from criminal activity are transformed into funds with an legal source • Money laundering provides the fuel for drug dealers, terrorists, arms dealers and other criminals to operate and expand their enterprises.

4. Statistics - Money Laundering • In 1996, the aggregate size of money laundering in the world may be between 2% and 5% of the world’s gross domestic product. • Estimated the size of the money laundering is over $500 billion annually. • Using 1996 statistics, money laundering ranged between US Dollar (USD) 590 billion and USD 1.5 trillion.

5. Washing Dirty Money • Placement • physically moving and placing the funds into financial institutions or the retail economy • Layering • multiple and sometimes complex financial transactions are conducted to further conceal their illegal nature • Integration • illicit funds re-enter the economy disguised as legitimate business earnings (securities, businesses, real estate)

6. Dirty Money Flows Domestic Returning Inbound Outbound Flow-through

7. Link to Economic Development • It will distort the economic data and complicate government’s efforts to manage economic policy. • It will have adverse consequences for interest and exchange rate volatility, particularly in dollarized economies.

8. Link to Economic Development (cont.) • It will affect income distribution. • It can deter the legal transaction by contamination. • It can increase the potential for destabilizing and economically inefficient movements. • Reduce the annual GDP.

9. The Financial Sector Money laundering erodes financial institutions • by increasing the probability individual customers will be defrauded by corrupt individuals within the institution • by increasing the probability that the institution itself will become corrupt or even controlled by criminal interests, again leading to customers being defrauded • by increasing the risk of financial failure faced by the institution as a result of the institution itself being defrauded.

10. The Financial Sector Money laundering weakens the financial sector’s role in economic growth • Strong developing-country financial institutions are critical to economic growth • Confidence and reputation play a special role in developing economies’ financial systems ⊕sound financial systems are essential for private entrepreneurs to emerge, for business to flourish, and for local people and investors from abroad to find the confidence to invest, and create wealth, income, and jobs • ⊕private investors are more reluctant to commit funds to obtain ownership in enterprises cited for corruption

11. The Financial Sector Anti-money laundering reforms support financial institutions through enhanced financial prudence • Strong correspondence between anti-money-laundering policies and financial good-governance rules • Private institutions and associations often adopt parallel rules • The cost burden of anti-money-laundering policies on financial institutions must be assessed in context

12. The Real Sector Money laundering depresses growth

13. The Real Sector • Money laundering: • distorts investment and depresses productivity • facilitates corruption and crime at the expense of development • can increase the risk of macroeconomic instability

14. The Real Sector : Crimes • Criminal organizations can transform productive enterprises into sterile investments. • An efficient money-laundering channel is a key "input" to crime because the financial proceeds from crime are less valuable to the criminal than are laundered funds • The less expensive the money-laundering "input" to crime, the more "productive" the criminal element will be.

15. ML, Crime & Corruption MC = Cost of committing crime MR = Crime opportunities Quantity of Crime C o s T

16. The External Sector Money laundering diverts capital away from development

17. The External Sector • Outbound capital flows: facilitating illicit capital flight • Inbound capital flows: depressing foreign investment • Trade: distorting prices and content

18. The External Sector • Illicit capital flight worsens scarcity of capital in developing countries ‘The costs of capital flight are well known: they include a loss of productive capacity, tax base and control over monetary aggregates - imposing a substantial burden on the public… and rendering policymaking more difficult’ - International Monetary Fund

19. The External Sector • Inward capital flows: depressing foreign investment ‘… Such allegations or actions can, through reputational effects affect the willingness of economic agents, particularly those outside the country, to conduct business in a given country with adverse consequences.’ - International Monetary Fund

20. The External Sector • Trade: distorting prices and content ‘The exchange rate differential reflected… a premium that purchasers of foreign exchange were willing to pay to falsify import documents so that they could evade customs duties, or to make transfers that were otherwise restricted or illicit.’ - International Monetary Fund

21. AML Efforts • Creating anti-money laundering regulatory and enforcement organizations in countries and regional groupings • Financial Action Task Force (FATF), UN, Egmont Group • Financial Crimes Enforcement Network (FinCEN) • Office of Foreign Assets Control (OFAC) • Bank Secrecy Act (BSA) and the USA PATRIOT Act of 2001 • Cooperation between national governments

22. Conclusion • Money laundering threatens economic development. • The international financial community should strongly support anti-laundering efforts, and cooperate to share information, and regulatory and enforcement actions. • Developing countries should impose anti-laundering laws to improve the credibility of not only its financial sector, but its governance as well.

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