Draft for discussion, Nov.

16th Governance in Finance and Banking: Confronting the Challenge of Money Laundering

Strategic Considerations, Proposed Approach, and Learning Program Activities for client countries, FY02
I. Governance in Finance Framework: Background, Rigor and Rationale A. Background, Developmental Costs and some analytical links In the aftermath of September 11th, facing up to the problem of global Money Laundering has taken new urgency.1 Yet from a broader and longer term perspective, awareness about the scope and consequences of the vast money laundering activities prevailing worldwide has already been recognized as a financial and developmental challenge for some time. An environment ripe for money laundering activities is one where high level corruption and misgovernance prevails, and one where financial and macro-economic stability can be threatened. Further, money laundering of proceeds of public sector corruption has been associated with unsustainably high public debt in a number of countries (where the illicit and looted privatized proceeds of such corruption in sitting in foreign banks are often of similar magnitudes to the external debt of the country). In addition to money laundering constituting a threat to the stability of the banking systems in misgoverned settings, and impairing development, there also serious national security implications. Money laundering involves by definition tainted money an illegal or corrupt act has already taken place. In that sense the more fundamental antecedents to money laundering need to be understood within the context of the overall rule of law, governance and anticorruption framework in a country, as well as within an international/global context (inter alia including multinationals and global banking). Thus, it is imperative to have an analytical, empirical and operational understanding of the fundamental preconditions and varying (from country-tocountry) manifestations of corrupt and criminal activities, all of which occur prior to the money laundering transaction taking place. Yet at the same time the effective implementation tight anti-money laundering (AML) supervision and enforcement in the financial sector can be a deterrent to corrupt and criminal activities, and in that sense addressing money laundering can also help with the fundamentals. Further, where proper AML enforcement (by the financial institutions themselves) is in place, it can be a key stage for detection in the overall corrupt transaction chain (see schematic diagram attached). Thus, for a concerted AML strategy worldwide to makes a dent, the costs of corrupt and criminal activities preceding laundering (as well as the cost money laundering itself) need to be raised by a variety of well targeted incentives and measures. Consequently, in addition to the development and growth gains of a stable financial system, a developmental dividend from AML

According to the Websters dictionary, Money Laundering is defined as the act of: transferring illegally obtained money or investments through an outside party to conceal the true source. There are many variants of this definition, that even vary from country to country. According to US law money laundering refers to a transaction involving money previously obtained from any illegal activity. Another related accepted definition refers to: the process of converting cash or other property that is derived from illegal activity, to give it the appearance of having been obtained from a legitimate source.

can also be expected from this indirect (corruption-reducing) channel, since corruption and crime, in turn, have been empirically shown to impair development. According to the IMF, money laundering is one of the most serious issues facing the international financial community. It is estimated to account for 2 to 5 percent of global GDP, i.e. an annual flow of at least an estimated US$1 trillion annually. Yet the links between corruption, crime, drug trafficking, money laundering, and also terrorism are far from linear, or simple just to the contrary, which means that serious analytical underpinnings are required for an effective AML strategy within a broader governance framework. To illustrate: challenging conventional wisdom, which has tended to associate money laundering with drug trade, even if it admittedly remains a crucial source of laundered funds, it is actually estimated that the majority of laundered money comes from activities other than drug trade. a non-insignificant share of monetary transactions related to crime, corruption or terrorist financing do not take place through the (conventionally supervised) banking system and/or would not necessarily fall under the rubric of money laundering since it is common to either face the reality of dirty-money being utilized for criminal purposes (i.e. with little effort to launder), or find that legally acquired monies are being directed for criminal (even terrorist) purposes. there is a complex web of criminal, illegal and corrupt activities that precede the money laundering transaction (loosely classified under either the rubric of illegal criminal, commercial, public sector corruption or state capture (private-public sector nexus), and depending the source of the funds both the manifestations and possible measures to combat such misgovernance will vary (as well as the relative importance of each type of illegal activity varying substantially from country to country) [See schematic chart in attachment illustrating the complex linkages which inter alia cast doubt in simplistically linking bank-intermediated money laundering and terrorism].

The developmental costs of money laundering appear to be rather steep. Private sector development is impaired, along macro-economic stability. More broadly, ongoing empirical work based on worldwide data suggests that financial sector abuse in a country is closely related to corruption and misgovernance, and the latter in turn are shown to result in lower income per capita for the nation (controlling for other factors), as well as leading to subpar performance in social indicators such as child mortality. Research work has also shown that countries with a larger share its economy in the underground (and unofficial) tend to grow at a slower rate. Since in a number of countries the unofficial economy accounts for 40-70%, these developmental costs can be rather steep. B. Learning Programs Work to date Although money laundering has been recognized as a serious financial and development challenge, AML activities have not been a central part of the mandate of the WBG.2 Instead, AML activities have been the focus of specialized financial enforcement institutions within countries (such as FIUs in the Egmont group) and for international task forces such as the FATF3
2

There has been reporting documentation on this issue; for references, see Board paper (SecM2001-0228) which was discussed by the Board on April 13, 2001 and the update provided to the Board on August 30, 2001 (SecM2001-0532), as well as the information note prepared by FSE on October 30th, 2001.
Financial Action Task Force (FATF) was established in 1992, and subsequently regional chapters or related AML groups have been established in the Caribbean (CFATF), Asia/Pacific Group on Money Laundering (APG), in the
3

 while at the margin to date the IMF has been somewhat involved (hosting seminars, etc., with some WBG attendance, and in one case, last February, co-sponsoring with WBG a workshop, etc.). Yet even in terms of training and learning programs, there has been little activity from the WBG. In learning programs, the exceptions (proving the rule) were a Distance Learning series to Francophone Africa conducted last year, and a general module presented to high level participants in the Governance/Anti-Corruption Core Program for seven Latin American countries earlier this year (see at the bottom of attached table of activities). While some limited materials were prepared in the context of these initial learning programs, presentations were delivered, and participatory discussions with relevant policy-makers took place in these learning events all constituting a start -- the fact remains that neither a full fledged learning strategy nor a comprehensive set of materials and modules for AML learning programs is in place yet. Consequently, this brief note is an initial contribution to set out some general principles for AML activities for our clients, as well as outlining the activities and modules to be delivered in the remaining of this fiscal year.

II. Key Elements towards a two-stage AML learning strategy The draft proposed elements below balance the twin needs to: i) develop a client-oriented AML learning program for WBG clients that include rigorous materials within a coherent broader developmental and governance framework and marking a sharp departure from the limited work in this area so far (all of which take some time and resources), and, at the same time, ii) the need to concretely respond to the need to deliver learning activities in the immediate future. Consequently, the strategy envisages two stages, the first stage to be concretely implemented in the very short term (essentially the program for the current FY02), as well as the elements for a second stage in the short-to-medium term (FY03 and beyond). For the very short term strategy for AML-related learning activities intends to respond immediately by concretely initiating activities to disseminate AML-related know-how, and elicit interactive policy discussions with key policy-makers, bankers and other stakeholders (such as journalists, judges, lawyers, parliamentarians, anticorruption institutions, etc.) in a large number of client countries. Thereafter, for the short-to-medium term (beyond FY03), in addition to scaling up the type of activities proposed below for FY02 (and detailed in attached table), the feasibility of the possible preparation of more in-depth specialized skill-based training activities for bank supervisors and bankers (in conjunction with outside specialized partners) is to be reviewed internally in the Bank (by FSE/WBI, with senior management) in the near future -- after consultations with outside partners as well and considerations of comparative advantage.4

Council of Europe Group (PC-R-EV); in Eastern and Southern Africa (ESAAMLG), South American (GAFISUD, while the West African Anti-Money Laundering Group is to be established. 4 In this context, one consideration would be whether the outside agencies (such as FATF and others), and the private sector training to bankers in specialized AML enforcement would still be leaving a gap in this skill-transfer area (one which the WBG may or may not have any comparative advantage in filling).

III. Phase I of the Strategy very short term (FY02) Deliver activities to the needs predicated on the principles we are already implementing in related programs that are ongoing, namely: 1. Anchoring the approach to AML-learning activities with clients within the broader (and multisectoral) framework related to governance in the public and private (and financial) arena -- recognizing that AML is an integral part of a broader challenge of misgovernance. As seen in schematic chart in Annex 1, a money laundering transaction is associated with either: i) public sector corruption (such as corrupt country leadership laundering looted national patrimony; or laundered bribes received by officials for procurement); ii) criminal activity (organized crime, drug trafficking, etc); iii) commercial fraud (tax evasion, transfer pricing, insider trading), or iv) state/regulatory capture (elite corporate sector bribing to shape the regulations, laws and policies of the state for their financial benefit, such as rents accrued from purchase of monopoly rights in energy sector, etc.). A highly interactive/participatory learning program approach, with diversity of approaches and views presented (rather than just showing the perspective of a single industrialized country). While this is done in general in our learning programs nowadays, this is particularly important in this sensitive area, where localized expertise and conditions (including the legal aspects of AML) vary significantly from setting to setting. For instance, (reviewing again the attached schematic chart), it is clear that in terms of the variety of illegal sources of profits that are candidates for money laundering (stage 1 in process in annex), some such sources play a more important role than others in some countries and regions, and vice-versa. Further, participants will include a range of relevant stakeholders, beyond just bankers or even supervisors and regulators, to include also judges and prosecutors, related civil society/NGOs, parliamentary representatives, and the media. Mainstreaming into governance and learning programs: modularizing and tailoring materials on AML to be integrated into existing learning programs/courses in governance, anticorruption, judiciary/legal reform and banking. In parallel to mainstreaming, development of free-standing AML activities (and as inputs to the mainstreaming process) Policy-oriented Focus -- and emphasis on awareness-raising and policy-debates in the early stages of the first stages, focusing on fundamentals, key analytical linkages, main concrete actions. Regional Expertise and Local Adaptation. The realities of each region (and across different countries in the same region, such as the differences between Mexico, Argentina and Peru in Latin America, for instance) necessitate regional/country tailoring and localized expertise. 5 Further, there are differences of legal, analytical and enforcement approach within OECD, which need to be reflected. Hence, care will be exercised in the choice of key speakers, trainers, facilitators and participants to reflect a wide spectrum of expertise, and local adaptation will be done.

2.

3.

4.

5.

6.

For instance, even within the US there is such a gap between the treatment of domestic vs. international money laundering, with the law stipulating that any one among 176 illegal acts qualify as money laundering when they have been committed domestically, while only 10 of those 176 qualify if they have been perpetrated on foreign soil.

7.

Empirically-oriented, with focus on evidence and also in measuring/analyzing causes, costs and consequences of ML. Drawing also where feasible from governance/anticorruption diagnostic surveys (see as an illustration attached graphs on the large extent of capture of the financial/banking system in transition economies, as well as role of organized crime in some Latin American countries; also such empirical research materials are available upon request). Focusing on major current analytical and empirical gaps. While in other institutions significant efforts are already taking place in the enforcement issues of AML (an area where the WBG has little expertise), less efforts and focus currently exists in having an analytically sound approach to the AML issue, viewed in a broader context (as per point 1 above), as well as limited extent of policy dialogue with key policy-makers. Similarly, little research and empirical work exists, which backstops the engagement proposal under point 7 above, as well as collaborative research and empirical work with DEC/FSE in the future (below).

8.

IV. Phase II of the Strategy: Short-to-Medium Term -- Scaling Up Issues This section is to be elaborated in far more detail following further internal discussions with FSE on a scaled-up collaborative framework, detailed resource implications, etc. Inter alia, key issues to be addressed: A. Building on the proposed FY02 for expanding in FY03. Review of the scope for scaling up of the activities being initiated in FY02 (as per attached matrix) B. WBG comparative advantage, and review of training gaps outside of WBG. Extent to which WBG would provide specialized AML training to bankers in many client countries (issues of comparative advantage vis a vis other institutions, expertise, mandate, funding) -- over and above the primer type of materials which will be developed and available during the courses of FY02 already (and further developed thereafter for wider dissemination/web availability). C. WBI-FSE analytical and training collaboration. Scope for WBI supporting FSE in the broadening of FSAP framework to encompass key issues in Governance in Finance particularly on issues beyond what has been typically addressed under the Basle principles and in corporate governance codes of conduct. Further, exploring further the scope for collaborative activities in the delivery of AML-related activities for both clients and staff. D. Research and Empirics. Identifying (and detailing some of the above) the key analytical and research issues (including empirical), in collaboration with DEC/FSE/IMF, inter alia focusing on the magnitudes, manifestations, causes and consequences of money laundering, on the complex linkages between various dimensions of governance and money laundering (as per above), and between the unofficial economy and money laundering. In this context, close coordination with the IMF will be in order (given the work they are already conducting). E. Resource Implicationsvery preliminary. The very short term program elaborated above for FY02 (phase I) has an estimated additional cost of about US$120K for WBI (if cost-sharing with FSE and working in many cases within planned courses as suggested). If no additional resources are available, reallocation from other planned

activities would take place (implying a few cancellations/postponements). The resource implications for next FY and beyond are to be worked out in detail in near future, after detailing of plans.

V. Can AML make a difference, and if so, how?: Analytical Issues for Discussion and for the Policy Debates in Learning Forum There is an urgent need to discuss AML issues within a rigorous and broader framework, recognizing that there are very basic issues yet to be settled in terms of basic strategy as well as effective implementation. The six conceptual issues raised below are by no means exhaustive, yet complementing the context presented on the learning strategy above they are intended to be a contribution to the policy debate on AML within the WBG , as well as potentially being key issues to discuss with client stakeholders and partners during the DL-based upcoming global forum on AML. 1. Rigorous Cost-Benefit of AML: what can and should be done? The concern on AML, both due to recent terrorist events, as well as the broader recognition of the vast sums of money involved, as well as the apparent developmental costs, is eminently understandable. Yet circumspection and humility is still in order when pondering the question of what AML-specific interventions, if any, may make a difference? And in those measures where there is consensus that they do make a difference, what is the role of the WBG? To place this issue in proper perspective, let us consider the following facts. An estimate from a couple of years ago (Baker) suggests that merely about 1/10th of 1 percent all money laundered through German and Swiss Banks were detected. In other words, 99.9% of money laundering through such industrialized countries went undetected. If in the intervening period there have been some detection and enforcement improvements, and such effort were to deepen in the coming (say) three years, could one expect in the best case an improvement from a rate of 0.1 percentage point detection, to, 5%? Or very optimistically, to 20% perhaps? Would then the remaining 80% (even if of a shrinking pie, given deterrence) be still enormously harmful and disproportionally so, since it is likely that the more criminal and anti-developmental the illegal activity was in the first place, the greater the private benefits to ensure that laundering takes place (even at higher cost; vs., transfers related to tax evasion, transfer pricing or over/under-invoicing). Against such realistic background of the expected limits on the benefit side even if admittedly positive and not necessarily insignificant --, it is clear that there is a need to assess the cost side of the AML-related interventions. What should be the priority interventions, given limited resources and limited institutional capacity in most settings? What should be the proper balance between interventions which are directed to AML enforcement and detection (i.e. addressing the laundering of funds from corrupt and criminal acts already committed) vs. interventions to prevent such corruption and crimes to take place in the first place? While some AML-related interventions would also fulfill a preventive role, some other governance-enhancing and corruption control prevention measures can also be effective and need to be considered in the design of a rigorous strategy. 2. Uniform world, uniform rules or bipolar world, customized approach? The thesis is that it is the latter, at the very least a rather bipolar world, one with essentially functioning rule of law institutions (even if far from perfect), and one where misrule of law rules.

In the latter corruption is rife, including within the judiciary and banking institutions themselves (see graphical evidence in ppt file). In such settings some banks and other financial institutions are captured (or even created) by corrupt vested interests (ref. research on state capture). In such settings, the financial institution (and the legal/judiciary decisions) are at the disposal of the often illegal intent of the customer. This phenomenon is not just relegated to some small rogue shell banks in small countries, witness BCCI and Meridien Bank, among others. Thus, the US/OECD notion of expecting significant benefits from training such type of institutions -- which are part of the problem, not of the solution in (say, the nowadays popular) know your customer rules, is mistaken. Instead, a different and more systemic approach is required in the many settings that approach classification as misrule of law prevailing. Further, in the latter type of settings, innovative alternatives to conventional money laundering through the banking system often exist (see schematic diagram). Thus, a differentiated approach may have to be an imperative rather than applying western/oecd approaches and standards to all. 3. Broadening the scope of the rules: Know which Customer? Indeed, much is being said about the importance of implementing know-your-customer rules. Yet where it matters in terms of money laundering, the front customer is far removed from the real criminal launderer. Who are the real corporate interests behind the official name the bank lists? Unfortunately, regulators in most places are still satisfied by the simple declaration of names received by the bank. Thus, further work is therefore needed to ensure that the corporates behind the small front customer are duly identified and known (see Pieth), which in turn has implications for training and for deepening Basle rules as well as diagnostic tools within instruments such as FSAP and related. 4. Distinguishing between terrorist financing and money laundering A significant portion of proceeds for terrorism does not go through a money laundering process (as it is either legitimately originated funds or dirty money being often channeled directly to criminal activity, and not necessarily through the conventional banking, see chart). Under issue # 2 above we raised the concern about the limits of AML interventions in general; if we complement this with the point raised here it follows that the limits for utilizing AML as a tool for anti-terrorism may be even more stringent in any serious cost-benefit analysis (versus other methods to combat terrorism and its financing). 5. AML needs to be viewed as one aspect within a much broader fundamental framework of governance in finance The case for understanding the antecedents and causes of money laundering within a broader framework was made in earlier sections. 6. Incentives and Innovation: thinking afresh within a broader and multi-sectoral framework Given the above, it may well be the case that merely applying conventional approaches to AML will not suffice. Thus innovation and different approaches in the more difficult settings in our client countries may be required. In misruled settings, where banks have been captured by particular interests, the traditional notion of reputational costs will not suffice, and thus particular supervisory/enforcement approaches may be needed. In some other settings, insufficient focus may have been given so far to mechanisms of self-regulation, as the innovative arrangement among the 11 large banks under the Wolfsberg principles. In other countries, further

emphasis could be given to tackling the problem from the public corruption side: having full declaration of assets and incomes by all politicians and public officials and their dependents, with bank account information, is one suggestion; working closely with the investigative journalists and with the media more generally to publish ratings of financial institutions, is another. These are merely to illustrate that a strategy will have to be multi-disciplinary and multi-pronged, within a broader governance improvement framework.

Attached matrix of Learning Activities for Clients Below

Draft

Governance in Finance: Anti-Money Laundering Learning Activities (and Related), FY02* Course Learning Program Anti-Money Laundering (AML) how treated Region/Countries Units Responsible * Dates Mode of Delivery

FY02 Upcoming Activities 1. AML Courses/Free-Standing Activities Strengthening Governance Governance and and the Financial Sector: Finance Anti-Money Laundering 1: ECA Strengthening Governance Governance and and the Financial Sector: Finance Anti-Money Laundering 2: LAC Strengthening Governance and the Financial Sector: Anti-Money Laundering 3: EAP Strengthening Governance and the Financial Sector: Anti-Money Laundering 4: SAR Strengthening Governance and the Financial Sector: Anti-Money Laundering 5: MENA Strengthening Governance and the Financial Sector: Anti-Money Laundering 6: Francophone Africa Strengthening Governance and the Financial Sector: Governance and Finance

AML-dedicated learning event (free-standing)

ECA: Russia, Ukraine, Kazakhstan, Latvia, Romania, Bulgaria LAC: Argentina, Bolivia, Mexico, Ecuador, Peru, Colombia (Paraguay TBD) EAP: China, Thailand, Vietnam, Hong Kong, Philippines, Pakistan SAR: Pakistan, India, Bangladesh, Sri Lanka

WBIGF, FSE Dec. 2001

DL

AML-dedicated learning event (free-standing)

WBIGF, FSE Jan. 2002

DL

AML-dedicated learning event (free-standing)

WBIGF, FSE Jan. 2002

DL

Governance and Finance

AML-dedicated learning event (free-standing)

WBIGF, FSE Feb. 2002

DL

Governance and Finance

AML-dedicated learning event (free-standing)

MENA: Egypt, Jordan, WBIGF, FSE Feb. 2002 Lebanon, Oman, Tunisia Africa Francophone: Senegal, Benin, Cote dIvoire, Nigeria Africa Anglophone: Tanzania, WBIGF, FSE March 2002

DL

Governance and Finance

AML-dedicated learning event (free-standing)

DL

Governance and Finance

AML-dedicated learning event (free-standing) 9

WBIGF, FSE March 2002

DL

Course

Learning Program Anti-Money Laundering (AML) how treated

Region/Countries

Units Responsible *

Dates

Mode of Delivery

Anti-Money Laundering 7: Anglophone Africa Money Laundering Conference Governance and Finance Seminar

Mozambique, Mauritius, South Africa, Kenya Ghana Europe and Francophone Africa

WBI with HEC and FSE WBIGF w/local partners WBIGF w/ AFREX, AFTI2, WANAD WBIGF, EXTRO, Radio Nederland WBIGF w/local partners WBIGF w/AFREX, AVU, WANAD WBIGF, Merck WBIGF

Late May 2002

F2F w/DL

2. Mainstreaming: Modules within broader courses Governance Monitoring Governance Course Module

Africa Latin America Anglophone Africa

Investigative Journalism

Governance

Course Module

Spring/ Summer 2002 (Jan.-Mar. 2002)

F2F w/DL DL

Investigative Journalism

Governance

Course Module

Latin America

(late Spring) DL

Investigative Journalism Web Based Course Economics and Business Journalism

Governance

Course Module

Global

(4Q, FY02)

DL

Governance

Course Module

Francophone Africa

(Apr-May 2002)

DL

Media and Governance

Governance

Course Module

ECA

Strengthening Public Accounts Committees Seminar for Senior Bank Supervisors from Emerging Economies

Governance

Course Module

Global

Finance

Course Module

Global

FSE, U.S. Federal Reserve

Spring/ Summer 2002 Spring/ Summer 2002 Oct.-Nov. 2002

F2F w/DL F2F

F2F

10

Course

Gobierno Abierto y Particativo Federal (GAP Federal) Judicial Reform in LAC

Learning Program Anti-Money Laundering (AML) how treated Governance Course Module

Region/Countries

Mexico

Governance

Course Module

Corporate Governance and Private Sector Development Corporate Governance and Strategy Corporate Competitiveness for Southeast Europe Corporate Governance, Social Responsibility and Ethics Corporate Governance for East Asia Transparency in Infrastructure Concessions

Governance

Course Module

Bolivia, Colombia, Ecuador, Honduras, Mexico, Paraguay, Peru ECA: China, Mongolia, Vietnam

Units Responsible * WBIGF, SECODAM, Tech. de Monterrey WBIGF

Dates

Mode of Delivery DL

Mid-Feb. 2002

June 2002

DL

Governance

Course Module

7-9 FSU countries

Governance

Course Module

Governance

Course Module

Albania, Bosnia, Macedonia, Yugoslavia Romania, Bulgaria, Slovakia East Asia, including China China, Egypt, India, Indonesia, Jordan, Philippines, Thailand, Vietnam Global

WBIGF, IMF, OECD, BIS, WTO, EBLD WBIGF, ECA, local partners WBIGF, ECA WBIGF, INT, local partners WBIGF, EAP, local partners WBIGF

May 2002

F2F w/DL

May 2002

DL

Feb. 2002

DL

March 2002

DL

Governance

Course Module

March 2002

DL

Governance and Infrastructure

Course Module

March-April 2002

DL

3. Governance in Finance Seminar (non-AML) WB/Brookings 4th Annual Finance Financial Markets and Development Conference 4. Other Learning Initiatives

Seminar

FSE, WBIGF, Brookings Institution

April 2002

F2F

11

Course

Development of specialized web-based materials on AML Governance/ Governance Anti-Corruption/ Investment Climate Diagnostic Surveys 5. AML Activities Already Held Networks of Money Governance Laundering LAC Anti-Corruption Core Course

Learning Program Anti-Money Laundering (AML) how treated Finance and Web Materials Governance Empirical Diagnostic

Region/Countries

Global

Units Responsible * WBI/FSE w/IADB WBI w/partners

Dates

Mode of Delivery Web

Continuing

Selected Countries

TBD

Field work

Governance

A DL course w/ five modules over a 2-month period Course Module

Benin, Cote dIvoire, Senegal, Cameroon, Togo (from Paris) Bolivia, Colombia, Ecuador, Honduras, Mexico, Paraguay, Peru

WBIGF, CEBC, HEC

Jan.-March 2000

DL

WBIGF w/ June-Oct. Transparency 2001 International

F2F w/DL

* Note: External Potential Partners in delivering AML learning programs are likely to include (many of) the following: Financial Action Task Force (FATF); and selected FIUs from Egmont group such as FINCEN United Nations Drug Control Program (Vienna): Pacific Group on Money Laundering (APG) Caribbean Financial Action Task Force (CFATF) Financial Action Task Force on Money Laundering in South America (GAFISUD) Council of Europe PC-R-EV Committee for ECA Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) Intergovernmental Task Force Against Money Laundering in Africa (ITFMLA) Federal Reserve Board (US- Fed) Banque de France; other Central Banks, as well as institutions such as IOSCO; IFAD Inter-American Development Bank (IaDB) OECD (w/ expert group on bribery in international business transactions) EBRD, ADB Centre d'Etudes sur le Blanchiment et la Corruption (CEBC - Groupe HEC) Financial Stability Institute (FSI) ; Financial Stability Forum (FSF) Wolfsburg Group of 11 Large Banks Self-regulation Transparency International (TI); Local/National Chapters of TI; Inter-Parliamentary Union; Journalist Associations Domestic Institutions within client countries (tbd, FIUs, others)

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Far from a Simple Laudromat: AML within a Broader Perspective A Schematic Chart Misgovernance, Money Laundering and Terrorism
Governance Setting: ML Process: Stage 1. Type of Business Activity and Source of Profit:
Legal Business Concern Drug Trafficking/ Arms Trade/ Prostitution Corruption by Country Leadership/ Politicians Corrupt Public Officials/ Procurement Regulatory/ State Capture by Corporates/ Banks Insider Trading, Stock Market X-Rate & Trade Prices Manipulation Organized Crime/ Racketeering/ Extortion/ Gambling Transfer Pricing/ Tax Evasion Charities and Other Front Companies

Good Governance

Misgovernance and Corruption in Public Sector and Corporate/Financial Sector

Stage 2. Type of Financial Transaction/ Intermediary:

Legal Financial Transactio n through Bona-fide Financial Institution Source A

Money Laundering; #1: a) Through Banks: i)Placement ii)Layering iii)Integration -- e*banking

b) Through NBFIs: -- Real Estate -- Securities Brokers/Derivatives/X-Rate Market -- Leasing/Insurance Companies -- Others

Money Laundering; #2:

Informal Financial Institutions: -- Hawalas -- X-Rate Mkt. (Peso) -- Cash; Other

Source(s) B (B1,B2)

Source C

Stage 3. Use of Funds/Profits:

Legitimate Consumption/ Investment/ Developmental Use of Funds

Illegal Political/ Campaign Funding

Terrorist Activity

Other Criminal Activities

Luxury Consumption

Stage 4. Development?

ProDevelopment

Anti-Development and Global Public Bad

13
DK/EF/WBI/Draft 11/01

FATF: Financial Action Task Force (FATF). What they do:

Ensure the adoption of the FATF 40 Recommendations in its member countries and encourage their implementation in other countries. Evaluate the implementation of anti-money laundering measures Monitor developments in international money laundering techniques and develop countermeasures Determine the size and nature of the problem of money laundering on a global scale.

The 40 Recommendations are a series of policy principles formulated to ensure an economy is not vulnerable to money laundering, covering three areas: i) Legal; ii) Financial and Regulatory, and iii) Law Enforcement. The FATF consists of the following members:

Argentina Belgium Denmark Germany Iceland Japan Netherlands Portugal Sweden United Kingdom

Australia Brazil Finland Greece Ireland Luxembourg New Zealand Singapore Switzerland United States

Austria Canada France Hong Kong, China Italy Mexico Norway Spain Turkey

Selected Bibliography (to be completed) Baker, Raymond, "The Biggest Loophole in the Free Market System", The Washington Quarterly, 1999. FATF, various background documents. Friedman, Eric, Johnson, S., Kaufmann, D., and Zoido-Lobatn, P., Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries, published in The Journal of Public Economics, June 2000. Hellman, Joel and Kaufmann, D., Confronting the Challenge of State Capture in Transition Economies, IMFs Finance and Development, September 2001.

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Johnson, Simon, Kaufmann, D. and Zoido-Lobatn, P., Corruption, Public Finance, and the Unofficial Economy, World Bank Policy Research Working Paper 2169 ,August 1999. Johnson, Simon, Kaufmann, D and Zoido-Lobaton, P., Regulatory Discretion and the Unofficial Economy. American Economic Review.1998, 88(2):387392, IMF, Financial System Abuse, Financial Crime, and Money Laundering: A Background Paper, February 2001 IMF Survey on Workshop on Financial Abuse and Money Laundering, March 2001 IMF and World Bank, Enhancing Contributions to Combating Money Laundering: Policy Paper, April 26th 2001 Kaufmann, Daniel, Kraay, A. and Zoido-Lobaton, P., Governance Matters; World Bank Policy Research Working Paper 2196, October 1999. Mehrez, Gil and Kaufmann, D., Transparency, Liberalization and Financial Crises, World Bank Policy Research Working Paper 2286, February 1999. Pieth, Mark, Tracking Down the Dirty Money: Legislative Activism Triggered by Current Terrorist Threats Lacks the Co-ordination to be Effective, Comments and Analysis, Financial Times, Oct 25, 2001. (Also MP on Wolfburg) Siegelbaum, Paul, Money Laundering, speech given at the Poland in the Face of Money Laundering Conference, organized by the Jagiellonian University, in Crackow, Poland on June 22, 2001.(with Cari Votava, ECA-FSE) Wechsler, William, Follow the Money, Foreign Affairs July, 2001 / August, 2001. World Bank, Diagnostic Study of Institutional Integrity and Governance in Colombia, October 2001. (WBI draft) World Bank, Peru Governance and Anti-Corruption Diagnostic Report, September 2001.(WBI draft) World Bank, Anti-Money Laundering (AML) Progress Report, Board Paper (SecM2001-0532) August 31, 2001. World Bank, Update on World Bank Anti-Money Laundering Activities (AML) in the Wake of September 11th Events, Board Paper (SecM2001-0028), October 2001.

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