The Effects of Money Laundering on Economic Development A Presentation by Winnie Tat Sarah He Ying Icee Paramio A Presentation by Winnie Tat Sarah He Ying

The Effects of Money Laundering on

Economic Development

The Effects of Money Laundering on

Economic Development

A Presentation byWinnie Tat

Sarah He YingIcee Paramio

A Presentation byWinnie Tat

Sarah He YingIcee Paramio

AgendaAgenda

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

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

What is Money Laundering?

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.

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.

Statistics - Money Laundering

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.

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.

Washing Dirty MoneyWashing 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)

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)

Dirty Money FlowsDirty Money Flows

Domestic Returning

Inbound Outbound

Flow-through

Domestic Returning

Inbound Outbound

Flow-through

Link to Economic Development

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.

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.

Link to Economic Development (cont.)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.

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.

The Financial SectorThe 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.

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.


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

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


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

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

The Real SectorThe Real Sector

Money laundering depresses growthMoney laundering depresses growth

The Real SectorThe 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

Money laundering: distorts investment and depresses productivity

facilitates corruption and crime at the expense of development

can increase the risk of macroeconomic instability

The Real Sector : Crimes

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.

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.

ML, Crime & CorruptionML, Crime & Corruption

MC = Cost of committing

crime

MR = Crime

opportunities

Quantity of Crime

MC = Cost of committing

crime

MR = Crime

opportunities

Quantity of Crime

C

o

s

T

The External SectorThe External Sector

Money laundering diverts capital away from

development

Money laundering diverts capital away from

development


Outbound capital flows: facilitating illicit capital flight

Inbound capital flows: depressing foreign investment

Trade: distorting prices and content

Outbound capital flows: facilitating illicit capital flight

Inbound capital flows: depressing foreign investment



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

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’



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.’


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.’




‘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.’



‘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.’


AML EffortsAML 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

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

ConclusionConclusion

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.

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.

Questions or Comments?

Thank you!

Questions or Comments?

Thank you!

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The Effects of Money Laundering on Economic Development A Presentation by Winnie Tat Sarah He Ying Icee Paramio A Presentation by Winnie Tat Sarah He Ying