Transcript The Effects of Money Laundering on Economic Development

The Effects of Money
Laundering on Economic
Development
A Presentation by
Winnie Tat
Sarah He Ying
Icee Paramio
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
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.
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.
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)
Dirty Money Flows
Domestic
Returning
Inbound
Outbound
Flow-through
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.
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.
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.
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
The Financial Sector
Anti-money laundering reforms support financial
institutions through enhanced financial
prudence
 Strong correspondence between anti-moneylaundering 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 Sector
Money laundering depresses
growth
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
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.
ML, Crime & Corruption
MC = Cost of committing
crime
C
o
s
T
MR = Crime opportunities
Quantity of Crime
The External Sector
Money laundering diverts capital
away from development
The External Sector
 Outbound capital flows: facilitating
illicit capital flight
 Inbound capital flows: depressing
foreign investment
 Trade: distorting prices and content
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
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
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
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
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 antilaundering laws to improve the credibility of
not only its financial sector, but its
governance as well.
Questions or Comments?
Thank you!