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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.
The Financial SectorThe 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
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 SectorThe 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
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
The External SectorThe External Sector
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
Trade: distorting prices and content
The External SectorThe 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
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 SectorThe 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
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 SectorThe 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
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 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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