What is Money Laundering? How does It Occur? What are the Development Impacts of Money Laundering? Emiko Todoroki The World Bank Building Financial Market.

What is Money Laundering? What is Money Laundering? How does It Occur?How does It Occur?

What are the Development What are the Development Impacts of Money Laundering?Impacts of Money Laundering?

Emiko TodorokiEmiko Todoroki

The World BankThe World Bank

Building Financial Market Integrity in AfghanistanBuilding Financial Market Integrity in Afghanistan

April 16, 2006April 16, 2006

Money Laundering: Money Laundering: How big is the threat?How big is the threat?

How much money is laundered each year?How much money is laundered each year?

Publicized figures vary between Publicized figures vary between US$ 500 billion and US$ US$ 500 billion and US$ 1.5 trillion annually1.5 trillion annually. .

To put this figure into context, To put this figure into context, Wal-Mart, the largest retail company in the world, reported Wal-Mart, the largest retail company in the world, reported

annual revenue of US$ 250 billion dollars in January 2004. annual revenue of US$ 250 billion dollars in January 2004. Spain is 7Spain is 7thth largest economy in the world with about $1 trillion largest economy in the world with about $1 trillion

GDP/year. GDP/year. The amount of criminally derived funds entering The amount of criminally derived funds entering

legitimate financial systems each year is almost legitimate financial systems each year is almost incalculable.incalculable.

What is money What is money laundering?laundering?

A process by which A process by which proceeds proceeds from a criminal activity are from a criminal activity are disguised to conceal their illicit origins. This process disguised to conceal their illicit origins. This process enables the criminal to enjoy these profits without enables the criminal to enjoy these profits without jeopardizing their source. jeopardizing their source.

Where you can find the definitions?Where you can find the definitions? United Nations Convention against Illicit Traffic in Narcotic Drugs and United Nations Convention against Illicit Traffic in Narcotic Drugs and

Psychotropic Substances (Vienna Convention,1988)Psychotropic Substances (Vienna Convention,1988) United Nations Convention against Transnational Organized Crime United Nations Convention against Transnational Organized Crime

(Palermo Convention, 2000)(Palermo Convention, 2000)

Simple money laundering Simple money laundering conceptconcept

Is Mr A Laundering Money?Is Mr A Laundering Money? How about the Friend?How about the Friend?

Mr AMr A FriendFriend

Works in a Bank inWorks in a Bank in

jurisdiction Xjurisdiction X

Jurisdiction B: secrecy lawsJurisdiction B: secrecy laws

illicit smuggling

of weapons

A Typical ML SchemeA Typical ML Scheme

Source: UNODCSource: UNODC

Three Stages of Three Stages of Money LaunderingMoney Laundering

Placement Placement StageStage

Layering Layering

StageStage

Integration Integration StageStage

Initial injection of illicit Initial injection of illicit funds into the financial funds into the financial systemsystem

Multiple layers of Multiple layers of transactions that further transactions that further separate funds from their separate funds from their illegal origins illegal origins

Reintroduction of illicit Reintroduction of illicit funds into legitimate funds into legitimate economy. economy.

Purpose is to separate Purpose is to separate illicit funds from their illicit funds from their illegal origins. illegal origins.

Purpose is to make it Purpose is to make it difficult to trace the funds difficult to trace the funds to their illegal origins. to their illegal origins.

Purpose is to allow Purpose is to allow criminals to use the criminals to use the funds without raising any funds without raising any suspicion. suspicion.

Placement StagePlacement Stage

ExamplesExamples Depositing cash into an account or into several Depositing cash into an account or into several

accounts in different locations.accounts in different locations. Paying cash for bank drafts, traveller’s cheques, Paying cash for bank drafts, traveller’s cheques,

and other value instruments.and other value instruments. Purchasing items of value for cash (such as Purchasing items of value for cash (such as

works of art, antiques, motor vehicles, and so works of art, antiques, motor vehicles, and so on) for the purpose of selling them. on) for the purpose of selling them.

Commingling criminal cash with legitimate cash Commingling criminal cash with legitimate cash in a business account.in a business account.

Converting cash in one currency into another Converting cash in one currency into another currency.currency.

Layering StageLayering Stage

ExamplesExamples Wiring payments to and from various accounts Wiring payments to and from various accounts

(personal and corporate) in different jurisdictions(personal and corporate) in different jurisdictions Buying, then selling, an investment productBuying, then selling, an investment product Buying and then surrendering a single-premium Buying and then surrendering a single-premium

insurance contractinsurance contract Engaging in international trade transactionsEngaging in international trade transactions Making other types of payment where funds Making other types of payment where funds

move from one account to anothermove from one account to another

Integration StageIntegration Stage

ExamplesExamples Purchase of property (for personal use or Purchase of property (for personal use or

investment)investment) Purchase of other high-value items, for example, Purchase of other high-value items, for example,

jewelries, antiques, works of art jewelries, antiques, works of art Purchase of legitimate businessesPurchase of legitimate businesses Purchase of investments for incomePurchase of investments for income Any purchase for personal use with a cheque, Any purchase for personal use with a cheque,

credit card, or other payment methodcredit card, or other payment method

What is Terrorist Financing?What is Terrorist Financing? ““Terrorist Financing is the Terrorist Financing is the actact of providing of providing

financial supportfinancial support to to terroriststerrorists or or terrorist terrorist organizationsorganizations to enable them to carry out to enable them to carry out terrorist acts”terrorist acts” Where to find the Definition:Where to find the Definition: UN International Convention UN International Convention

for the Suppression of Financing of Terrorism for the Suppression of Financing of Terrorism

Primary Objective is non-financial, Primary Objective is non-financial, yet as with yet as with all organizations, terrorist groups require funds all organizations, terrorist groups require funds in order to carry out their primary activities.in order to carry out their primary activities.

Source of Funds can be Source of Funds can be legallegal or or IllegalIllegal

What are the sources of What are the sources of Terrorist Financing?Terrorist Financing?

Legal Sources

CONTRIBUTIONS AND DONATIONS

SALE OF PUBLICATION

LEGITIMATE BUSINESS ACTIVITIES

Illegal Sources

DRUG TRAFFICKING

EXTORTION AND KIDNAPPING

ROBBERY

FRAUD

GAMBLING

SMUGGLING AND TRAFFICKING IN COUNTERFEIT GOODS

Why measures to fight ML and Why measures to fight ML and TF are brought together?TF are brought together?

What are similarities between money laundering and What are similarities between money laundering and terrorist financing?terrorist financing?

• Terrorists also need to move their funds and avoid suspicion, just as Terrorists also need to move their funds and avoid suspicion, just as money launderersmoney launderers

• Terrorists use the same methods as money launderers to handle Terrorists use the same methods as money launderers to handle their funds (placement, integration and layering stages)their funds (placement, integration and layering stages)

What is the difference between money laundering and What is the difference between money laundering and terrorist financing?terrorist financing?

• Terrorists are Terrorists are notnot in their business for money in their business for money• Terrorist sources of funds can be Terrorist sources of funds can be legal or illegallegal or illegal

Where do ML/TF operations take Where do ML/TF operations take place?place?

• Money Laundering and Terrorist Financing are Money Laundering and Terrorist Financing are GLOBAL CRIMESGLOBAL CRIMES!!

• Money launderers and financier of terrorism Money launderers and financier of terrorism INTERNATIONALIZEINTERNATIONALIZE their operations to their operations to achieve various objectives.achieve various objectives.

Where do ML/TF operations take Where do ML/TF operations take place?place?

OBJECTIVES FOR ML AND TF

AVOID JURISDICTIONS WITH STRONG LAW ENFORCEMENT FRAMEWORK

TAKE ADVANTAGE OF CONSTRAINTS IN COMMUNICATION BETWEEN DOMESTIC AGENCIES

EXPLOIT REGULATORY AND LAW ENFORCEMENT WEAKNESS

ADD LAYERS TO TRANSACTIONS TO MAKE IT DIFFICULT TO TRACE THE TRANSACTIONS

Where do ML/TF operations take Where do ML/TF operations take place?place?

What are the Implications of ML What are the Implications of ML for Development?for Development?

Money laundering can exploit Money laundering can exploit any any jurisdiction - therefore no country is jurisdiction - therefore no country is immune. immune.

It has serious impact for development:It has serious impact for development:

MACROECONOMY RULE OF LAW

FINANCIALSYSTEM

GOVERNANCE

What are the Implications of ML What are the Implications of ML for Development?for Development?

Affecting macro economy… Affecting macro economy…

RapidRapid movement of large amount of money inconsistent movement of large amount of money inconsistent with financially productive purposes destabilizes: with financially productive purposes destabilizes: Proper interest rate movementProper interest rate movement Proper exchange rate movementProper exchange rate movement Proper pricing of real estatesProper pricing of real estates

DiscourageDiscourage long-term investment in legitimate activities long-term investment in legitimate activities

DeprivesDeprives the country of legitimate tax paying the country of legitimate tax paying businessbusiness

What are the Implications of What are the Implications of ML for Development?ML for Development?

Affecting the rule of law…Affecting the rule of law… UndermineUndermine the rule of law in society. the rule of law in society. Tend to induceTend to induce corruption in the public corruption in the public

sector.sector.

What are the Implications of ML What are the Implications of ML for Development?for Development?

Affecting the financial system…Affecting the financial system…

Reputational riskReputational risk• Discourage people to put their money in banks because of lack of Discourage people to put their money in banks because of lack of

trusttrust Operational riskOperational risk

• Institutions incur reduced, terminated, or increased costs for inter-Institutions incur reduced, terminated, or increased costs for inter-bank or correspondent banking servicesbank or correspondent banking services

Legitimate businesses and enterprises suffer from reduced Legitimate businesses and enterprises suffer from reduced access to world markets or access at a higher cost due to extra access to world markets or access at a higher cost due to extra scrutiny of their ownership, organization and control systemsscrutiny of their ownership, organization and control systems

Tend to induce corruption in the financial sectorTend to induce corruption in the financial sector

What are the Implications of ML What are the Implications of ML for Development?for Development?

Affecting economic liberalization…Affecting economic liberalization…

By using front companies and other investments in legitimate By using front companies and other investments in legitimate companies money laundering proceeds can be utilized to companies money laundering proceeds can be utilized to control whole industries or sectors of the economy of certain control whole industries or sectors of the economy of certain countriescountries

Threaten the efforts of many countries to reform their Threaten the efforts of many countries to reform their economies through privatization. Criminal organizations are economies through privatization. Criminal organizations are capable of outbidding legitimate purchasers of former state-capable of outbidding legitimate purchasers of former state-owned enterprisesowned enterprises

Encourage governments to impose restrict capital controlsEncourage governments to impose restrict capital controls Encourage governments to impose restrict regulations on Encourage governments to impose restrict regulations on

financial transactions and trade with jurisdictions that do not financial transactions and trade with jurisdictions that do not have adequate money laundering control policieshave adequate money laundering control policies

How does AML system help?How does AML system help?

A well functioning anti-money laundering system:A well functioning anti-money laundering system: Makes it difficultMakes it difficult for corrupt officials to expatriate their ill- for corrupt officials to expatriate their ill-

gotten fundsgotten funds IncreasesIncreases public confidence in the financial system public confidence in the financial system Increases Increases investment in the legitimate private economy, investment in the legitimate private economy,

allowing for increase resources from taxesallowing for increase resources from taxes ProvideProvide a disincentive for the criminal involvement in the a disincentive for the criminal involvement in the

economy, promoting transparency and productivityeconomy, promoting transparency and productivity

Thank youThank you

Contact:Contact:Emiko TodorokiEmiko Todoroki

[email protected]@worldbank.org

phone: +1-202-458-9466phone: +1-202-458-9466