The Effects of Money Laundering on Economic Development

1
The Effects of Money Laundering on Economic
Development

• A Presentation by
• Winnie Tat
• Sarah He Ying
• Icee Paramio

2
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

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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.

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Statistics - Money Laundering

• In 1996, the aggregate size of money laundering
  in the world may be between 2 and 5 of the
  worlds 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.

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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)

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Dirty Money Flows

• Domestic
• 
  Returning
• Inbound
• 
  Outbound
• Flow-through

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Link to Economic Development

• It will distort the economic data and complicate
  governments efforts to manage economic policy.
• It will have adverse consequences for interest
  and exchange rate volatility, particularly in
  dollarized economies.

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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.

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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.

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The Financial Sector

• Money laundering weakens the financial sectors
  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

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The Financial Sector

• Anti-money laundering reforms support financial
  institutions through enhanced financial prudence
• Strong correspondence between anti-money-launderin
  g 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

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The Real Sector

• Money laundering depresses growth

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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

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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.

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ML, Crime Corruption

• 
  MC Cost of committing
• 
  crime
• 
  
• 
  MR Crime opportunities
• Quantity of Crime
  

C o s T
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The External Sector

• Money laundering diverts capital away from
  development

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The External Sector

• Outbound capital flows facilitating illicit
  capital flight
• Inbound capital flows depressing foreign
  investment
• Trade distorting prices and content

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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

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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

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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

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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

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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
  anti-laundering laws to improve the credibility
  of not only its financial sector, but its
  governance as well.

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• Questions or Comments?
• Thank you!