How are Corruption and Money Laundering linked?

Both corruption and money laundering are of great concern for the IMF and they are now an integral part of its work because of the numerous disruptive consequences that each has on national and regional economies.

Anti-corruption and anti-money laundering work are linked in numerous ways, and especially in recommendations that promote, in general, transparency, integrity and accountability. Recommendation 6 of the FATF 40+9 Recommendations and Paragraph 7 of the Methodology for Assessing Compliance with the FATF 40+9 Recommendations, are particularly relevant to anti-corruption efforts. The essential connections are:

•Money laundering (ML) schemes make it possible to conceal the unlawful origin of assets. Corruption is a source of ML as it generates large amounts of proceeds to be laundered. Corruption may also enable the commission of a ML offense and hinder its detection, since it can obstruct the effective implementation of a country's judicial, law enforcement and legislative frameworks.

•When countries establish corruption as a predicate offense to a money laundering charge, money laundering arising as a corrupt activity can be more effectively addressed. When authorities are empowered to investigate and prosocute corruption-related money laundering they can trace, seize and confiscate property that is the proceeds of corruption and engage in related international cooperation.

•When corruption is a predicate offense for money laundering, AML preventive measures can also be more effectively leveraged to combat corruption.

The Financial Action Task Force (FATF) Secretariat is currently coordinating a project to draft a paper outlining the links between corruption and money laundering that may facilitate the implementation of international AML/CFT standards.

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What is Money Laundering?

Criminal activities, such as drug trafficking, smuggling, human trafficking, corruption and others, tend to generate large amounts of profits for the individuals or groups carrying out the criminal act. However, by using funds from such illicit sources, criminals risk drawing the authorities' attention to the underlying criminal activity and exposing themselves to criminal prosecution. In order to benefit freely from the proceeds of their crime, they must therefore conceal the illicit origin of these funds.

 

Briefly described, "money laundering" is the process by which proceeds from a criminal activity are disguised to conceal their illicit origin. More precisely, according to the Vienna Convention and the Palermo Convention provisions on money laundering, it may encompass three distinct, alternative actus reas: (i) the conversion or transfer, knowing that such property is the proceeds of crime (ii) the concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; and (iii) the acquisition, posession or use of property, knowing, at the time of the receipt, that such property is the proceeds of crime.

 

The international standard for the fight against money laundering and the financing of terrorism has been established by the Financial Action Task Force (FATF), which is a 33-member organization with primary responsibility for developing a world-wide standard for anti-money laundering and combating the financing of terrorism. The FATF was established by the G-7 Summit in Paris in 1989 and works in close cooperation with other key international organizations, including the IMF, the World Bank, the United Nations, and Can money laundering be quantified?

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The Fund's involvement in Anti-money laundering/ combating the financing of terrorism

The international community has made the fight against money laundering and the financing of terrorism a priority. Among the goals of this effort are: protecting the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those engaged in crime to profit from their criminal activities. The IMF's unique blend of universal membership, surveillance functions, and financial sector expertise make it an integral and essential component of international efforts to combat money-laundering and the financing of terrorism.

 

In 2000, the Fund responded to calls from the international community to expand its work in the area of anti-money laundering (AML) in general and concerning the abuse of Offshore Financial Centers (OFC) in particular by initiating an OFC assessment program and exploring how it could incorporate AML work into its activities, especially Article IV surveillance and the newly-established Financial Sector Assessment Program (FSAP).1 Work on developing an AML Report on Standards and Codes (ROSC) module was ongoing when the tragic events of September 11, 2001 intensified the efforts and broadened their scope to include combating the financing of terrorism (CFT). Within about a year, the Fund was already actively at work assessing member countries compliance with the international standard developed (and subsequently fundamentally revised) by the Financial Action Task Force (FATF), as well as providing technical assistance on how to improve AML/CFT regimes. This preliminary experience was favorably evaluated by the Board, which in March, 2004, decided to incorporate AML/CFT assessments and AML/CFT technical assistance into the Fund's regular work and continue to make AML/CFT assessments a mandatory ROSC in every FSAP and OFC assessment.

The IMF is especially concerned about the possible consequences of money laundering and the financing of terrorism on its members' economies. These include risks to the soundness and stability of financial institutions and financial systems, increased volatility of international capital flows, and a dampening effect on foreign direct investment. The problem is global; money launderers and terrorist financiers exploit loopholes and differences among national AML/CFT systems and move their funds to or through jurisdictions with weak or ineffective legal and institutional frameworks.

The IMF is contributing to the international fight against money laundering and the financing of terrorism in several important ways, consistent with its core areas of competence. As a collaborative institution with near universal membership, the IMF is a natural forum for sharing information, developing common approaches to issues, and promoting desirable policies and standards -- all of which are critical in the fight against money laundering and the financing of terrorism. In addition, the IMF's broad experience in conducting financial sector assessments, providing technical assistance (TA) in the financial and nonfinancial sectors, and exercising surveillance over members economic systems is particularly helpful in evaluating country compliance with the international AML/CFT standards and in developing and implementing programs to assist member countries in addressing identified shortcomings.

Currently, the three main areas of IMF work in connection with AML/CFT are:

Assessments: Each evaluation of financial sector strengths and weaknesses conducted under the Financial Sector Assessment Program (FSAP) and the Offshore Financial Centers Program must include an assessment of the jurisdiction's AML/CFT regime. Such assessments measure compliance with the FATF 40+9 Recommendations according to an agreed Methodology for Assessing Compliance with the FATF 40+9 Recommendations also used by the Financial Action Task Force (FATF), the FATF-style regional bodies (FSRBs), and the World Bank in conducting their assessments;

 

Technical Assistance: Along with the World Bank, the IMF provides substantial technical assistance to member countries on strengthening their legal, regulatory, institutional and financial supervisory frameworks for AML/CFT; and

 

Policy Development: IMF and World Bank staff have been active in researching and analyzing international practices in implementing AML/CFT regimes as a basis for providing policy advice and technical assistance.

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