Money laundering reviews should influence financial stability assessments, says IMF

Thomson Reuters Accelus - Tue, 15 Jan 2013 12:49 GMT
Author: Compliance Complete
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By Martin Coyle Anti-money laundering and countering terrorist financing issues should be considered when assessing a country's financial stability, according to the International Monetary Fund (IMF). The global organisation has released a framework that deals with instances of money laundering deemed serious enough to threaten domestic stability and has called on its staff to report the issues when they occur. The IMF said money laundering, terrorist financing and related predicate crimes could undermine the stability of a country's financial system as well as its broader economy. It added that it might have "spill over" effects on global stability. "Threats to financial stability and macroeconomic performance can be directly attributable to money laundering and terrorist financing in certain cases, resulting, for example, in loss of access to global financial markets and destabilising inflows and outflows," the IMF said. One industry source told Compliance Complete that the review was fairly high level but could lead to future interesting conclusions. "The express inclusion of analysis as to whether financial crime in a jurisdiction is so bad that it could impact financial stability is going to make for some very interesting future country reports from the IMF," the source said. State of corruption The report used the example of convicted fraudster Allen Stanford's massive Ponzi scheme, which was based in Antigua and Barbuda. When his criminal enterprise collapsed in 2009 his bank, as well as a large part of the Antiguan economy, came tumbling down too. The island's GDP shrank by over 10 percent as a result. In countries where financial stability is compromised by the effects of money laundering the IMF said its staff should provide the authorities with policy advice on the measures that states should take to address such threats. The report said that "left unchecked" money laundering and predicate crimes enable criminals to amass wealth, power and influence that undermine the rule of law, and corrupt society and the economy. "AML/CFT controls, when effectively implemented, mitigate the adverse effects of criminal economic activity and promote integrity and stability in financial markets. Strong AML/CFT regimes enhance financial sector integrity and macroeconomic stability both on a national and international level," the report said. The IMF asserted that there are circumstances where money laundering can undermine the stability of a country's financial system or a broader economy. "The actual or perceived failure of a member to deal effectively with ML or TF may result in a loss of access of its financial system to global financial markets, with potentially negative consequences for financial stability and the economy as a whole." Weak frameworks The IMF explained that national supervisors often prohibit their banks from dealing with institutions from countries with weak AML frameworks or subject their transactions to tougher controls. It pointed to the Financial Action Task Force, which publishes lists of countries with perceived weaknesses in their anti-money laundering controls. The IMF also warned of "destabilising inflows and outflows", or hot money that can flow in and out of financial institutions. It said that illegal transactions that are significant in relation to the size of the country's formal sector could have a negative impact. It said that money laundering could be symptomatic of wider issues of financial sector fraud as well as problems related to the integrity of the country's regulatory framework. The report suggested that money laundering in one country could have a spill over effect on neighbouring states and lead to illicit money transfers. This could destabilise the country's economy. Decisive factors The IMF said that a decision to include anti-money laundering issues in a stability assessment would be based on an overall assessment of the country's circumstances. It would take account of whether: a country's access to global financial markets is vulnerable to AML/CFT-related sanctions and blacklisting; the actual or potential level of abuse of financial institutions as instrumentalities for ML or TF is large relative to the country's financial sector or GDP; the estimated level of proceeds of crime generated in the country is large relative to the country's formal sector (official) GDP; transactions in specific illegal markets (e.g., drug production and trafficking) are large relative to the country's formal sector (official) GDP; criminal elements own, control, or hold a significant proportion of financial sector assets, or a significant equity interest in key financial institutions; regulatory capture by criminal elements or weaknesses in the regulatory and criminal justice systems hamper effective supervision of the financial sector; there is a significant risk of financial sector fraud of a magnitude that could undermine the stability of the domestic financial system; corruption by government or elected officials is significant relative to the size of the economy or the government budget; and a recent terrorist attack or the threat of one makes key sectors vulnerable (e.g., banking, tourism, transportation, foreign investment), or the level and nature of terrorist incidents otherwise threaten domestic financial stability. The IMF paper follows a discussion by the fund's board in June 2011.