Money Laundering and Corruption Mike Levi Maria Dakolias Ted Greenberg June 8, 2006

Objectives Define money laundering How AML supports anti-corruption

“After foreign exchange and the oil industry, the laundering of dirty money is the world’s third- largest business.” Jeffrey Robinson, The Laundrymen How Much Is Laundered? IMF ESTIMATE = 2-5% Global GDP

What is Money Laundering? Definition: The process of disguising the proceeds of crime in an effort to conceal their illicit origins and legitimize their future use. Objective: To conceal true ownership and origin of the proceeds, a desire to maintain control, a need to change the form of the proceeds. Techniques: They can be simple, diverse, complex, subtle, but secret. Proceeds = any economic advantage derived directly or indirectly from criminal offenses

Money Laundering Cycle 2. PLACEMENT 3. LAYERING 4. INTEGRATION The last stage in the laundering process. Occurs when the laundered proceeds are distributed back to the criminal. Creates appearance of legitimate wealth. Involves distancing the money from its criminal source: movements of $ into different accounts movements of money to different countries Increasingly difficult to detect Initial introduction of criminal proceeds into the stream of commerce Most vulnerable stage of money laundering process 1. Predicate Crimes Corruption and Bribery Fraud Organized crime Drug and human trafficking Environmental crime Terrorism Other serious crimes… Money Laundering Cycle

Money is laundered through… Banks Financial services Brokerage firms Other Examples: Insurance companies, Money remitters, Cash intensive businesses, Brokerage firms, Realtors Crooked LAWYERS and ACCOUNTANTS

Simple Bribe and Money Laundering Transaction Company A Needs to generate $1 million for bribe to Finance Minister. Uses invoices from company in Country 2 Country 1 Country 2 Company Bank Account Country 3 Company owned by Minister’s cousin Country 4 $500,000 - Purchase of Real Estate $500,000 - Purchase of Bearer Share

What Are The Benefits Of Money Laundering Laws? Money Laundering is a separate offense which carries additional jail time. Allows for seizure and confiscation of proceeds of crime. Allows law enforcement access to bank and other financial institution records. Requires financial institutions to file suspicious and sometimes cash transaction reports, and to identify the beneficial owners of legal entities. Requires establishment of Financial Intelligence Units which receive reports from financial institutions and can provide new channels for international exchange of information.

Key Questions How does anti-money laundering make it riskier for corruptors/corruptees? How much can AML deter corruption? What are the measures that will contribute to increase risk and prevention of corruption?

Incentives to Launder Large amount of proceeds from corruption that need to be hidden Low confidence in the security of assets in country Asset disclosure requirements Political instability or possible regime change Greater risk for corruptors and corruptees of investigation and prosecution Greater opportunities for corruption and money laundering but at the same time greater risk of investigation

Where are we in 2006? Tighter controls on AML globally Fewer secrecy havens Greater international cooperation and pressure to adopt international standards (FATF and FSAPS by IMF/WB) Private sector generally proactive in monitoring their business relationships Greater opportunities for corruption and money laundering but at the same time greater risk of investigation No database of Money Laundering Cases

The Case of Switzerland Originally known for its extreme bank secrecy Evolution of reputational risk assessment of Swiss financial sector. Began to freeze assets. Recent Cases with Swiss Banks: Marcos: returned $700 million Abache: returned $200 million Montesinos: returned $77.5 million From Swiss Bank, money went to Banks in Nigeria, USA, UK, Austria, Lichtenstein, Luxembourg—with a total of more than $700 million

What are some of the Challenges? Developing political will at senior levels of government. Tighter AML can be costly and reduce resources from other needs. Building capacity in developing countries for investigation and prosecution. Knowing your client is not always easy. Knowing your client’s client is difficult to impossible. Coordination among countries law enforcement, financial intelligence units, regulators, and judiciaries. Application of AML regime in a cash based economy. Greater opportunities for corruption and money laundering but at the same time greater risk of investigation

Conclusion Results unkown—don’t know whether there has been a reduction in corruption because of AML (no database of Money Laundering Cases) It is easier to prosecute AML even when local jurisdictions are not able (i.e. ML is usually multi-jurisdictional) AML is a compliment to anti-corruption programs but it is not a silver bullet Greater opportunities for corruption and money laundering but at the same time greater risk of investigation

Thank You.

Examples Of What Countries Can Do? Enact and implement AML regime including creating “Financial Intelligence Units”, suspicious transaction reporting, enhanced due diligence on financial transactions regarding “politically exposed persons” and civil/criminal forfeiture. Build clear and efficient internal mechanisms to share information by and between regulators and law enforcement agencies. Join regional anti-money laundering group to help enhance regional and international cooperation opportunities. Build capacity of investigators, prosecutors and judges to handle financial investigations.

How does the Bank help? Effective AML/CFT regime: Understanding of ML & TF amongst stakeholders Legal framework Functioning FIU Supervision of AML Law enforcement capacity WB technical assistance: Awareness raising workshops/ Global Dialogues Legislative drafting FIU capacity building Capacity building for regulators/ supervisors Capacity building for law enforcement

Money laundering, why do we care? Is a global threat; Is fuel to expand criminal enterprise; Helps hide corrupt payments; Uneven playing field for honest business; Risks for financial systems & institutions-erodes integrity Regulatory Reputational, credit and operational risk. Market risk. Economic: Deters private investment Destroys competition Revenue impact Financial: Perpetuates corruption, obstructs good governance Erodes confidence Destabilizes financial institutions

Money laundering is any transaction which seeks to conceal or disguise proceeds from illegal activities. Proceeds = any economic advantage derived directly or indirectly from criminal offenses.

Money laundering, why do we care? Is a global threat; Is fuel to expand criminal enterprise; Helps hide corrupt payments; Uneven playing field for honest business; Risks for financial systems & institutions-erodes integrity Regulatory Reputational, credit and operational risk. Market risk. Economic: Deters private investment Destroys competition Revenue impact Financial: Perpetuates corruption, obstructs good governance Erodes confidence Destabilizes financial institutions