Banks, Illegal Financial Flows and Management of Frozen Assets Yaoundé, Cameroon June 6, 2014 GODFRED PENN LEAD COUNSEL & ADVISOR TO THE GENERAL COUNSEL AFRICAN DEVELOPMENT BANK GROUP

INTRODUCTION & OUTLINE ILLICIT FINANCIAL FLOWS (IFFs), AFRICA REGIONAL DISTRIBUTION OF IFFs DRIVERS OF IFFs IN AFRICA THE DEVELOPMENT IMPACT OF IFFs INTERNATIONAL LEGAL FRAMEWORKS ON IFFs MANDATE OF THE FATF MANAGEMENT OF FROZEN ASSETS-THE ROLE OF MDBS THE ROLE OF THE AFDB GROUP AFDB GROUP GAP I & II PREVENTING IFFs IN PRIVATE SECTOR TRANSACTIONS ANTI-CORRUPTION SANCTIONS REGIME MOVING FORWARD QU I CK RUN DOWN AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

Illicit Financial Flows in Africa Saturday, April 15, 2017 Illicit Financial Flows in Africa “Illicit financial flows involve the transfer of money earned through corruption, kickbacks, tax evasion, criminal activities, transactions involving contraband goods, and funds transferred in violation of exchange controls” Source: Joint Report by AfDB and GFI (2013) Source: African Financial Markets Initiative Website To enjoy the amount of illicit assets, criminals are forced to launder these funds through legitimate international financial channels in an attempt to disguise their illegitimate origins. It is very important that effective asset tracing tools and techniques are developed and shared amongst law enforcement bodies to help stem the tide of illicit financial flows, deny criminals the chance to enjoy the proceeds of their crime, and ultimately, to achieve justice. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

Saturday, April 15, 2017 GLOBAL The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organised crimes and to investigate to what extent these funds are laundered. The report estimates that in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7% (or USD 1.6 trillion) being laundered. See: http://www.fatf-gafi.org/pages/faq/moneylaundering/. See also http://www.baselgovernance.org/fileadmin/docs/publications/working_papers/15_Tracking_and_Tracing_Stolen_Assets_in_Foreign_Jurisdictions.pdf.) Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

Regional Distribution of Illicit Financial Flows in Africa Saturday, April 15, 2017 Regional Distribution of Illicit Financial Flows in Africa Africa lost between US$1.2-1.4 trillion through illicit financial flows over the period 1980 - 2009 The regions of West & Central Africa, North Africa and Southern Africa, together accounted for 95% of total cumulative illicit outflows from Africa over that period Source: Joint Report by AfDB and GFI (2013) Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

Drivers of Illicit Financial Flows in Africa Saturday, April 15, 2017 Drivers of Illicit Financial Flows in Africa Embezzled rents and royalties from natural resource extraction activities Tax evasion, tax havens, secrecy jurisdictions Lack of transparency and accountability in financial systems and budget processes Bribes and kickbacks in public procurement Trade mispricing such as underpricing and overpricing of imports and exports Money laundering Lack of resources to monitor financial systems and enforce applicable laws AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

Development Impact of Illicit Financial Flows Saturday, April 15, 2017 Development Impact of Illicit Financial Flows In 2009 illicit financial flows out of Africa were three times the amount of official development assistance received Illicit financial flows are a form of capital flight, which results in reduced levels of local investment Illicit financial flows exacerbate income inequality Illicit activities jeopardize the integrity of the national financial system and weaken financial institutions Weak and unregulated financial systems can further deter access to foreign investments and markets The issue of illicit financial flows is particularly important now as Africa is receiving less official development assistance from developed countries Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

INTERNATIONAL LEGAL FRAMEWORKS There are legal instruments that regulate the tracing, freezing, seizing and confiscation of instrumentalities and proceeds of crime. E.G.: 1998 UN Convention on Illicit Trafficking in Narcotic Drugs and Psychotropic Substances (Vienna Convention) 1999 International Convention for the Suppression of the Financing of Terrorism 2004 UN Convention against Transnational Organized Crime (Palermo Convention) 2004 UN Convention against Corruption AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

INTERNATIONAL LEGAL FRAMEWORKS Saturday, April 15, 2017 INTERNATIONAL LEGAL FRAMEWORKS Financial regulation standards are also set by the Basel Committee on Banking Supervision, for banks the International Organisation of Securities Commissioners (IOSCO), for securities firms and markets the International Association of Insurance Supervisors (IAIS), for insurance companies. Other self-regulating bodies, such as the International Federation of Accountants or the Wolsberg Group of Banks, have also set standards for their own area. The Wolfsberg Group is an association of eleven global banks, which aims to develop financial services industry standards, and related products, for Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies. The members include Banco Santander, Bank of Tokyo-Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Societe Generale, UBS. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

Saturday, April 15, 2017 THE FATF The Financial Action Task Force (FATF) was established in 1989 by the G-7 countries to respond more effectively to Money Laundering (ML). The FATF Forty Recommendations require the criminalization of ML. In addition, the recommendations call on countries to adopt legislative and other measures in order to: freeze, seize and confiscate criminal proceeds; waive bank secrecy laws to permit financial institutions to monitor and report suspicious transactions; protect those reporting these transactions from civil and criminal liability; establish financial investigation units; and, cooperate fully in international law enforcement efforts to combat ML. A number of initiatives have been established for dealing with the problem of ML at the international level. International organisations, such as the United Nations or the Bank for International Settlements, took some initial steps at the end of the 1980s to address the problem. Following the creation of the FATF in 1989, regional groupings – the European Union, Council of Europe, Organisation of American States, to name just a few – established anti-money laundering standards for their member countries. The Caribbean, Asia, Europe and southern Africa have created regional anti-money laundering task force-like organisations, and similar groupings are planned for western Africa and Latin America in the coming years. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

THE FATF The FATF Special Recommendations require countries to criminalize: the financing of terrorism terrorist organizations and terrorist acts and to designate these new offences as ML predicate offences The FATF is also involved in monitoring the progress of members in complying with its recommendations. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

The Role of Multilateral Development Banks Saturday, April 15, 2017 The Role of Multilateral Development Banks As financial institutions operating in the global financial system, MDBs must tighten fiduciary safeguards and establish and maintain internal procedures to prevent and detect corruption and money laundering Examples: Develop effective internal policies, train and educate employees, implement effective audit functions Provide financial and technical assistance to member countries wishing to implement international standards for anti- corruption and anti-money laundering measures Support member countries with financial sector reforms to strengthen banking supervision and regulation of financial institutions Coordinate, cooperate and exchange best practices with other MDBs to harmonize efforts for combatting illicit flows As a part of its Governance Strategy and Implementation Plan, the World Bank, through its Financial Market integrity Unit, encourages financial centers to take action in their own countries against the laundering of the proceeds of corruption, the theft of natural resources, tax evasion, and aggressive tax planning, and monitors progress against these commitments. It also continues to support developing countries‘ efforts to tackle illegal financial flows through the effective implementation of international standards and by facilitating their access to operational-level cooperation, in particular on law enforcement and criminal justice. The World Bank, in partnership with the United Nations Office on Drugs and Crime (UNODC) supports international efforts to end safe havens for corrupt funds. The Stolen Asset Recovery Initiative (STAR: http://star.worldbank.org/star/) works with developing countries and financial centres to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

1st GOVERNANCE STRATEGY ROLE OF AFDB GROUP 1st GOVERNANCE STRATEGY GAP I was based on the Bank Group’s Medium-Term Strategy (MTS), 2008-2012, The Bank’s key focus was and has been on improving economic and financial governance on the continent by  supporting  actions which strengthen Public Financial Management (PFM) and by improving a Business Enabling Environment (BEE) at the country, sector and regional levels AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

ROLE OF AFDB GROUP UNDER GAP I With the central objective of assisting African countries to build capable and responsive states, the Bank’s work in governance also targeted the specific needs of fragile states by encouraging them to  increase transparency and accountability in the management of public resources. Governance indicators have shown steady improvements. EG. According to the Bank Group’s “Development Effectiveness Review on Governance”, published in 2012, across the 14 countries where the African Development Bank Group invested in revenue systems, tax revenue rose from 10.5% to 14.7% of GDP, while tax rates for businesses declined from 94% of commercial profits to 54%. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

AFDB GROUP’S GAP II To respond to the continent’s accelerating transformation, the new Bank Group Strategy for 2013-2022 has two core objectives: (i) achieving inclusive growth; and (ii) gradual transition to green growth. The Bank aims to support Africa’s transformation through five core operational priorities one of which is Governance and Accountability (G&A) which provides the strategic platform for GAP II. GAP II builds on the achievements of the first “Governance Strategic Direction and Action Plan (GAP I)” for 2008-2012 AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

3 CORE OBJECTIVES AFDB GROUP’S GAP II Strengthening governments’ capacity for transparent and accountable use of public resources and citizens’ ability to hold Governments to account Improving outcomes in the sectors and citizens’ ability to monitor them Promoting a business enabling environment which supports Africa’s socio-economic transformation, job creation and financial inclusion AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

STRATEGIC PILLARS AFDB GROUP’S GAP II GAP II is built around three strategic pillars: (a) public sector and economic management, (b) sector governance, and (c) investment and business climate. A cross-cutting objective supporting the three objectives aims to reduce corruption in both the public and private sectors. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

Saturday, April 15, 2017 Preventing Illicit Financial Flows in AfDB Group Private Sector Operations The AfDB Group has taken specific measures to prevent and detect illicit financial activity in its private sector operations. All private sector financing legal documentation contains integrity provisions that allow the AfDB Group to exit the project in the event that a Borrower engages in illicit activities. As a condition for financing, the Borrower must covenant that: It has not and will not engage in money laundering activities It has not and will not engage in Sanctionable Practices All financing provided to it by Shareholders is not of illicit origin It has not and will not do business with entities and persons that are on the sanctions lists provided by the UN, World Bank, EU and United States Treasury It is not, and its shareholders are not, on any applicable sanctions lists As a part of its Governance Strategy and Implementation Plan, the World Bank, through its Financial Market integrity Unit, encourages financial centers to take action in  their own countries against the laundering of the proceeds of corruption, the theft of natural resources, tax evasion, and aggressive tax planning, and monitors progress against these  commitments. It also continues to support developing countries‘ efforts to tackle illegal financial flows through the effective implementation of international standards and by facilitating their access to operational-level cooperation, in particular on law enforcement and  criminal justice.   The World Bank, in partnership with the United Nations Office on Drugs and Crime (UNODC) supports international efforts to end safe havens for corrupt funds. The Stolen Asset Recovery Initiative (STAR: http://star.worldbank.org/star/) works with developing countries and financial centers to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets. AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP

The AfDB Group Anticorruption & Sanctions Regime Sanctionable Practices = any corrupt practice, fraudulent practice, collusive practice, coercive practice, or obstructive practice carried out in connection with AfDB Group projects Corrupt practices must be effectively investigated and sanctioned. A strong sanctions regime can provide an effective deterrent effect In August 2013, the Bank Group enhanced its sanctions procedures The Sanctions Procedures govern the process for investigating allegations of Sanctionable Practices that have been made in relation to Bank Group- financed operations The Bank Group’s Integrity and Anti- Corruption Department investigates allegations of sanctionable practices Sanctions that may be imposed include: Letter of Reprimand, Debarment, and Financial Penalties Proceeds from financial penalties imposed on sanctioned parties are invested in programs aimed at combatting corruption AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017

Saturday, April 15, 2017 Moving Forward International and regional cooperation to combat illicit financial flows in Africa is on the rise, allowing for greater dialogue, exchange of best practices, coordination of efforts and wider implementation of preventative measures Banks can play multiple roles in combatting illicit financial flows: Improving internal procedures for preventing and detecting corruption and money laundering Supporting regional member countries in their efforts to curtail illicit financial flows AFRICAN DEVELOPMENT BANK GROUP Saturday, April 15, 2017 AFRICAN DEVELOPMENT BANK GROUP