1. What is Money Laundering? How does It Occur? What are the Development Impacts of Money Laundering? Emiko Todoroki The World Bank Building Financial Market Integrity in Afghanistan April 16, 2006

2. Money Laundering: How big is the threat? How much money is laundered each year?  Publicized figures vary between US$ 500 billion and US$ 1.5 trillion annually.  To put this figure into context, Wal-Mart, the largest retail company in the world, reported annual revenue of US$ 250 billion dollars in January 2004. Wal-Mart, the largest retail company in the world, reported annual revenue of US$ 250 billion dollars in January 2004. Spain is 7 th largest economy in the world with about $1 trillion GDP/year. Spain is 7 th largest economy in the world with about $1 trillion GDP/year.  The amount of criminally derived funds entering legitimate financial systems each year is almost incalculable.

3. What is money laundering?  A process by which proceeds from a criminal activity are disguised to conceal their illicit origins. This process enables the criminal to enjoy these profits without jeopardizing their source.  Where you can find the definitions? United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention,1988) United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention,1988) United Nations Convention against Transnational Organized Crime (Palermo Convention, 2000) United Nations Convention against Transnational Organized Crime (Palermo Convention, 2000)

4. Simple money laundering concept  Is Mr A Laundering Money?  How about the Friend? Mr A Friend Works in a Bank in jurisdiction X jurisdiction X Jurisdiction B: secrecy laws illicit smuggling of weapons

5. A Typical ML Scheme Source: UNODC

6. Three Stages of Money Laundering Placement Stage LayeringStage Integration Stage Initial injection of illicit funds into the financial system Multiple layers of transactions that further separate funds from their illegal origins Reintroduction of illicit funds into legitimate economy. Purpose is to separate illicit funds from their illegal origins. Purpose is to make it difficult to trace the funds to their illegal origins. Purpose is to allow criminals to use the funds without raising any suspicion.

7. Placement Stage Examples  Depositing cash into an account or into several accounts in different locations.  Paying cash for bank drafts, traveller’s cheques, and other value instruments.  Purchasing items of value for cash (such as works of art, antiques, motor vehicles, and so on) for the purpose of selling them.  Commingling criminal cash with legitimate cash in a business account.  Converting cash in one currency into another currency.

8. Layering Stage Examples  Wiring payments to and from various accounts (personal and corporate) in different jurisdictions  Buying, then selling, an investment product  Buying and then surrendering a single-premium insurance contract  Engaging in international trade transactions  Making other types of payment where funds move from one account to another

9. Integration Stage Examples  Purchase of property (for personal use or investment)  Purchase of other high-value items, for example, jewelries, antiques, works of art  Purchase of legitimate businesses  Purchase of investments for income  Any purchase for personal use with a cheque, credit card, or other payment method

10. What is Terrorist Financing?  “Terrorist Financing is the act of providing financial support to terrorists or terrorist organizations to enable them to carry out terrorist acts” Where to find the Definition: UN International Convention for the Suppression of Financing of Terrorism Where to find the Definition: UN International Convention for the Suppression of Financing of Terrorism  Primary Objective is non-financial, yet as with all organizations, terrorist groups require funds in order to carry out their primary activities.  Source of Funds can be legal or Illegal

11. What are the sources of Terrorist Financing? Legal Sources CONTRIBUTIONS AND DONATIONS SALE OF PUBLICATION LEGITIMATE BUSINESS ACTIVITIES Illegal Sources DRUG TRAFFICKING EXTORTION AND KIDNAPPING ROBBERY FRAUD GAMBLING SMUGGLING AND TRAFFICKING IN COUNTERFEIT GOODS

12. Why measures to fight ML and TF are brought together? What are similarities between money laundering and terrorist financing? What are similarities between money laundering and terrorist financing? Terrorists also need to move their funds and avoid suspicion, just as money launderers Terrorists also need to move their funds and avoid suspicion, just as money launderers Terrorists use the same methods as money launderers to handle their funds (placement, integration and layering stages) Terrorists use the same methods as money launderers to handle their funds (placement, integration and layering stages) What is the difference between money laundering and terrorist financing? Terrorists are not in their business for money Terrorists are not in their business for money Terrorist sources of funds can be legal or illegal Terrorist sources of funds can be legal or illegal

13. Where do ML/TF operations take place? Money Laundering and Terrorist Financing are GLOBAL CRIMES!Money Laundering and Terrorist Financing are GLOBAL CRIMES! Money launderers and financier of terrorism INTERNATIONALIZE their operations to achieve various objectives.Money launderers and financier of terrorism INTERNATIONALIZE their operations to achieve various objectives.

14. Where do ML/TF operations take place? OBJECTIVES FOR ML AND TF AVOID JURISDICTIONS WITH STRONG LAW ENFORCEMENT FRAMEWORK TAKE ADVANTAGE OF CONSTRAINTS IN COMMUNICATION BETWEEN DOMESTIC AGENCIES EXPLOIT REGULATORY AND LAW ENFORCEMENT WEAKNESS ADD LAYERS TO TRANSACTIONS TO MAKE IT DIFFICULT TO TRACE THE TRANSACTIONS

15. Where do ML/TF operations take place?

16. What are the Implications of ML for Development?  Money laundering can exploit any jurisdiction - therefore no country is immune.  It has serious impact for development: MACRO ECONOMY RULE OF LAW FINANCIAL SYSTEM GOVERNANCE

17. What are the Implications of ML for Development? Affecting macro economy…  Rapid movement of large amount of money inconsistent with financially productive purposes destabilizes: Proper interest rate movement Proper interest rate movement Proper exchange rate movement Proper exchange rate movement Proper pricing of real estates Proper pricing of real estates  Discourage long-term investment in legitimate activities  Deprives the country of legitimate tax paying business

18. What are the Implications of ML for Development? Affecting the rule of law… Undermine the rule of law in society. Undermine the rule of law in society. Tend to induce corruption in the public sector. Tend to induce corruption in the public sector.

19. What are the Implications of ML for Development? Affecting the financial system… Reputational risk Reputational risk Discourage people to put their money in banks because of lack of trust Discourage people to put their money in banks because of lack of trust Operational risk Operational risk Institutions incur reduced, terminated, or increased costs for inter- bank or correspondent banking servicesInstitutions incur reduced, terminated, or increased costs for inter- bank or correspondent banking services Legitimate businesses and enterprises suffer from reduced access to world markets or access at a higher cost due to extra scrutiny of their ownership, organization and control systems Legitimate businesses and enterprises suffer from reduced access to world markets or access at a higher cost due to extra scrutiny of their ownership, organization and control systems Tend to induce corruption in the financial sector Tend to induce corruption in the financial sector

20. What are the Implications of ML for Development? Affecting economic liberalization… By using front companies and other investments in legitimate companies money laundering proceeds can be utilized to control whole industries or sectors of the economy of certain countries By using front companies and other investments in legitimate companies money laundering proceeds can be utilized to control whole industries or sectors of the economy of certain countries Threaten the efforts of many countries to reform their economies through privatization. Criminal organizations are capable of outbidding legitimate purchasers of former state- owned enterprises Threaten the efforts of many countries to reform their economies through privatization. Criminal organizations are capable of outbidding legitimate purchasers of former state- owned enterprises Encourage governments to impose restrict capital controls Encourage governments to impose restrict capital controls Encourage governments to impose restrict regulations on financial transactions and trade with jurisdictions that do not have adequate money laundering control policies Encourage governments to impose restrict regulations on financial transactions and trade with jurisdictions that do not have adequate money laundering control policies

21. How does AML system help?  A well functioning anti-money laundering system: Makes it difficult for corrupt officials to expatriate their ill- gotten funds Makes it difficult for corrupt officials to expatriate their ill- gotten funds Increases public confidence in the financial system Increases public confidence in the financial system Increases investment in the legitimate private economy, allowing for increase resources from taxes Increases investment in the legitimate private economy, allowing for increase resources from taxes Provide a disincentive for the criminal involvement in the economy, promoting transparency and productivity Provide a disincentive for the criminal involvement in the economy, promoting transparency and productivity

22. Thank you Contact: Emiko Todoroki etodoroki@worldbank.org phone: +1-202-458-9466 etodoroki@worldbank.org