Banks, Illegal Financial Flows and Management of Frozen Assets

1. 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

2. INTRODUCTION & OUTLINE QU I CK RUN DOWN AFRICAN DEVELOPMENT BANK GROUP

3. 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 AFRICAN DEVELOPMENT BANK GROUP

4. 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.

5. 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)

6. 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

7. 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

8. 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

9. 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. AFRICAN DEVELOPMENT BANK GROUP

10. 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. AFRICAN DEVELOPMENT BANK GROUP

11. THE FATF • The FATF is also involved in monitoring the progress of members in complying with its recommendations. AFRICAN DEVELOPMENT BANK GROUP

12. 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 AFRICAN DEVELOPMENT BANK GROUP

13. ROLE OF AFDB GROUP AFRICAN DEVELOPMENT BANK GROUP

14. 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

15. 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

16. AFRICAN DEVELOPMENT BANK GROUP

17. AFDB GROUP’S GAP II AFRICAN DEVELOPMENT BANK GROUP

18. AFDB GROUP’S GAP II AFRICAN DEVELOPMENT BANK GROUP

19. 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 AFRICAN DEVELOPMENT BANK GROUP

20. 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

21. 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