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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.” .

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Money laundering and corruption mike levi maria dakolias ted greenberg june 8 2006 l.jpg

Money Laundering and Corruption

Mike Levi

Maria Dakolias

Ted Greenberg

June 8, 2006


Objectives l.jpg
Objectives

  • Define money laundering

  • How AML supports anti-corruption


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“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


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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


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Money Laundering Cycle

1.Predicate Crimes

  • Corruption and Bribery

  • Fraud

  • Organized crime

  • Drug and human trafficking

  • Environmental crime

  • Terrorism

  • Other serious crimes…

4.INTEGRATION

2. PLACEMENT

  • The last stage in the laundering process.

  • Occurs when the laundered proceeds are distributed back to the criminal.

  • Creates appearance of legitimate wealth.

  • Initial introduction of criminal proceeds into the stream of commerce

  • Most vulnerable stage of money laundering process

3.LAYERING

  • Involves distancing the money from its criminal source:

    • movements of $ into different accounts

    • movements of money to different countries

  • Increasingly difficult to detect


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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


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Simple Bribe and Money Laundering Transaction

Country 3

Country 1

Company owned by Minister’s cousin

  • Needs to generate $1 million for bribe to Finance Minister.

  • Uses invoices from company in Country 2

Company A

Company Bank Account

$500,000 - Purchase of Real Estate

$500,000 - Purchase of Bearer Share

Country 4

Country 2


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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.


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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?


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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


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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


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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

The Case of Switzerland


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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.


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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



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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.


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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

How does the Bank help?


Money laundering why do we care l.jpg

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, why do we care?


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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 care21 l.jpg

Is a global threat; or disguise

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, why do we care?