What is Money Laundering?
How does It Occur?
What are the Development
Impacts of Money Laundering?
Building Financial Market Integrity in Afghanistan
April 16, 2006
Emiko Todoroki
The World Bank
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.
Spain is 7th 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.
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 Transnational Organized Crime
(Palermo Convention, 2000)
Simple money laundering
concept
Mr A
illicit smuggling
of weapons
Friend
Works in a Bank in
jurisdiction X
Jurisdiction B: secrecy laws

Is Mr A Laundering Money?
 How about the Friend?
A Typical ML Scheme
Source: UNODC
Three Stages of
Money Laundering
Placement
Stage
Layering
Stage
Integration
Stage
Initial injection of illicit
funds into the financial
system
Multiple layers of
Reintroduction of illicit
transactions that further
funds into legitimate
separate funds from their economy.
illegal origins
Purpose is to separate
illicit funds from their
illegal origins.
Purpose is to make it
Purpose is to allow
difficult to trace the funds criminals to use the
to their illegal origins.
funds without raising any
suspicion.
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.
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
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
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

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
What are the sources of Terrorist
Financing?
Legal Sources
Illegal Sources
CONTRIBUTIONS AND DONATIONS
DRUG TRAFFICKING
SALE OF PUBLICATION
EXTORTION AND KIDNAPPING
LEGITIMATE BUSINESS ACTIVITIES
ROBBERY
FRAUD
GAMBLING
SMUGGLING AND TRAFFICKING IN
COUNTERFEIT GOODS
Why measures to fight ML and
TF are brought together?
What are similarities between money laundering and
terrorist financing?
•
•
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)
What is the difference between money laundering and
terrorist financing?
•
•
Terrorists are not in their business for money
Terrorist sources of funds can be legal or illegal
Where do ML/TF operations take
place?
• Money Laundering and Terrorist Financing are
GLOBAL CRIMES!
• Money launderers and financier of terrorism
INTERNATIONALIZE their operations to
achieve various objectives.
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
Where do ML/TF operations take
place?
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
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 exchange rate movement

Proper pricing of real estates
Discourage long-term investment in legitimate activities
Deprives the country of legitimate tax paying
business
What are the Implications of
ML for Development?
Affecting the rule of law…


Undermine the rule of law in society.
Tend to induce corruption in the public
sector.
What are the Implications of ML
for Development?
Affecting the financial system…

Reputational risk
•

Discourage people to put their money in banks because of lack of
trust
Operational risk
• Institutions incur reduced, terminated, or increased costs for interbank 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
Tend to induce corruption in the financial sector
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
Threaten the efforts of many countries to reform their
economies through privatization. Criminal organizations are
capable of outbidding legitimate purchasers of former stateowned enterprises
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
How does AML system help?

A well functioning anti-money laundering system:


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
Makes it difficult for corrupt officials to expatriate their illgotten funds
Increases public confidence in the financial system
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
Thank you
Contact:
Emiko Todoroki
etodoroki@worldbank.org
phone: +1-202-458-9466