Money Laundering &
International Financial Crime
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Banking & Finance in Small States – Issues and policies
Workshop organised by the Islands and Small States Institute at the University of Malta
MONEY LAUNDERING AND INTERNATIONAL FINANCIAL CRIME
George Farrugia
Senior Financial Analyst - FIAU
International Financial Crime
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Crime goes beyond national borders
Criminals co-operate & assist each other
Governments – established co-operation mechanisms to
assist each other
Money launderers are often hired professionals
Launderers seek globally to find weak jurisdictions
Failure to legislate renders country vulnerable
What is Money Laundering?
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ANALYSIS UNIT
“The process by which the proceeds of crime are
passed through a series of transactions which
disguise their illicit origins, and make them appear
to have come from a legitimate source”
Grabosky & Graycar (1996)
i.e. Turning “dirty money” into “clean money”
Money laundering not a new phenomena but attracted
attention during 2nd half of 20th century
What is Money Laundering?
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ANALYSIS UNIT
Money laundering gathered enough strength that
governments could no longer tolerate it
Costs of ML and its consequences could affect whole
countries especially smaller ones
1990s characterised with continuous global effort to bring
all jurisdictions in line with a common minimum standard
Effort brought about the FATF and the development of
Financial Intelligence Units
Financial Intelligence Units (FIUs)
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
The Egmont Group definition:
A central, national agency responsible for receiving, (and as permitted,
requesting), analysing and disseminating to the competent authorities,
disclosures of financial information:
(i) concerning suspected proceeds of crime and
potential financing of terrorism, or
(ii) required by national legislation or regulation,
in order to combat money laundering and terrorism financing.
Financial Intelligence Units (FIUs)
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ANALYSIS UNIT
By the end of the century most countries established their FIU
Setting up an FIU is not a luxury but a very useful tool against
international crime
Money laundering is not a simple local crime
Small states became more reliant on foreign investment and
now are more exposed
Money laundering threatens financial viability and integrity of
country
Advantages of FIUs in small countries
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ANALYSIS UNIT
Number of subject persons in small countries is smaller and
easier to control
Closer link between FIU and subject persons
Better relations and shorter lines of communication leading to
more efficiency
Advantages of FIUs in small countries
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Better position to influence their legislative authorities to
amend laws and include new issues
Easier to act and react to new issues and problems
More likely to have a better knowledge of the industries
and markets – due to physical proximity
Advantages of FIUs in small countries
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Places where criminals can hide their money are limited
In small countries it is easier to attract attention “everyone knows each other”
Small is beautiful!?
Disadvantages of FIUs in small countries
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Lack of resources – financial, technical and human
No economies of scale even to have the minimum
requirements of an FIU
Lack of expertise
Small states’ FIUs difficult to be heard and influence decisions
Effort hardly recognised even if it is known that resources are
few
Disadvantages of FIUs in small countries
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Performance of FIUs is measured on same scale as for
much larger and resourceful countries
Particularly small islands states are branded as offshore
tax havens
Consequences of inefficient FIUs
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
FIUs have to be effective - legislation and establishing FIUs is
not enough
Criminal use of financial systems affects any country – but it
can be devastating on smaller ones
Criminals gain access to government officials, public
authorities, regulators and supervisors
Laws and regulations cannot be complied effectively
Consequences of inefficient FIUs
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ANALYSIS UNIT
Country bad reputation shuns away investment and attracts
launderers
One incident puts whole country in bad light
Country risk viewed higher and credit rating degenerates
Higher cost of investment
Vicious cycle – economy degeneration hinders development discontentment
Capital flight to less risky countries
Consequences of Money Laundering
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Increased Criminality:
Criminals enjoy the benefits of their crimes with impunity
Criminals can“reinvest” profits to finance further crimes
Effect on small states amplified
Consequences of Money Laundering
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Microeconomic Effects:
Private sector vulnerable to “crowding out” effect
•Unfair competition created
•Legitimate businesses cannot compete with
businesses financed by other “illicit” sources
Consequences of Money Laundering
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Macroeconomic Effects:
Policy mistakes due to measurement errors in
macroeconomic statistics;
Changes in money demand unrelated to measured or
observable changes in economic fundamentals;
Volatility in exchange rates and interest rates due to
unanticipated transfers of funds;
Other distributional effects or asset price bubbles;
Consequences of Money Laundering
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Macroeconomic Effects:
Reduced tax revenue and public expenditure due to
misreporting and under-reporting of income;
Misallocation of resources;
Contamination effects on legal transactions due to the
perceived potential of criminal association;
Loss of confidence in markets
Consequences of Money Laundering
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
Macroeconomic Effects:
Compromising of bank soundness;
Distortion of allocation of resources;
Sterile or low quality investments;
Re-direction of funds impact negatively on economic growth
Consequences of Money Laundering
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ANALYSIS UNIT
Social Effects:
Fewer taxes collected & good citizens have to contribute more
Unemployment increases due to unfair competition
Increased criminality, discontentment and insecurity
Increased law enforcement expenses
Conclusion
FINANCIAL INTELLIGENCE
ANALYSIS UNIT
International financial crime is not victimless
If money laundering prevails – detriment to whole country,
especially if small
Money laundering is prevented by:
•Correct legislation
•Effective FIUs – exchange of information
•Effective regulatory supervisory and law
enforcement authorities
•Co-operation between authorities at national
and international levels
Conclusion
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ANALYSIS UNIT
Thank you for your attention and participation.
QUESTIONS?
Thanks to the
Islands and Small States Institute