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
 INTRODUCTION & OUTLINE
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 ILLICIT FINANCIAL FLOWS (IFFs), AFRICA
 REGIONAL DISTRIBUTION OF IFFs
 DRIVERS OF IFFs IN AFRICA
 THE DEVELOPMENT IMPACT OF IFFs
 INTERNATIONAL LEGAL FRAMEWORKS ON IFFs
 MANDATE OF THE FATF
 MANAGEMENT OF FROZEN ASSETS-THE ROLE
OF MDBS
 THE ROLE OF THE AFDB GROUP
 AFDB GROUP GAP I & II
 PREVENTING IFFs IN PRIVATE SECTOR TRANSACTIONS
 ANTI-CORRUPTION SANCTIONS REGIME
 MOVING FORWARD
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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
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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.
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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)
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Drivers of Illicit Financial Flows in Africa
 Embezzled rents and royalties from natural resource extraction
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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
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Development Impact of Illicit Financial
Flows
In 2009 illicit financial flows out of Africa were three times
the amount of official development assistance received
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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
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 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
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 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.
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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.
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THE FATF
 The FATF Special Recommendations
require countries to criminalize:
the financing of
terrorism
terrorist organizations
and terrorist acts and to
designate these new
offences as ML
predicate offences
 The FATF is also involved in monitoring the
progress of members in complying with its
recommendations.
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The Role of Multilateral Development
Banks
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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
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Provide financial and technical assistance to member countries
wishing to implement international standards for anticorruption and anti-money laundering measures
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Support member countries with financial sector reforms to
strengthen banking supervision and regulation of financial
institutions
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Coordinate, cooperate and exchange best practices with other
MDBs to harmonize efforts for combatting illicit flows
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1st GOVERNANCE
STRATEGY
 ROLE OF AFDB GROUP
① GAP I was based on the Bank Group’s MediumTerm Strategy (MTS), 2008-2012,
② The Bank’s key focus was and has been on
improving economic and financial governance
on the continent
 by supporting actions which strengthen
Public Financial Management (PFM) and
 by improving a Business Enabling
Environment (BEE) at the country, sector
and regional levels
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 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%.
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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
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AFRICAN DEVELOPMENT BANK GROUP
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AFDB GROUP’S GAP II
3 CORE
OBJECTIVES
 Strengthening governments’ capacity
for transparent and accountable use of
public resources and citizens’ ability to
hold Governments to account
 Improving outcomes in the sectors and
citizens’ ability to monitor them
 Promoting a business enabling
environment which supports Africa’s
socio-economic transformation, job
creation and financial inclusion
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AFDB GROUP’S GAP II
STRATEGIC
PILLARS
 GAP II is built around three
strategic pillars: (a) public sector
and economic management, (b)
sector governance, and (c)
investment and business climate.
 A cross-cutting objective
supporting the three objectives
aims to reduce corruption in both
the public and private sectors.
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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
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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
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Corrupt practices must be effectively
investigated and sanctioned. A strong
sanctions regime can provide an
effective deterrent effect
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In August 2013, the Bank Group
enhanced its sanctions procedures
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The Sanctions Procedures govern the
process for investigating allegations of
Sanctionable Practices that have been
made in relation to Bank Groupfinanced operations
AFRICAN DEVELOPMENT BANK GROUP
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The Bank Group’s Integrity and AntiCorruption Department investigates
allegations of sanctionable practices
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Sanctions that may be imposed include:
Letter of Reprimand, Debarment, and
Financial Penalties
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Proceeds from financial penalties
imposed on sanctioned parties are
invested in programs aimed at
combatting corruption
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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
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