Combating Money Laundering and the Financing of Terrorism

• Author: Eduardo Aninat, Daniel Hardy, and R. Barry Johnston
• Position: Deputy Managing Director of the IMF/Division Chief/Deputy Division Chief in the IMF's Monetary and Exchange Affairs Department

Money laundering and terrorist financing can threaten financial stability and economic prosperity, adding to the gravity of the underlying crimes. The IMF, working closely with the global community, is stepping up its efforts to fight these abuses.

Money laundering and terrorist financing are not typically linked to financial instability, but they should be. These activities are not just the by-products or precursors to often serious criminality and even acts of barbarism; they also taint otherwise unaffected people and institutions. When a financial institution is used unwittingly by criminal elements or terrorists, it risks damage to its reputation. If its staff colludes with criminal elements to launder funds or channel financing to terrorists, the damage can be much greater. Those that do business with an institution found to be engaged in money laundering may also suffer a loss of reputation, and when a financial center is widely perceived to be vulnerable to money laundering, others will shy away from investing there. The most serious dangers arise when important financial institutions are controlled by criminals, because in these circumstances the integrity and operations of the whole financial system can be compromised.

For some countries and jurisdictions, the economic and financial impact could be significant. Once the integrity of an institution or financial center is brought into question, its long-term viability is at risk, with potentially serious economic consequences. Moreover, where there is a lack of integrity in financial systems, decisions on the allocation of resources are corrupted and investment is misallocated, dampening economic growth.

Money laundering involves transforming the proceeds of crime into usable form and disguising their illegal origins. After the criminal proceeds are introduced to the financial system, they are hidden-laundered-through a variety of transactions and financial vehicles and finally invested in financial and related assets. These operations often involve international transactions as a means of "layering"-that is, of obscuring the source of the funds (Box 1).

Box 1 An example of money laundering

A recent case of money laundering was revealed when three financial institutions reported similar suspicious transactions. It turned out that drug traffickers were using go-betweens who would deliver the cash proceeds of crime to professionals in travel agencies and import/export businesses. The professionals would place the funds in their bank accounts and, for a fee, transfer them on the basis of fake invoices to bank accounts abroad. An estimated $30 million was laundered this way, but, in the end, prosecutions were brought in two countries.

This case displays many of the common features of money laundering and effective anti-money-laundering measures: cash is introduced into the banking system by people far removed from the predicate criminal activity (the activities that give rise to the cash or other valuables to be laundered); layering is achieved by splitting the funds among many small, seemingly innocuous agents (known as "smurfs"), creating a misleading paper trail, and getting funds abroad as soon as possible. The coordinated analysis of suspicious transaction reports from different sources was instrumental in helping to uncover a money laundering scheme.

Indeed, money laundering is intrinsically global. If one country or jurisdiction tightens its regulations on money laundering and the financing of terrorism, these activities will quickly shift to a less regulated environment. Even a country with little crime and little money laundering may have to take action to avoid the "immigration" of the problem.

Terrorist financing can be defined as the processing of property from any source (perhaps a legitimate one) to be used to finance terrorist activity that has been or will be committed. It is thought to use many of the same techniques as money laundering, and, therefore, many of the possible countermeasures are similar. Furthermore...