Money Laundering and

Corruption

Mike Levi
Maria Dakolias
Ted Greenberg
June 8, 2006

5-1
5-2
 Objectives

• Define money laundering

• How AML supports anti-corruption

5-3
 “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

5-4
 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

5-5
 Money Laundering Cycle 1.
Predicate Crimes
• Corruption and Bribery
• Fraud
• Organized crime
• Drug and human trafficking
• Environmental crime
• Terrorism
• Other serious crimes…

4. 2.
INTEGRATION PLACEMENT
• The last stage in the laundering
• Initial introduction of criminal
process.
proceeds into the stream of
• Occurs when the laundered
commerce
proceeds are distributed back to
• Most vulnerable stage of money
the criminal.
laundering process
• Creates appearance of
legitimate wealth.

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

5-6
 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
5-7
 Simple Bribe and Money Laundering Transaction
Country 3
Country 1

Company owned by Minister’s cousin

Company A
• Needs to generate
$1 million for bribe to
Finance Minister.
• Uses invoices from
company in Country
2

Company Bank Account $500,000 - Purchase $500,000 - Purchase

of Real Estate of Bearer Share

Country 4
Country 2
5-8
 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.

5-9
 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?

5-10
 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

5-11
 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

5-12
 The Case of Switzerland
• 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

5-13
 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.
5-14
 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

5-15
 Thank You.

5-16
 Examples Of What Countries
Can Do?
1. 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.
2. Build clear and efficient internal mechanisms to
share information by and between regulators and
law enforcement agencies.
3. Join regional anti-money laundering group to help
enhance regional and international cooperation
opportunities.
4. Build capacity of investigators, prosecutors and
judges to handle financial investigations.

5-17
 How does the Bank help?
• Effective AML/CFT • WB technical assistance:
regime:
– Understanding of ML & – Awareness raising
TF amongst workshops/ Global
stakeholders Dialogues
– Legal framework – Legislative drafting
– Functioning FIU – FIU capacity building
– Supervision of AML – Capacity building for
– Law enforcement regulators/ supervisors
capacity – Capacity building for law
enforcement

5-18
 Money laundering, why do we
care?
• 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.
5-19
• Economic:
– Deters private investment
– Destroys competition
– Revenue impact
• Financial:
– Perpetuates corruption,
obstructs good
governance
– Erodes confidence
– Destabilizes financial
institutions
 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.

5-20
 Money laundering, why do we
care?
• 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.
5-21
• Economic:
– Deters private investment
– Destroys competition
– Revenue impact
• Financial:
– Perpetuates corruption,
obstructs good
governance
– Erodes confidence
– Destabilizes financial
institutions