Speech

Anti-Money Laundering and Combating the Financing of Terrorism: The Challenges Ahead, Remarks by Agustín Carstens, Deputy Managing Director, IMF

June 4, 2004

Introduction

Mr. Gianviti, Mr. Yerukunundu, distinguished speakers and participants, ladies and gentlemen:

This seminar on monetary and financial law is a unique event at the IMF. Started in 1986, and held every two years since then, it is the only IMF seminar or conference in which the participants are all lawyers and in which economic developments are seen through the prism of law. Interest in the proceedings goes well beyond those immediately involved. The proof of this is that the books containing the seminar papers are among the best selling publications of the IMF.

The agenda of this seminar is rich and touches on many of the compelling economic and legal problems we face as policymakers. Today, I would like to focus my brief remarks on a significant issue that became a permanent part of the Fund's work program just two months ago—that is, anti-money laundering and combating the financing of terrorism. I understand that you discussed the technical aspects of this issue earlier in the seminar. My remarks today will be more general, with an eye to the challenges we face going forward.

The Fund's Work in Anti-money Laundering and Combating the Financing of Terrorism

Since global efforts to combat AML/CFT began in the early 1990's, there have been many successful initiatives by the world community. Money laundering is now criminalized in almost all countries. Banks and financial institutions are better protected against penetration by criminal organizations. A network of financial intelligence units is in place to provide a rapid response to criminal money transfers. And confiscation of large sums of illicit money is now routine.

However, by the end of the last decade, national and global efforts had plateaued. Ensuring universal and consistent application of international standards had proven difficult, and there were insufficient resources to address deficiencies in a number of countries.

In response, four years ago the international community asked the IMF and the World Bank to contribute to anti-money laundering efforts, and, in the aftermath of September 11^th, to help counter the financing of terrorism. As you know, this contribution includes an assessment of national practices against an international standard and the provision of technical assistance to help bring countries closer to that standard. The experience of the pilot assessment program identified a number of deficiencies. These included inadequate systems for obtaining information on customer identity, reporting suspicious transactions, and confiscating terrorist assets. The IMF and World Bank have helped countries to address these problems through an ambitious program of technical assistance. Last year, we gave direct assistance to some 63 countries, and 130 countries benefited from 32 regional programs.

Although progress has been made, let us be clear on one point: crime still pays. The history of the fight against money laundering and the financing of terrorism has illustrated that the bad guys are quick to engage in criminal arbitrage. Money launderers will exploit any weakness in legislative and institutional frameworks, both domestic and international. They will take advantage of any failure of international cooperation, and particularly in informal, unregulated and unsupervised sectors. Loopholes will be found wherever they exist.

Let me give you two examples that highlight the challenges we face and that are especially relevant to you as lawyers working within central banks and with financial regulators.

Application of AML/CFT Standards to the Legal Profession

First, consider how, as controls have been tightened in the formal financial system, the attorney-client privilege has made lawyers a particularly attractive means for disguising the money trail. After all, isn't this privilege just another form of secrecy, which can cleverly substitute for bank secrecy to improperly cloak transactions and sources of funds? At the same time, isn't the attorney-client privilege an important building block for a fair legal system?

To respond to the risk that lawyers will be used to commit financial crimes, the FATF 40 Recommendations were revised in June 2003 to mandate that countries apply a set of anti-money laundering measures to the so-called "designated non-financial businesses and professions." This category includes not only the legal profession, but also accountants, real estate agents, dealers in precious metals and precious stones, casinos, and trust and company service providers.

Predictably, these new measures have raised a great deal of opposition from the legal profession on the grounds that such requirements breach attorney-client confidentiality. And, understandably, the biggest legislative and judicial obstacles have arisen in countries known for a strong adherence to the concept of the rule of law. It is clear that implementing these new rules will require careful balancing between hallowed privileges, on the one hand, and crime prevention, on the other.

Hawala and other Informal Funds Transfer Systems

Second, consider the use of Hawala and other informal funds transfer systems. Such "IFT" systems are informal money transfer services that accept cash in one location and pay a corresponding cash sum to a beneficiary in another location by means of a message or phone call. In other words, this is money transfer without the initial use of banks, bank clearinghouses, or other entities that create a paper trail. These systems are widely used in countries with small or weak formal banking systems for a great number of legitimate financial transactions—including, for example, foreign workers' remittances. However, they can also become an attractive conduit for channeling terrorist [and other illicit] funds, since they typically do not leave a paper trail.

In response to the events of September 11, 2001, FATF introduced Special Recommendation VI. This Recommendation seeks to ensure that consistent anti-money laundering and counter-terrorist financing measures are imposed on all forms of money or value transfer services—informal as well as formal.

While this is laudable, how do we implement this universal standard across a wide range of economies and levels of development? Hawala and other forms of IFT need to be understood within the diverse socio-cultural, legal, and economic contexts of each country. Before enacting legislation, policy makers, central bankers and financial regulators must have a clear understanding of IFT systems' roles in the flow of funds, as well as the business relationships required for those flows of funds. Policy makers must then provide enough regulation so that the jurisdiction is not considered "soft" by money launderers, while at the same time avoiding over-regulation that could drive IFT operations further underground.

Conclusion

The challenge that is common to both of these examples is how to move from reactive responses to the problems of the past to proactive responses designed to meet future needs. How can we strengthen the legal and institutional frameworks of our member countries in a harmonized manner to combat money laundering and financing of terrorism? And how can we do so taking appropriate account of the diversity in economic development and the variety of legal cultures?

I trust that, during the last two weeks, you took full advantage of the opportunity to delve more deeply into the many relevant areas where economics and law meet. From this experience, you have acquired new ideas on how to tackle such challenges and, more generally, the always unfinished business of improving the lives of people in your respective countries. I wish you every success.

Thank you.