Role of International Organisations in Checking Money Laundering
With the advent of globalisation and novel payment methods coupled with insufficient regulatory mechanisms, there has been an uptick in money laundering. Its detrimental effects have compelled the domestic governments to take measures towards curbing it as a matter of priority, which has further led to the establishment of various international organisations with the same objective. International organisations like the Financial Action Task Force (FATF), International Monetary Fund (IMF), the United Nations Office on Drugs and Crime (UNODC) and others have been at the forefront of the fight against money laundering. These organisations have played an instrumental role in helping countries strengthen their money laundering regulatory mechanisms, conducting capacity-building exercises, and acting as global watchdogs. This article first discusses the definition of money laundering and the need to curb it. It then goes on to discuss the key international organizations involved in combating money laundering, their efforts, and their impact in the fight against money laundering. Lastly, it discusses the challenges faced by such organisations and provides a future outlook on the role of such organisations.
Money Laundering and the Need to Curb it.
Money laundering is “the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions”.[1] The traditional understanding of money laundering as an activity only related to organised crime has become redundant in the present times, and the domestic as well as the international regulators have now adopted an expansive definition of the term— one which is broad enough to include any crime related to an economic good, even those committed by an individual alone.[2]
The statistics show that there is an urgent need to tackle this issue. The amount of money laundered annually exceeds 4% of the global Gross Domestic Product and is only projected to increase.[3]
Some of the effects of money laundering which derive the majority of focus are those that have a direct link to safety and security, such as terrorism financing, weapon proliferation financing, and drug trafficking. These lead to a marked increase in crime rates and the money laundered acts as fuel to organised crime. Additionally, money laundering undermines regulatory and financial systems. The money, despite being in huge sums, evades tax leading to the broadening of income inequality. The public’s trust in financial institutions like banks, as well as in the stability of the economy is eroded whenever money laundering scams are unveiled.[4] Investors and businesses may also be wary and prefer countries with tougher regulatory mechanisms, affecting the FDI and capital flows of countries with weak Anti-Money laundering efforts (AML). If a country adopts a reputation as being lax on money laundering, it may also find it hard to make strategic partnerships till it ensures strict compliance with international standards like those imposed by the FATF.
Governments thus, have a vested interest in curbing money laundering. Understanding the multifaceted effects of money laundering is crucial in developing effective strategies to mitigate its devastating impact on the global community as well as recognising new trends. International Organisations formed by like-minded governments have taken charge in this regard.
Role of International Organisations
The transboundary nature of money laundering, along with the potential for cross-border cooperation in matters of technical assistance and information sharing between countries made the establishment of international organisations an attractive idea in the fight to combat money laundering. The problem calls for a need to harmonise laws and develop a common standard for regulations and best practices since one country alone cannot tackle the issue. International organisations thus, act as mechanisms through which countries can cooperate and coordinate to enhance capacity building and share information and intelligence while holding each other accountable. This article will now undertake an analysis of how intergovernmental bodies have contributed to this objective.
The FATF, the primary intergovernmental body in charge of developing worldwide Anti-Money laundering (AML) standards, was established by the G7 countries in 1989. It is most renowned for its “Black and Grey lists” which identify national-level vulnerabilities or inaction, after which it issues calls for action to high-risk jurisdictions. The FATF’s lists have been highly effective, and as of February 2023, the FATF has reviewed 125 countries and jurisdictions and publicly identified 98 of them. Out of these 98 jurisdictions, 72 have since made the necessary reforms to address their AML/CFT weaknesses and have been removed in the process.[5]
The FATF is also recognised for issuing Anti-Money Laundering recommendations and standards, which are updated regularly. These standards were first issued in 1990 and since then have been endorsed by over 180 countries. These recommendations usually involve measures strengthening the powers of national law enforcement on matters of search & seizure, enacting sanctions on terrorism, adopting a risk-based approach, regulating non-profit organisations etc. Compliance with the recommendations is evaluated through Mutual Evaluation and by bodies like the World Bank and IMF through the FATF-formulated assessment methodology.
It also issues guidelines in the form of Best Practice Papers and advice to aide countries. It has 9 regional affiliates that constitute a global network for checking money-laundering efforts in their jurisdictions. It routinely issues AML guidelines to banks, and banks that fail to comply are fined with some, even losing their license to operate. Most notably, UBS, a Switzerland bank was ordered to pay 5.1 Billion USD in fines for facilitating tax evasion by a French court in 2019.[6]
Similarly, the UNODC also acts as a body through which members cooperate in legal and financial arenas. It has launched a global programme against money laundering which is committed to promoting national coordination and regional and international cooperation on issues concerning money laundering and terrorism financing. Any country in need can reach out to receive policy, institutional and operational assistance. The UNODC encourages the construction and improvement of Financial Intelligence Units across the world. FIUs serve an important role in gathering, analysing and distributing information on money laundering and suspected financial activities. It has developed the ‘goAML’ application for FIUs in particular, and 60 member states of the United Nations currently employ the software. It also performs research and analysis on money laundering trends, strategies, and vulnerabilities. It publishes papers, research, and evaluations to increase awareness, assist policy development, and promote evidence-based decision-making in the fight against money laundering.
The IMF and the World Bank also work closely with governments in their AML efforts. The IMF has dedicated AML/Counter-Terrorist Financing after the 2001 attacks in the United States of America. It also developed the Financial Sector Assessment Program (FSAP), which includes two components: a financial stability assessment by the IMF, and a financial development assessment, conducted by the World Bank. The Program ascertains the resilience of a country’s economy and identifies key areas that need to be worked on. For instance, after India’s assessment in 2019, the report recommended clearing the nation’s banking system of non-performing loans and bolstering the capitalisation of national banks. The IMF and World Bank also conduct capacity development with members and make reports on important developments like economic growth, virtual currencies, fintech etc.
International agencies like Interpol and Europol also give investigative and operational support to countries in their fight against money laundering.
The Impact of Work Undertaken by International Organisations
The FATF, in particular, has been instrumental in AML efforts. Its Black and Grey Lists have achieved tremendous success in strengthening the regulatory mechanisms in high-risk jurisdictions. Countries on the grey list face pressure to implement immediate reforms to restore their reputation. Additionally, the perceived higher risks associated with blacklisted countries can deter foreign investments, affect trade relationships, and hinder access to international financial resources, while those on the Black List face stringent economic sanctions. Many countries, like the US and the UK, have strict regulations in place that prohibit or restrict financial transactions with entities on FATF lists. The effect of grey-listing can be observed by examining the case of Pakistan, which was put on the grey list in 2018, which further dropped its growth rate to 1.1 percent in 2019 and 0.5 percent in 2020.[7] The grey-listed caused cumulative real GDP losses of approximately $38 billion to the country.[8] Economists noticed that the Pakistani economy heaved a sigh of relief and started showing signs of recovery only after being taken off the Grey List.[9]
The 2022 FATF Compliance report showed that over 200 jurisdictions committed to the FATF Recommendations by passing new anti-money laundering laws and regulations. Over 70% of all FATF members showed a substantial or high level of effectiveness for investigating and prosecuting terrorism finance offences.
For instance, India enhanced its AML efforts by adopting domestic legislation like the Prevention of Money Laundering Act, 2002 (PMLA). It strengthened its PMLA by removing loopholes before its proposed FATF assessment in 2023.
On the recommendation of the international watchdog, various Designated Non-Financial Businesses and Professions (DNFBPs) like real estate agents, sub-registrar’s etc. have been brought under the PMLA’s ambit, and reporting requirements for Non-Governmental Organisations (NGOs) have been strengthened. India also enhanced the punishments for terrorism financing and confiscation measures for the same as laid down in the Unlawful Activities Prevention Act, 1967. The low conviction rate under PMLA, pointed out as a concern by the FATF, was also taken into account, with India instituting special courts for conducting trials under the PMLA and the Enforcement Directorate hiring over 50 lawyers for conducting the trials in these Special Courts.[10]
India has in the past also introduced various rules detailing the powers of FIUs & the Enforcement Directorate, rules detailing the attachment of property, period of retention, legal obligations of reporting entities, etc. India also judiciously undergoes the FSAP by the IMF and World Bank, while the Department of Economic Affairs coordinates with various financial sector regulators and other relevant agencies to represent India’s views. For instance, recently, the Finance Minister of India, Ms.Nirmala Sitaraman asked the IMF to develop a global plan and achieve consensus on crypto regulation.[11]
The aforementioned instances indicate that many countries have thus shown great reverence and eagerness to comply with the AML efforts of International Organisations. However, certain challenges have been collectively faced, and avenues where international organisations must play a greater role have been identified.
Challenges and Future Outlook
While the international organisations have played a major role in developing complex standards and undertaking capacity-building exercises with countries, the magnitude of money laundering crimes is still humongous and ever-increasing. Anti-money laundering activities recover only 0.1% of criminal funds.[12] The FATF, in its Report on the State of Effectiveness and Compliance with FATF standards, self-reported that nearly (97%) of the 120 countries it assessed have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector. The FATF’s peer-review model can only act as a soft law that can, at best, only incentivise greater progress. It has acknowledged that countries have approached a mechanical approach to adopting its criteria rather than directing substantive efforts to check money laundering. Thus, more must be done to keep the problem at bay.
Additionally, money laundering crimes are only becoming more and more sophisticated. The introduction of unregulated, untraceable and decentralised virtual assets has the capacity to pose a major challenge for regulators. While fiat money accounts for the majority of money laundered, Bitcoin accounts for $2.5 billion of money laundered since its inception in 2009.[13]
Countries like North Korea and Iran continue to stay on the FATF Blacklist with no intention of adopting reforms. Other countries that are absent from its blacklist continue to fund terrorist groups without permanent consequences.[14] International bodies alone cannot ensure that governments cooperate, develop policies, and effectively co-ordinate with public and non-public bodies. With the advent of globalisation, the increase in international transactions has made money laundering a transboundary crime that can only be tackled if all domestic governments show a willingness to work together.
Some unintended consequences arise from countries’ varied approaches to implementing the FATF Standards. Some of these phenomena have been studied by the FATF in its Report on Mitigating the Unintended Consequences of the FATF Standards. De-risking, a phenomenon where financial institutions terminate or restrict business relationships with clients or categories of clients to avoid rather than manage risk in line with the FATF’s risk-based approach, is becoming increasingly common. This is detrimental to emerging markets and negatively impacts the goals of financial inclusion and equal access to banking services.
The call for a risk-based approach by various International Organisations can impede funding for Non-Profit organisations and subject them to increased surveillance. Many countries have adopted stringent regulations on money laundering that may sideline due process requirements. For instance, India’s PMLA notably reverses the burden of proof, allows attachment of the property of an accused even before conviction, and provides for bail only after the fulfillment of certain conditions. Its constitutionality has been challenged[15] in various judgments like the Vijay Madanlal[16] judgment. While tightening its restrictions on foreign funding to keep a check on money laundering, India has also been criticised for being “hostile” to NGOs.[17]
International Organisations must, therefore, play a greater role in keeping up with the emerging trends in the modus-operandi of money laundering crimes, alerting governments so they can keep pace with developments by updating their regulatory mechanisms and playing a role in mitigating unintended adverse consequences, by ensuring a balance between human rights and regulation is maintained.
References:
[1] Article 3.1, Vienna 1988 Convention.
[2] See the definition of Money Laundering under the Indian Prevention of Money Laundering Act, 2002; Part 7 of the UK Proceeds of Crimes Act 2002 (POCA) and the United States Money Laundering Control Act of 1986.
[3] Money Laundering overview, UNODC ( https://www.unodc.org/unodc/en/money-laundering/overview.html)
[4] Negative Effects of Money Laundering on The Economy, sanctionscanner.com
[5] https://www.fatf-gafi.org/en/countries/black-and-grey-lists.html
[6]https://apnews.com/article/europe-business-france-paris-money-laundering-ed0b616b62354ac7b6932c37e5f238fa#:~:text=PARIS%20(AP)%20—%20A%20French,the%20banks%20that%20aid%20them.
[7] What Pakistan’s likely exit from FATF grey list means for its struggling economy, Moneycontrol.com
[8] Bearing the Cost of Global Politics, The impact of FATF Grey-Listing on Pakistan’s Economy, Dr. Naafey Sardar
[9] What Pakistan’s likely exit from FATF grey list means for its struggling economy, Moneycontrol.com
[10] Mutual Evaluation of India: 8th Follow-up report & Progress Report on Action Plan
[11]https://timesofindia.indiatimes.com/business/india-business/imf-to-expand-work-on-crypto-as-finance-minister-nirmala-sitharaman-flags-threats/articleshow/90946306.cms
[12] Ronald F. Pol, La Trobe University.
[13] https://legaljobs.io/blog/money-laundering-statistics/
[14] https://www.state.gov/state-sponsors-of-terrorism/
[15] https://www.mondaq.com/india/money-laundering/1262376/explainer-%7C-vijay-madanlal-choudhary-and-others-v-union-of-india-and-others
[16] SPECIAL LEAVE PETITION (CRIMINAL) NO. 4634 OF 2014.
[17] https://theconversation.com/india-decades-of-hostility-against-ngos-have-worsened-under-narendra-modi-113300
