The fight against financial crime isn’t lost, but the world needs to do more to limit the economic impact of crime.
Money laundering is a necessary component of the organized crime that too frequently spans borders, skirts taxes, funds terrorism and corrupts officials—and it comes with hefty macroeconomic costs. Bad actors are also embracing new technologies on top of their traditional techniques, all of which makes economic growth less inclusive and sustainable, fueling inequality and informality.
The international community has made significant progress toward strengthening safeguards against money laundering and terrorist financing, with help from the IMF and other organizations. We decided a decade ago to take a more bespoke approach to identifying key risks, working with member countries and international partners, particularly, the Financial Action Task Force, the international standard-setter in this area.
But the overall efforts are still broadly insufficient. For example, as the FATF noted last year, there is still a major gap between progress countries have made on technical compliance, such as enacting new laws, and on the effectiveness of these efforts. For example, very little laundered ill-gotten proceeds are ever confiscated.
Accordingly, the IMF recently reviewed our strategy on anti-money laundering and combatting the financing of terrorism (AML/CFT). The goal is to better help our 190 member economies address these critical financial integrity issues.
We must first recognize that financial crime affects lives and livelihoods, especially those of the most vulnerable, and that the costs it imposes are very high—and increasing. Direct costs vary and can include lower revenues, higher expenditures, sanctions, lost banking services, and even increased financial instability.
For example, and as recent IMF work has shown in the Nordic Baltic Region, AML/CFT deficiencies are associated not only with large drops in stock prices for the most directly affected banks, but also declines in share prices of other lenders who simply happen to be in the same country, as well as banks in the region that have similar cross-border exposures.
The indirect costs are even greater because they are imposed across an economy, whether by fueling boom-and-bust cycles or making home prices unaffordable. Potential financial stability impacts include bank runs and lost foreign investment. Large-scale money laundering can even spur volatility in international capital flows, undermine good governance, spark political instability, and just generally erode trust—in governments and institutions.
Liquidity, as measured by deposit flows, tends to deteriorate around financial integrity events for the affected bank while other domestic banks’ liquidity could benefit from positive substitution effects in the short-term.