The World Bank in the Global Fight

Against Money Laundering

and Terrorist Financing

ii

Copyright © 2003. The International Bank for Reconstruction andDevelopment/The World Bank

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iii

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Defining the Terms: What is Money Laundering and Terrorist Financing? . . . . . . . . . . . . . . .2

Defining the Problem: Impact on Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Detrimental Effects of Money Laundering and Terrorist Financing . . . . . . . . . . . . . . . . . . . .4

Benefits of an Effective AML/CFT Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Providing the Solution: The Implementation of International Standards . . . . . . . . . . . . . . . .7

World Bank AML/CFT Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Country Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Technical Assistance and Capacity Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Research and Resource Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

World Bank Partnerships in the International Response . . . . . . . . . . . . . . . . . . . . . . . . . . .17

The Challenges Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Table of contents

iv

Acknowledgments

This brochure was prepared by the staff of the World Bank’s Office of Financial Market Integrity,under the direction of Margery Waxman, Program Director, and Cesare Calari, Financial Sector VicePresident. Comments or questions about this brochure should be sent to Margery Waxman, mwaxman@worldbank.org, or Tracy Tucker, ttucker@worldbank.org, World Bank, 1818 H Street,NW, Washington, DC 20433, USA; or faxed to 202-522-2433.

Introduction

Fighting money laundering and terroristfinancing has become a global priority asthe world has witnessed the devastating

effects of these criminal activities on the integri-ty and functioning of financial systems, anti-corruption efforts, economic growth and devel-opment. Although money laundering andterrorist financing can occur in any country,they have particularly adverse economic andsocial consequences for developing countrieswhose markets are less diverse and tend to besmaller than those of developed countries.

Money laundering and terrorist financing arehigh priority issues for many of the WorldBank’s client countries. In response to thisworldwide challenge, the Bank has significantlyexpanded its work in this area. The Bank has afocused and systematic program for helpingcountries to build capacity for anti-money laun-dering (AML) and combating the financing of

terrorism (CFT). The overall objective of thisprogram is to help countries build and imple-ment a sound legal and institutional frameworkthat meets international AML/CFT standards.

The Bank works in collaboration with theinternational and multilateral organizationsinvolved in the fight against money launderingand terrorist financing, especially the Interna-tional Monetary Fund (IMF). The Bank’s pro-gram includes raising political awareness of thedangers of money laundering and terroristfinancing through regional and sub-regionallearning dialogues, assessing compliance withinternational standards, helping developingcountries to build legal and regulatory regimesand institutional capacity, and sharing knowl-edge of best practices by hosting technical work-shops, developing resource materials and con-ducting research.

1

Defining the terms

What is money laundering and terrorist financing?

Money laundering and terrorist financ-ing are global problems. They aredifficult to detect because they

employ sophisticated schemes involving com-plex and convoluted techniques for transferringfunds to, through, and from different countries,and from one financial institution or intermedi-ary to another, and for converting funds intodifferent types of financial instruments andother value-storing assets. Despite their com-plexity, both concepts are relatively simple toexplain.

Money laundering is the process by whichthe proceeds derived from a criminal activity (i.e.,the predicate offense) are disguised in an effortto conceal their illicit origins and to legitimizetheir future use. The financing of terrorism isthe financial support, in any form, of terrorismor those who encourage, plan or engage in ter-rorism. The two activities are linked because thetechniques used to launder money are essential-ly the same as those employed to conceal thesources and uses of terrorist financing.

The predicate offense of money laundering isa specific crime that generates proceeds. Drugtrafficking is the most common example of apredicate offense. As one example, drug traffick-ers convert cash into bank deposits, which arethen transferred to other financial institutions,other countries or both. Predicate offensesinclude virtually any serious crime generatingproceeds, including kidnapping, theft, sellingstolen goods, illegal arms trafficking, prostitu-tion, corruption and fraud.

Successful money laundering achieves twogoals. First, it separates the perpetrator and theproceeds from the underlying crime. Second, itdisguises the proceeds as legitimate funds orassets, which, in essence, rewards the criminalwith apparently clean profits from the crime.No matter which underlying crime is involved,the proceeds need to be laundered in order toconceal the original crime and disguise the fundsfor future use. Such funds can then be re-invest-ed into additional criminal activities or used togain an interest in or control of legitimate busi-nesses. Thus, when money is successfully laun-dered, criminals or terrorists are rewarded withfunds that appear to be “clean”.

2

Money launderers and those who finance ter-rorism need access to and use of financial insti-tutions. Management and staff of these institu-tions who are not attentive can inadvertentlysupport these criminal activities by providingmeans to convert cash into different types offinancial instruments; to convert the currency ofone country into the currency of another; and totransfer funds to, and through, other financialinstitutions, both domestically and internation-ally. Worse still, management and staff of finan-cial institutions can become criminally involvedin these illegal schemes. Unless these activitiesare stopped, financial institutions can providelaundering mechanisms for criminals to profitfrom their criminal activities or finance terror-ism behind the wall of financial secrecy. Banks,

insurance companies, securities firms, invest-ment and trust companies, bureaux de change,money transmitters, casinos, real estate agents,lawyers and dealers of precious commodities areall targets for money launderers.

Money laundering and terrorist financing areprocesses that generally involve three stages:placement, layering and integration. Placementinvolves the initial placement of funds or assetsinto the financial system. Layering involves thetransfer or conversion of the funds or assets toconceal their source and disguise their where-abouts. Integration involves the conversion ofillicit funds into apparently legitimate assetsthrough the purchase of real estate, securities,other financial assets or luxury items.

3

Defining the problem

Impact on on development

No country is safe from attack bymoney launderers and those whofinance terrorism. These crimes can

occur anywhere, including countries with com-plex financial systems. However, money laun-derers and terrorists often target countries withweak AML/CFT regimes where there is less riskthat their criminal operations will be detectedor that they will be prosecuted. These criminalsare particularly aware of countries sufferingfrom corruption and complacency about lawenforcement.

Detrimental Effects of Money Laundering and Terrorist FinancingMoney laundering and terrorist financing canhave particularly damaging economic and socialconsequences for developing countries becausetheir economies and financial sectors tend to beless diverse and more susceptible to manipula-tion than those of more developed countries.Thus, sustainable economic growth and devel-opment can be imperiled in countries that are

used as money laundering platforms (seeFigure 1). Experts in the study of money laun-dering and terrorist financing have found thatthese activities can have the following impact:1

■ Potential increase in crime and corruption

■ Potential damage to reputation of financialinstitutions and markets

■ Less foreign private investment

■ Possible destabilization of financial marketsand weaker financial institutions

■ Weakened legitimate private sector

■ Potential economic distortion

4

1. See for example:Brent Barlett, The Negative Effects of Money Laundering on Eco-

nomic Development, International Economics Group, DeweyBallantine LLP for the Asian Development Bank, May 2002;

Peter J. Quirk, Macroeconomic Implications of Money Laundering,IMF Working Paper WP/96/66, June 1996;

Vito Tanzi, Money Laundering and the International FinancialSystem, IMF Working Paper, WP/96/55, May 1996.

■ Loss of tax revenue

■ Weakened control over economic policy

■ Possible risk to privatization

■ Potential reduction of foreign governmentassistance

■ Trigger for international sanctions by theFATF

Benefits of an effective AML/CFT regimeA country with an effective AML/CFT regimesubstantially reduces the cost impact and othernegative consequences of money laundering andterrorist financing. Moreover, an effectiveregime offers important benefits to a countryboth domestically and internationally as itdecreases corruption and increases the potentialfor economic growth and sustainable develop-ment. These benefits include the following:

5

1.5

5.5

LatinAmerica

FormerSovietUnion

EasternEurope

Sub-saharanAfrica

Middle East East Asiadeveloping

East Asiaindustrial

South Asia OECD

Costs of Business from Terrorist Threat

Money Laundering through BanksMoney Laundering through Non-banks

Low

High

Figure 1. Money Laundering and Terrorism – GCS2002 Regional Sample Averages Based on Firm Reports, 80 countries

Source: Daniel Kaufmann: Governance in the Financial Sector: The Broader Contest of Money Laundering and Terrorist Financing (December 2002).

■ Lower levels of crime and corruption

■ Enhanced reputation in the internationalcommunity

■ Greater potential for foreign investment andeconomic assistance

■ Enhanced stability of financial institutions

■ Improved prospects for economic develop-ment

■ Increased government revenue

■ Enhanced long-term economic planning

■ More successful privatization efforts

■ Lower negative social costs

■ Improved integrity of the overall economy

6

The implementation of international standards

The solution is to make it as difficult aspossible for criminals and those whofinance terrorism to use national and

international financial systems to launder theirproceeds and finance their activities. This will beachieved by encouraging every country to have aneffective AML/CFT regime that detects and pros-ecutes those involved in these activities. Such aregime includes having appropriate laws to crim-inalize money laundering and terrorist financingand require the reporting of suspicious or unusu-al transactions to the appropriate authorities.

Additionally, it means having appropriatesystems in place that permit cooperation andinformation sharing among financial institu-tions, financial sector supervisors, and lawenforcement authorities to ensure that evidenceof suspicious financial transactions can be actedon to prevent and detect criminal activity. Theabsence of an AML/CFT regime, or the exis-tence of a lax or corrupt one, in a particularcountry permits criminals and those whofinance terrorism to operate freely and to use

their financial gains to expand their criminalpursuits and promote illegal activities.

Because money laundering and terrorist financ-ing are global problems, it is impossible for a singlecountry to handle them on its own. Internationalcooperation is a necessary component. Ac-cordingly, the effectiveness of a country’s AML/CFT regime depends on its compliance with inter-national standards to combat these activities.

The elements of an effective AML/CFTregime have been established by the FinancialAction Task Force (FATF), which is an inter-governmental body that develops and promotespolicies to fight money laundering and terroristfinancing. The Bank and the IMF have recog-nized FATF as the international standard setterin these areas. To achieve its objectives, FATFissued Forty Recommendations on Money Laun-dering and eight Special Recommendations onTerrorist Financing ( FATF 40 + 8),2 which out-line action to be taken by individual countries.

7

Providing the solution

2. The references to the FATF 40 + 8 Recommendations in thisdocument are based on the recommendations established by theFATF in 1996 and 2001 respectively. In June 2003, the FATFadopted a revised set of 40 Recommendations. The revised FATF40 Recommendations are being reviewed for incorporation intothe AML/CFT Methodology (see section on the World Bank’sAMC/CFT Program for more information on the methodology).

8

The international standards, while contain-ing some mandates for precise action, are main-ly principles that permit each country to deliverthe objectives by adopting laws, systems andprocedures that are consistent with its own legalprinciples and institutional structure, providedthey are fully effective in combating moneylaundering and terrorist financing.

Actions required to implement the FATF 40+ 8 Recommendations can be divided into fivemajor categories:

1. Legal system requirements. It is necessaryfor a country to have laws or other legallyenforceable measures that accomplish the fol-lowing:

■ Ratify and implement relevant UN Inter-national Conventions;

■ Make money laundering and terroristfinancing crimes;

■ Provide for the freezing, seizure and con-fiscation of assets used in money launder-ing and terrorist financing;

■ Make financial institutions subject toAML/CFT laws; and

■ Establish standards of integrity for controland management of financial institutions.

2. Financial institution requirements. Becauseof the crucial role that financial institutionsplay in money laundering and terrorist financ-ing, the following issues need to be addressedboth by a country to establish its AML/CFTregime, and by a financial institution to pro-tect itself from possible abuse by criminalsand terrorists:

■ Customer identification requirements,due diligence, and ongoing monitoring ofaccounts and transactions;

■ Reporting of suspicious transactions; and

■ Record keeping requirements.

3. The establishment of a financial intelli-gence unit (FIU). According to the defini-tion established by the Egmont Group ofFinancial Intelligence Units,3 the financialintelligence unit (FIU) is a central, nationalagency responsible for receiving, analyzingand disseminating to competent authoritiesinformation about suspected money launder-ing. International success in the fight againstmoney laundering and terrorist financing

3. The Egmont Group of Financial Intelligence Units is an infor-mal organization of financial intelligence units (FIUs) worldwidethat provides a forum for FIUs to improve support to theirrespective national anti-money laundering programs. Furtherinformation on the Egmont Group’s work can be found in thesection on Partnerships in this document.

requires that the FIU have extensive access tofinancial information and databases and theability to cooperate with their counterpartsworldwide.

4. International cooperation. Money launder-ing and terrorist financing operations increas-ingly use the international financial system tobenefit from the free movement of capitalthroughout the world in order to hide theillicit origins of their crimes and further theircriminal activities. The laws of a countryneed to allow rapid and efficient internation-al cooperation for the gathering of financialintelligence, as well as for the investigationand prosecution of money laundering andterrorist financing.

5. Special considerations for terrorist financ-ing. FATF’s eight Special Recommendations onTerrorist Financing cover the following issues:

■ Ratification and implementation of the1999 UN International Convention for

the Suppression of the Financing of Ter-rorism and the UN Security Council Res-olution 1373;

■ Criminalization of the financing of ter-rorism;

■ Freezing, seizure and confiscation of assetsrelated to the financing of terrorism;

■ Reporting of suspicious financial transac-tions related to terrorism;

■ International cooperation against terroristfinancing;

■ Special requirements for alternative moneytransfer systems;

■ Originator information in wire transfers;and

■ Examination of the financial activities ofnon-profit organizations.

9

World Bank’s AML/CFT Program

The AML/CFT program is a priority forthe World Bank because of the signifi-cant economic and social consequences

that money laundering and terrorist financingcan have on its most vulnerable client countries.The Bank’s AML/CFT program is a multi-pronged approach that complements the Bank’sother work in the Financial Sector, Private Sec-tor Development, Infrastructure, and PovertyReduction and Economic Management Net-works to stimulate sustainable growth anddevelopment in all countries.

Country Assessments

The Financial Sector Assessment Program(FSAP) is a joint initiative of the Bank and theFund that measures and analyzes the depth,development, diversity and durability of a finan-cial system, and formulates ways to strengthen it.In October 2002, the Bank and the Fundlaunched a pilot program to assess a country’slegal and institutional framework to fight moneylaundering and terrorist financing according tothe FATF international standards. These assess-ments typically take place as part of the FSAP.

To ensure that all countries will be assessedusing a single, comprehensive mechanism, theBank and the IMF worked in collaboration withFATF and other international organizations, toproduce a global AML/CFT methodology. Theglobal methodology was endorsed by the Bankand the IMF and adopted by the FATF at itsPlenary Session in October 2002. The globalmethodology consists of 120 criteria coveringthe FATF 40 + 8 Recommendations and thestandards relevant to money laundering issuedby the Basel Committee, IAIS and IOSCO. Itcovers the legal and institutional AML/CFTframework in a country, law enforcement meas-ures, international cooperation and the estab-lishment of financial intelligence units. As theinternational standards for AML/CFT wererevised by the FATF in June 2003, the globalmethodology will be amended in the near futureto reflect those revisions.

The AML/CFT assessments serve as a diag-nostic tool for identifying vulnerabilities anddeficiencies in the existing AML/CFT frame-work, and the areas most in need of assistance.The assessments help the authorities to sequenceand prioritize their needs for technical assistance

10

and capacity building as well as gain a greaterunderstanding of the importance of their coun-try’s role in the global fight against money laun-dering and terrorist financing.

Technical Assistance and Capacity Building

More than 100 countries have requested techni-cal assistance to help bring their AML/CFTframeworks into compliance with internationalstandards. The Bank mobilizes resources to helpcountries build internal capacity in all relevantareas, including the development of AML/CFTlegislation, regulatory systems, and institutionalstructures. In particular, technical assistance isgiven high priority in countries where weakness-es in the AML/CFT framework may pose sig-nificant risks for governance and development.Some countries have successfully used Bankprojects to borrow funds from the Bank to buildcapacity to fight money laundering and terroristfinancing.

The Bank is working with the IMF as well asother partners, such as the UN, the FinancialAction Task Force (FATF), the FATF-styleRegional Bodies (FSRBs), the Egmont Group,its member FIUs and donor countries to deliverassistance and expertise. By joining forces, wehave been able to maximize the funds availablefor such assistance and provide expertise from avariety of knowledgeable organizations andcountries. Lessons learned from other countries

in the same region have proven to be particular-ly helpful.

The Bank’s technical assistance program forAML/CFT focuses on the following:

Outreach and raising awareness. The Bank isusing Global Dialogues to raise awareness aboutthe risks and potential costs for countries ofmoney laundering and terrorist financing. Inthis regard, the Bank has organized AML/CFTGlobal Dialogue Series with policy makers andvarious experts using distance learning throughthe Global Development Learning Network.These dialogues are conducted in partnershipwith the IMF (see Box 1).

Legal and regulatory advice and support.Once policy makers are fully engaged in the dis-cussion of how to achieve an effectiveAML/CFT regime, the next step is to establishor enhance the country’s legal framework. This,of course, means ensuring that the laws proper-ly address all aspects of an effective regime,including criminalization of money launderingand terrorist financing; customer identificationand record keeping requirements; reporting ofsuspicious transactions; freezing, seizure andconfiscation of assets; the establishment of afinancial intelligence unit; and internationalcooperation and mutual legal assistance.

In response to country requests, the Bankassists authorities in drafting and amending therelevant laws and regulations to help them meet

11

international standards. The Bank has providedmore than 25 countries with advice and assis-tance in drafting legislation, as well as in imple-menting the legal framework. The Bank has alsoorganized several conferences and workshops

specifically addressing legal issues and challengesthat can impede full implementation.

Capacity building. The Bank is responding torequests from countries to incorporate AML/

12

Box 1. Global Policy DialogueFor the past year, the Bank and IMF have conducted a series of AML/CFT Global Policy Dialoguesthrough live, inter-active video conferences with more than 500 policy makers from 42 countries. Thesediscussions are conducted among small groups of countries from the same geographic region, andprovide an opportunity for officials to discuss accomplishments and challenges regarding AML/CFTissues. These candid discussions help Bank, IMF and other experts to better understand the difficul-ties facing countries struggling to implement AML/CFT regimes as well as provide a clearer picture ofwhat types of assistance are most useful to countries.

The following are some of the key issues addressed in the Global Policy Dialogue Series:

■ How can the Bank and IMF help countries to strengthen their response to money laundering andterrorist financing?

■ How does money laundering and terrorist financing fit into the broader context of corruption andpoor governance?

■ How have different governments responded? What are the current challenges for regulators?What is the appropriate institutional structure for each country in constructing an effective pro-gram to fight money laundering and terrorist financing?

■ What challenges will participating countries face in the future?

The Dialogue Series has proven to be a valuable tool for senior policy makers to share their views onthe costs of money laundering and terrorist financing, and on the practical means of sustaining eco-nomic development and financial market integrity in the face of such threats. The dialogue helps coun-tries learn from each other by drawing on their particular experiences, as well as from the experienceof international experts.

Summaries of these Dialogues are available by region on the Bank’s AML/CFT website:(www.amlcft.org).

CFT capacity building in investment andadjustment lending projects. Recognition ofefforts to improve AML/CFT regimes areincluded, where relevant, in Country AssistanceStrategies (CAS), the Bank’s medium-term,country-level business plan for each client coun-try. This provides an opportunity for countryauthorities to consider possible AML/CFT risksand highlight what they are doing to addressthose concerns. A number of countries haveused this avenue to seek assistance from theBank in strengthening their legal and institu-tional AML/CFT framework.

The Bank initiates and participates in capaci-ty building programs with the IMF and otherinternational organizations and experts fromvarious countries. For example, during 2002,the Bank and the IMF held regional conferencesin Montevideo, Uruguay and Moscow, Russia(see Box 2). These large regional conferences,which involved government officials from manycountries, focused on building AML/CFTframeworks, best practices exchange and focusedattention on building operational FIUs. A small-er, more targeted AML/CFT workshop wasorganized in February, 2003 in Ljubljana(Slovenia) for countries of South East Europe.This conference was organized by the SlovenianFIU and the World Bank. The workshop helpedthis group of countries learn from first-handexperiences about the particular challenges intheir region.

Coordination of technical assistance andcapacity building. The Bank serves as theAML/CFT Global Technical Assistance Clear-inghouse. In this effort, the Bank works in coop-eration with the IMF, FATF, the FSRBs, theUnited Nations and other international organi-zations. To coordinate the identification of highpriority technical assistance needs inAML/CFT, the Bank has created a technicalassistance database, which allows participants toinput data on the technical assistance requests ofcountries, and allows donors to input data asthey address specific AML/CFT technical assis-tance requests.

Accordingly, the Bank has organized a net-work of contacts among participating organiza-tions, to facilitate the coordination and the col-lection of information on projects and activities.Currently, technical assistance requests from 111countries have been placed into the database.The database enhances the capacity of donors toprovide targeted AML/CFT technical assistance,to avoid unnecessary duplication of efforts, andto use limited resources more effectively.

Research and Resource Development

The World Bank is committed to increasingglobal awareness of the problems associated withmoney laundering and terrorist financingthrough the development of resources designedto assist individual countries in the fight againstthese criminal activities, and through extensive

13

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Box 2. Moscow ConferenceThe Bank and the IMF, with funding from FIRST (a multi-donor trust fund for implementation of inter-national financial sector standards), organized an international conference on AML/CFT training forhigh level officials from 21 countries in Europe and Central Asia. The conference compiled a wealth ofinformation and expertise to help participants learn how international standards are implemented in avariety of countries. The conference covered crucial issues, such as the creation of financial intelli-gence units, the development of legislation and enforcement structures, regulatory and supervisorypractices, and cross-border cooperation.

Experts from Eastern European countries that have recently developed AML/CFT regimes presentedthe lessons learned and best practices. Participants made personal contacts with their counterpartsin neighboring countries, which enabled them to support each other and share information as theydeveloped their own AML/CFT regime. In addition, the conference enabled participants to identify themost urgent needs so that the Bank and others could provide future technical assistance more effec-tively and efficiently .

This conference was sponsored by numerous organizations, including the following:

■ Council of Europe’s MONEYVAL Committee

■ The Egmont Group of Financial Intelligence Units

■ European Bank for Reconstruction and Development (EBRD)

■ Financial Action Task Force on Money Laundering (FATF)

■ Russian Committee for Financial Monitoring (KFM)

■ Ministry of Finance of the Russian Federation

■ Central Bank of the Russian Federation

■ State Duma Committee on Credit Organizations and Financial Markets

■ UN Office on Drugs and Crime

■ U.S. Justice Department

■ U.S. Treasury Department

Based on the success of the Moscow conference, the Bank and the IMF have received requests tosupport additional conferences. Using Moscow as the model and other approaches, conferences arenow being planned for the Asia-Pacific countries, Central and West Africa, Eastern and SouthernAfrica, and Latin America.

research aimed at identifying key areas that maybe particularly vulnerable to financial abuse.

Reference Guide to AML/CFT. The Bank hasproduced a Reference Guide to Anti-MoneyLaundering and Combating the Financing of Ter-rorism. This manual presents the basic informa-tion about the components of an effectiveAML/CFT regime and provides a roadmap forcountries at various stages of development tobring themselves up to the AML/CFT interna-tional standards. The reference guide has beenpublished in hard copy and is also available in anelectronic version on the Bank’s website. Theelectronic version will be kept up to date,reflecting developments on money launderingtrends and techniques, and the evolvingresponse of the international community. TheReference Guide has been translated into Ara-bic, French, Russian and Spanish in an effort toexpand its use worldwide.

Informal Fund Transfer Systems (IFTs).4

Informal fund transfer systems (IFTs) are pay-ment systems that allow funds to be transferredthrough less regulated and, hence, less expensivemethods than conventional formal financialinstitutions. IFTs are widely used in manyregions around the globe and like other transfersystems, can be vehicles for money launderingand terrorist financing. These systems are cur-rently being examined by several organizationsto identify the risks of abuse, and to provide rec-ommendations on how to contain these riskswithout hindering their legitimate use.

A recent joint IMF-World Bank study onIFTs reviewed the operational characteristics ofthese mechanisms, examined the historical andsocioeconomic context of IFTs and analyzedtheir use for legitimate and criminal purposes.This study also examined the implications ofIFTs for economic and regulatory policy.5

The Bank is working with the United King-dom’s Department for International Develop-ment (DFID) on an international conference onmigrant labor remittances. The conference willbring together leading donors, government offi-cials, banks, non-governmental organizations

15

Reference Guide toAnti-Money Laundering and

Combating the Financing of Terrorism

Paul Allan Schott

ssion

4. The commonly used alternate terminology for Informal FundTransfer Systems (IFTs) is Alternative Remittance Systems(ARSs). The two terms can be used interchangeably.

5. Samuel Munzele Maimbo: The Money Exchange Dealers ofKabul: A Study of the Hawala System in Afghanistan, World BankWorking Paper, No. 13, 2003.

and other agencies to understand the key issuesand challenges relating to such remittances. Theconference will also identify best practices fromregional and country initiatives that haveimproved the regulatory and institutionalframework for banks, and facilitated access for

recipients to complementary financial services.Finally, the conference is intended to define col-laborative strategies between agencies toenhance transparency and accountability, and tostrengthen the effectiveness and developmentalimpact of these remittances.

16

Partnerships

World Bank partnerships in the international response

The World Bank is not alone in respond-ing to the growing international con-cern about money laundering and ter-

rorist financing. The Bank works in closecooperation with the IMF to ensure that the twoglobal financial institutions focus on the mostvulnerable countries, providing targeted techni-cal assistance in response to assessments ofAML/CFT regimes, and avoiding duplication ofefforts. The close cooperation between the Bankand the Fund has significantly increased theeffectiveness of both institutions.

In addition to the IMF, the Bank works inpartnership with other international and region-al organizations to provide a comprehensiveresponse to the threat of money laundering andterrorist financing. The AML/CFT efforts ofthese organizations vary, depending on theorganization, and can include: conductingmutual evaluations of AML/CFT regimes oftheir member states; providing technical andother assistance; and funding research on trends

and developments in money laundering and ter-rorist financing schemes. The Bank supports thework of these organizations and endeavors tocomplement their efforts.

■ The United Nations (UN) has adoptedinternational treaties and resolutions thatdeal with both money laundering and ter-rorist financing. These documents commitall participating countries to take specificactions. The UN’s Global ProgrammeAgainst Money Laundering conductsresearch and provides assistance toenhance the effectiveness of internationalaction on these issues. The UN SecurityCouncil has formed the Counter Terror-ism Committee (UNCTC) to monitor theperformance of all member countries inimplementing the UN Security CouncilResolutions on terrorist financing and inbuilding capacity to fight terrorism.

■ The Financial Action Task Force onMoney Laundering (FATF) is a multina-tional body dedicated to fighting moneylaundering and combating terrorist financ-

17

ing. As mentioned above, FATF has issuedForty Recommendations on Money Laun-dering and eight Special Recommendationson Terrorist Financing (FATF 40 + 8)which are recognized as the internationalstandards for government action on AMLand CFT.

■ The Basel Committee on BankingSupervision (Basel Committee), Interna-tional Association of Insurance Supervi-sors (IAIS), and International Organiza-tion of Securities Commissions (IOSCO)have each issued guidelines or standardson AML/CFT measures for their respec-tive members.

■ The Egmont Group is an informal associ-ation of financial intelligence units (FIUs).FIUs are established by governments toreceive, analyze and disseminate to lawenforcement agencies the reports of suspi-cious or unusual transactions. Currently, ithas more than 80 member FIUs. Its pur-pose is to foster the development of FIUsand information exchange through FIUnetworks. The Egmont Group providestraining and support to FIUs and works in

partnership with international organiza-tions including the World Bank and theIMF. Egmont FIUs provide technicalassistance to individual countries to helpdevelop or strengthen FIUs.

■ The FATF-style Regional Bodies (FSRBs)are five regional groups of countries thatwork with FATF to implement interna-tional standards on money laundering andterrorist financing and conduct mutualevaluations of member countries (see Box3). The World Bank and the IMF workvery closely with the FSRBs to supportand enhance their regional capacity build-ing programs.

In addition to these organizations, the Bank isworking with the Wolfsberg Group, a voluntaryorganization of international private banks thathas established a set of global AML principlesdesigned to guide private and correspondentbanking. The Wolfsberg Group has also issued astatement on “The Suppression of the Financingof Terrorism”. Its work demonstrates the impor-tance of private sector efforts in the fight againstmoney laundering and terrorist financing.

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Box 3. FATF-STYLE REGIONAL BODIES: Partners in the Global Fight Against MoneyLaundering and Terrorist Financing■ The Asia Pacific Group on Money Laundering (APG) consists of 26 member states from South Asia,

Southeast Asia and the South Pacific. The APG has agreed to conduct mutual evaluations of itsmembers using the global methodology adopted by the FATF, and endorsed by the World Bank andIMF for their own evaluations. In addition to expanding its technical assistance and training strate-gy, the APG now serves as the point of reference for the coordination of technical assistance pro-grams in the region.

■ The Caribbean Financial Action Task Force (CFATF) consists of 29 members and aims to achieveeffective implementation of, and compliance with the FATF 40 + 8 Recommendations and an addi-tional 19 recommendations that CFATF has adopted for its own membership. In addition to con-ducting ongoing self-assessments and mutual evaluations among member countries, CFATF pub-lishes annual Country Reports and coordinates training and technical assistance programs.

■ The Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) has 14 member coun-tries. In addition to helping its members receive technical assistance and capacity building support,ESAAMLG has recently launched a mutual evaluation program of its members’ compliance with theFATF 40 + 8 Recommendations using the global methodology.

■ The Council of Europe’s MONEYVAL Committee (formerly PC-R-EV), consists of more than 25 mem-ber countries. MONEYVAL has conducted several rounds of mutual evaluations of the AML/CFTregimes of its member countries. Each Evaluation Report is presented and discussed in the full ple-nary sessions and countries present progress reports to subsequent plenaries. MONEYVAL willbegin using the global methodology in its next round of evaluations.

■ The South American Financial Action Task Force (GAFISUD) is the newest of the FSRBs and con-sists of 10 member countries. GAFISUD is in the process of conducting mutual evaluations of itsmembers and will use the global methodology for its second round of evaluations. GAFISUD servesas a clearing house for AML/CFT training and capacity building activities in the region.

The Challenges Ahead

Money launderers and terrorist finan-ciers are sophisticated operators whotry and keep one step ahead of law

enforcement and regulatory measures to defeatthem. As one vulnerability in the financial sys-tem is closed off, they develop other techniques.The challenge is to try and deal with such vul-nerabilities before they emerge, or to combatthem as soon as they appear. This requires theinternational community to:

■ identify emerging vulnerabilities beforethey become a major problem;

■ issue and enforce new standards to dealwith them; and

■ provide the resources to implement thesestandards.

The World Bank has participated with ourinternational partners in all three strands of thiswork and will continue to do so by:

■ developing our expertise in identifyingemerging money laundering and terrorist

financing vulnerabilities (e.g. undergroundbanking) and contributing to studies ofmoney laundering/terrorist financingtypologies;

■ contributing to the exercise to revise inter-national AML/CFT standards in theFATF and developing with the FATF andthe IMF a new global methodology forassessing compliance by countries withthese new standards; and

■ designing and delivering technical assis-tance programs to help developing coun-tries to come into compliance with thesenew standards.

The revised FATF 40 Recommendations gobeyond the previous standards in an attempt todefeat new techniques for laundering moneyand will require countries to devote moreresources than before to AML efforts. The eightSpecial Recommendations on Terrorist Financingset new standards which also require substantialinvestment to achieve compliance. Although thesuccess of these standards depends on imple-

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mentation by all countries, financing additionalresources to implement these new standards willbe a harder task for developing countries. As aresult, there will be a substantial increase in thedemands for technical assistance from all exist-ing providers.

The World Bank will do its best to respond,within the resources it has available for this task,and will continue to develop its strategy for pri-oritizing such requests. But it is already obvious

that no single institution will be able to meetthese requests. It will require an enhanced andcoordinated effort from all international andregional organizations and donors if developingcountries are to comply with these new stan-dards in a reasonable timeframe. Organizingthat enhanced and coordinated response, andthen delivering it, is the next challenge for theentire international community. The WorldBank is ready to play its full part in this task.

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For more information about the World Bank’s AML/CFT program, please visit our website atwww.amlcft.org or write to aml@worldbank.org. For information on the AML/CFT programs ofother key organizations, please refer to the following websites:

Organization WebsiteBasel Committee on Banking Supervision www.bis.org

Commonwealth Secretariat www.thecommonwealth.org

Council of Europe www.coe.int/DefaultEN.asp

Egmont Group of Financial Intelligence Units (FIUs) www1.oecd.org/fatf/Ctry-orgpages/org-egmont_en.htm

Financial Action Task Force on Money Laundering (FATF) www.fatf-gafi.org

FATF-Style Regional Bodies

Asia / Pacific Group on Money Laundering (APG) www.apgml.org

Caribbean Financial Action Task Force (CFATF) www.cfatf.org/eng/

Council of Europe Select Committee of Experts on the Evaluation www.coe.int/T/E/Legal_affairs/Legal_co-operation/of Anti-Money Laundering Measures (MONEYVAL) (formerly PC-R-EV) Combating_economic_crime/Money_Laundering/

Eastern and Southern Africa Anti-Money Laundering Group (ESSAMILG) www.esaamlg.org

Financial Action Task Force of South America (GAFISUD) www.gafisud.org

Inter-American Drug Abuse Control Commission (CICAD) www.cicad.oas.org

International Association of Insurance Supervisors (IAIS) www.iaisweb.org

International Monetary Fund (IMF) www.imf.org

International Organization of Securities Commissions (IOSC) www.iosco.org

United Nations-International Money Laundering Information Network (Model Laws and Regulations) www.imolin.org

United Nations-Security Council Resolutions www.un.org/documents/scres.htm

Wolfsberg Group of Banks www.wolfsberg-principles.com

Further information