Combating money laundering, financing of terrorism in financial sector: A general perspective (Part 2)

PIA FORUM with DOREEN KAMBANGANJI
Effects of money laundering and terrorist financing Min Zhu, deputy managing director of the International Monetary Fund (IMF), made the following expression on the effects of money laundering and terrorist financing:

“Money laundering and the financing of terrorism are financial crimes with economic effects. They can threaten the stability of a country’s financial sector or its external stability more generally. Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate factors that facilitate financial abuse. Action to prevent and combat money laundering and terrorist financing thus responds not only to a moral imperative, but also to an economic need.” (Quote accessed from the IMF website: www.imf.org on 29/04/14) Money laundering and terrorist financing have adverse effects on the integrity and stability of a financial system and the broader economy of a country. Therefore, in an increasingly interconnected world we now live in, these negative effects in one particular country can pose significant negative impact on the regional or global financial integrity. Examples of economic and social consequences of money laundering and terrorist financing

Money laundering and terrorist financing harms the integrity and soundness of a country’s financial sector. Individual financial institutions, whether in the banking, insurance or securities sector, can adversely be affected once caught up in a money laundering or terrorist financing web. The following are some of the consequences:

Reputational risk/consequence

This is the adverse publicity that the financial institution will obtain as regards its business practices such that it will dissuade borrowers, depositors, policyholders or investors as the case may be from continuing with or commencing any business relationship with that particular financial institution.

Operational risk/consequence

The fact that a financial institution has been found to have participated in or facilitated a particular money laundering or terrorist financing scandal brings into question the reliability, and adequacy of that financial institution’s internal processes and procedures, credibility or capacity of its staff, management and its general work ethic.

Legal risk/consequences

The financial institution may be subjected to potential law-suits from third parties, adverse judgments from courts of law or fines and other penalties from the regulators as a result of its involvement in a money laundering or terrorist financing activity.

The risks and consequences highlighted in this article are very interrelated and interconnected. They, however, culminate into the same effect of serious financial loss and dent on the integrity of the country and its financial system.

Effects on the country’s socio-economic development

The risks or consequences arising from the individual financial institutions established in the jurisdiction of that country have a direct effect on the country’s general reputation as well. The country may be assumed not to have adequate or robust anti-money laundering and countering the financing of terrorism framework, lack of will to commit itself to the requirements of Anti-Money Laundering (AML) and Combating the Financing of Terrorist (CFT) and may in the worst case scenario, get designated as a high risk and non-co-operative jurisdiction. A country can, therefore, suffer immense consequences such as reduced access to world markets due to restrictions on the trading platform that the country and its business entities can be subjected to or reduced governmental assistance from other foreign countries or multilateral institutions.

Due to non-existent or inefficient anti-money laundering and countering the financing of terrorism framework, the country can potentially become a haven for various crimes that are essentially predicate to the offences of money laundering or terrorist financing, hence fuelling the occurrence of the two principal offences. Examples of these offences are corruption, drug-trafficking, human-trafficking, fraud and tax evasion, to mention a few.

The accumulation of these risks or consequences makes the country suffer lack of confidence from other countries and key players in the financial sector such that this makes it very difficult for the country to forge any economic or investment ties and strategies.
The author is manager for legal services at the Pensions and Insurance Authority. He is also a certified anti-money laundering specialist.
For more information surrounding issues of insurance and pensions, kindly visit our website at www.pia.org.zm. For any contributions or clarifications, kindly contact the Pensions and Insurance Authority on email: pia@pia.org.zm; Telephone: +260-211-251401/5, Fax: +260-211-251492 or your correspondence can be addressed to P/Bag RW 30X, Ridgeway, Lusaka.