Cross-border payments are vital for economic growth, international trade, global development and financial inclusion. Yet they are generally slower, more expensive, less transparent and less accessible than domestic payments. These long-standing issues have been thrown into sharp relief by improvements in domestic payments and by developers of proposals for new payment arrangements.

The G20 has made enhancing cross-border payments a priority during the 2020 Saudi Arabian Presidency. Faster, cheaper, more transparent and more inclusive cross-border payment services would deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development and financial inclusion. While the economic ramifications of the Covid-19 pandemic are undoubtedly also affecting the payments landscape in the short term, it is important to maintain momentum to identify and take forward structural improvements in cross-border payment arrangements for the post-pandemic global economy.

The applied literature on illicit (“dirty”) money flows increasingly uses gravity equations as a workable empirical strategy to control for characteristics of both “source” and “destination” countries. This literature lacks reliable data as well as solid theoretical underpinnings. We contribute in two ways: i) we exploit the theory of portfolio investments to empirically derive a global picture of anomalous (i.e. unpredicted) money flows over time; ii) we correlate these anomalous flows with money laundering determinants. Our results show: i) theoretical based financial gravity models are a sound way to look at “dirty” money flows; ii) non-compliance with international transparency standards affects the probability of observing anomalous flows in global financial data; iii) a global map of risk (i.e., anomalous financial activities) can be derived from official statistics; iv) moving from the notion of “risky countries” to that of “risky financial bilateral flows” allows to better investigate the push and pull factors of anomalous flows. The full dataset of bilateral anomalies in portfolio investment flows resulting from our empirical work is made freely available for further research.

This paper investigates the relationship between money laundering and economic growth in Trinidad and Tobago. It utilizes annual secondary time series data for the period 1990 to 2017. The proxy of fraud offences and narcotics is used to estimate the volume of money laundering. Cointegration analysis and Error Correction Modelling is employed to test the long-run and short-run relationship between money laundering and economic growth. Long-run analysis revealed that there is a positive significant relationship between fraud offences and economic growth while narcotics offences maintained a negative significant relationship with economic growth at a 5% significance threshold. In the short-run, estimations revealed that only fraud offences had a significant negative impact on economic growth.

In the global framework for managing and mitigating money laundering and terrorist financing (ML/TF) risks, a risk-based approach (RBA) requires the adjustment of the implementation of measures in proportion to the level of ML/TF risk presented by the specific circumstances – with stronger measures in higher-risk situations. ‘De-risking’ (defined as the termination or restriction of business relationships with entire countries or classes of customers in order to avoid rather than manage the risks (October 2016, FATF Guidance on Correspondent Banking Services)) remains a challenge for the Caribbean region.

This paper documents a hidden cost of anti-money laundering policies. We show that a policy implemented in Colombia reduced bank deposits in high intensity drug trafficking areas, causing banks that source deposits from these areas to cut lending in other areas, negatively impacting employment and number of firms. Additionally, using a proprietary database on bank-firm relationships, we show that small firms that rely on affected banks experience a negative shock to sales, investment, and profitability. Last, we use night lights data to show that these results are not due to a reallocation of activity across firms or to a move to the informal economy.

Special sorts of conditions must exist for the creation of the special sort of criminal that he typified. I have tried to define those conditions–but unsuccessfully. All I do know is that while might is right, while chaos and anarchy masquerade as order and enlightenment, those conditions will obtain.

Via a global field experiment and associated audit study, this project tests the effectiveness of international rules mandating that banks screen out criminals’ money from the financial system. The global financial crisis of 2007-11 once again demonstrated banks’ crucial role in underpinning the global economy, but it also cast considerable doubt on the extent to which
banks can be trusted to follow laws and regulations.

Research on money laundering and anti-money laundering (AML) leads to common frustrations about data. Judging the effectiveness or efficiency of different interventions is impossible without reliable evidence, yet in such a fluid policy field, the need for empirical clarity is paramount.

The collection of data is an essential element of every methodology. For the Basel AML Index, the ability to collect and analyse data on issues related to money laundering and terrorist financing (ML/TF) is crucial to the assessment of ML/TF risks. However, the collection of accurate, comprehensive, comparable data on anti-money laundering and combating the financing of terrorism (AML/CFT) regimes worldwide remains a challenge. The quality of data is struggling in the following areas: regularly updates, country coverage, solid methodology for collection and data manipulation. There is a general recognition by all stakeholders that all data-related efforts in the AML field are not enough

This paper empirically examines corporate money laundering/gambling activities from a financial perspective – the impact of money laundering/gambling on firms’ financial performance. We specifically address whether the firms associated with money laundering suffer any short or long-term effects on their financial performance following the pubic release of money laundering activities. Our findings suggest that the firms that engage in money laundering/gambling activities perform better after the relative news of their money laundering becomes public (all countries except Canada).

Financial ties between countries provide the foundation for international trade, yet international cooperation on trade and finance remain largely separate from each other. This paper examines a key consequence of the failure of international institutions to keep pace with globalization: the impact of international financial regulation on trade flows. In the aftermath of the 2008 global financial crisis, international institutions imposed new rules on the international banking sector. But the institutions issuing these standards aimed to reduce financial risk without considering the potential impli-cations of such measures for international trade.

Financial institutions employ multiple resources to combat financial crimes such as money laundering and terrorism financing. Automated systems use combinations of rules or scenarios, value thresholds, peer group activity, rolling analysis of actual activity to historical activity, tolerances based on customer risk ratings, and often, artificial intelligence to identify atypical activity. Human intervention involves investigating, determining and documenting the rationales for closing an investigation without further escalation or reporting banks’ customers’ potentially suspicious behavior and transactional activity.

Over recent years, de-risking practices threaten to cut off access to the global financial system for local banks in various regions of the world, therefore, it is essential to assess ML/FT risks associated with correspondent banking relationships to mitigate their effects. This paper contributes by proposing a Supervisory Toolkit on Correspondent Banking, in order to provide tools that facilitate supervision; it is being currently applied to the risks assessments carried out in Peru. The Supervisory Toolkit is comprised of two parts: (i) Guide for the Supervision of the Prevention and Management of ML/FT Risks System in Correspondent Banking and (ii) ML/FT Risk Assessment Methodology for Correspondent Banking Relationships. By applying the Toolkit in Peru, supervisors were able to evaluate the level of risk of local banks, applying a risk-based approach according risks derived from their correspondent banking relationships. Also, supervisors were able to have a better comprehension of the relevant characteristics of the correspondent banking relationships, the level of risks of the foreign banks with which said relationships are maintained, the level of risk exposure and the quality of risk management of the local banks.

The paradox of geography continues to explain much of the opportunities and challenges facing the 20-member states and territories that comprise the Caribbean Community today, including those occasioned by the recent of “de-risking” phenomenon, which has witnessed the withdrawal
of correspondent banking services. On the one hand, proximity to the US, coupled with economic openness, have created opportunities for economic development in the areas of tourism, hydrocarbons, and offshore banking and financial services upon which individuals and governments in the region depend.

Many stakeholders in the global anti-money laundering (AML) space, including correspondent banks, rely upon explicit or de facto AML sovereign rating services. This reliance is similar to that reposed by fixed income investors in sovereign debt ratings.

The embeddedness of the Russian economy in a complex network of offshore financial centres is well-documented in academic research and official statistics. For more than two decades, Cyprus has served as a de facto financial centre of Russia, having continually been the leading source of FDI into and out Russia, followed closely by other (often European) financial havens. This long-term historical pattern was interrupted in 2014/2015, when the Bahamas became the leading source of FDI inflows into Russia, accounting for more than 53% of FDI inflows in the country. Since then, top sources of capital flows into Russia have persistently included the ‘wilder’ financial havens such as Bermuda or the BVI, raising fresh concerns about illicit financial flows in and out of the country, including money laundering.

This Policy Brief argues that inclusion on any future adopted European Union (EU) AML/CFT list of high-risk third jurisdictions would be problematic for The Bahamas for three main reasons. First, EU ‘obliged entities’ will be required to conduct enhanced client due diligence (ECDD) on transactions involving Bahamian clients and Bahamian intermediaries. Secondly, while no sanctions are involved, noncompliance for an international financial center like The Bahamas might entail reputational fallout at a time when Caribbean countries are facing the loss of correspondent banking relationships (CBRs) due to the de-risking practices of large global banks, with the attendant implications for the ease of doing business, cross-border trade and financial transaction flows. Thirdly, The Bahamas will now be expected to comply with another set of rules defined by a body of which it is not a member and where it has little or no opportunity to influence the methodology by which it is being assessed.

This paper investigates the patterns of business ownership in Europe, using a unique dataset on the nationality of 28.7 million shareholders of companies registered in 41 European countries. By means of an exploratory multivariate analysis, it tests whether ownership links between different countries are driven exclusively by social and macroeconomic variables—such as trade or geographic or cultural proximity—or instead are also related to measures of financial secrecy, corruption and lack of compliance to anti-money laundering regulations.

Background

The XLVII CFATF Plenary, in May 2018, gave approval for a stocktaking exercise on ‘De-risking’ in the Caribbean region to be conducted. The outstanding factors to address this exercise were the perceived loss of Correspondent Banking Relationships (CBRs) that have affected the CFATF members and the barriers that this represents for the continuation of the business of Financial Institutions (FIs) and non-FIs alike. Addressing ‘De-risking’ in the Region has become especially urgent since both FIs and non-FIs have already begun to experience its negative effects, such as obstructing the development of financial systems, compromising the competitiveness of Caribbean businesses and increasing the number of persons who are excluded from accessing financial services.

The stocktaking exercise aims to better understand the ‘De-risking’ phenomenon, with the purpose of improving the performance of CFATF members at their Mutual Evaluations, as well as minimising the perception that the Region is susceptible to the abuse of their financial systems. On the other hand, the CFATF Secretariat aims to assist members in maintaining an up-to-date understanding of the FATF Standards relevant to ‘De-risking’.

Methodology

The methodology utilised for this project entailed gathering information from primary and secondary sources. Information was obtained from primary sources using questionnaires completed, by Central Banks and FIs from the CFATF membership. In the May 2018 Plenary, approval was granted for further research to be conducted with the secondary sources of information originating from official government statistics, publications and media reports.

In June 2018, two questionnaires were drafted by the CFATF Secretariat; one aimed at Central Banks and the other at FIs, with the purpose of collecting responses from the regulatory framework perspective as well as from the operational perspective of FIs.

The draft questionnaires were circulated for review by CRTMG members with the purpose of ensuring that they were drafted appropriately to capture the information needed to understand the de-risking challenges. Nine members of the CRTMG volunteered to examine the completed questionnaires and determine timelines for the analysis of the information particularized.

Once the review was concluded, the questionnaires were circulated to the Central Banks and FIs of the CFATF Membership for completion.
This report was discussed and adopted at the November 2018 CFATF Plenary meeting held in Bridgetown, Barbados and there was unanimous agreement for the continuation of a second phase of the research and for sharing the current information to feed into the FATF work on de-risking.
In January 2019, the questionnaire for FIs was re-circulated to the FIs and Central Banks from whom no responses were received in 2018. This resulted in an additional thirty-seven (37) responses being received.

With respect to the survey completed by Central Banks, there were twenty-two CFATF member respondents.