African Development Fund

• 32 pages
• Confidential
• July 10, 2007

CONFIDENTIAL
AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND
ADB/BD/WP/2007/70 ADF/BD/WP/2007/46
10 July 2007
Prepared by: OSGE
Original: English
Probable Date of Board Presentation
TO BE DETERMINED
FOR CONSIDERATION
MEMORANDUM
TO : THE BOARDS OF DIRECTORS
FROM : Donald KABERUKA
President
SUBJECT : BANK GROUP STRATEGY FOR THE PREVENTION OF MONEY
LAUNDERING AND TERRORIST FINANCING IN AFRICA *
Please find attached the above-mentioned document.
Attach:

Executive Summary

The international community is concerned with the growing incidence of organized crime, corruption, and terrorism and the debilitating effect these problems have on peace, security and development. A successful strategy to address these international threats necessarily involves measures to address money laundering and the financing of terrorism (ML/FT). Money laundering allows criminals and corrupt officials to enjoy the proceeds of their crime with impunity, while terrorist activities are enabled by those who finance them from the proceeds of crime or other sources. Money laundering can also be a problem in its own right, particularly for small or developing countries with weak or under-regulated financial sectors, because money laundering activities conducted on a large scale can jeopardize the integrity of a national financial system, weaken financial institutions and hinder economic development. The Articles of Agreements establishing the ADB entrust it with fiduciary responsibility to ensure the proceeds of any loan it makes or guarantees are issued only for the purpose for which the loan was guaranteed. The agreements entrust the Bank with a responsibility to ensure probity in its business transactions, and therefore, call for the elimination of fraud and corruption from its lending operations and financial assistance. Preventing fraudulent transactions that may disguise the origins of proceeds of crime or profits from corruption and the use of Bank funds to commit terrorist activities or other forms of crime are part of that responsibility.

Like all financial institutions, the Bank Group is required to establish and maintain internal procedures to prevent its assets from being used for ML or FT purposes. Measures can be taken to tighten its fiduciary safeguards to ensure that its own lending is used for the intended purposes and is not subjected to financial abuse. These include AML/CFT internal procedures and policies, ongoing employee training, and an audit function to test the system and to ensure adequate compliance with these procedures and policies.

The ADB also recognizes the negative impact that ML/FT can have on development. It sees a need to enhance its role in combating ML/FT in Africa as part of its mandate to promote good governance and development. It acknowledges its responsibility to work closely with its development partners to support the initiatives already undertaken in this respect at the national, regional and international levels.

This Bank strategy has been prepared under close supervision of a Bank-wide Task Force that was set up in 2005. The draft strategy had been reviewed internally by the Bank-wide Task Force on AML/CFT and by the Senior Management Review meeting. Additionally, at a Review Workshop on Bank Strategy on Preventing and Combating Money Laundering and Terrorist Financing in Africa organized by the Bank on 21 September 2006 in Tanzania, external stakeholders, including other multilateral development Banks, reviewed the document and made further input to it.

The Bank Group’s strategy to prevent ML and FT involves strategic actions in four key areas. The Bank will:

• Adopt measures to tighten the Bank Group’s fiduciary safeguards, its internal procedures and policies, and its audit function to ensure that its own lending is used for its intended purposes and is not subjected to financial abuse, corruption or money laundering.
• Facilitate the implementation of international AML/CFT standards by RMCs and participate in regional and national AML/CFT capacity building initiatives in collaboration with other international organizations and development agencies.
• Assist RMCs, directly and through FSRBs, and support their efforts to develop AML/CFT laws and strategies in compliance with international standards and build an institutional capacity to implement these laws and strategies, including a capable financial investigation unit.
• Support and assist the establishment of effective and operational sub-regional FSRBs.

Some recommendations are also made for the immediate, but gradual implementation of
the strategy.

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A- Money Laundering and Terrorism Financing

2.1 As a clandestine operation, money laundering does not easily lend itself to empirical research. Criminals go to great lengths to hide the proceeds of their crimes and to dissimulate their money laundering activities; action that will intensify as detection and
prosecution improves. The ML methods and techniques they use change frequently. Furthermore, many ML activities take place across borders. As a result, it is very difficult to produce accurate estimates of the amount of money laundering that takes place anywhere in the world. Reliable estimates of how much money is being laundered in Africa are even harder to obtain. By all accounts, these funds are substantial and, in the wrong hands, can indeed create significant problems in any country.

2.2 ML is a process whereby the origin of funds generated by illegal means is concealed. The process of ML usually involves three stages: (1) the introduction of the proceeds of crime into the financial system (placement); (2) transactions to convert or transfer the funds to other locations or financial institutions (layering); and, (3) reintegrating the funds into the legitimate economy as “clean” money and investing it in various assets or business ventures.

2.3 Different methods are used to launder money. These methods are very adaptable and tend to evolve constantly. They include the use of internet services, on-line banking and new electronic payment technologies, international companies and shell companies, trade and false invoicing for the supply of goods or services, real estates, art, diamonds, and gold and other precious metals.

2.4 ML activities can also take place through various abuses of informal banking and financing channels and alternative remittance systems. These informal systems generally operate outside of the regulatory system that applies to financial institution. Although these systems serve legitimate purposes, they provide a high level or anonymity and can be abused by money launderers and terrorist organizations to escape the scrutiny of financial regulators and law enforcement agencies.

2.5 ML activities can occur in any country, but they may have a more significant impact on developing countries with relatively small or fragile financial systems or weak economies that are particularly susceptible to disruption as a result of illicit activities. They damage critical financial sector institutions and they may scare away foreign investors and reduce a country’s access to both foreign investments and foreign markets.

2.6 Banking institutions and other financial institutions such as insurance companies, securities firms, or financial investment management firms are particularly vulnerable to the adverse consequences of ML. ML erodes these important financial institutions and impairs their development. Financial institutions in a developing country play an important role in investment decisions and capital flows. Confidence in them is therefore crucial for developing economies which rely on these decisions for future growth, as well as to attract a stable base of customer deposits to support credit growth for consumers and business, while increasing the potential size of the formal economy.

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10. Financial institutions should not keep anonymous accounts or accounts in obviously fictitious names: they should be required (by law, by regulations, by agreements between supervisory authorities and financial institutions or by self-regulatory agreements among financial institutions) to identify, on the basis of an official or other reliable identifying document, and record the identity of their clients, either occasional or usual, when establishing business relations or conducting transactions (in particular opening of accounts or passbooks, entering into fiduciary transactions, renting of safe deposit boxes, performing large cash transactions).

In order to fulfill identification requirements concerning legal entities, financial institutions should, when necessary, take measures:

(i) to verify the legal existence and structure of the customer by obtaining either from a public register or from the customer or both, proof of incorporation, including information concerning the customer’s name, legal form, address, directors and provisions regulating the power to bind the entity.

(ii) to verify that any person purporting to act on behalf of the customer is so authorised and identify that person.

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