Journal of Money Laundering Control

The International Monetary Fund’s involvement in combating money laundering and the financing of terrorism
William E. Holder,
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The International Monetary Fund's Involvement in
Combating Money Laundering and
the Financing of Terrorism
William E. Holder
INTRODUCTION
In an age of globalisation, the International Monetary
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Fund (the Fund) plays a signi®cant role. As a coopera-
tive institution of its 184 members, its basic functions
stem from the stipulated purposes in its Articles of
Agreement. Accordingly, as daily press reports sig-
nify, the Fund is charged with several interconnected
activities, including, in particular, the maintenance of
monetary and ®nancial stability.
A lot is expected of the Fund. It might be useful to
recall, therefore, that it labours under several consti-
tutional constraints. First, the authority of the Fund,
being a formal international (that is, intergovern-
mental) organisation, is limited by its constituent
charter Ð this is not world government in its more
literal sense. Secondly, and similarly, the Fund is
owned and operated by the governments of the
world: the Fund's members constitute the Fund.
Thirdly, given the matrix of formal and informal
international and regional institutions, the question
of the allocation of functions among them, and the
overlap of functions, comes into play. Fourthly,
despite occasional assertions of bloated bureaucracies,
the ®nancial and other resource constraints of
institutions like the Fund must be faced.
All of those factors have in¯uenced developments
on the Anti-Money Laundering/Combating the
Financing of Terrorism (AML/CFT) front in general,
and the Fund's recent assumption (with the World
Bank) of new and expanded responsibilities on the
AML/CFT area in particular.
The objective in these comments is to trace the
unfolding of these developments, in the context of
the Fund's character, instruments and policy. The
paper starts with reference to the means (or instru-
ments) of the Fund's involvement, together with
the question of the Fund's competence to undertake
an AML/CFT engagement. Then the interaction
with the Financial Action Task Force (FATF) will
be discussed, speci®cally the quest for a `compre-
hensive common methodology', with the recogni-
tion of the FATF as the standard setter, and ®nally
Journal of Money Laundering Control Ð Vol. 6 No. 4
turn to the recent working accommodation between
the Fund and the FATF.
THE FUND'S INSTRUMENTS
The Fund's `surveillance' function, under Art. IV of
its Articles of Agreement, involves an intensive
exchange with each member country on its economic
and ®nancial system. In this process, sta€ prepare a
detailed analysis of trends, underlying conditions,
and risks, both for the country and the international
community. The Executive Board of the Fund then
reviews the sta€ analysis and reaches conclusions
(the Summing Up). This dialogue identi®es and
examines, for instance, ®nancial sector vulnerabilities,
the emergence of unsustainable external debt, and the
hazards of capital movements. The member is
expected, though not obliged, to take corrective
steps in response to the policy advice. These outcomes
are communicated to the government and, upon
publication, to the public.
After the Asian crisis, beginning in 1997, and sub-
sequent national ®nancial crises, the Fund adopted a
range of new instruments in order to help prevent
and resolve ®nancial crisis, by complementing the
macroeconomic focus of its Art. IV surveillance,
injecting the wellbeing of the ®nancial sector into
its conditionality, and focusing its technical assistance.
Thus, in the last ®ve years, the Fund has adopted sev-
eral discrete initiatives in order to strengthen ®nancial
stability. Three of these have particular relevance to
the AML/CFT area.
(a) In 1999, the Fund adopted (together with the
World Bank) the Financial Sector Assessment
Program (FSAP) as its centrepiece for inquiring
into the health Ð and thereby the vulnerability
Ð of a member's ®nancial sector. In this exer-
cise, Bank and Fund sta€, supported by experts
for component parts, examine in detail the Journal of Money Laundering Control
country's banks, securities and money markets, Vol. 6, No. 4, 2003, pp. 383±387
# Henry Stewart Publications
foreign exchange and payments systems, and ISSN 1368-5201
Page 383
 Holder
assess the associated regulatory, supervisory and
legal frameworks. The FSAP product is divided
into two parts. On the one hand, a more detailed
and con®dential analysis is made available to the
member, but under the current policy is neither
distributed within the institutions nor published
by the Fund, the Bank or the authorities. The
second part of the FSAP derives from the ®rst:
the Fund and Bank sta€s prepare separate reports
to their Executive Boards Ð the Financial
System Stability Assessment (FSSA) in the case
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of the Fund, and the Financial Sector Assessment
(FSA) in the case of the Bank. On the Fund side,
this ®nancial sector assessment report is, as a tech-
nical matter, set aside from the Art. IV sur-
veillance documentation. The FSSA, however,
focusing as it does on ®nancial stability issues, is
seen as providing a backdrop to surveillance. In
addition, the assessment draws on Reports on
Observance of Standards and Codes (ROSCs).
The Fund encourages the member to publish
the ®nancial sector assessment, both to inform
market participants and to strengthen policy
decisions of the member. Most assessments are
available on the Fund website, but that decision
is for the member to take.
(b) In the last three years, the international com-
munity has pushed hard for the identi®cation,
development and monitoring of international
standards and codes relating to economic and
®nancial good practices in a wide range of
specialised topics. The Fund, together with
other institutions, has moved quickly to identify
relevant standards and the appropriate standard-
setting bodies, and to construct a process for their
monitoring and assessment. In January 2000, the
Fund assumed a signi®cant coordinating role.
Speci®cally, it approved the incorporation of
11 core topics as being of central use for Fund
and World Bank operational work, identifying
three categories: (i) those within the Fund's
direct operational focus at the time the scheme
began (these consist of data dissemination, ®scal
transparency, monetary and ®nancial policy
transparency and banking supervision); (ii)
those areas assessed in the FSAP referred to
above (securities, insurance and payments
systems); and (iii) those areas decided to be of
relevance to the e€ective operation of domestic
and international ®nancial systems by the Fund's
Executive Board and now being developed in
Page 384
cooperation with the World Bank and other
international institutions (corporate governance,
accounting, auditing and Ð when standards are
available Ð insolvency and creditor rights). For
each topic a Fund/Bank mission, drawing on
other institutional experts as necessary, reviews
and assesses a country's situation. The resulting
Reports on the Observance of Standards and
Codes thus serve as direct inputs into the FSAP
and FSSA, and provide timely background to
Fund surveillance and World Bank operational
work, as well as being immediately made
public, subject to the members consent. (To
date, about 250 ROSCs have been produced,
and about two-thirds are available on the
Internet.)
(c) Within the same period, beginning in 2000, the
Fund began its programme on O€shore Finan-
cial Centers (OFCs), again on the basis of the
risk of weaknesses and vulnerabilities in the
international and national ®nancial systems.
The Executive Board of the Fund emphasised
the importance of ®nancial supervision, espe-
cially concerning the banking, insurance and
securities sectors. OFC assessments take one of
three graduated forms: self-assessment by OFCs
of relevant standards, Fund-led assessments,
and a comprehensive, FSAP-type assessment,
including assessment of risks, vulnerabilities,
institutional situation, and assessment of obser-
vance of standards. So far, the programme con-
templates about 20 country assessments per
year, again with an eye to publication (see, for
example, Luxembourg, Gibraltar and Panama).
Now, it would be useful to step back and observe the
nature and signi®cance of these instruments which, as
noted, have developed very quickly in design, adop-
tion and implementation. Several aspects of these
instruments deserve comment.
Most fundamentally, the legal basis for the Fund's
policies on the FSAP, ROSC and OFC exercises
should be highlighted, for this classi®cation condi-
tions their mechanisms and potential. While they
are often linked to the Fund's exercise of surveillance
under Art. IV of the Articles of Agreement, and even
referred to as `part' of surveillance, legally the basis
for the FSAP, ROSC and OFC policies, and the
resulting country dialogue and assessment, builds on
the Fund's technical assistance function. In short,
any Fund member may request technical or ®nancial

services of the Fund, and the Fund may decide to
respond positively.
Several signi®cant consequences ¯ow from this
classi®cation.
(a) First, the function of surveillance imposes obliga-
tions on all members, as well as duties and limits
of the Fund. In contrast, technical assistance arises
from the request of the individual member; it is
thus voluntary on the side of the member and
discretionary on the side of the Fund, although
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it can be de®ned in scope and purpose between
the country and the Fund.
(b) Secondly, for the conduct of surveillance, the
Articles provide a framework for the Fund to
obtain information that is necessary for that
purpose. Accordingly, once information falls
within the ambit of that provision, the member
is obliged to supply it, or risk being found in
breach of obligation and subject to sanctions.
Technical assistance, in contrast, envisages no
such obligation or sanction; it depends entirely
on the desire and cooperation of the member.
(c) The distinction between surveillance and techni-
cal assistance also raises the question of support
and involvement of other entities. The World
Bank, in particular Ð as well as other standard
setters Ð contribute to the overall FSAP and
ROSC enterprise, in pursuit of their own
objectives and according to their own mandates.
Surveillance, meanwhile, is a Fund function, and
sui generis to it. A determination by the Fund that
the instruments of the FSAP and ROSCs fell
within the surveillance function would thus
cause complications and constraints for the
ongoing joint enterprise.
(d) Fourthly, the modalities of surveillance must be
applied to all members in a uniform way. As a
resource question, at this time such uniform
and comprehensive application would be a
daunting prospect.
(e) Fifthly, the legal categorisation of the function
also a€ects the transparency objectives of the
Fund. As between surveillance and technical
assistance, a di€erent regime governs the publi-
cation of documents, in that publication of
Executive Board documents, such as Art. IV
consultation papers, depends upon the decision
of the Executive Board, while publication of
the products of technical assistance rests with
the member and the Managing Director. A
International Monetary Fund's Involvement in Combating Money Laundering
common element, however, is that publication
of both Art. IV surveillance documentation and
technical assistance reports (whether assessments
or otherwise) depend upon the consent of
the member. Given that reality, therefore, the
Fund has rejected the `name and shame'
approach that might have been considered as
an alternative strategy for its various assessments
of standards.
COMPETENCE OF THE FUND
The Fund's direct and full involvement in AML/CFT
is relatively new Ð in fact it stretches back less than
two years. That involvement has not come without
debate about limits to its competence and consterna-
tion about mission creep. Why not leave AML/CFT
to others? Does it ®t into the core mandate of the
Fund? Does the Fund's expertise, usually macroeco-
nomic in focus, although embracing the ®nancial
sector, extend to AML/CFT?
The ®rst major step occurred in September 2000.
The International Monetary and Financial Com-
mittee (IMFC) Ð an IMF ministerial-level commit-
tee that advises the Board of Governors and thereby
sets the political agenda of the Fund, started the
AML ball rolling. Speci®cally,
`It asks that the Fund explore incorporating work on
®nancial abuse, particularly with respect to interna-
tional e€orts to ®ght against money laundering, into
its various activities, as relevant and appropriate.'
Since then, the IMFC has repeated its exhortation,
and in more compelling terms.
Subsequently, in April 2001, money laundering
reached the Executive Board's agenda. The Board
decided that `the Fund has an important role to
play in protecting the integrity of the international
monetary system, including through e€orts to
combat money laundering'. In November 2001, the
movement picked up steam, with the addition of
CFT, Executive Directors ®nding that: `The Fund
has a key role to play in combating money launder-
ing and terrorism ®nance as part of international
e€orts to prevent the abuse of ®nancial systems
and to protect and enhance the integrity of the
international ®nancial system.'
By these decisions, the Executive Board found that
AML/CFT activities fell within the mandate of the
Fund, that AML/CFT work should be geared up in
the circumstances of the day, and that the Fund was
Page 385
 Holder
prepared to step up to the plate. At the same time, the
Board drew a line concerning the Fund's movement
in AML/CFT. At its meeting of April 2001, directors
noted `the important role played in law enforcement
by various national and international agencies, but
con®rmed that it would not be appropriate for the
Fund to become involved in law enforcement activ-
ities'. Mirroring that caveat, in November 2001 the
Board con®rmed that `it would be inappropriate
for the Fund to become involved in law enforcement
issues', and that `primary responsibility for enforce-
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ment of anti-money laundering and anti-terrorism
®nancing measures will continue to rest with national
authorities'.
The Board's carving out of `law enforcement
activities' accords well with the legal situation, that
is, that the Fund lacks supranational, governmental
authority. Generally, and not only concerning law
enforcement for AML/CFT, the Fund lacks power
to enforce laws, whether banking, monetary or
AML/CFT. Those functions rest with national
governments as part of national sovereignty, unless
ceded by the shifting line between national authority
and international law.
Consistently, however, the Fund may engage in
the assessment of laws, and advise its members of
the best way for them to exercise their sovereign
powers Ð policy advice that can fall within Art.
IV surveillance, the exercise of conditionality, and
as part of technical assistance. In other words, the
Fund may assess the ecacy of laws and institutions
without infringing upon a member's sovereignty.
In this situation, the debate shifted from the ques-
tion of legal authority to a second aspect of compe-
tence, namely, the maintenance of the Fund's core
expertise. In recent years, as already noted, the
Board has emphasised the inclusion of ®nancial issues
in the core areas of the work of the Fund, while
recognising the need for both a disciplined approach
and one that builds on collaboration with other
institutions.
Not surprisingly, therefore, the Board, in its initial
linking of AML/CFT to the ®nancial system, asserted
that the Fund's primary e€ort should be directed at
assessing compliance with ®nancial supervisory prin-
ciples (in particular, those of the BCP, IAIS, and
IOSCO). In addition, during its later discussion in
November 2001, most Executive Directors, in con-
sidering the nature and scope of the evolving
methodology document to be used for assessments,
supported an expanded coverage to include legal
and institutional issues.
Page 386
THE DENOUEMENT
In July 2002, the Executive Boards of the Fund and
the World Bank each came to grips with several con-
tentious points of substance and process, speci®cally:
Ð How to proceed to a uni®ed comprehensive
methodology, which would elaborate on the
40 ‡ 8 Recommendations of the FATF, and
allow for consistent and coherent country
assessments?
Ð Whether the Fund and Bank should move to
assessments of AML/CFT pursuant to the evolv-
ing common methodology? And, as part of this
matrix, what should be the ongoing relationship
between the Fund/Bank and the FATF?
Taking both internal institutional and the external
circumstances into account, the Board's deliberation
rested on four principles:
(a) First, there was unwavering support for a
single assessment methodology, based on a
global standard found in the FATF 40 ‡ 8
Recommendations.
(b) Secondly, concerning the scope of Fund/Bank
involvement, the focus would normally be con-
®ned to the prudentially regulated ®nancial
sector; assessment beyond that area could be
undertaken, however, when the subject was
macroeconomically relevant and posed a
signi®cant risk of money laundering/terrorism
®nancing.
(c) Thirdly, assessment procedures should be trans-
parent, consistent with the mandate and exper-
tise of the di€erent institutions involved, and
compatible with the uniform, voluntary and
cooperative nature of the ROSC process.
(d) Finally, ongoing technical assistance should be
available to countries desiring to build their
institutional capacity and develop their ®nancial
sectors.
Building on these principles, the Fund Board (and, in
parallel, the World Bank Board) adjudicated as
follows:
As to the identi®cation of the international
standard, the Board endorsed the FATF 40 ‡ 8
Recommendations as the relevant standard. This
endorsement, however, was quali®ed by four
conditions:
(i) Satisfactory completion by the FATF, in con-
sultation with Fund/Bank sta€, of the draft
comprehensive methodology (by the time of

the Fund/Bank Annual Meetings in late Septem-
ber for consideration at the FATF Plenary in
October 2002);
(ii) FATF endorsement, at its October Plenary
Meeting, of the comprehensive assessment
methodology and its use in both FATF/FSRB
mutual evaluations and Fund/Bank sta€-led
assessments;
(iii) FATF agreement that its assessments would
adhere to the principles of the Fund/Bank
ROSCs; and that
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(iv) FATF would refrain from a further round of the
Non-Cooperative Countries and Territories
initiative, at least for the next 12 months.
Secondly, the Board took a pragmatic approach on
the modality of assessments: for a pilot period of 12
months, they will be carried out by either the
Fund/Bank Sta€ or the FATF/FSRBs. Speci®cally,
(i) On the FATF side, the FATF and FSRBs would
carry out assessments, and produce ROSCs, in
the context of mutual assessments, without the
involvement of Fund/Bank Sta€.
(ii) Fund/Bank-led assessments and associated
ROSCs, especially in the context of FSAPs
(Fund and Bank) and OFCs (Fund alone)
would follow the common methodology.
In the Fund/Bank-led assessments, however, a dis-
tinction will be respected between Fund/Bank sta€
responsibility, on the one side, and the responsibility
of selected experts, on the other side, in that the
experts will be responsible for conducting assessments
of criminal law enforcement and non-prudentially
regulated activities. In addition, the expert-led section
will not be reviewed by Fund/Bank sta€; instead, it
will be reviewed by the FATF (in the case of a
member of FATF or a participating FSRB) or by
separate expert reviewers (if a non-member of
FATF or a participating FSRB).
CONCLUSION
In light of the above, it will be appreciated that the
Fund's involvement in AML/CFT has been fast-
moving, intensive, and consequential for the inter-
national community in general and the members of
the Fund in particular. Already, an international stan-
dard in Fund/Bank terms for AML/CFT (that is, the
FATF 40 ‡ 8 Recommendations) has been accepted,
the supporting, uniform and comprehensive metho-
dology is virtually ®nalised as between the Fund/
International Monetary Fund's Involvement in Combating Money Laundering
Bank and the FATF, with FATF assuming ®nal
authorship (and awaiting formal adoption), and
AML/CFT ROSCs conducted by the Fund/Bank
and the FATF/FSRBs (separately) are foreseeable.
On the Fund side, AML/CFT elements have per-
meated its work programme. In particular, FSAP
and OFC assessments already include an AML/
CFT module as a matter of course, applying the
emerging methodology document. In addition, in
the context of the Art. IV consultations a detailed
Fund AML/CFT questionnaire has been issued to
some 60 countries, covering supervisory, regula-
tory, legal and international aspects. Meanwhile,
technical assistance to national jurisdictions is
expanding rapidly, especially to ®ll legislative and
institutional gaps and weaknesses. Finally, country
transparency has increased markedly, through the
publication of country assessments (although not
for all countries).
Throughout this process, two signi®cant features
might be noted. First, a variety of quite diverse enti-
ties have interacted and collaborated to great e€ect,
including global international specialised agencies
(the Fund and the World Bank), more exclusive
and less structured entities (FATF, FSRBs and the
Egmont Group) and other relevant standard setters
(Basle Committee, IOSCO and IAIS), each contri-
buting to the negotiated and community-supported
outcome.
Secondly, there has been elaborate national beha-
viour change, essentially voluntary and collaborative,
especially by the acceptance of AML/CFT as a matter
of international concern, the identi®cation of an
international standard for AML/CFT, and the general
submission to external assessments. Of interest, this
enterprise has been put in place without promulga-
tion of an international treaty regime, which would
have entailed extensive delays in negotiation, adop-
tion and implementation. Out of mixed motivations,
and in the pursuit of their individual national inter-
ests, nation states (and their territories) have opted
for cooperation rather than confrontation, in a vari-
ety of forums, thus contributing to the net welfare
of the global community.
William E. Holder, Deputy General Counsel,
International Monetary Fund. These comments
constituted an address to the Twentieth
Cambridge International Symposium on
Economic Crime, 8th±15th September, 2002.
They are made in a personal capacity.
Page 387
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