AML-CFT Standards—Links to Stability and Institutional Development
Money laundering can have potentially negative consequences for a country’s macroeconomic performance, can impose welfare losses, and may also have negative cross-border externalities. For example, it could compromise bank soundness with potentially large fiscal liabilities, could lessen the ability to attract foreign investment, and could increase the volatility of international capital flows and exchange rates. In the era of high capital mobility, abuse of the global financial system makes national tax collection and law enforcement more difficult. Money laundering may also distort the allocation of resources and the distribution of wealth and can be costly to detect and eradicate. Economic damage can arise not only from direct financial system abuse but also from allegations that affect the reputation of a country or from one country’s actions against perceived financial system abuse in another economy. Those types of allegations or actions can, through reputational effects, affect the willingness of economic agents—particularly those outside the country in question—to conduct business (e. g., inward investment, banking correspondent relationships) in that country, which can lead to adverse consequences.
Money laundering and terrorist financing may compromise the reputations of financial institutions and jurisdictions, undermine investors’ trust in those institutions and jurisdictions, and, therefore, weaken the financial system. Trust underpins the existence and development of financial markets. The effective functioning of financial markets relies heavily on the expectation that high professional, legal, and ethical standards will be observed and enforced. A reputation for integrity—soundness, honesty, adherence to standards and codes—is one of the most valued assets by investors, financial institutions, and jurisdictions.
