How do Financial Crimes Affect Economies?

The fight against financial crime is ongoing, but the world needs to do more to limit its economic impact. Money laundering is a crucial component of organized crime that often spans borders, skirts taxes, funds terrorism, and corrupts officials. It comes with hefty macroeconomic costs and makes economic growth less inclusive and sustainable, fueling inequality and informality.

The international community has made significant progress in strengthening safeguards against money laundering and terrorist financing, with the IMF and other organizations working together to identify key risks. However, there is still a significant gap between progress countries have made on technical compliance and the effectiveness of these efforts.

The IMF recently reviewed its strategy on anti-money laundering and combatting the financing of terrorism (AML/CFT) to better help its 190 member economies address these critical financial integrity issues. Financial crime affects lives and livelihoods, especially those of the most vulnerable, and its costs are high and increasing. Direct costs can include lower revenues, higher expenditures, sanctions, lost banking services, and increased financial instability.

Indirect costs are even greater, as they are imposed across an economy, fueling boom-and-bust cycles or making home prices unaffordable. Large-scale money laundering can also spur volatility in international capital flows, undermine good governance, spark political instability, and erode trust in governments and institutions. Liquidity tends to deteriorate around financial integrity events for affected banks, while other domestic banks’ liquidity could benefit from positive substitution effects in the short-term.

Illicit financial flows are a global issue, with insufficient AML/CFT frameworks in some countries attracting criminal proceeds from abroad. Countries exporting illicit flows experience less opportunity, higher inequality, higher poverty, more illegal immigration, misused resources, and environmental degradation. For example, illicit financial flows in Africa drain domestic revenues, negatively impact investment rates, and curtail Africa’s savings rate.

To better understand the consequences of money laundering and terrorist financing on individuals, countries, and the global economy, the IMF is deepening AML/CFT considerations across all its work and urging members to safeguard their financial sectors and broader economy to ensure global financial stability. Analyzing these issues requires understanding the fiscal, monetary, financial sector, and structural costs of illicit flows.

The IMF Executive Board has approved a plan to enhance its data analytics capacity to address money laundering and illicit flows in vulnerable sectors, enhancing coordination across surveillance, lending engagements, capacity development, and Financial Sector Assessment Programs, thereby enhancing inclusive and sustainable growth.

Despite decades of progress in financial integrity, the Fund and the international community must persist and press on in this fight. Cooperation among stakeholders, including governments, international bodies, and civil society, is essential. The IMF will use its global reach to help its members assess the impact of financial crimes and illicit flows and design and implement policies to address them.

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