Management of Frozen Assets Yaound, Cameroon June 6, 2014 GODFRED - - PowerPoint PPT Presentation

Banks, Illegal Financial Flows and Management of Frozen Assets

GODFRED PENN LEAD COUNSEL & ADVISOR TO THE GENERAL COUNSEL AFRICAN DEVELOPMENT BANK GROUP Yaoundé, Cameroon June 6, 2014

INTRODUCTION & OUTLINE

 ILLICIT FINANCIAL FLOWS (IFFs), AFRICA

 REGIONAL DISTRIBUTION OF IFFs  DRIVERS OF IFFs IN AFRICA  THE DEVELOPMENT IMPACT OF IFFs

 INTERNATIONAL LEGAL FRAMEWORKS ON IFFs

 MANDATE OF THE FATF

 MANAGEMENT OF FROZEN ASSETS-THE ROLE OF MDBS  THE ROLE OF THE AFDB GROUP

 AFDB GROUP GAP I & II  PREVENTING IFFs IN PRIVATE SECTOR TRANSACTIONS  ANTI-CORRUPTION SANCTIONS REGIME

 MOVING FORWARD

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Q U I C K R U N D O W N

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“Illicit financial flows involve the transfer of money earned through corruption, kickbacks, tax evasion, criminal activities, transactions involving contraband goods, and funds transferred in violation of exchange controls”

Source: Joint Report by AfDB and GFI (2013) Source: African Financial Markets Initiative Website

Illicit Financial Flows in Africa

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• The United Nations Office on Drugs and Crime

(UNODC) conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organised crimes and to investigate to what extent these funds are laundered.

• The report estimates that in 2009, criminal

proceeds amounted to 3.6% of global GDP, with 2.7% (or USD 1.6 trillion) being laundered.

GLOBAL

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Africa lost between US$1.2-1.4 trillion through illicit financial flows over the period 1980 - 2009

 The regions of West &

Central Africa, North Africa and Southern Africa, together accounted for 95% of total cumulative illicit outflows from Africa over that period

Regional Distribution of Illicit Financial Flows in Africa

Source: Joint Report by AfDB and GFI (2013)

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Drivers of Illicit Financial Flows in Africa

 Embezzled rents and royalties from natural resource extraction

activities

 Tax evasion, tax havens, secrecy jurisdictions  Lack of transparency and accountability in financial systems

and budget processes

 Bribes and kickbacks in public procurement  Trade mispricing such as underpricing and overpricing of

imports and exports

 Money laundering  Lack of resources to monitor financial systems and enforce

applicable laws

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Development Impact of Illicit Financial Flows

• Illicit financial flows are a form of capital flight, which results in reduced levels of local investment
• Illicit financial flows exacerbate income inequality
• Illicit activities jeopardize the integrity of the national financial system and weaken financial institutions
• Weak and unregulated financial systems can further deter access to foreign investments and markets
• The issue of illicit financial flows is particularly important now as Africa is receiving less official

development assistance from developed countries

In 2009 illicit financial flows out of Africa were three times the amount of official development assistance received

 INTERNATIONAL LEGAL FRAMEWORKS

There are legal instruments that regulate the

tracing, freezing, seizing and confiscation of instrumentalities and proceeds of crime. E.G.:

 1998 UN Convention on Illicit Trafficking in Narcotic

Drugs and Psychotropic Substances (Vienna Convention)

1999 International Convention for the Suppression of

the Financing of Terrorism

2004 UN Convention against Transnational Organized

Crime (Palermo Convention)

2004 UN Convention against Corruption

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Financial regulation standards are also set by

the Basel Committee on Banking Supervision, for

banks

the International Organisation of Securities

Commissioners (IOSCO), for securities firms and markets

the International Association of Insurance

Supervisors (IAIS), for insurance companies.

Other self-regulating bodies, such as the

International Federation of Accountants or the Wolsberg Group of Banks, have also set standards for their own area.

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 INTERNATIONAL LEGAL FRAMEWORKS

THE FATF

The Financial Action Task Force (FATF) was established in

1989 by the G-7 countries to respond more effectively to Money Laundering (ML).

The FATF Forty Recommendations require the

criminalization of ML.

In addition, the recommendations call on countries to

adopt legislative and other measures in order to:

 freeze, seize and confiscate criminal proceeds;  waive bank secrecy laws to permit financial institutions to

monitor and report suspicious transactions;

 protect those reporting these transactions from civil and criminal

liability;

 establish financial investigation units; and,  cooperate fully in international law enforcement efforts to

combat ML.

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 The FATF Special Recommendations require countries to criminalize:

the financing of terrorism terrorist organizations and terrorist acts and to designate these new

• ffences as ML

predicate offences

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 The FATF is also involved in monitoring the progress of members in complying with its recommendations.

THE FATF

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The Role of Multilateral Development Banks

• As financial institutions operating in the global financial

system, MDBs must tighten fiduciary safeguards and establish and maintain internal procedures to prevent and detect corruption and money laundering

• Examples: Develop effective internal policies, train and

educate employees, implement effective audit functions

• Provide financial and technical assistance to member countries

wishing to implement international standards for anti- corruption and anti-money laundering measures

• Support member countries with financial sector reforms to

strengthen banking supervision and regulation of financial institutions

• Coordinate, cooperate and exchange best practices with other

MDBs to harmonize efforts for combatting illicit flows

ROLE OF AFDB GROUP

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1st GOVERNANCE STRATEGY

① GAP I was based on the Bank Group’s Medium- Term Strategy (MTS), 2008-2012, ② The Bank’s key focus was and has been on improving economic and financial governance

• n the continent
• by supporting actions which strengthen

Public Financial Management (PFM) and

• by improving a Business Enabling

Environment (BEE) at the country, sector and regional levels

ROLE OF AFDB GROUP

UNDER GAP I

With the central objective of assisting African countries to

build capable and responsive states, the Bank’s work in governance also targeted the specific needs of fragile states by encouraging them to increase transparency and accountability in the management of public resources.

Governance indicators have shown steady improvements.  EG. According to the Bank Group’s “Development Effectiveness Review on Governance”, published in 2012, across the 14 countries where the African Development Bank Group invested in revenue systems, tax revenue rose from 10.5% to 14.7% of GDP, while tax rates for businesses declined from 94% of commercial profits to 54%.

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AFDB GROUP’S GAP II

To respond to the continent’s accelerating

transformation, the new Bank Group Strategy for 2013-2022 has two core objectives: (i) achieving inclusive growth; and (ii) gradual transition to green growth.

The Bank aims to support Africa’s transformation

through five core operational priorities one of which is Governance and Accountability (G&A) which provides the strategic platform for GAP II.

GAP II builds on the achievements of the first

“Governance Strategic Direction and Action Plan (GAP I)” for 2008-2012

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AFDB GROUP’S GAP II

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3 CORE OBJECTIVES

 Strengthening governments’ capacity for transparent and accountable use of public resources and citizens’ ability to hold Governments to account  Improving outcomes in the sectors and citizens’ ability to monitor them  Promoting a business enabling environment which supports Africa’s socio-economic transformation, job creation and financial inclusion

AFDB GROUP’S GAP II

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STRATEGIC PILLARS

 GAP II is built around three strategic pillars: (a) public sector and economic management, (b) sector governance, and (c) investment and business climate.  A cross-cutting objective supporting the three objectives aims to reduce corruption in both the public and private sectors.

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Preventing Illicit Financial Flows in AfDB Group Private Sector Operations

• The AfDB Group has taken specific measures to prevent and

detect illicit financial activity in its private sector operations.

• All private sector financing legal documentation contains

integrity provisions that allow the AfDB Group to exit the project in the event that a Borrower engages in illicit activities.

As a condition for financing, the Borrower must covenant that:  It has not and will not engage in money laundering activities  It has not and will not engage in Sanctionable Practices  All financing provided to it by Shareholders is not of illicit origin  It has not and will not do business with entities and persons that are on the sanctions lists provided by the UN, World Bank, EU and United States Treasury  It is not, and its shareholders are not, on any applicable sanctions lists

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The AfDB Group Anticorruption & Sanctions Regime

Sanctionable Practices = any corrupt practice, fraudulent practice, collusive practice, coercive practice, or obstructive practice carried out in connection with AfDB Group projects

• Corrupt practices must be effectively

investigated and sanctioned. A strong sanctions regime can provide an effective deterrent effect

• In August 2013, the Bank Group

enhanced its sanctions procedures

• The Sanctions Procedures govern the

process for investigating allegations of Sanctionable Practices that have been made in relation to Bank Group- financed operations

• The Bank Group’s Integrity and Anti-

Corruption Department investigates allegations of sanctionable practices

• Sanctions that may be imposed include:

Letter of Reprimand, Debarment, and Financial Penalties

• Proceeds from financial penalties

imposed on sanctioned parties are invested in programs aimed at combatting corruption

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Moving Forward

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• International and regional cooperation to combat illicit

financial flows in Africa is on the rise, allowing for greater dialogue, exchange of best practices, coordination of efforts and wider implementation of preventative measures

• Banks can play multiple roles in combatting illicit financial

flows:

• Improving internal procedures for preventing and

detecting corruption and money laundering

• Supporting regional member countries in their efforts to

curtail illicit financial flows