Monetary implications of FATF regulation of secret bank accounts to combat money laundering
| Pages | 214-230 |
| Published date | 01 April 2006 |
| DOI | https://doi.org/10.1108/13685200610661023 |
| Date | 01 April 2006 |
| Author | Wassim N. Shahin |
| Subject Matter | Accounting & finance |
Monetary implications of FATF
regulation of secret bank
accounts to combat money
laundering
Wassim N. Shahin
School of Business, Lebanese American University, Byblos, Lebanon
Abstract
Purpose – This paper aims to analyze the monetary consequences of the new restrictions imposed in
February 2000 by the Financial Action Task Force (FATF) on money laundering. FATF established
25 criteria based on its 40 recommendations (currently 49) to combat money laundering and the
financing of terrorism. A total of 23 countries were placed on a list of Non-Cooperative Countries and
Territories (NCCTs) for not meeting most of the criteria. Several of the criteria relate to additional
tightening or regulation of banking and financial secrecy in these countries. In order to be de-listed
from NCCTs, countries have started regulating their banking and financial sectors by placing
restrictions on the degree of secrecy, passing tighter secrecy laws and closing loopholes in existing
laws. The new regulatory measures may have money, banking and other economic implications.
Design/methodology/approach – Presents a theoretical model of a banking firm offering secret
bank accounts to examine the impact of changing secrecy laws on deposits, interest rates, money and
credit aggregates.
Findings – Three different sets of results are plausible depending on the reactions of banks with
regard to their deposit rate. The likelihood of banks changing this rate is examined using a profit
function analysis.
Originality/value – It provides a theoretical framework for an agenda of future empirical research
as researchers should emphasize the impact of tightening secrecy standards on bank deposit rates.
The degree of the change in this rate may determine the magnitude and sometimes the direction of the
changes in monetary variables.
Keywords Banks, Money laundering, Accounting procedures
Paper type Research paper
1. Introduction
The Financial Action Task Force (FATF) is an intergovernmental body composed of
31 member jurisdictions from six continents and two regional organizations[1].
FATF’s purpose is to establish international standards, develop and promote policies
to combat money laundering and the financing of terrorism. In April 1990, the FATF
issued 40 recommendations providing a comprehensive plan of action to combat
money laundering. In October 2001, in light of the September 11 attacks in the USA, the
FATF’s mandate was expanded to include measures to combat terrorist financing. As
a result, the FATF immediately issued eight special recommendations on terrorist
financing and added in October 2004 a new special recommendation on cross-border
movements of cash making the forty plus nine recommendations a framework for
world governments to use in developing their own efforts against money laundering
and terrorist financing[2]. On February 14, 2000, the FATF published an initial report
developing 25 criteria based on the 40 recommendations identifying detrimental rules
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
JMLC
9,2
214
Journal of Money Laundering Control
Vol. 9 No. 2, 2006
pp. 214-230
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200610661023
and practices that affect international cooperation in the fight against money
laundering[3]. Based on these criteria, 23 countries and territories in Europe, the Middle
East, Africa, Asia-Pacific, the Caribbean and South Atlantic governed by bank and
financial secrecy laws were classified as Non-Cooperative Countries and Territories
(NCCTs)[4]. Countries had to adjust their banking and financial framework according
to the 25 criteria to be moved off or de-listed from the NCCTs group. Several of the
criteria as will be shown in Section 2 addressed the banking sector calling for major
regulation of financial secrecy and secret bank accounts in the form of tightening
secrecy conditions. This included passing new secrecy laws, closing loopholes in
existing laws, scrutinizing banks, and imposing restrictions on the traditionally
independent banking industry.
The new restrictions may have some economic, political, social, and personal
consequences. Economic implications encompass fiscal and monetary issues,
capital flows, exchange rates, national income, and investments. It is very germane
to take note of the fact that secrecy laws cover all forms of deposits. Countries
enjoying banking secrecy do not offer separate secret and non-secret deposits.
Therefore, the relative proportion of secret deposits to the banks total liability is
very high since all deposits benefit from secrecy laws. A change in these laws
may in turn have major economic effects on the banking industry and, therefore,
the whole economy.
This paper examines the monetary and banking consequences of changing secrecy
laws. Analyzing the effects of changing secrecy laws on monetary aggregates is of
utmost importance since the immediate impact of the new legal restrictions is on the
banking system. Therefore, studying the short-run impact of the policy change on
bank deposits, interest rates, credit, and money aggregates immediately following the
imposition of the restrictions is a necessary step in understanding the effects of
changing the laws on economic activity, capital flows and exchange rates[5].
The analysis in this paper shows that three different sets of results are plausible,
depending on the banks’ reactions to the authority’s actions. If banks do not react to
government policy, the result is a decrease in secret deposits with a major impact on
the banks’ balance sheet and interest rates. If, on the other hand, banks were to raise
their deposit rate to make deposits more attractive and offset some of the impact of the
authority’s action on their portfolio, two results are plausible. The direction of the first
result is similar to the case of passive banks with a difference in magnitude. The
second result differs from the previous cases in terms of direction. The outcome may
not coincide with the perception that governments’ actions cause deposits to decrease.
The authority’s action may, in fact, cause deposits to increase.
The paper is organized as follows. The next section discusses the FATF criteria
specific to bank regulation and the changes that have governed bank secrecy laws in
NCCTs. Section 3 develops a model showing the interaction among banking firms and
domestic and international secret depositors. Section 4 uses comparative statics
techniques to examine the short-term implications of tightening secrecy standards on
interest rates and monetary aggregates when banks do not react to policy- makers’
regulations. Section 5 analyzes the case where banks retaliate to restrictions. A banks’
reaction function is developed to examine the impact of changing secrecy laws on
deposits, interest rates, money and credit aggregates. Section 6 analyzes the impact of
tightening secrecy standards on banks’ profit function. Possible conditions under
Monetary
implications
of FATF
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