caleb m fundanga : the role of the banking sector in combating money laundering a paper presented by dr caleb m fundanga, governor of the bank of zambia, at a seminar organised by the c and n centre for advanced international studies, lusaka, zambia, 23 january 2003. * * * mr chairman distinguished guests ladies and gentlemen allow me first of all to thank you for inviting me to address you on this topic of great importance to the development of our financial system in zambia – “ the role of the banking sector in combating money laundering ”. i have every reason to believe that your training in the last couple of days has provided an opportunity for you to share with the resource persons valuable insights on the subjects you have covered. mr chairman, the scourge of money laundering is not new to mankind. despite money laundering being topical in policy discussions nowadays and on the minds of supervisors and regulators like the bank of zambia, the scourge itself has a long history and could be as old as the history of organised trade. nonetheless, in spite of the fundamentals of the crime remaining, largely, the same as in the olden days, recent advances in technology and globalisation have offered and will continue to offer more sophisticated means to convert ill - gotten proceeds into legally acceptable financial assets. in recent times, money laundering has grown into real big business. for instance, the economist magazine estimated that about usd 500 billion to usd 1. 5 trillion is laundered through banks each year. further, the financial action task force ( fatf ) - an intergovernmental organization under the auspices of the organisation for economic co - operation and development ( oecd ) also estimates money laundering to be in the ranges of usd 590 billion to us1. 5 trillion. as a percentage of world economic output, money laundering accounts for about 2 % to 5 %. obviously, given the secrecy and the illegal nature of this business, it is difficult to tell exactly the extent of money laundering. nevertheless, these figures give us an indication of the magnitude of the problem. in this regard, financial institutions, in particular, banks provide a conduit through which money ( including laundered money ) flows. because of this, the financial system is the focal point of antimoney laundering initiatives because dirty money is most visible when it is first introduced into the financial system. ladies and gentlemen, before i proceed in discussing the various aspects of money laundering including stages in money laundering, its effects on

the economy, the global and local initiatives to fight money laundering and the role that banks can play in combating money laundering, allow me to define what money laundering is. for the purposes of my presentation today, i shall define money laundering as the method of hiding, mixing and disguising the proceeds of criminal activities through legally operating institutions for the purpose of destroying the origins of the proceeds. mr chairman, it is clear from the definition that money laundering is a tool that is used by people involved in illegal activities, such as drug trafficking, organised crime, tax - evading, political bribery and th above all, corruption. in addition, the events of september 11 have added another dimension to the problem of money laundering and brought to light the synonymity between money laundering and terrorism. what then are the stages in money laundering? though the money laundering process seems so complicated, it usually follows a traceable pattern and three distinct stages can be identified. these are : • placement stage. this it involves the disposal of cash proceeds of the illegal activity. it is at this stage that the proceeds are introduced into the financial system in a manner that avoids detection by the banks and the authorities. at this stage criminals use techniques like depositing large amounts of money in several smaller batches so as to avoid suspicion and detection. • layering stage. this is when the true character of the cash proceeds of the illegal activities is hidden through a series of transactions in order to erase the audit trail. this is done by transferring this money to off - shore banking centres with strict secrecy laws, or to bearer bonds, and / or shell holding companies and accounts held in the name of nominees. • the last stage is the integration stage where the successfully laundered money is integrated into the financial system. money laundering has a wide range of adverse effects on any country ’ s economic, political and social structures. since laundered money passes through the financial system, money laundering also has several effects on the financial systems as a whole and banks in particular. some of the effects include : • first, undermining legitimate private sector efforts. money launderers use front companies, to disguise the proceeds of illicit activities and in the process hide the ill - gotten gains. these companies have access to substantial illicit funds, therefore allowing them to subsidize the front company and offer it ’ s products and services at levels below market rates. at times they quote prices, which are below production cost. this explains why front companies