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

david dodge : recent review of the canadian economy opening statement by mr david dodge, governor of the bank of canada, to the senate banking, trade and commerce committee, ottawa, 20 april 2004. * * * good morning, mr. chairman and members of the committee. as always, we appreciate the opportunity to meet with you twice a year, following the release of our monetary policy report. these meetings help us keep senators and all canadians informed about the bank ’ s views on the economy and about the goal of monetary policy and the actions we take to achieve it. the canadian economy continues to adjust to developments in the global economy such as stronger world demand, higher commodity prices, and the realignment of world currencies, including the canadian dollar. emerging - market economies, especially china and india, are contributing to intensified competition but are also creating new trading opportunities for canada. these developments require shifts in activity among sectors and create a need for adjustments by many businesses. monetary policy is facilitating these adjustments by supporting aggregate demand, with the goal of keeping the economy near its full production potential and inflation on target. when paul and i appeared before this committee last october, we told you that economic growth in canada was weaker than expected and that there was more slack in the economy than we had projected six months earlier. as you know, the canadian economy was affected by a number of shocks in 2003. thus, despite a broadening of the global economic recovery and higher commodity prices, it turned out that the economy at the end of the year was operating well below the level that we had projected in our october report. preliminary indications are that growth in the first quarter of this year was marginally below 3 per cent. thus, the bank ’ s view is that the economy is still operating significantly below its potential. our outlook for economic growth and inflation is essentially unchanged from that of the january monetary policy report update. the economy is expected to grow by about 2 3 / 4 per cent in 2004, picking up to about 3 3 / 4 per cent in 2005. this stronger growth is expected to come from private domestic demand, reflecting the current monetary stimulus in the economy and high levels of business and consumer confidence. such growth would return the economy to close to its production potential by the third quarter of 2005. core inflation - which removes the most volatile components of the consumer price index and the impact of indirect taxes on the remaining components - should average 1 1 / 2 per cent over the remainder of this year. as excess