Chapter

Chapter 3. Strengthening the International Financial System

Author(s):
International Monetary Fund
Published Date:
October 2002
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Discussions of how to reform the international financial system took center stage in 1998 in the aftermath of the crises in the Asian countries. Since then, much has been done to improve the IMF’s capacity for crisis prevention and the architecture of the international financial system more generally. Specifically, initiatives have been launched to improve the IMF’s analysis of countries’ vulnerability; to increase the transparency of economic policymaking by member countries as well as of the IMF’s own policies and operations; to promote timely and accurate reporting to the IMF and publication of economic data within a framework of internationally accepted standards; to strengthen financial sectors, including through prudential supervision; and to encourage the adoption of consistent monetary and exchange rate regimes less prone to crisis. As a result, policies have been strengthened in many countries. The resilience of the global economy and the international financial system in the face of the economic slowdown of 2001 and the events of September 11 suggests that these efforts are beginning to bear fruit.

Nevertheless, it would be unrealistic to suppose that all member countries will always be able to avoid crises. Thus the IMF has also been working to strengthen its capacity to assist members to resolve crises. During FY2002, the Board discussed two main aspects of this work. First, it examined how to help members cope with difficulties, when they arise, of maintaining their access to capital markets in a fashion that also maintains the stability of the international financial system. Second, in relation to extreme cases when a member needs to restructure its financial obligations, the Board investigated frameworks for sovereign debt restructuring that would lead members to be more inclined to approach their creditors at an early stage, before delay destroys value and increases the scale of economic disruption. At the same time, the Board recognized that care should be taken in the design of a new framework to avoid inducing countries to look to default as an easy way of avoiding needed adjustments.

Another key area of work to strengthen the international financial system—the international effort against money laundering—took on heightened importance in the wake of the events of September 11, 2001. Those events prompted a reexamination at national and international levels of mechanisms to promote and enforce laws combating not just money laundering but also the financing of terrorism. In this context, the IMF discussed how it should intensify its contribution to these international efforts, and work advanced on several fronts.

This chapter describes the progress made in the areas of crisis prevention (external vulnerability, transparency, standards and codes, and strengthening financial sectors), crisis resolution (including sovereign debt restructuring), and combating money laundering and the financing of terrorism up to April 2002. It also covers work done in the related areas of offshore financial center assessments and capital account liberalization. For IMF surveillance of international capital markets during the year, see Chapter 2. In addition, more detailed information on the initiatives that have been launched can be found on the IMF website.

Crisis Prevention

Assessing External Vulnerability

The crises of the late 1990s were in many ways different from earlier crises and prompted a reevaluation of traditional methods of assessing a member’s vulnerability to changes in external circumstances. This reevaluation has reflected the increased role of private financing in emerging markets, the increased interconnectedness of markets across the globe, and the links between external financing difficulties and distress in the financial and corporate sectors—links formed partly by pressures on a country’s exchange rate. With the prevention of crises and the promotion of financial stability among its top priorities, the IMF has strengthened its analysis of the vulnerability of member countries to changes in external circumstances and, in particular, to capital market conditions.

In October 2001, the Executive Board took stock of the progress in monitoring members’ external vulnerability on a more continuous basis, especially for emerging market economies, whose access to international capital markets is often not certain. Directors welcomed the increased efforts to combine qualitative analysis reflecting individual country circumstances with vulnerability indicators and other quantitative tools, and the improved integration of bilateral and multilateral surveillance activities, as crises can emanate from either advanced or emerging market economies. They noted that the use of information on markets and market developments in vulnerability assessments was being further strengthened by the work of the new International Capital Markets Department.

Directors observed that the IMF was drawing systematically on a number of separate inputs:

  • The latest revisions to the World Economic Outlook. These are the starting point for any assessment of vulnerabilities because a key objective is to capture influences from the global economy on emerging market countries, including through the explicit consideration of adverse scenarios.
  • Early warning system models. These models estimate the likelihood of a balance of payments crisis based on a combination of vulnerability indicators. While work continues on improving their performance, these models still miss many crises and predict others that do not occur, and are likely to remain imperfect, somewhat mechanical, signaling tools; as such they need to be qualified by detailed country analysis and used cautiously.
  • Financing requirements. Where there is a risk that a country’s access to global financial markets may become difficult or be interrupted, detailed estimates of its external financing needs and prospective sources and uses of funds are important. The potential for liquidity problems is also reflected in the work on reserve adequacy, which takes into account indicators such as the ratio of reserves to short-term external debt, and stress testing of the balance of payments. This work on reserve adequacy and the work on assessing the determinants of spreads and ratings are useful to inform preventive policies.
  • Market information and contagion risks. Besides the direct information content of foreign exchange spreads on borrowing costs for individual countries, the analysis of spreads serves to focus attention on changes in market perceptions and as such sharpens the discussion of contagion. The new International Capital Markets Department is responsible for systematically drawing on market information as well as refining tools to understand markets and market behavior.
  • Financial sector vulnerability assessments. The IMF’s specialized knowledge about the financial sectors of its members is a key input into the IMF’s evaluation of vulnerabilities. Evaluations under the Financial Sector Assessment Program (FSAP)—jointly sponsored by the IMF and World Bank—help to assess the robustness of the financial sector through stress tests and alternative scenarios. For all countries, the staff remains actively involved in financial sector monitoring and advice.
  • Area department expertise. The specialist knowledge of the IMF’s area departments on their countries provides a broader perspective and judgment on the tools used for vulnerability assessments.

The increased focus on vulnerability and appropriate policy responses has further highlighted the significance of addressing gaps and deficiencies in the required data. The IMF’s Special Data Dissemination Standard (SDDS) already provides an agreed framework for making available data on reserves and external debt. Other data needed for vulnerability assessments include those on foreign exchange exposures of the financial sector and the nonfinancial corporate sectors, and countries’ financing needs—including their reliance on rollovers, trade finance, and bond finance. Directors encouraged staff to focus more intensively on these informational needs to ensure that data availability improves over time, and stressed that many countries would require technical assistance to achieve this.

Strengthened vulnerability assessments allow for timely policy adjustments to forestall external crises. Directors agreed that the IMF had an important role to play in involving national authorities in the discussion on vulnerabilities and in convincing them of the urgency of such measures, while information on possible future crises had to be kept strictly confidential. They underscored the role of the Board—through, for example, applying peer pressure and charging management explicitly to take action to express heightened concern on the part of the IMF. In this regard, it was all the more essential that the results of the staff work on vulnerability be communicated to Executive Directors in a timely fashion.

Work to reduce external vulnerabilities of member countries has continued to involve the development of policy guidelines. Guidelines for Public Debt Management, developed by the IMF and the World Bank, were published at the end of FY2001. Guidelines for Foreign Exchange Reserve Management were also developed in close collaboration with reserve management entities from a broad group of member countries and international institutions and published in September 2001 (see Box 3.1). In October 2001, the Executive Board considered a paper on issues related to reserve adequacy and management, including the implications of the capital account approach to assessing reserve adequacy for reserve management. The paper was also meant to assist countries in formulating strategies for investing reserve assets and managing risk and to complement existing guidelines on reserve management. A next step will be to consider reserve adequacy in the context of a broader approach to external liquidity management, including external debt management.

Box 3.1Board Discusses Guidelines for Foreign Exchange Reserve Management

During their September 2001 review of the Guidelines for Foreign Exchange Reserve Management, subsequently published by the IMF, the Board noted that the guidelines would serve as a set of basic principles for countries to draw upon in formulating sound reserve management policies and practices. Directors welcomed the voluntary nature of the guidelines and agreed that their scope and coverage were appropriate. The focus on a prudent risk management framework, and the emphasis on transparency and accountability frameworks, provided a basis for disseminating sound reserve management practices. Such practices complemented prudent macroeconomic policies and sound financial sectors, which were critical for building countries’ resilience to shocks and preventing financial crises.

Directors also expressed appreciation for the feedback received from a broad group of member countries and international institutions in a comprehensive outreach process organized during the preparation of the guidelines. This process had strengthened members’ sense of ownership of the guidelines and helped to ensure that the guidelines were in line with generally accepted sound practices. In particular, reserve managers had welcomed the focus of the guidelines on broadly applicable principles, while avoiding prescriptive practices, so as to ensure their relevance for members with a wide range of institutional structures at different stages of development.

Since there was no universally applicable set of practices for all countries, implementing the guidelines should be done in a way that took into account specific country circumstances. In discussing the potential use under surveillance, and in line with the voluntary nature of the guidelines, Directors agreed that the guidelines could be used to inform discussion between the authorities and the IMF on key areas requiring improvement in reserve management but should not be treated as rigid requirements or formal benchmarks for assessing reserve management.

The agenda for further work on vulnerability assessment is broad and evolving, and Directors have discussed a number of potential improvements to the various inputs into the assessments. The priorities ahead include work on national balance sheet approaches to crisis prevention and resolution, and on financial sector indicators. In addition, continuing efforts will be made to better understand market dynamics, to identify developments in individual countries that may have implications for other members, and to take careful account of the aggregated effects on the global economy of similar policies synchronized across a number of countries.

Transparency

Increased transparency, in both economic policy and in economic and financial data, can strengthen a market participant’s ability to assess credit risks appropriately and so reduce the likelihood of crises and lessen their severity when they do occur. To this end, the IMF has promoted the transparency of its members’ policies, undertaken a wide-reaching program to improve public understanding of its own policies and operations, and encouraged feedback from national authorities and from the public on transparency and other key policy initiatives. The IMF website has been a primary channel for these efforts.

There has been a dramatic change in the last few years in the IMF’s publication policy and the availability of information about the IMF and members’ policies. Before 1994, as far as country information was concerned, little more than research-oriented working papers and some background papers to Article IV staff reports were published by the IMF. The only publicly available information on an Article IV consultation was usually a brief summary in the IMF’s Annual Report. Details of IMF-supported programs were considered confidential. Now the IMF publishes a wealth of information about its policy advice, lending arrangements, finances, and policies and assessments on key topics.

The IMF took an important step in bringing greater transparency to the IMF’s bilateral surveillance when it launched Public (originally Press) Information Notices (PINs) in mid-1997. As of April 30, 2002, PINs summarizing the Executive Board’s Article IV consultations on the economic situation of member countries had been published for 90 percent of the IMF membership, up from 56 percent at end-1998. But more notably, full Article IV staff reports are now published when the country concerned agrees. Between June 1999, when the Board decided to authorize the release of Article IV staff reports on a voluntary basis, and end-April 2002, 106 members have published 177 reports. Participation has been uneven, however, with publication rates highest for advanced, Western Hemisphere, and Central and Eastern European members.

The change in transparency with respect to IMF-supported programs has been as important. Chairman’s statements, news briefs, and press releases following Executive Board discussion of the use of IMF resources are now released on a routine basis. There is a presumption that the documents setting out the authorities’ intentions under their IMF-supported programs will be released to the public, and 96 percent of all such documents have been published since January 2001, when the Board approved the publication of all such documents. In January 2001, the Board agreed to the release of stand-alone staff reports on IMF-supported programs (Use of Fund Resources reports), subject to the member’s consent. Through end-April 2002, 55 percent of stand-alone reports on IMF supported programs had been released, with publication rates highest among the countries of Central and Eastern Europe.

The IMF is now more transparent in its policies and operations. Staff papers discussing key policy issues and summaries of Executive Board discussions of these papers are now released. In addition, the IMF has engaged in a dialogue with the public on some key policy issues. For example, public comment has been sought on the IMF’s review of conditionality through the Internet and through seminars with wide participation of academics, policymakers, and nongovernmental organizations. A number of outside (as well as internal) evaluations of IMF activities and programs have been conducted in recent years, and the results of almost all of those studies have been published. Finally, an Independent Evaluation Office (IEO), which was established to complement the IMF’s existing review and evaluation procedures, began operations in FY2002.

Standards and Codes

The spread of internationally accepted standards and codes of good practice in policymaking and institutional arrangements contributes to the better working of markets by allowing participants and policymakers to compare information on country practices against agreed benchmarks. Standards are also designed to improve transparency and good governance, and increase the accountability and credibility of policy.

Launched in response to the Asian crises, the IMF’s standards and codes initiative has encouraged the development and improvement of internationally recognized standards in key areas; led to assessments of countries’ observance of standards; and helped countries implement standards, including through the provision of technical assistance. Seeking and responding to feedback from authorities and the private sector have been important aspects of the initiative. During FY2002, progress was made on all these fronts.

Fourth Review of IMF’s Data Standards Initiatives

In July 2001, the Executive Board concluded policy discussions on the IMF’s Special Data Dissemination Standard (SDDS) and General Data Dissemination System (GDDS). This was the Fourth Review of the IMF’s Data Standards Initiatives, in the course of which Directors discussed observance of the SDDS, the template for the dissemination of reserves data, the development of the external debt data category, and participation in the GDDS. In addition, the Board reviewed the staff’s proposal to integrate an assessment methodology, called the Data Quality Assessment Framework, into the structure of the data module of the Reports on Observance of Standards and Codes (ROSCs), as a central element of a Data Quality Assessment Program. (See Box 3.2.)

Directors welcomed the opportunity to review the experience under the IMF’s data standards initiatives and to consider proposals for their further refinement and consolidation. They expressed their strong appreciation to the staff for its work in this area. Directors supported the consultative approach applied in strengthening the design and implementation of these initiatives (see Box 3.3), and stressed that the voluntary nature of the initiatives as well as the cooperative approach to their implementation should remain important characteristics in moving forward. The substantial progress achieved in recent years under the IMF’s data initiatives had further raised the IMF’s standing as a center for dissemination of economic and financial statistics.

Directors highlighted the importance of members’ data dissemination efforts for improved transparency and crisis prevention. They commended national authorities on the substantial progress achieved so far, as evidenced by the strong increase, since last year’s review, in the number of countries meeting the specifications of the Special Data Dissemination Standard. They were also encouraged that participation in the General Data Dissemination System was increasing at a satisfactory pace and in line with the target set at the Third Review of Data Standards Initiatives.

The increased interest in the SDDS among users was evidenced by an increase in the usage of the Data Standards Bulletin Board (DSBB) and the feedback from the IMF’s outreach efforts. Directors supported the staff’s plans to strengthen further its outreach efforts through seminars on international standards and codes, as well as take advantage of the opportunities afforded by ROSC missions and surveys of the DSBB’s users to solicit views.

Progress was also being made in the area of external debt statistics. Directors noted the work being done to finalize the Debt Guide as well as the positive response from the IMF membership to a series of seminars to raise awareness of the data dissemination standards for external debt and ascertain the extent to which countries were advancing toward meeting these requirements. The implementation of the new external debt data category would be discussed during the next review of the IMF’s data standards initiatives.

Directors welcomed the development of the Data Quality Assessment Framework, and most supported its integration into the data module of the ROSC. Directors agreed to preserve the structure of the ROSC module, whereby the module would continue to provide a summary assessment of a member’s observance with the data dissemination standards complemented with a summary assessment of data quality.

Looking ahead, Directors broadly agreed that the IMF’s data standards would need to be updated to take into account the latest developments in statistical methodology. They also supported implementing an open exchange system for the distribution and exchange of statistical information on the Internet, which would enhance the functionality and user friendliness of the DSBB.

Box 3.2IMF’s Data Standards

The IMF’s Data Standards Initiatives aim to enhance the availability of timely and comprehensive statistics and therefore contribute to the pursuit of sound macroeconomic policies and to the improved functioning of financial markets.

The Special Data Dissemination Standard (SDDS) was established in 1996 to guide countries that have or might seek access to international capital markets in the provision of data to the public. As of April 30, 2002, there were 50 subscribers to the SDDS—in November 2001, Costa Rica became the third new subscriber (the others were Brazil and Tunisia) since the end of the transition period in December 1998. Subscription is voluntary. Among other things, subscribers undertake to follow SDDS requirements on the coverage, periodicity, and timeliness of the data; to issue calendars identifying when data are to be released; and to pursue good practices with respect to the integrity and quality of the data. SDDS subscribers supply information about their data dissemination practices for posting on the Internet on the Dissemination Standards Bulletin Board (DSBB) at http://dsbb.imf.org. In addition, subscribers are required to maintain an Internet website, referred to as a National Summary Data Page (NSDP), which contains the actual data and to which the DSBB is electronically linked.

The General Data Dissemination System (GDDS) was established in 1997 as a framework for countries to improve their statistical systems to meet the evolving requirements of the user community. The GDDS fosters the application of sound methodological principles, the adoption of rigorous compilation practices, and the observance of procedures that ensure professionalism and objectivity. Countries that participate in the GDDS provide metadata describing their data dissemination practices and detailed plans for improvement for posting on the DSBB.

In July 2001 the Executive Board approved an important enhancement to the IMF’s data standards. The Data Quality Assessment Framework—and its integration into the data module of the Report on the Observance of Standards and Codes1 (ROSC)—addresses the concern that standards assessments should examine not only the periodicity, timeliness, and coverage of data releases but also the quality of the data being released. The framework for assessing data quality was developed by the IMF in consultation with national statistical offices, international organizations, and data users outside the IMF. It brings together best practices and internationally accepted concepts and definitions in statistics and covers such dimensions of data quality as integrity, methodological soundness, accuracy and reliability, serviceability, and accessibility, as well as the related institutional prerequisites.

1 Reports on the Observance of Standards and Codes, a joint endeavor of the IMF and World Bank carried out in consultation with the relevant authorities of the respective countries, summarize the extent to which countries observe certain internationally recognized standards.

Most Directors agreed that the next review of the IMF’s data standards initiatives should take place in the second half of 2003.

Assessing Members’ Observance of Standards

The number of assessments summarized in ROSC modules increased by over 100 percent during FY2002. As of end-April, 228 ROSC modules for 76 economies had been completed and 165 for 59 economies had been published. Assessments are being carried out by the World Bank on countries’ observance of standards in the areas of corporate governance, and accounting and auditing. Participation in ROSC modules—which is voluntary—has been led by member countries in Central and Eastern Europe.

Although members are responsible for implementing standards, the IMF and other international bodies are helping by providing technical assistance. (For further details, see Chapter 7.)

Feedback from Users of Reports on Observance of Standards and Codes

The IMF—in cooperation with other institutions, including the World Bank and the Financial Stability Forum—has undertaken a series of outreach missions designed to inform and solicit feedback from members and markets of the work on standards. In the last financial year, IMF staff has participated in seminars in France, Germany, Italy, Spain, Tunisia, and the United States, as well as at the World Trade Organization in Geneva and the OECD/Development Assistance Committee in Paris.

This outreach has elicited feedback that is helping to make ROSCs more accessible to users—for example, shorter in length, with a standardized format, and with more comprehensive country coverage. National authorities have also expressed concern that adequate technical assistance be made available to help them address weaknesses identified in standards assessments. Steps are being taken to respond to these concerns and the associated resource implications.

Strengthening Financial Sectors

Along with the Asian crises, the banking sector problems faced by a large number of IMF members have highlighted the critical importance of concerted action to strengthen financial systems. During FY2002, as part of its intensified financial sector surveillance activities launched in recent years, the IMF continued to carry out a number of financial “health checkups” under the Joint IMF-World Bank Financial Sector Assessment Program (FSAP), examined the use of summary financial soundness indicators, and gave greater focus to assessments of offshore financial centers.

Financial Sector Assessment Program

The FSAP, participation in which is voluntary, aims at strengthening the monitoring of countries’ financial systems in the context of the IMF’s bilateral surveillance and the World Bank’s financial sector development work. Following the pilot, the IMF and the Bank Executive Boards agreed that the FSAP should be undertaken in the future at a rate of up to 24 country assessments a year. At the IMF, Financial System Stability Assessment (FSSA) reports, which are derived from the discussion of FSAP findings, were endorsed as the preferred instrument for strengthened monitoring of financial systems as part of IMF surveillance. By April 2002, 27 countries had completed their FSAP participation.1 An additional 50 countries had committed to participate in the program, and the work was already under way for 27 of these countries. In January 2001, publication of the FSSAs was authorized to allow sharing an integrated assessment of the strengths and vulnerabilities of these financial sectors with markets; 11 countries had published their FSSAs by April 2002. The program of assessments in financial year 2002 placed greater emphasis on systemically important countries in line with the views of the two Boards.

As a complement to the work on assessing external vulnerability and the Financial Sector Assessment Program, the IMF has developed a set of Financial Soundness Indicators (FSIs) and methods of macroprudential analysis designed to improve the assessment and monitoring of vulnerabilities in financial systems. (Macroprudential analysis includes stress testing of financial systems’ sensitivity to a variety of shocks.) In June 2001, the Board endorsed a core and an “encouraged” set of FSIs. The core set focuses on the banking sector and was selected because of its analytical relevance, usefulness, and availability. The encouraged set includes additional indicators of the banking sector as well as indicators for the nonbank financial sector, the corporate and household sectors, and real estate markets. Directors agreed that a more general compilation and greater use of soundness indicators, with a focus on the core set, would pave the way for a significant strengthening of surveillance. They supported more systematic compilation of data on FSIs in the Financial Sector Assessment Program and in Article IV reports with in-depth financial sector assessments.

Box 3.3Collaborating on Standards

IMF staff members have collaborated with a number of other groups to revise and develop standards. Staff members are working with

  • the Basel Committee on the New Basel Capital Accord—a crucial complement to the Basel Core Principles, the internationally recognized standard for banking supervision;
  • relevant international agencies to develop assessment methodology and guidance on international standards for securities regulation (International Organization for Securities Commissions, IOSCO), insurance supervision (International Association of Insurance Supervisors, IAIS), and systemically important payment systems (Committee on Payment and Settlement Systems, CPSS);
  • the Bank and the International Accounting Standards Board on developing more detailed standards and standards assessment methodologies for accounting and auditing;
  • other agencies to complete their work on the External Debt Guide and are assisting countries to compile data on external debt consistent with the Special Data Dissemination Standard (SDDS) requirements and the General Data Dissemination System (GDDS) recommendations.1 In this regard, the IMF posted the second draft of the Debt Guide on its external website seeking another round of comments before finalizing it; and
  • the Financial Action Task Force (FATF) and the World Bank to develop a methodology for enhancing the assessment of legal, institutional, and financial supervisory standards relevant for countering money laundering and terrorist financing (see text).
1 The Inter-Agency Task Force on Finance Statistics, formed under the aegis of the United Nations Statistical Commission and chaired by the IMF, is the coordinating body for this work.

In July 2001, during their Fourth Review of the IMF’s Data Standards Initiatives, Directors discussed the possible inclusion of FSIs in the SDDS. While a number of Directors believed this would be a useful development, others considered that such indicators should not be included even at a later stage, so as not to discourage new subscriptions and not to overburden existing subscribers. It was decided to return to the issue at a future date.

The work ahead on FSI-related issues includes activities in four areas: support of compilation efforts by national authorities; analytical and empirical work on measuring and analyzing FSIs; strengthened monitoring of FSIs, in cooperation with country authorities, as a key component of the FSAP/FSSA process; and encouraging national authorities to release the indicators to the public on a regular basis.

Offshore Financial Center Assessments

The IMF has extended its financial sector work to include offshore financial centers (OFCs). The program involves voluntary assessments of OFCs at three possible levels of intensity.2 As of end-April 2002, IMF staff have undertaken missions to 19 offshore financial centers for the purpose of gathering information, providing technical assistance, and assisting self-assessments; staff completed 9 OFC assessments and three (Cyprus, Gibraltar, and Panama) were published during the period. The Coordinated Portfolio Investment Survey (CPIS) organized by the IMF, which includes the participation of several important OFCs, will support this work by helping national statisticians to compile more comprehensive data on cross-border investment positions.

Capital Account Liberalization

The IMF has strengthened its work on capital account issues, including by undertaking more analysis, giving more prominence to capital account issues in Article IV consultations, and expanding discussions with the private sector. The benefits of capital account opening include a more efficient international allocation of savings and improved productivity (for example, through technology transfer in foreign direct investment flows), enlarged opportunities for portfolio diversification, risk sharing, deeper financial markets, and a greater international division of labor. On the other hand, volatile international capital flows have played a role in a number of recent crises, pointing to the importance of appropriate sequencing of capital account liberalization.

In July 2001, in response to a request from the International Monetary and Financial Committee of the IMF, the Board held a preliminary discussion on financial sector stability and sequencing of capital account liberalization. Bearing in mind that there is no simple rule applicable to all countries, Directors discussed some general principles that could be helpful to countries in sequencing and coordinating capital account liberalization. These principles emphasize

  • the importance of macroeconomic stability and of giving priority to financial sector reforms that support such stability;
  • coordinating different financial sector policies to ensure mutually reinforcing reforms;
  • taking into account the initial condition of financial and nonfinancial entities and the effectiveness of existing capital controls;
  • implementing early, key measures that may have a long lead time;
  • considering the sustainability of the reform process; and
  • ensuring the transparency of the liberalization process.

The principles point to the desirability, in most cases, of liberalizing long-term flows (in particular foreign direct investment) ahead of short-term flows with suggestions of specific policy measures that should be put in place before different types of flows are liberalized. In many cases a gradual approach to liberalization may be required, but would not in itself guarantee orderly liberalization.

A workshop to discuss advanced country experiences with capital account liberalization took place in December 2001. Discussions will continue both within the IMF and with the private sector, including through the Capital Markets Consultative Group.3

Crisis Resolution

While the IMF’s efforts at crisis prevention should reduce the number of crises over time, it would be unrealistic to expect that all member countries will always be able to avoid crises. During FY2002, the Executive Board held continuing and informal discussions on a range of issues related to the resolution of financial crises and the role of the private sector.

In August 2001, the Board had a preliminary, informal discussion on a staff paper that reviewed the treatment of the claims of private sector and Paris Club creditors. The Board had requested staff to prepare a paper on issues relating to comparability of treatment between Paris Club and private sector claims in the exceptional cases in which a rescheduling by Paris Club and other official bilateral creditors is required. Directors felt that many of the questions raised by the paper were of a technical nature, but that the staff paper nevertheless provided a useful background to help advance the discussions between the staff and the Paris Club, and between the Paris Club and the private sector, on ways to address comparability of treatment and private sector involvement.

In September 2001, the Board assessed the determinants and prospects for the pace of capital market access by countries emerging from crises, a critical element of the framework for private sector involvement. Directors had a broad-ranging discussion but concluded that more theoretical and empirical work was needed before they could reach firm opinions on this complex subject. They also agreed with the staff that these assessments could not be made in a mechanical way, and that judgment and monitoring would continue to be required in each specific case.

Directors considered that improved understanding of the reasons behind the loss of market access could also provide useful indications on how countries might reaccess markets. Three determinants of market access stood out: namely, changes in global financial conditions; market contagion; and domestic economic policies. Past experience suggested that countries that lose market access as a result of adverse developments in global financial markets, or minor spillover from crises elsewhere, generally regain market access quickly as the effects of such developments pass. Some Directors stressed that domestic economic policies were often a major cause of loss of market access.

The Board considered the determinants of the restoration of market access identified in the staff paper to be a useful starting point, but stressed that the sample was limited. While noting the importance of favorable conditions in international capital markets for restoring access, Directors agreed that the single most important determinant of a country’s prospects was adopting credible corrective policies—especially corrective macroeconomic and structural policies that improved a country’s external accounts and debt sustainability. Other determinants were also considered.

Finally, many Directors stressed the need to seek greater input from market participants themselves and a better understanding of the rationale underlying their lending decisions as the IMF continued to refine its work in this area.

Work Program for Crisis Resolution

The Managing Director’s April 2002 Report to the IMFC laid out a four-point work program to strengthen the framework for crisis resolution:

  • Increasing the IMF’s capacity to assess the sustainability of a country’s debt;
  • Clarifying the IMF’s access policy;
  • Strengthening the tools available for securing the private sector’s involvement in the resolution of financial crises; and
  • Examining a more orderly and transparent legal framework for sovereign debt restructurings, as well as identifying with more clarity the considerations that should guide the availability of IMF financing during and after a restructuring.

Improving the analytical framework that the IMF uses to judge debt sustainability is essential to the IMF’s ability to respond appropriately to different crises. As outlined in the Prague framework, the IMF must strive to distinguish between those cases where a major debt restructuring, possibly involving a substantial write-down of claims, is called for; those cases where the official sector will need to encourage creditors to reach voluntary agreements to maintain their exposure to help overcome coordination problems; and cases in which it is appropriate for the IMF, in conjunction with others, to provide financing in support of the member’s adjustment program to help restore confidence and catalyze the resumption of private capital inflows. This distinction should be based solidly on an assessment of the member’s debt sustainability.

In assessing the sustainability of a member’s external and fiscal position, the focus is on a member’s ability to sustain financial and economic viability, and whether some form of debt reprofiling or restructuring is necessary to achieve that objective in the context of a well-designed program of adjustment. Sustainability analysis may not always yield unequivocal results, but the IMF is working to strengthen the analytic basis used to make an inherently difficult judgment. It is envisaged that staff would bring together in a more systematic fashion the elements that go into such a judgment, including the initial stock of actual and contingent liabilities, expected external and internal developments that will affect the debt-servicing burden, the likelihood of more adverse scenarios occurring, and the member’s capacity—including its political and institutional capacity—to adjust policies in response to shocks.

A second strand in the work program will be to clarify the policy on access to IMF resources for members facing capital account crises. In this context, it will be important to recognize that a policy on access limits in such cases must be based on the reality that the IMF’s resources are inherently limited, while the potential financing needs of a country integrated into global markets can be very large indeed, and, in some cases, are not adequately reflected in members’ quotas. The policy would specify the circumstances under which the IMF would be prepared to support a member’s policies in the event it was facing difficulties. The general direction would be that larger levels of access require stronger justification. A clearer policy on access limits should allow the IMF to provide the scale of financing needed to support members addressing their problems, while at the same time reinforcing incentives for responsible policies and prudent assessment of risk.

A third strand of the work program aims to strengthen the tools available for securing the private sector’s involvement in the resolution of financial crises within the context of the existing legal framework. One aspect of the work explores the use, in cases in which a member’s debt burden is judged to be sustainable, of financing options to help resolve financial crises and to complement the catalytic approach. The broad conclusion is that although the use of alternative financing tools under certain circumstances may help to manage crises, they need to be carefully assessed on a case-by-case basis. In each case, the benefits of these financing techniques need to be weighed against potential dangers of unsettling markets that they may affect, as well as their impact on transferring risk from sovereigns to the domestic financial system.

To contain the harmful impact of sovereign debt restructuring, efforts will be needed to limit the erosion of confidence and keep the restructuring process orderly, including through the prompt announcement of corrective policy measures and the formulation of a fair restructuring offer.

Sovereign Debt Restructuring

In the infrequent cases when countries run up unsustainable debt burdens, they need to seek a restructuring of their obligations. A shortcoming in the international financial system is the absence of a framework for the predictable and orderly restructuring of sovereign debts. There is no comprehensive mechanism for majority decision making by private creditors—a problem that is compounded when the debt includes numerous different debt instruments issued in different jurisdictions. The upshot of this collective action problem is that debt restructuring is often delayed, prolonged, and disorderly, depleting asset values of creditors and imposing severe hardship on the debtor country. This is not only damaging to the debtor and its creditors, it is also disruptive to international capital markets and to the trading partners of the debtor country.

In a February 2002 Executive Board seminar to discuss staff papers that examined complementary tools for the catalytic approach and further considerations in the restructuring of international sovereign bonds, Directors made progress on their discussion of issues relating to the involvement of the private sector in the resolution of financial crises. Directors noted that even though the recent experience with the catalytic approach had been uneven, it was useful to give early consideration to the use of such complementary tools as rollover agreements with domestic investors aimed at helping meet financing needs while policies took hold and confidence was rebuilt. Directors stressed, however, that such policies could not substitute for sound economic policies, efficient public debt management, strengthened transparency, and active debtor-creditor relations. The use of alternative financing tools to help to manage crises would have to be examined on a case-by-case basis, carefully weighing the benefits and potential costs of these techniques in the specific context of each country.

Directors noted that, notwithstanding the principle that contractual obligations should be honored, in those exceptional circumstances in which financing requirements were large and prospects for an early return to spontaneous capital market access were poor, a broad spectrum of actions might be warranted. Bondholders along with other creditors may need to contribute to the resolution of the crisis. In cases in which a member’s debt situation is not sustainable, these actions might need to include a restructuring that brought about debt and debt-service reduction so as to provide an adequately financed program.

On March 6 and March 8, 2002, the Executive Board held an informal seminar to discuss approaches to improving the legal framework for sovereign debt restructuring. They discussed two staff papers. The first—issued in November 2001—followed closely the speech by First Deputy Managing Director Anne Krueger (see Box 3.4) setting out a possible new statutory regime governing debt restructuring. The second staff paper—issued in February 2002—elaborated further on such statutory approaches and developed an approach in which the IMF played a less central role in decision making. The second paper also assessed the extent to which the use of collective action clauses in debt instruments could achieve the desired improvements in the sovereign debt restructuring process. There are pros and cons to all the options being considered, and it was recognized that substantial further consideration would be necessary before coming to concrete proposals.

The seminar highlighted a common belief among many Directors, a belief shared by management, that the existing process for restructuring sovereign debt was more prolonged, more damaging to the country and its creditors, and more unpredictable than was desirable. Both countries and their creditors would gain if stronger incentives were created for countries with unsustainable debts to address their problems rapidly, and if there were a more predictable process, in such exceptional cases, for reaching rapid agreement on a restructuring that paved the way toward the restoration of sustainability. This needed to be done without introducing incentives that might result in unnecessary defaults or broadly increasing the perceived risk of default.

The twin challenges were to develop an improved framework that could facilitate the sovereign debt restructuring process and to improve the IMF’s analytical basis for making judgments about debt sustainability. These efforts should be integrated into broader efforts to improve the effectiveness of crisis prevention and resolution. Recourse to a comprehensive debt restructuring would remain appropriate in only very limited and exceptional circumstances, consistent with the private sector involvement framework.

The staff paper for the discussion outlined broad statutory and contractual approaches for achieving these objectives: a statutory approach with enhanced IMF authority, a statutory approach based on majority action across the aggregated debts of the sovereign, and a contractual approach based on collective action clauses. The second statutory option envisages a restructuring mechanism with limited IMF involvement in the operations of the mechanism itself and where decisions on whether to give legal protection for the sovereign and provide seniority for new private financing would be left to the debtor and a qualified majority of its creditors. Although an amendment of the IMF’s Articles of Agreement could provide the statutory basis for this power, the IMF would not be empowered to make decisions that limited the enforcement of creditor rights. Rather, it would give the qualified majority of creditors the ability to accord the debtor temporary protection against legal action, strengthen the hand of the debtor and a qualified majority of its creditors against a dissident group of creditors, and perhaps most crucially, allow the entire creditor body to vote as a whole rather than instrument by instrument (which is the case with existing collective action clauses). At the same time, safeguards would be established to protect the seniority of certain claims, and procedures would need to be put in place to verify claims and ensure the integrity of the voting process.

Box 3.4FDMD Krueger Proposes a Sovereign Debt Restructuring Mechanism

Proposals for a new sovereign debt restructuring mechanism were spelled out by IMF First Deputy Managing Director Anne O. Krueger initially in a speech to the National Economists’ Club in November 2001 and then in a more developed version at the Institute for International Economics in April 2002. The proposal was also described by Ms. Krueger in a pamphlet entitled “A New Approach to Sovereign Debt Restructuring,” published in April 2002.

The First Deputy Managing Director took as her premise the growing international realization that the absence of a strong legal framework for sovereign debt restructuring generates considerable costs. First, sovereigns wait too long before seeking a restructuring, leaving both their citizens and creditors worse off. Second, when they finally do opt for restructuring, the process takes longer than needed and is less predictable than debtors and creditors would like. Ms. Krueger observed that the current international financial system lacks an established framework for an equitable debt restructuring that returns the country to sustainability.

In advancing her proposal, Ms. Krueger outlined the objective of a Sovereign Debt Restructuring Mechanism (SDRM) as being “to facilitate the orderly, predictable, and rapid restructuring of unsustainable sovereign debt.” Use of the mechanism would be for the debtor country to decide and not for the IMF or a country’s creditors to impose. The mechanism would only be invoked in very limited circumstances—specifically, when a country’s debt had become unsustainable.

Two key challenges, she said, were, first, to create incentives for debtors to address their problems promptly and, second, to create incentives for all parties to reach rapid agreement on restructuring terms. The policies of the IMF regarding the availability of its resources before, during, and after the restructuring process would play a critical role in shaping these incentives.

Under the terms of the approach outlined by Ms. Krueger, an international legal framework would be created that would allow a qualified majority of a sovereign’s creditors to approve a restructuring agreement, which would then be binding on a dissenting minority. This provision would be supported by three other features: a temporary stay on creditor litigation after a suspension of payments but before a restructuring agreement is reached; safeguards to protect creditor interests during the stay; and a mechanism to induce new financing by giving it seniority over preexisting private indebtedness during the period of the stay.

As envisaged by Ms. Krueger, an international judicial panel would be set up to arbitrate disputes and oversee voting. An amendment to the IMF’s Articles of Agreement would provide the legal basis to make an agreement binding on all creditors. Significant legal authority would not, however, be transferred to the IMF itself; the IMF would not be in the position of imposing an agreement and the essential decision-making authority would rest with the debtor and a majority of its creditors.

Inevitably, it would take time to sort through the complex issues associated with the design of a restructuring mechanism, and then, if so agreed and if there was broad-based support for the steps that it would require, to put a statutory approach in place. Contractual improvements could help before then, and, as was emphasized by several Directors, such improvements should be pursued vigorously on their own merits. The IMF will continue to explore ways in which contractual approaches to debt restructuring can be made more effective. Future work in this area would include steps that could be taken to create stronger incentives for the use of appropriate majority restructuring and majority enforcement provisions in international debt contracts. It would also include an assessment of the feasibility and market acceptability of collective action clauses that aggregate claims across instruments for voting purposes.

Finally, the Board agreed that efforts to improve the existing framework for debt restructuring should not displace other aspects of the work program on the resolution of financial crises. Improving the assessment of debt sustainability was crucial. The Board’s discussion also confirmed that an early review of access limits would be a key element in IMF efforts to improve the effectiveness of the private sector involvement framework.

In its April 2002 Communiqué, the IMFC endorsed the IMF’s work program to strengthen the existing Prague framework for crisis resolution, and in particular to provide members and markets with greater clarity and predictability about the decisions the IMF will take in a crisis.

The Committee also welcomed the consideration of innovative proposals to improve the restructuring of sovereign debt to help close a gap in the current framework. It encouraged the IMF to continue to examine the legal, institutional, and procedural aspects of two approaches, which could be complementary and self-reinforcing: a statutory approach, which would enable a sovereign debtor and a supermajority of its creditors to reach an agreement binding all creditors; and an approach, based on contract, which would incorporate comprehensive restructuring clauses in debt instruments. The Committee looked forward to reviewing progress in this area at its next meeting in fall 2002.

Combating Money Laundering and the Financing of Terrorism

Money laundering and the financing of terrorism are issues that concern countries at every stage of development, and involve both onshore and offshore financial centers. These are global problems that not only affect security, but also potentially harm economic prosperity and the international financial system.

Background

At the end of the last financial year, the Executive Boards of the IMF and the Bank considered how the two institutions might enhance their contributions to global efforts to fight money laundering. Directors recognized that more vigorous national and international efforts to counter money laundering were needed. Directors emphasized that the IMF’s involvement in this area should be confined to its core areas of competence, and confirmed that it would not be appropriate for the IMF to become involved in law enforcement activities. The Board generally agreed that the IMF should take a number of steps to enhance the international efforts to counter money laundering, including:

  • developing a methodology that would enhance the assessment of financial standards relevant for countering money laundering that could be used in reports under the Financial Sector Assessment Program;
  • working more closely with major international antimoney-laundering groups;
  • increasing the provision of technical assistance in this area;
  • including anti-money-laundering concerns in its surveillance and other operational activities when macroeconomically relevant; and
  • undertaking additional studies and publicizing the importance of countries acting to protect themselves against money laundering.

A set of similar steps was agreed to by the Bank.

Directors also generally agreed that the 40 Recommendations on anti-money laundering (AML) made by the Financial Action Task Force on Money Laundering (FATF) should be recognized as the appropriate standard for combating money laundering.4 Directors agreed that work should go forward to determine how the recommendations could be adapted and made operational to the IMF’s work, with a view toward eventually preparing related ROSCs. They noted that the FATF process needed to be made consistent with the ROSC process and once this was done, the FATF could be invited to participate in the preparation of a ROSC module on money laundering. The Board asked staff to contribute to the ongoing revisions to the FATF 40, discuss with the FATF principles underlying the ROSC procedures, and come back to the Board with a report and proposals.

Post-September 11 Board Discussion

At a November 12, 2001, Board discussion, Executive Directors welcomed the opportunity to review progress in the IMF’s work on anti-money-laundering issues and to consider the IMF’s role in combating terrorism financing in the aftermath of the attacks of September 11. They stressed that the IMF had a key role to play in combating money laundering and terrorism financing as part of international efforts to prevent the abuse of financial systems and to protect and enhance the integrity of the international financial system.

Directors acknowledged the progress achieved in implementing the measures contained in the Board’s summing up of April 13, 2001, to enhance the role of the IMF in the area of anti-money laundering. In particular, Directors noted that:

  • an AML Methodology Document had been prepared, circulated for comment, and was being piloted;
  • work was under way with FATF to adapt the FATF 40 Recommendations to the IMF’s Report on Observations of Standards and Codes process and to review and update the Recommendations; and
  • technical assistance for anti-money laundering had been intensified and in some cases extended to include, for example, the creation of financial intelligence units.

In considering how the IMF could extend its activities to limit the use of financial systems for terrorism financing, and to make its anti-money-laundering work more effective, Directors stressed that the IMF’s involvement in these areas should be consistent with its mandate and core areas of expertise. Recognizing that no single agency can resolve the problems independently, they emphasized that the IMF should adopt a disciplined and collaborative approach that respected the expertise, scope, and mandate of other institutions, and that the roles of the various institutions involved should be clarified. Directors reaffirmed that the IMF’s primary efforts should be in assessing compliance with financial supervisory principles and providing corresponding technical assistance. They confirmed, in particular, that it would be inappropriate for the IMF to become involved in law enforcement issues.

Directors generally agreed on a set of measures (later known as the IMF’s action plan) in response to the challenges facing the institution. In particular, Directors supported:

  • Expanding the IMF’s involvement beyond anti-money laundering to efforts aimed at countering terrorism financing.
  • Expanding the joint IMF/World Bank AML Methodology Document and IMF technical assistance to include aspects relating to and-terrorism financing. In addition, Directors noted that effective implementation of financial supervisory principles depends on a sound legal framework and on other institutional structures. Thus, most Directors considered it appropriate to expand coverage to legal and institutional issues in the anti-money-laundering methodology. Some Directors considered that the methodology document should eventually cover all the FATF recommendations, both the original 40 (as revised) and the additional 8 on anti-terrorist financing. Several other Directors, however, supported an evolutionary approach whereby the staff would work on expanding coverage of the assessment methodology to these issues while experience in the implementation of the current Methodology Document accumulated.
  • Applying the expanded methodology in Offshore Financial Center (OFC) assessments (the pace of which would be speeded up), as well as onshore assessments in the context of Financial Sector Assess ment Programs, though they stressed that these assessments should be done on a voluntary basis.
  • Circulating to all IMF members over time in the context of Article IV consultations a voluntary questionnaire (based on the expanded AML methodology). This exercise should be seen as a complement to and not as a substitute for FSAPs and OFC assessments, and should inform the Article IV discussions and help set priorities for technical assistance. The results of the exercise could, with the agreement of the member, be made available to the Board.
  • Enhancing the IMF’s collaboration with the Financial Action Task Force, including by working closely and rapidly with the task force on a suitable assessment process compatible with the uniform, voluntary, and cooperative nature of the ROSC exercise and by contributing to the revision of the FATF 40 Recommendations.
  • Increasing relevant IMF technical assistance—but avoiding diversion of assistance resources from their traditional uses—to correct deficiencies in countries’ anti-money-laundering and anti-terrorism-financing regimes identified in the course of FSAPs and OFC assessments; and to develop an IMF role in the coor dination of such technical assistance.
  • Undertaking further research and analysis on relevant issues, including alternative remittance and payment systems, and corporate vehicles.

Directors further agreed that a key element in combating money laundering and terrorist financing was more effective information sharing and cooperation among national authorities and international agencies. They called upon governments to create mechanisms to enable collection and sharing, including cross-border sharing of financial information with appropriate supervisory and law enforcement authorities. Directors stressed that primary responsibility for enforcement of anti-money-laundering and antiterrorism-financing measures would continue to rest with national authorities.

Directors noted the preliminary estimates of additional resources needed to undertake these tasks. They generally agreed that these estimates could be used as a basis for moving forward. Refining these estimates and including the resource impact of the extra work, together with any possible offsets, would be examined in the budget discussions for the financial year 2003.

Box 3.5Progress on Anti–Money Laundering and Combating the Financing of Terrorism During FY2002

In a joint progress report to the IMFC in April 2002 on the implementation of their intensified work on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), the IMF and the World Bank reviewed progress in developing assessment methodologies, in intensifying the assessment of members’ AML/CFT regimes and offshore financial centers, in research on informal funds transfer systems, in analysis of AML/CFT legal and institutional frameworks, and in building capacity among members (for the last, see Chapter 7 on technical assistance).

Development of AML/CFT Methodologies

Convergence on a single comprehensive AML/CFT methodology. The November 17, 2001, IMFC Communiqué called for enhancing “collaboration with the FATF on developing a global standard covering the FATF recommendations, and working to apply the standard on a uniform, cooperative, and voluntary basis.” In response to this call, and to earlier guidance, IMF and Bank staffs have intensified their consultations with the FATF. A single comprehensive methodology for assessing the FATF 40+8 Recommendations has not yet been agreed, although there is substantial convergence at the staff level.

Expanded Methodology Document, A preliminary redraft of the expanded methodology was sent for information to the Boards of the IMF and the Bank in February 2002. It extended an earlier draft: (1) combating the financing-of-terrorism elements were integrated into the assessments along with anti-money-laundering elements; (2) a separate new section was developed to address the adequacy of the legal and institutional AML/CFT framework; and (3) a section covering nonprudentially regulated financial service providers was introduced.

Simultaneously with circulating this expanded methodology to the IMF and Bank Boards, the draft was sent for comments to the standard setters (Basel Committee, IOSCO, IAIS, FATF, and the Egmont Group). As a result of consultations with standard setters, a revised version of the expanded methodology, including additional material from the FATF, was circulated to the Boards of the IMF and Bank before the Spring 2002 Meetings of the IMFC.

Intensification of AML/CFT Assessments

In FSAPs and OFC Assessments. AML/CFT issues are now being addressed in all FSAPs and OFC assessments. FSAP and OFC missions have provided the framework for raising issues and making concrete recommendations to national authorities for action to strengthen their AML/CFT regimes. Among the concerns identified in these assessments have been weak legal and regulatory frameworks for AML/CFT; ineffective implementation of AML/CFT regimes including poor industry awareness; narrow coverage of institutions; limited definition of violations under AML/CFT laws and regulations; and inadequate reporting and evaluation of suspicious activities.

Several countries have already taken actions to strengthen their AML/CFT regimes in response to IMF and Bank recommendations and the assessments conducted in FSAPs and the OFC assessment program. For example, a large offshore financial center conducted a comprehensive review of its AML / CFT policies and implemented a strong action plan to address weaknesses identified by the assessment; a major developing country enacted new AML/CFT legislation; another major developing country established a Financial Intelligence Unit and is joining the Egmont Group; and another is upgrading its supervisory capacity on AML/CFT. Further actions are being taken by a number of countries with technical assistance from the IMF and the Bank (see Chapter 7).

The OFC assessment program has been accelerated: IMF staff has agreed with jurisdictions to schedule double the number of Module 2 or Module 3 OFC assessments initiated in 2002 to 20 from the 10 assessments begun in 2001.

AML/CFT in the Context of Article TV Surveillance. Consistent with the call in the IMF Action Plan for expanded attention to AML/CFT issues in Article IV consultations, a specific questionnaire—covering legal, regulatory, supervisory, and institutional aspects of AML/CFT—has been distributed to an initial group of 38 members. Responses are voluntary. The initial group of 38 countries was selected so as to achieve representative geographical coverage, to complement assessments under FSAPs and the OFC assessment program, and to feed into the schedule of Article IV consultations.

Progress on Other Research and Analysis

Informal Funds Transfer Systems. The IMF and the Bank are conducting a study of these systems among various developed, transitional, and developing countries. The goal of the research is to study the technical details and functioning mechanisms of the systems with particular regard to their macroeconomic, financial, and regulatory implications, including their potential use for money laundering and the financing of terrorism.

The first informal funds transfer network examined was the Hawala system. The IMF-Bank fact-finding mission visited six countries (Germany, Pakistan, the Philippines, Saudi Arabia, the United Arab Emirates, and the United Kingdom). The mission examined the factors underlying the development of the Hawala system and the extent of its use as well as its economic and regulatory impact. It found that the system is largely driven by legitimate remittance activity of expatriate communities.

However, its characteristics—mainly anonymity and lack of traceability—-have made it vulnerable to criminal activities. Regulation varies considerably from country to country. Although the system is prohibited in some countries (Saudi Arabia), it is permitted by other government authorities even though not necessarily supervised. Some countries (the United Kingdom) require registration. Others (Germany) license system dealers. Further research will be conducted, including on the best way to monitor these systems and constrain their use by criminals. A final report will be prepared in time for the Fall 2002 Annual Meetings.

AML/CTT Legal and Institutional Framework. The IMF’s Legal Department has conducted a survey of the AML/CFT legal and institutional frameworks of a broad cross-section of countries using the criteria defined in the draft expanded methodology. The survey relies on publicly available documents and will form the basis for an analytical report, to be completed before the Fall 2002 Annual Meetings.

Directors believed that this package of further actions by the IMF, taken together, constituted a substantive and measured response to the global challenges by enabling the IMF to make a more useful contribution to combating money laundering and terrorist financing. They requested the staff to keep the Board informed on progress in this area, including on efforts to converge toward a single and comprehensive assessment methodology that was operational for the IMF’s work, and to prepare a progress report for the Board by the Spring 2002 Meeting of the International Monetary and Financial Committee (see Box 3.5) as well as a paper on the outcome of the enhanced work program before the 2002 Annual Meetings.

IMFC April 2002 Communiqué

At its April 2002 meeting, the IMFC underscored that international efforts to counter abuse of the international financial system to finance terrorism and launder the proceeds of illegal activities remained a priority. It was encouraged by the response by many countries to its call in November 2001 for all countries to ratify and implement fully the UN instruments to counter terrorism financing, to freeze terrorist assets, and to establish financial intelligence units and ensure the sharing of information. The Committee urged countries that had not as yet done so to fully implement and comply with these instruments. It also welcomed the substantial progress made by the IMF, in close collaboration with the World Bank, in implementing all elements of its action plan to intensify the work on anti-money laundering and combating the financing of terrorism. The Committee noted in particular the good start made in assessing gaps in national AML/CFT regimes, and fully supported the provision of technical assistance to help countries identify and address such gaps.

While reiterating the responsibility of national authorities for combating money laundering and the financing of terrorism, the Committee stressed that success will critically depend on continued vigilance and timely action at the global level. It called on the IMF to make further progress on all elements of its work program, consistent with its mandate and expertise. In particular, efforts should now focus on completing the comprehensive AML/CFT methodology, based on a global standard covering the Financial Action Task Force recommendations, and the development of assessment procedures compatible with the uniform, voluntary, and cooperative nature of the ROSC process. Enhancing the delivery of technical assistance on AML/CFT would also be crucial. The Committee urged the IMF, in cooperating with other international organizations and donor countries, to identify and respond to needs for technical assistance. It looked forward to receiving a full report on progress in this area at its next meeting in September 2002. The Committee called on members to share information on their own actions in this field.

1

An FSAP is considered complete once the FSSA has been discussed by the Executive Board and the FSAP report has been sent to the authorities.

2

Module I is an assisted self-assessment with technical assistance from experts, as needed, to help offshore financial centers assess their compliance with particular standards. Module 2 is a stand-alone IMF-led assessment of standards, and Module 3 (or FSAP) is a comprehensive assessment of risks and vulnerabilities, institutional preconditions, and standards observance prepared by the IMF.

3

Just before the September 2000 Annual Meetings in Prague, the IMF set up, at the behest of the Managing Director, a Capital Markets Consultative Group (CMCG) to foster a regular dialogue between IMF management and senior staff and representatives of the private financial sector. The C M C G meets several times a year, at various locations around the world, principally in the major financial centers. Representatives come from a range of financial institutions, including banks, investment houses, and institutional investors. All regions of the world are represented. The meetings are private and informal in nature.

4

The FATF’s 40 Recommendations are widely recognized as the key set of AML standards. These recommendations cover law enforcement, financial system regulation, and international cooperation. In October 2001, the FATF issued new international standards to combat terrorist financing, in the form of eight Special Recommendations. The "FATF 40+8" is the shorthand reference used by the FATF to cover all the Recommendations.

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