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Cleaning “Dirty” Money
Money laundering is a process that takes illicit or “dirty” money generated
from illegal activities and puts it through a cycle of transactions so that it
comes out at the end as apparently legal or “clean.” In general, the money is
generated from a range of criminal activities, such as drug trafficking, murder
for hire, theft, robbery, embezzlement and fraud. The process conceals the true
source, ownership or use of funds.
The term “money laundering” derives from the fact that gangsters in the 1920s
commingled the proceeds of their illegal operations with the basically
untraceable proceeds from coin laundries operated by the ring, thus making the
funds appear as if they been derived legitimately. Although the term may have
started in the 20th century, the practice of disguising unlawful proceeds
traces its roots back to the dawn of banking itself. For example, when the
Roman Catholic Church in medieval times banned lending money at interest,
financiers developed methods to get around this restriction.
Criminal organizations have three objectives for laundering the proceeds of
their illegal activity. These are:
To pay expenses related to their illegal
activity.
To invest their proceeds in the criminal cycle
and boost illegal activity.
Eventually, to enjoy the profits of their
criminal activity.
Today, money laundering represents an estimated 2 percent to 5 percent
of the world’s gross domestic product. Estimates of money laundering worldwide
range from $800 billion to $1.6 trillion; 47 percent of the launderers use
banks to clean dirty money. While some observers have challenged the accuracy
of these numbers, this problem is one of huge proportions even after several
years of strong lobbying by the inter-governmental Financial Action Task Force
(FATF) to assure that banks and non-bank financial institutions adopt the
FATF's Forty Recommendations on combating money laundering.
Three Stages of Money Laundering
The money-laundering process comprises three main stages:
Placement is the physical disposal of bulk cash
proceeds derived from illegal activity.
Layering is separating the illicit proceeds from
their source by creating complex layers of financial transactions.
Layering confuses the audit trail and provides anonymity.
Integration is re-injecting of the laundered
money back into the legal economy in such a way that funds re-enter the
financial system as legitimate business proceeds.
Is Terrorist Financing Similar to Money Laundering?
Terrorism financing is the process of reverse laundering, but tends to
use smaller amounts than is the case with money laundering. This process uses
funds raised from legitimate sources such as personal donations and profits
from businesses and charitable organizations, as well as from criminal sources.
Terrorists use the same money laundering techniques to evade authorities'
attention and protect the identity of their sponsors and the ultimate beneficiaries
of the funds.
Challenges in the Middle East
Fighting money laundering is not easy for any financial institution. In the Middle East, cultural customs, terrorism and smuggling
make the detection of doubtful cash transfers particularly challenging. That is
why banks and other financial institutions must be more alert in monitoring
customer activities and knowing their customers.
In order to implement a robust anti-money-laundering (AML) program in a
financial institution, senior management must support it and empower employees
to ask uncomfortable questions; set up proper controls and strictly enforce
them in order to detect suspicious transactions or activities; and make timely
reports to financial intelligence units about suspicious activities.
In some Middle Eastern countries, these obligations are often perceived as
conflicting with customer relationships and cultural customs. For example, a
bank employee who fails to discharge AML compliance responsibilities — whether
wittingly or to avoid asking a customer uncomfortable questions — can
negatively impact efforts at other institutions by not demonstrating a unified
front and by making that institution more appealing to both money launderers
and to customers who find AML obligations uncomfortable.
Financial institutions generally have decades of experience implementing AML
programs and ensuring compliance. But many Middle Eastern financial
institutions are adopting corporate cultures that weaken AML and anti-terrorist
financing efforts, or continue doing business in ways that can undermine global
AML compliance efforts.
One of the biggest problems for AML initiatives in the Middle
East is cultural customs that accept deference to customers and
anonymity. Accounts lacking full identification details or with misleading
information are not unusual in the region. Verification of customer information
is often difficult, if not impossible.
“Know your customer” is an element lacking at many Middle Eastern financial
institutions which follow local traditions of accommodating customers’
requests. Gathering customer information is generally a sensitive issue, as
customers may view banks’ requests for additional information as intrusive or
offensive. For example, it can be difficult for a bank to refuse to enter into
or to exit a relationship with a politically connected person. Doing so could
mean trouble for the staffer involved.
Lack of adequate information has a significant impact on other aspects of AML
programs, such as transaction monitoring and the bank’s ability to apply a
risk-based approach to its clientele base. Bank officials frequently claim that
they do not want to offend customers and lose business to a less law-abiding
competitor.
One region-specific challenge is that it can be very difficult to
perform a check against a sanctions lists based on a customer's name due to the
multiple available spellings of names used in the region.
Financial institutions often have a formal program in place to test the
effectiveness of their AML systems and controls. However, the quality of some
of this testing can be questionable. Internal auditors commonly carry out this
independent testing, but a major concern is whether internal auditors have
sufficient experience and knowledge to perform this testing efficiently.
Moreover, reviews often take place infrequently and some time after the event.
Challenges at the National Level The governments in the Middle East are taking steps towards enforcing
AML/counter-terrorism financing laws, regulations and guidelines. However,
there are several deficiencies in the legal and financial systems which need to
be addressed:
Although money laundering is a criminal offense,
terrorist financing is not specifically prohibited in some countries.
There is often an overreliance on suspicious
transaction reporting to generate money laundering investigations
A large informal cash economy exists, and many
financial transactions do not enter the banking system.
Cash reporting requirements are not consistently
enforced and some countries do not have currency reporting requirements
for individuals leaving the country.
Financial intelligence units have been created
in accordance with international standards, but some of them lack adequate
organization, expertise and independence.
There are deficiencies in monitoring the
operations of local charities abroad.
The presence of underground banking (Hawala)
presents a potential means for laundering funds
It is difficult to find a balance between the
privacy of individuals’ rights versus the need to protect society against
criminals and terrorists.
Recommendations for Improvement:
Implement a nationwide awareness campaign about
the risk of money laundering and terrorism financing. Such campaigns must
be able to send a strong, convincing message to the public at large that
financial institutions are implementing "know your customer” programs
with the objective of safeguarding the country and soundness of the
financial system from terrorists or criminals.
Improve the efficiency and independence of
financial intelligence units and encourage them to provide feedback on
suspicious transaction reports to reporting institutions as well as
sharing information with foreign financial intelligence units.
Improve enforcement of cross-border currency
controls, specifically allowing for seizure of suspicious cross-border
currency transfers.
Empower law enforcement and customs authorities
to examine and investigate trade-based money laundering, informal value
transfer systems and customs fraud. They should take the initiative and
proactively generate leads and investigations and be able to follow the
financial trails wherever they lead.
Update AML laws against terrorism specifically
to address the threat of terrorism financing, including asset
identification, seizure and forfeiture.
Encourage countries to ratify the UN Convention
against Transnational Organized Crime; UN International Convention for the
Suppression of the Financing of Terrorism; and UN Convention against
Corruption.
Strengthen charity oversight, especially in
overseas operations.
Implement and enforce a uniform cash declaration
policy for inbound and outbound travelers.
More needs to be done to combat both money laundering and terrorism
financing. While governments and financial institutions in the region have
taken effective and advanced steps, the political and cultural environment in
the region will continue to present challenges.
Hany Abou-El-Fotouh is Director Policy & Corporate Affairs,
CI Capital Holding – the investment banking arm of Commercial International
Bank, Egypt.
He is a leading expert on money laundering and terrorist financing controls and
corporate governance best practices in the MENA region. Founder of the Middle East Compliance Officers' Forum (MECOF), he has
been honored for his work in promoting compliance culture and awareness in the
MENA region
