| The term "money laundering" derives from the | | | | many Middle Eastern financial institutions which |
| fact that gangsters in the 1920s commingled the | | | | follow local traditions of accommodating |
| proceeds of their illegal operations with the | | | | customers' requests. Gathering customer |
| basically untraceable proceeds from coin laundries | | | | information is generally a sensitive issue, as |
| operated by the ring, thus making the funds | | | | customers may view banks' requests for |
| appear as if they been derived legitimately. | | | | additional information as intrusive or offensive. For |
| Although the term may have started in the 20th | | | | example, it can be difficult for a bank to refuse to |
| century, the practice of disguising unlawful | | | | enter into or to exit a relationship with a politically |
| proceeds traces its roots back to the dawn of | | | | connected person. Doing so could mean trouble |
| banking itself. For example, when the Roman | | | | for the staffer involved. |
| Catholic Church in medieval times banned lending | | | | Lack of adequate information has a significant |
| money at interest, financiers developed methods | | | | impact on other aspects of AML programs, such |
| to get around this restriction. | | | | as transaction monitoring and the bank's ability to |
| Criminal organizations have three objectives for | | | | apply a risk-based approach to its clientele base. |
| laundering the proceeds of their illegal activity. | | | | Bank officials frequently claim that they do not |
| These are:o To pay expenses related to their | | | | want to offend customers and lose business to a |
| illegal activity.o To invest their proceeds in the | | | | less law-abiding competitor. |
| criminal cycle and boost illegal activity.o Eventually, | | | | One region-specific challenge is that it can be very |
| to enjoy the profits of their criminal activity. | | | | difficult to perform a check against a sanctions |
| Today, money laundering represents an estimated | | | | lists based on a customer's name due to the |
| 2 percent to 5 percent of the world's gross | | | | multiple available spellings of names used in the |
| domestic product. Estimates of money laundering | | | | region. |
| worldwide range from $800 billion to $1.6 trillion; | | | | Financial institutions often have a formal program |
| 47 percent of the launderers use banks to clean | | | | in place to test the effectiveness of their AML |
| dirty money. While some observers have | | | | systems and controls. However, the quality of |
| challenged the accuracy of these numbers, this | | | | some of this testing can be questionable. Internal |
| problem is one of huge proportions even after | | | | auditors commonly carry out this independent |
| several years of strong lobbying by the | | | | testing, but a major concern is whether internal |
| inter-governmental Financial Action Task Force | | | | auditors have sufficient experience and knowledge |
| (FATF) to assure that banks and non-bank | | | | to perform this testing efficiently. Moreover, |
| financial institutions adopt the FATF's Forty | | | | reviews often take place infrequently and some |
| Recommendations on combating money | | | | time after the event. |
| laundering. | | | | Challenges at the National Level |
| Three Stages of Money Laundering | | | | The governments in the Middle East are taking |
| The money-laundering process comprises three | | | | steps towards enforcing AML/counter-terrorism |
| main stages: | | | | financing laws, regulations and guidelines. However, |
| 1. Placement is the physical disposal of bulk cash | | | | there are several deficiencies in the legal and |
| proceeds derived from illegal activity. | | | | financial systems which need to be addressed:o |
| 2. Layering is separating the illicit proceeds from | | | | Although money laundering is a criminal offense, |
| their source by creating complex layers of | | | | terrorist financing is not specifically prohibited in |
| financial transactions. Layering confuses the audit | | | | some countries.o There is often an overreliance |
| trail and provides anonymity. | | | | on suspicious transaction reporting to generate |
| 3. Integration is re-injecting of the laundered | | | | money laundering investigationso A large informal |
| money back into the legal economy in such a | | | | cash economy exists, and many financial |
| way that funds re-enter the financial system as | | | | transactions do not enter the banking system.o |
| legitimate business proceeds. | | | | Cash reporting requirements are not consistently |
| Is Terrorist Financing Similar to Money Laundering? | | | | enforced and some countries do not have |
| Terrorism financing is the process of reverse | | | | currency reporting requirements for individuals |
| laundering, but tends to use smaller amounts than | | | | leaving the country.o Financial intelligence units |
| is the case with money laundering. This process | | | | have been created in accordance with international |
| uses funds raised from legitimate sources such as | | | | standards, but some of them lack adequate |
| personal donations and profits from businesses | | | | organization, expertise and independence.o There |
| and charitable organizations, as well as from | | | | are deficiencies in monitoring the operations of |
| criminal sources. Terrorists use the same money | | | | local charities abroad.o The presence of |
| laundering techniques to evade authorities' | | | | underground banking (Hawala) presents a potential |
| attention and protect the identity of their | | | | means for laundering fundso It is difficult to find a |
| sponsors and the ultimate beneficiaries of the | | | | balance between the privacy of individuals' rights |
| funds. | | | | versus the need to protect society against |
| Challenges in the Middle East | | | | criminals and terrorists. |
| Fighting money laundering is not easy for any | | | | Recommendations for Improvement:o Implement |
| financial institution. In the Middle East, cultural | | | | a nationwide awareness campaign about the risk |
| customs, terrorism and smuggling make the | | | | of money laundering and terrorism financing. Such |
| detection of doubtful cash transfers particularly | | | | campaigns must be able to send a strong, |
| challenging. That is why banks and other financial | | | | convincing message to the public at large that |
| institutions must be more alert in monitoring | | | | financial institutions are implementing "know your |
| customer activities and knowing their customers. | | | | customer" programs with the objective of |
| In order to implement a robust | | | | safeguarding the country and soundness of the |
| anti-money-laundering (AML) program in a financial | | | | financial system from terrorists or criminals.o |
| institution, senior management must support it | | | | Improve the efficiency and independence of |
| and empower employees to ask uncomfortable | | | | financial intelligence units and encourage them to |
| questions; set up proper controls and strictly | | | | provide feedback on suspicious transaction |
| enforce them in order to detect suspicious | | | | reports to reporting institutions as well as sharing |
| transactions or activities; and make timely reports | | | | information with foreign financial intelligence units.o |
| to financial intelligence units about suspicious | | | | Improve enforcement of cross-border currency |
| activities. | | | | controls, specifically allowing for seizure of |
| In some Middle Eastern countries, these obligations | | | | suspicious cross-border currency transfers.o |
| are often perceived as conflicting with customer | | | | Empower law enforcement and customs |
| relationships and cultural customs. For example, a | | | | authorities to examine and investigate trade-based |
| bank employee who fails to discharge AML | | | | money laundering, informal value transfer |
| compliance responsibilities - whether wittingly or to | | | | systems and customs fraud. They should take |
| avoid asking a customer uncomfortable questions | | | | the initiative and proactively generate leads and |
| - can negatively impact efforts at other | | | | investigations and be able to follow the financial |
| institutions by not demonstrating a unified front | | | | trails wherever they lead.o Update AML laws |
| and by making that institution more appealing to | | | | against terrorism specifically to address the threat |
| both money launderers and to customers who | | | | of terrorism financing, including asset identification, |
| find AML obligations uncomfortable. | | | | seizure and forfeiture.o Encourage countries to |
| Financial institutions generally have decades of | | | | ratify the UN Convention against Transnational |
| experience implementing AML programs and | | | | Organized Crime; UN International Convention for |
| ensuring compliance. But many Middle Eastern | | | | the Suppression of the Financing of Terrorism; |
| financial institutions are adopting corporate cultures | | | | and UN Convention against Corruption.o |
| that weaken AML and anti-terrorist financing | | | | Strengthen charity oversight, especially in |
| efforts, or continue doing business in ways that | | | | overseas operations.o Implement and enforce a |
| can undermine global AML compliance efforts. | | | | uniform cash declaration policy for inbound and |
| One of the biggest problems for AML initiatives in | | | | outbound travelers. |
| the Middle East is cultural customs that accept | | | | More needs to be done to combat both money |
| deference to customers and anonymity. Accounts | | | | laundering and terrorism financing. While |
| lacking full identification details or with misleading | | | | governments and financial institutions in the region |
| information are not unusual in the region. | | | | have taken effective and advanced steps, the |
| Verification of customer information is often | | | | political and cultural environment in the region will |
| difficult, if not impossible. | | | | continue to present challenges. |
| "Know your customer" is an element lacking at | | | | |