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The Washing Machine

The Washing Machine

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Published by hanyfotouh649

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Published by: hanyfotouh649 on Apr 11, 2009
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06/26/2010

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The Washing Machine - Fighting Money Laundering in theMiddle East.
By Hany Abou-El-Fotouh
, CAMS, CDIR 
Cleaning “Dirty” Money
Money laundering is a process that takes illicit or “dirty” money generatedfrom illegal activities and puts it through a cycle of transactions so that itcomes out at the end as apparently legal or “clean.” In general, the money isgenerated from a range of criminal activities, such as drug trafficking, murder for hire, theft, robbery, embezzlement and fraud. The process conceals thetrue source, ownership or use of funds.The term “money laundering” derives from the fact that gangsters in the 1920scommingled the proceeds of their illegal operations with the basicallyuntraceable proceeds from coin laundries operated by the ring, thus makingthe funds appear as if they been derived legitimately. Although the term mayhave started in the 20th century, the practice of disguising unlawful proceedstraces its roots back to the dawn of banking itself. For example, when theRoman 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 worldwiderange from $800 billion to $1.6 trillion; 47 percent of the launderers use banksto clean dirty money. While some observers have challenged the accuracy of these numbers, this problem is one of huge proportions even after severalyears of strong lobbying by the inter-governmental Financial Action TaskForce (FATF) to assure that banks and non-bank financial institutions adoptthe FATF's Forty Recommendations on combating money laundering.
Three Stages of Money Laundering
The money-laundering process comprises three main stages:1.Placement is the physical disposal of bulk cash proceeds derived fromillegal activity.2.Layering is separating the illicit proceeds from their source by creatingcomplex layers of financial transactions. Layering confuses the audittrail and provides anonymity.
 
3.Integration is re-injecting of the laundered money back into the legaleconomy in such a way that funds re-enter the financial system aslegitimate business proceeds.
Is Terrorist Financing Similar to Money Laundering?
Terrorism financing is the process of reverse laundering, but tends to usesmaller amounts than is the case with money laundering. This process usesfunds raised from legitimate sources such as personal donations and profitsfrom businesses and charitable organizations, as well as from criminalsources. Terrorists use the same money laundering techniques to evadeauthorities' attention and protect the identity of their sponsors and the ultimatebeneficiaries of the funds.
Challenges in the Middle East
Fighting money laundering is not easy for any financial institution. In theMiddle 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 andknowing their customers.In order to implement a robust anti-money-laundering (AML) program in afinancial institution, senior management must support it and empower employees to ask uncomfortable questions; set up proper controls and strictlyenforce them in order to detect suspicious transactions or activities; and maketimely reports to financial intelligence units about suspicious activities.In some Middle Eastern countries, these obligations are often perceived asconflicting with customer relationships and cultural customs. For example, abank 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 aunified front and by making that institution more appealing to both moneylaunderers and to customers who find AML obligations uncomfortable.Financial institutions generally have decades of experience implementing AMLprograms and ensuring compliance. But many Middle Eastern financialinstitutions are adopting corporate cultures that weaken AML and anti-terroristfinancing efforts, or continue doing business in ways that can undermineglobal AML compliance efforts.One of the biggest problems for AML initiatives in the Middle East is culturalcustoms that accept deference to customers and anonymity. Accounts lackingfull identification details or with misleading information are not unusual in theregion. Verification of customer information is often difficult, if not impossible.“Know your customer” is an element lacking at many Middle Eastern financialinstitutions which follow local traditions of accommodating customers’requests. Gathering customer information is generally a sensitive issue, ascustomers 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 toexit a relationship with a politically connected person. Doing so could meantrouble for the staffer involved.Lack of adequate information has a significant impact on other aspects of AMLprograms, such as transaction monitoring and the bank’s ability to apply arisk-based approach to its clientele base. Bank officials frequently claim thatthey do not want to offend customers and lose business to a less law-abidingcompetitor.One region-specific challenge is that it can be very difficult to perform a checkagainst a sanctions lists based on a customer's name due to the multipleavailable spellings of names used in the region.Financial institutions often have a formal program in place to test theeffectiveness of their AML systems and controls. However, the quality of someof this testing can be questionable. Internal auditors commonly carry out thisindependent testing, but a major concern is whether internal auditors havesufficient experience and knowledge to perform this testing efficiently.Moreover, reviews often take place infrequently and some time after theevent.
Challenges at the National Level
The governments in the Middle East are taking steps towards enforcingAML/counter-terrorism financing laws, regulations and guidelines. However,there are several deficiencies in the legal and financial systems which need tobe addressed:
Although money laundering is a criminal offense, terrorist financing isnot specifically prohibited in some countries.
There is often an overreliance on suspicious transaction reporting togenerate money laundering investigations
A large informal cash economy exists, and many financial transactionsdo not enter the banking system.
Cash reporting requirements are not consistently enforced and somecountries do not have currency reporting requirements for individualsleaving the country.
Financial intelligence units have been created in accordance withinternational standards, but some of them lack adequate organization,expertise and independence.
There are deficiencies in monitoring the operations of local charitiesabroad.
The presence of underground banking (Hawala) presents a potentialmeans for laundering funds
It is difficult to find a balance between the privacy of individuals’ rightsversus the need to protect society against criminals and terrorists.
Recommendations for Improvement:

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