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The Washing Machine - Fighting Money Laundering in the Middle East.byHANY ABOU-EL-FOTIUH

Cleaning Dirty MoneyMoney laundering is a process that takes illicit or dirty money generated fromillegal activities and puts it through a cycle of transactions so that it comes out at the end asapparently legal or clean. In general, the money is generated from a range ofcriminal activities, such as drug trafficking, murder for hire, theft, robbery, embezzlement andfraud. The process conceals the true 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 basically untraceable proceedsfrom coin laundries operated by the ring, thus making the funds appear as if they been derivedlegitimately. Although the term may have started in the 20th century, the practice of disguisingunlawful proceeds traces its roots back to the dawn of banking itself. For example, when theRoman Catholic Church in medieval times banned lending money at interest, financiersdeveloped methods to get around this restriction.

Criminal organizations have three objectives for laundering the proceeds of their illegalactivity. These are: To pay expenses related to their illegal activity. To invest their proceedsin the criminal cycle and boost illegal activity. Eventually, to enjoy the profits of their criminalactivity.

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 $1.6trillion; 47 percent of the launderers use banks to clean dirty money. While some observershave challenged the accuracy of these numbers, this problem is one of huge proportions evenafter 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 FortyRecommendations on combating money laundering.

Three Stages of Money LaunderingThe money-laundering process comprises three main stages: Placement is the physicaldisposal of bulk cash proceeds derived from illegal activity. Layering is separating the illicitproceeds from their source by creating complex layers of financial transactions. Layeringconfuses the audit trail and provides anonymity. Integration is re-injecting of the launderedmoney back into the legal economy 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 use smaller amounts

than is the case with money laundering. This process uses funds raised from legitimatesources 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

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evade authorities attention and protect the identity of their sponsors and the ultimatebeneficiaries of the funds.

Challenges in the Middle EastFighting money laundering is not easy for any financial institution. In the Middle East, culturalcustoms, terrorism and smuggling make the detection of doubtful cash transfers particularlychallenging. That is why banks and other financial institutions must be more alert in monitoringcustomer 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 oractivities; and make timely reports to financial intelligence units about suspicious activities.

In some Middle Eastern countries, these obligations are often perceived as conflicting withcustomer relationships and cultural customs. For example, a bank employee who fails todischarge AML compliance responsibilities whether wittingly or to avoid asking acustomer uncomfortable questions can negatively impact efforts at other institutionsby not demonstrating a unified front and by making that institution more appealing to bothmoney launderers and to customers who find AML obligations uncomfortable.

Financial institutions generally have decades of experience implementing AML programs andensuring compliance. But many Middle Eastern financial institutions are adopting corporatecultures that weaken AML and anti-terrorist financing efforts, or continue doing business inways that can undermine global AML compliance efforts.

One of the biggest problems for AML initiatives in the Middle East is cultural customs thataccept deference to customers and anonymity. Accounts lacking full identification details orwith 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 financialinstitutions which follow local traditions of accommodating customers' requests. Gatheringcustomer information is generally a sensitive issue, as customers may view banks' requests foradditional information as intrusive or offensive. For example, it can be difficult for a bank torefuse to enter into or to exit a relationship with a politically connected person. Doing so couldmean 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 itsclientele base. Bank officials frequently claim that they do not want to offend customers andlose business to a less law-abiding competitor.

One region-specific challenge is that it can be very difficult to perform a check against asanctions lists based on a customer's name due to the multiple available spellings of namesused in the region.

Financial institutions often have a formal program in place to test the effectiveness of theirAML 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 whetherinternal 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

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The governments in the Middle East are taking steps towards enforcing AML/counter-terrorismfinancing laws, regulations and guidelines. However, there are several deficiencies in the legaland financial systems which need to be addressed: Although money laundering is a criminaloffense, terrorist financing is not specifically prohibited in some countries. There is often anoverreliance on suspicious transaction reporting to generate money laundering investigationsA large informal cash economy exists, and many financial transactions do not enter thebanking system. Cash reporting requirements are not consistently enforced and somecountries do not have currency reporting requirements for individuals leaving the country.

Financial intelligence units have been created in accordance with international standards, butsome of them lack adequate organization, expertise and independence. There aredeficiencies in monitoring the operations of local charities abroad. The presence ofunderground banking (Hawala) presents a potential means for laundering funds It is difficult tofind a balance between the privacy of individuals' rights versus the need to protect societyagainst criminals and terrorists.

Recommendations for Improvement: Implement a nationwide awareness campaign aboutthe risk of money laundering and terrorism financing. Such campaigns must be able to send astrong, convincing message to the public at large that financial institutions are implementingknow your customer programs with the objective of safeguarding the countryand soundness of the financial system from terrorists or criminals. Improve the efficiency andindependence of financial intelligence units and encourage them to provide feedback onsuspicious transaction reports to reporting institutions as well as sharing information withforeign financial intelligence units. Improve enforcement of cross-border currency controls,specifically allowing for seizure of suspicious cross-border currency transfers. Empower lawenforcement and customs authorities to examine and investigate trade-based moneylaundering, informal value transfer systems and customs fraud. They should take the initiativeand proactively generate leads and investigations and be able to follow the financial trailswherever they lead. Update AML laws against terrorism specifically to address the threat ofterrorism financing, including asset identification, seizure and forfeiture. Encourage countries

to ratify the UN Convention against Transnational Organized Crime; UN InternationalConvention for the Suppression of the Financing of Terrorism; and UN Convention againstCorruption. Strengthen charity oversight, especially in overseas operations. Implement andenforce a uniform cash declaration policy for inbound and outbound travelers.

More needs to be done to combat both money laundering and terrorism financing. Whilegovernments 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.

About The Author

Hany Abou-El-Fotouh is Director Head of Policy & Corporate Affairs / Board Secretary, CICapital Holding - the investment banking arm of Commercial International Bank which is thelargest private bank in Egypt . He provides advice and direction to the Board and managementwith respect to corporate governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the MENAregion. Founder of the Middle East Compliance Officers Forum (MECOF), he hasbeen honored for his work in promoting compliance culture and awareness in the MENA region

Hany writes articles to different newspapers and journals on a variety of subjects. He is apublic speaker and professional trainer. Previously, he worked in various senior positions inleading banks in Egypt and GCC countries like HSBC, Oman International Bank, Banque

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Saudi Fransi among others

Hany is a certified member of the Association of Certified Anti-Money Laundering Specialists(ACAMS) and Certified Director by Egyptian Institute of Directors

Tags: money laundering, compliance, middle east,

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