money laundry new-hong kong

8/14/2019 Money laundry New-Hong Kong

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Challenge In MoneyLaundering

By: Dr Gholamhossein Davani

Member of High Council of Iranian Association Of Certified Accountants(IACPA)

IMA,AAA,IIA,CFE,BAA,EAA,CAAA,AIA,FMA

Chairman of Dayarayan Auditing&Finanacial Services Firm (Provisional member of RSMInternational)


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Challenge In MoneyLaundering

Part one


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Money Laundering

Money laundering is all about deception. Its aim is todeceive the authorities as to the origination, existenceand/or application of illegal sources of income and thesubsequent processing of that income to make it appear tohave been legitimately earned. Money laundering plays afundamental role in facilitating the ambitions of the drugtrafficker, the terrorist, the organized criminal, the insidedealer, the tax evader as well as the many others whoneed to avoid the kind of attention from the authoritiesthat sudden wealth brings from illegal activities. This'facility' is the placing of the proceeds of such activities

beyond the reach of asset forfeiture laws.


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Money laundering is the process by which theproceeds of crime, and the true ownership of thoseproceeds, is changed so that the proceeds appear tocome from a legitimate source.

The ability to launder the proceeds of crime is vitalto the success of criminal operations. Anti MoneyLaundering (AML) laws and systems are aimed atpreventing criminals from being able to benefit fromtheir actions, and at taking the profit out of crime.

What is money laundering?


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The term "Money laundering" is often said to have originateat the time of the famous American gangsters that aroseoriginally out of Prohibition - the banning of alcoholic drinks.Several mechanisms were used to disguise the origins of thelarge amounts of money generated by the import and sale oalcohol and other "rackets" such as gambling, some of whichwas illegal.

Ironically, one of the methods of concealing the source ofthe money was legal gambling. The major headache thatgangsters faced was that the money was in cash, often insmall denomination coins. If the coins were put into thebank, the questions would be asked. But the storage of largeamounts of money in low value coins is a storage nightmare.So they created businesses, one of which was slot machines,

and another of which was laundries - so, it is said, that theterm "Money laundry" was born.


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Money laundry is considered one of the mostserious financial crimes due to its differenteffects on the mental, economic, social and

ethical aspects whether on the level ofindividuals, society or institutions. It is one ofthe most complicated economic problems.Balance and settlement are the basiccomponents in achieving a luxurious society.Any phenomenon that affects balance and

settlement will affect the future of the societysdevelopment and progress. .


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Organized Crime in the21.Century

The trans-national problem

International problem Dynamical problem Material technical problem Global problem


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Why Study Money Laundering?Governments are now realizing that the pursuitand confiscation of illegal monies from crime is aseffective a way of attacking crime as arresting the

felons, perhaps even more so given that manydrug barons are able to continue to conductbusiness from their prison cells e.g. Pablo Escobar.So by seizing the rewards from crime it is hopedthat such rent seeking activity is discouraged. Theextent to which money laundering enablescriminals to engage in activities harmful to theeconomy validates its study so as to prevent suchactivity.


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Most financial institutions are unaware of theextent to which the world financial markets andbanking system are being used to process illegalmonies. Banks and financial institutions are atrisk from being used for such activities as failure

to observe their new legal responsibilities incombating money laundering leaves many ofthem open to criminal prosecution and thesubsequent adverse publicity.


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Therefore the study of money laundering as ameans to countering crime, which imposes hugeeconomic resource costs on society and threatensthe proper functioning of the economy, as well asthreatening the stability of the banking system, is

a fully justified area of research.


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It should be noted that money laundering is not merelyconfined to criminals. Many governments and theiragencies engage in money laundering activities to providea cover for various covert operations. The CentralIntelligence Agency (CIA) is known to have used money

laundering to forward money to support the Iran-ContraRebels, while the British Government use of it in the MatrixChurchill Affair is widely known. However the size of suchactivities is dwarfed by illegal ones.


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Money laundry generally means a group ofprocedures, methods or means that aim at hidingthe real source of the money or possessions whichcome from criminal acts so that this money becomes

legitimate and is used again in the economy.Generally speaking, the financial sector could be themost influenced sectors by the operations of moneylaundry. This is because this sector is the mediumused by money launderers to hide the real source ofthe money and its profits.


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Some researchers define money laundry as the operation oftransferring and transporting money, which has been gained byillegal methods, has evaded legal obligations, or has any other

form of keeping wealth, to cover up its source. In Islamiccountries religious charities are involve in economic activitiesspecially illegally and black market business.


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The Money Laundering Cycle

Money laundering is the process thatdisguises illegal profits without compromisingthe criminals who wish to benefit from theproceeds. There are two reasons whycriminals -- whether drug traffickers,

corporate embezzlers or corrupt publicofficials -- have to launder money: the moneytrail is evidence of their crime and the moneyitself is vulnerable to seizure and has to beprotected. Regardless of who uses the

apparatus of money laundering, theoperational principles are essentially thesame.


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Stages of Money Laundry

Placement:It represents placing the dirty money into the financial or banksystem by deposits. They are placed in different accounts inone or more banks whether in one or more countries.

Layering:It means hiding the real source of this money, separating itfrom its suspicious source and giving it a legal and honestcover. Then, it is to be transported to professionalcompanies. The money, thus, will be legally good for use ineconomic projects.

Integration:This last stage represents giving the legal quality to the illegalmoney. It will be ready for investment for it will not be easy

to discover it except by secret investigation throughcomplicated channels.


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Organized Crime

Criminal groups have established internationalnetworks to carry out their activities moreeffectively through sophisticated technology

and by exploiting today's open borders. TheGlobal Programme against TransnationalOrganized Crime maps the latest trends amongorganized criminal groups and highlights theirpotential worldwide danger so that preventiveaction can take place.


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Organized crime can be categorized:Theft and Fraud:

Victimizing business:- Hijacking of cargo trucks- robbery- Bankruptcy fraud (also known as "bust-out")- Insurance fraud- stock fraud (Inside trading)

Victimizing individual persons:

- Car theft (either for dismantling at Chop shops" or for export- burglary- Credit cards- stock fraud (pump and dump" scam)

Victimizing state:- bid-rigging public projects

- money counterfeiting- smuggling, manufacturing illegally (counterfeiting) or tradingin untaxed alcohol (bootlegging) or cigarettes (buttlegging)

- providing immigrant workers to avoid taxes


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Providing illegal services and goods:- Loansharking- Gambling- Prostitution- Pornography

- Drug trafficking- Weapons trafficking- Murder for hire- Toxic waste dumping (in Japan)- People smuggling- Trafficking in human beings

Business and labor racketeering:- casino skimming (in Las Vegas)- setting up monopolies in rigid market low-tech industries (e.g.

garbage collecting, cement pouring)- bid-rigging-abusing labor unions (in eastern USA):

extortion (e.g. construction, transport, garment industry,longshoremen)getting "no-show" and "no-work" jobsusing non-union labor and pocketing the wage difference

- monopolizing the supply of immigrant workers with theassociated people smuggling (Russian-Estonian Obtshak inFinland)

Money laundering


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Groups and of post-conflict and transitionalsocieties

TerrorismTerrorism constitutes a threat to internationalpeace and security, and it is contrary to thepurposes and principles of the United Nations.UNODC's Global Programme against Terrorism isan integral part of the United Nations' collectiveaction against terrorism. The Programme,working closely with the Counter-TerrorismCommittee of the Security Council, provides

technical assistance to Member States andpromotes international cooperation againstterrorism.


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Cronyism and crony capitalism Bribery Nepotism

Political Sleaze (UK Politics) Rent seeking Lobbying without public scrutiny Kleptocracy- a government so corrupt that no

pretense of honesty remains

Forms or aspects ofcorruption


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Political scandals of the United States Hired Trucking Scandal Corruption scandals in the Paris region Illegal Logging

Tangentopoli Corruption in Latin America Corruption in South Korea& Russian Sponsorship scandal

Examples of corruption


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Trafficking in Human Beings

The smuggling of migrants and the trafficking of humanbeings for prostitution and slave labour have become twoof the fastest growing worldwide problems in recent years.

The Global Programme against Trafficking in HumanBeings will enable countries of origin, transit anddestination to develop joint strategies and practical action

against the trade in human beings.


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The Mafia, also referred to in Italian as Cosa Nostra,which is generally translated this thing of ours in theItalian language, is an organized criminal secret society

which evolved in mid-19th century Sicily. An offshootemerged on the East Coast of the United States duringthe late 19th century following waves of Italianimmigration to that country.

A member of the mafia is called in Italian a mafioso, anthe plural is mafiosi. In Sicilian the word is mafiusu and

mafiusi, respectively. Mafiosi like to think of themselvesas a special society of "men of honor". "Mafia" is often used by extension to refer to any large

group of people engaged in criminal racketeeringactivities, such as the Russian Mafia, Mexican Mafia,

Japanese Yakuza, Irish Mob, Chinese Triads, Indian

mafia, and the allegedly extinct Indian Thuggee.


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The Russian Mafia "Red Mafia" is a name givenabroad to groups of organized criminals of various

ethnicity which appeared from the Soviet Union afterits disintegration. Apart from ethnic Russians, theterm comprises the Chechen, the Georgian, theUkrainian, the Armenian, the Azeri mafiosi, as well asso called "mafia" groups from other former USSRrepublics. [For sake of the article, the terms "mafia"and "mafiya" will both be used.]

The Russian Mafia appears to be organized in similarways to the legendary Italian mafia. It is believed,however, to be a very loose organization with internalfeuds and murders being commonplace.

A particularly brutal practice rumored to be utilized bythe Russian Mafia is the killing of not only of theindividual who has "snitched" or turned against theOrganizatsiya, but also the individual's family.


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Many of the bosses and main members of theRussian mafia are believed to be ex-Soviet Armyand ex-KGB officers who lost their posts in thereduction of forces that began in 1993 after theend of the Cold War. It is also believed that many

of the groups' enforcers are ex-Russian Spetsnazspecial forces, an organisation renowned for itsbrutality. Russian mobsters recruit sportsmen, too- boxers, martial artists, weightlifters, [as fundingfor sports had decreased sharply] and otherolympic athletes. In some cases, the RussianMafiya has recruited olympic sharpshooters tocarry out hits.


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Known Russian Mafia Personalities Zeev "Zevik" Rosenstein (extradited to the U.S. from Israel)

Viktor Bout (former KGB Major turned arms merchant) Konstantin Golikov(notorious assassin, now has been killed) Sergei Mikhas Mikhailov Grigory Lushansky (leader of Nordex) Evsei "Little Don" Agron (killed) Ludwig "Tarzan" Fainberg (incarcerated in an Israeli prison)

Valentin Chpelivia (involved in the Kremlingate according to LucyKomisar)

Vyacheslav "Yaponchik" Ivankov (incarcerated in an Americanprison)

Alimzhan Tokhtakhounov (accused of fixing figure skating at the2002 Salt Lake City Olympics).

Sergei Belov (Boss of eurocorp)

Factors that affect mone


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Factors that affect moneylaundry are divided into two

types1- Factors that contribute in its appearance.

Examples: confusion that affects the localeconomy, weak economic policies which areused, chaos that accompanies economic and

security imbalances.

2- Factors that contribute in its increase.Examples :open-door policies, distorting thecontinued economic frame, open-door relation

with international monetary markets. Theinternational markets lead to money laundryprosperity by 25% of the size of operations whichreached to US$250 billion per year.


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Effects on politics, administration, andinstitutions

Corruption poses a serious development challenge. In thepolitical realm, it undermines democracy and goodgovernance by flouting or even subverting formalprocesses. Corruption in elections and in legislative

bodies reduces accountability and distorts representationin policymaking; corruption in the judiciary compromisesthe rule of law; and corruption in public administrationresults in the unfair provision of services. More generally,corruption erodes the institutional capacity of

government as procedures are disregarded, resourcesare siphoned off, and public offices are bought and sold.At the same time, corruption undermines the legitimacyof government and such democratic values as trust andtolerance

Money Laundry Effects


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Economic effects

Corruption also undermines economic development by

generating considerable distortions and inefficiency. In theprivate sector, corruption increases the cost of businessthrough the price of illicit payments themselves, themanagement cost of negotiating with officials, and the riskof breached agreements or detection. Although some claimcorruption reduces costs by cutting red tape, the availabilityof bribes can also induce officials to contrive new rules and

delays. Where corruption inflates the cost of business, it alsodistorts the playing field, shielding firms with connectionsfrom competition and thereby sustaining inefficient firms.

Corruption also generates economic distortions in the publicsector by diverting public investment into capital projectswhere bribes and kickbacks are more plentiful. Officials mayincrease the technical complexity of public sector projects to

conceal or pave way for such dealings, thus furtherdistorting investment. Corruption also lowers compliancewith construction, environmental, or other regulations,reduces the quality of government services andinfrastructure, and increases budgetary pressures ongovernment.


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Economists argue that one of the factors behind thediffering economic development in Africa and Asia is thatin the former, corruption has primarily taken the form ofrent extraction with the resulting financial capital movedoverseas rather invested at home (hence the

stereotypical, but sadly often accurate, image of Africandictators having Swiss bank accounts). Corruptadministrations in Middle East like Iran have often taken acut on everything (requiring bribes), but otherwiseprovided more of the conditions for development


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Measuring corruption Measuring corruption - in the statistical sense - is naturally not a

straight-forward matter, since the participants are generally notforthcoming about it. Transparency International, the leading anti-corruption NGO, provides three measures, updated annually: a

Corruption Perceptions Index (based on experts' opinions of howcorrupt different countries are); a Global Corruption Barometer(based on a survey of general public attitudes toward and experienceof corruption); and a Bribe Payers Survey, looking at the willingnessof foreign firms to pay bribes. Transparency International alsopublishes the Global Corruption Report. The World Bank collects arange of data on corruption, including a set of Governance Indicators.

Transparency International has performed perception surveys from

time to time. The 10 least corrupt countries, according to oneconducted in 2005, are (in alphabetical order): Australia, Austria,Denmark, Finland, Iceland, New Zealand, Norway, Singapore,Sweden, and Switzerland.

According to the same survey, the 9 most corrupt countries are (inalphabetical order): Angola, Bangladesh, Chad, Cte d'Ivoire,Equatorial Guinea, Haiti, Myanmar, Nigeria, and Turkmenistan

The rank of Iran for 2005 was 92

However, the value of that survey is disputed, as it is based onsubjective perceptions. Sophisticated technology may be available tothose countries considered by the public as "least corrupt" to concealcorruption from public view or disguise it as legitimate dealings.

According to independed research Tehran,Mashhad,Shiraz andIsfehan are the four most corrupt states within the Iran.


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Sources of illegal Money Money laundry is considered a complicated operation that has

multiple sources. There are activities that seem to be the sources ofmoney laundry, such as:- Smuggling goods without paying duties.- Trafficking in illegal and immoral goods and services.- Trafficking in human captives through kidnapping persons to get

ransoms or benefits.- Bribes and administrative corruption and benefiting from public

jobs.- Tax evasion and hiding the sources of profit.- Commissions gained by individuals or projects in return for striking

big bargains in return for facilities and speed by ignoring timesand conditions.

- Incomes from fraudulence, deception and forgery of documents.- Trade fraud, trading spoiled goods, foreign trademarks counterfeit,

stealing mental creativity and abusing individual ownership.- Embezzlement and stealing from public property under the pretextof reconstruction, projects or security reasons. Making use ofofficial authorities to transfer money to the pocket of specificindividuals instead of actually building schools or establishingprojects.


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The Magnitude of MoneyLaundering

By its deceptive nature, the full extent of money laundering is unknown;estimates range from $500 billion to $1500 billion( US banks launder over$500 billion a year in dirty money)That is $5 trillion over 10 years. Internationally the figure is $1.5 trillion ayear.

The main bulk of monies to be laundered originate from the narcoeconomyand so by estimating the size of the narcoeconomy a good approximation ofthe size of global money laundering may be achieved.

The Financial Action Task Force, (FATF), established in 1989 by the G7 and

European Community to assess the problem of money laundering andprevent the financial system being used for its purposes, estimated in 1990that in the US and Western Europe drug trafficking generated $85 billionannually from laundering and investment. Thus almost $233 million in drugmoney is available daily for laundering. The task force concluded in 1990that, in the US and Western Europe, drug traffickers' profits probably yielded$232,115 per minute. One can get a feel for the size of the narcoeconomy bythe fact that in 1990 approximately 20 per cent of Peru's Gross NationalProduct was generated by narcotics, whereas legitimate exports accounted

for only 14 per cent.


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In America, Citibank is the biggest moneylaunderer followed by JP Morgan Chase. Not onlydo they set up offshore accounts for their clients,

they also launder trillions of dollars throughcorrespondent banking. That's when a bankopens a correspondent account with an existingUS bank and through that account offers services,which are bookkeeping entries.


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What is the Government's strate?

It is difficult to estimate how much money is laundered in theIRAN every year, but it is likely to be $5-6 billions . Moneylaundering is also a global problem. At one end of the scale itcan involve the very simple conversion of criminal proceedsand at the other, the routing of complex transactions throughmany countries to disguise the illegal origin of the money.Accordingly AML in Iran controls have to be international if theyare to be effective. Some of the recent changes to the Iranlegislation covered in this Guidance flow from anti-moneylaundry. This Directive aims at improving AML controlsthroughout world-wide. The Persian Gulf (Specially UAE ) aremajor international financial and legal centre, with a highreputation for honesty and integrity. This means that the

Persian Gulf financial and professional firms are attractive tomoney laundries. I amen's sure the local government wants toensure that these firms are not used by launderers in spite ofall of these countries have approved Anti-money Laundry Law.


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Good governance

Rule of law

Transparency (humanities)

Accountability

Comitology


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Which Countries are involve inMoney Laundry

Swiss UK USA Russian UAE Iran Qatar Turkey

Luxemburg Offshore

Zones


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The Reputed Cocaine Bank Money Laundry Wizard For GeorgeBush Family Arrested In ChicagoBy Sherman H. Skolnick 1-28-2000

The reputed cocaine bank money laundry wizard for formerPresident George Herbert Walker Bush and two of his sons hasbeen arrested in Chicago. The matter is tied as well reportedlyto corrupt top IRS Officials, Chicago Region Office fingered by

our work.

Giorgio Pelossi, a prominent Swiss accountant, was arrestedJanuary 20, 2000, at O'Hare International Airport, after officialsof the U.S. Immigration and Naturalization Service, INS, foundhe was wanted on an international arrest warrant issued inMilan, Italy, about a year previous. Pelossi, 61, was somehowactually traveling under his own name.

The Functional Construction of Organiz


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The Functional Construction of OrganizCriminal Structures

LEADER

Brain

center

Managers

Little

Bosses

Shadow area

Criminalarea

Theft,robbery

Racketeering

Bribing,relations withadministration

and state

Lawyer

Consultant

Legalbusiness

Moneylaundry

Entrepreneurship

Alcohol anddrug trade

Prostitution

GamblingTerrorism

Th "G ld R l " i th


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The "Golden Rules" remain thesame as set out in earlier

guidance The "Golden Rules" remain the same as set

out in earlier guidance: Know the legislation;

Know the professional guidelines; Know your client; Know your business; Train your staff;

Monitor compliance.


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Source: www.amlcft.com


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Money Laundering In Iran

Part 2


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Iran new law & regulation

1-Regulations on Avoidance of Money Laundering(2004)

2- E. commerce law 2003

3- The Law of Using the Professional Services of the Certified Public Accountants (1993)

4- Bill Text of VAT in Iran (Non approved)

5- Article 49 of constitution law

6- Article 662 of Islamic criminal law

7- Convention Against Illicit Trafficking in Narcotic Drugs and Psychotropic Substances 1988


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Article 49- The Government shall be requiredto take wealth derived from usury, usurpation,bribery, embezzlement, theft, gambling,misuse of pious endowments, misuse ofGovernment contracts and transactions, sale

of original Mavat(1)

and Mubahat(2)

centers ofcorruption and other illegitimate acts, and toreturn it to its rightful owner; in case theowner is not known, to return it to theTreasury. This provision shall be carried outby the Government by examining,

investigating and substantiating the proof inaccordance with the provisions of Sharia(3) .

1. Ownerless barren lands2. Ownerless Properties3. Religious law

The constitution of theIslamic republic of Iran


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Legislation to combat money laundering in Iran wassubmitted to the Parliment on 8 October 2002 byMinister of Economic Affairs and Finance. The issuehas attracted more attention from observers of Iranoutside the country than from the Iranian public.Yet the decision to counter money laundering is ofeconomic, domestic and foreign policy significance

for Iranians. Moreover, it could play a crucial role inadvancing the agenda of Irans reform movement.On 25 April,2006 the Parliment passed the act andit is now awaiting the approval of the hard line-dominated upper house, the Guardian Council. Thisarticle will elaborate on different aspects ofcountering money laundering in Iran. Iran Focus will

elaborate on the content of the bill, its advantagesand shortcomings in later issues.


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Money laundering in Iran has been increasingsince the end of the 198088 IranIraq war.

According to Iranian newspaper sources, theamount laundered in Iran rose from about 6%of GDP in the mid-1970s to close to 25-30% inthe 2005. In 2003,a prominent Iranian banking official estimatedthat money laundering encompassed 20% ofIrans economy.

Money laundering, although not confined todeveloping countries, arises from extensiveunderground financial activities that are madeeasier when financial institutions areunderdeveloped as is the case in Iran. From the$11.3 billion a year that is spent on smuggling

commodities in Iran, some $6.1 billion islaundered by international criminal networks.


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The decision to initiate an anti-money-launderingcampaign falls under the Khatami governmentspolicies of improving the underdevelopedeconomy. In this effort, the governmentseconomic team has sought to strengthen thenational currency, control inflation, promote theprivate sector, enact stringent banking regulation

and monitor policies, and expand social and job-related insurance. All this marks the governmentsintention of clamping down on illegal financialactivities, a strategy that it considers necessaryto counter underground economic activities.However, what is in question is the extent towhich such policies will face resistance from

monopolists and those engaged in rent-seekingactivities.


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Drug trafficking one area where money laundering isextensively used is in drug deals, to which Iran is highlyexposed. There are two main illicit opium-producingareas in Asia, the Golden Crescent (Iran, Pakistan andAfghanistan) and the Golden Triangle (Burma, Laos and

Thailand). Iran has central strategic significance in theformer but also serves as a transit route to the latter asa gateway to Europe, Turkey and Russia.

The Islamic Republic has been zealously trying tocombat drug trafficking in Iran. Against all the odds, thisdid not diminish after the fall of the Taliban, which usedthe cultivation of poppies in Afghanistan to destroy theyounger generation in the West and among IranianShiites.

Irans specifics


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In the past 10 years, some 1,600 members of theIranian law enforcement forces have been killed inthe battle against drug trafficking. Despite anextensive assault on the drugs trade, opiumaddiction in Iran is vast, with some 2% of thepopulation of almost 70 million citizens addicted.

The UN Office on Drugs and Crime estimates that2.8% of the Iranian population aged over 15 usedopiates in 2001. That makes Iran the thirdconsumer worldwide. In 2002, the number ofdeaths from drug abuse increased by 370%,reflecting a shift in Iran to abuse of heroin. Opiate

drug seizures during 2005 in Iran included almost340 tones of opium. In that level of seizure, Iranranked first in the world.


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Illegal jetties Because of deficient trade regulations,many commodities are being smuggled into Iran. Some62 jetties in Iran have been identified as illegal and arenot supervised by customs authorities. So not only hasthere been a failure to stop illegal business but certainmonopolists have been encouraged to importcommodities. The fact that these commodities are illegalfor import for the sake of protection of domesticindustry but legal for trade at the market has

encouraged unofficial economic activities for somemonopolists and influential rent seekers.


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Traditional interest-free funds Another factor that encourages Iran to tacklethe issue of money laundering are the aspects of traditional economicactivity that are deeply rooted in Iranian society. Even if traditional businesssystems do not necessarily mean that a society based on it is more exposedto fraud or corruption than a modern economy, the existence of suchinterest-free funds is a handicap for a country that is already sufferingfrom all kinds of prejudice, accusations and lack of international legitimacy.

These unofficial institutes, known as Sandoq-e Qarzolhasaneh, workparallel to the countrys official economic infrastructure. Their activitieshave reduced the governments control over liquidity and financial andmonetary markets. These interest-free funds lack any operation permitfrom the Central Bank of Iran. This state of affairs has seriously underminedthe governments monetary policies to contain inflation just as it hasprevented the government from making efficient use of the peoplessavings. Especially, the rising inflation rate has been a source of concern forinternational financial institutions such as the IMF.


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The dilemma of Hawala is other componentof the conventional economy is the use of theHawala. This is an alternative remittancesystem. It operates outside Western bankingor conventional financial channels. It is basedon trust and extensive use of familyconnections or regional affiliations.


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The source of the money is, however, not alwaysillegitimate. Nor are recipients necessarily engaged in illicitactivities. Yet, as against white Hawala, the term BlackHawala refers to illegitimate transactions, specificallymoney laundering. Black Hawala transactions are almostalways associated with some serious offence such as

narcotics trafficking, fraud or money laundering. However,what makes Western observers skeptical about the use ofHawala is that it has the underlying potential to offerchannels for money laundering. Money laundering consistsof three phases: placement, layering and integration. SinceHawala is a remittance system, it can be used at any ofthese phases.


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Hawala across borders is endorsed by most of theIslamic banks as it is founded in the Quran. The threat tothe non-Muslim international community lies in the factthat Islamic banks are becoming large enough to operatewith Japanese and European banks. Moreover, theIslamic banks are now big enough to resist pressurefrom the US. Some observers are confident that the USwill not be able to crack into the Islamic banks after the9/11 incidents. The US economy, many Arabs believe,

will be adversely affected if Islamic funds are touched.


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Today, in Washington circles, Hawala isassociated with the systematic moneytransactions used by outlaws such as Osama binLaden for his business with diamonds and gold.

The Hawala is today considered illegal not only inthe US but also in Pakistan and India where it wasvery widely used. Also, World Trade Organizationmembership requirements specifically demand aban on Hawala. It is noteworthy that Iran has

already applied 16 times for WTO membership,but the US has vetoed this on every occasion.


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The process of money laundering inIran

The procedure for money laundering in Iran isdifferent from that in the West. For example, theinternational criminal networks in the GoldenCrescent and Golden Triangle transfer the sumsreceived from drug smuggling from local currenciesto different types of commodities. Thesecommodities are then transferred to their registeredcompanies in the UAE, Hong Kong or Singapore.These firms place these products at the disposal ofIranian criminal operators who then use the illegaljetties to import them into Iran. These commodities

or drugs are sold in the Iranian market. The amountsraised from these transactions are transferred to thetraditional interest-free funds which through theHawala or otherwise transfer these monies out ofIran.


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operators who then use the illegal jetties toimport them into Iran. These commoditiesor drugs are sold in the Iranian market. Theamounts raised from these transactions

are transferred to the traditional interest-free funds which through the Hawala orotherwise transfer these monies out ofIran.

All this could explain why the unofficialeconomic sector (money laundering is partof it) in Iran contributes to somethingbetween 45% and 52% of GDP.

I th i t ti l it


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Iran, the international communityand money laundering

Iran-US The 9/11 attacks brought newdimensions to security issues since theattacks related money laundering toterrorism. US President George W BushsState of the Union Speech in 2002, inwhich he designated Iran as part of anAxis of Evil, and the subsequent intensifiedaccusations of terrorism against Iran, haveplaced the Islamic Republic in a difficult

situation in various fields such as nuclearproliferation, money laundering and drugsmuggling.


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The mafia groups use an unusual mechanism forlaundering dirty money in Iran. They spend moneyearned from drug trafficking to purchase goods on thedomestic market and then export the goods to and sellthem in Dubai, Afghan and CIS countries. Thus thismoney re-enters the same cycle.

The total value of organized smuggling is estimated at$11.8 billion per annum. Some six billion dollars of thisamount goes directly to foreign mafia networks. It isvery unfortunate for a country with $23 billion of

annual oil revenues to have $11.8 billion involved insmuggling.


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The IMF and the World Bank focus on the degree oftransparency in states economic policies. SeveralMiddle Eastern states have voluntarily participated inIMFWorld Bank-initiated processes of assessment offiscal, monetary and financial policy transparency. Iranis among those whose legislation is assessed on anti-

money laundering and combating of terrorist financing.Despite Irans hostility to the US, the Islamic Republichas been relentlessly trying to engage with the IMF,World Bank and WTO. Moreover, many of the Khatamigovernments economic policies have been in harmonywith IMF criteria. Iran sees the end of its political

isolation in an economic opening assisted by thesemultilateral institutions. (For more on Iran and theseinstitutions


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Simple Money Laundry in Iran

Finance& refinance from Middle East bank especial UAE The Letter of credit without transfer money Over-invoice in Foreign transaction Tehran Stock exchange transaction Real state transaction

Gun transaction (Iran-Contra) Drug (Opium) Non-bank financial institute (Gharzal-hasaneh funds) Religious Non-profit institutes Religious Charities

Religious societies & Mission Iran Free Industrial &Commercial Zones

Foreign Businessmen and the


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An unknown number of foreign businessmen,believed to be in the low thousands, mostlyentrepreneurs and other high risk venture capitalistsarrived in Iran during the early and mid 1990's, fromall over the world, to seek their fortune and to cash

in on the transition from a Governmental to a freemarket/capitalist society. This period in time in Iranwas referred to by many of the businessmen as theConstruction period

Annual import from Dubai in 2005 was $ 21 Billion

Foreign Businessmen and theIran

financial Mafia


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Operation Spheres of Trans nation


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Operation Spheres of Trans-nationOrganized Criminal Groups (2)

Controlling of transit business sphere Cyber technology criminalization Fraudulence in crediting and insurance

Smuggling or theft of cultural objects andartwork Copyright objects illegal using, selling and

copying Exotic animal and plant contraband

Radioactive and other hazardous waistgathering, storing un destroying Money laundering


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In Iran, this phenomenon was not known before.Yet now it exists due to the rotating of theinternational economy and growth of

international currency markets. It is one of theeffects of the change that took place after 2003.


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How money laundry do in Iran

Buy-Sell Real state

Tehran stock Exchange Private banking transaction Non-Banking institutions Drug market

Arms smuggling Buy-Sell Governmental Bound (1997-2005 $14.1 Billion ) Co-operatives of frontier inhabitants ($ 6.5 Billion ) Tax shelter (Tax haven)-Iran Free zones Oil Swap with Iraq &CIS countries Establish a company out of Iran(Foreign Co.),sell goods &Services

to Iran with over invoice

Religious Charities Establish Holding company Traveler's Cheque for financial transactions Foreign currency transaction by Hawala

Why charities & religious groups are


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vulnerable to Money laundry &Corruption

Religious groups vary widely on the requirements ofaccountability - from audits on the regional level, toindividual entity audits, to no audits at all. The reasonsfor the lack of accountability to national organizationsfrequently have their roots in theology or group historyso it may cause problems to increase centralized

oversight. Similarly, independent audits may be tooexpensive for some. According with Iran tax act &civilcode and base of Islam theory all religious centers,foundations of the Islamic revolution, charitiesinstitution, and Islamic science schools have taxexemption and they are under hand of High Spiritual

Leadership. Charities & Religious groups often lackindependent audits or outside accountability.

General Circular of Money


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General Circular of MoneyLaundry

A drug dealer, has a large load of cash coming in from a sale but hefirst has to wash the soiled money. One of his agents, Alahmad, transportin Kish Free Zone, redenominated, and stores the money at a bank at thecountry's border. Alahmad later transfers the money to another agent,Alghassem, across the border through another bank. Yet another agent,Jassem, transfers the cash back across the border to the launderer'saccount in a third bank.

This scheme, the cross-border cash movement, is just one of the severalthat money launderers use to bleach the stains out of dirty cash.


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Millions of Afghan, Filipinos, Indians, Iranians,Pakistanis, and other people from Asia working inforeign countries use the system to send money hometo relatives through the Hawala route. Intelligenceofficials believe that Hawala, in recent years happens to

be the safest and fastest means to militants fortransferring money across the globe as it leaves noevidence of its movement and is difficult to track. Inmost cases, only couriers get apprehended; they aremerely a small part of a long chain


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Hawala transactions have been prevalent in Iranand Persian Gulf specially between worker classin Persian Gulf countries in one form or anotherfor a long time. Operators of this illegal activityattracted little attention till it came to light thatthis mode of fund transfer was being used to fundterrorist activities in India and many other partsof the world. This paper focuses on the origin andgrowth of Hawala, its modus operandi, majorcases and successes despite various flaws. Thepaper also throws light on the shortcomings in

the legal, banking and commercial practices andthe difficulties faced by the enforcement systems.


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Hawala is an alternative banking systemhundreds of years old, and is known in

Iran, the Middle East and Pakistan ashundi.It involves Hawala brokers - often localsmall businessmen - all over the worldwho know each other.

It enables people to transfer moneyfrom one part of the world to the otherwithout having to go through banks.There is no paper trail and no money

ever crosses a border.Discrepancies in the two-way flow aresettled up at the end of the month, orperhaps every half year.


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There are two historical systems, namely the Hawala/hundiand the fei chien. Hawala/hundi will be discussed later in thispaper to a larger extent, but to compare and contrast thetwo, a closer look at the Chinese system fei chien will behelpful.As most other systems, the fei chien arose as a result oftrade. During the Tang Dynasty , merchants from thesouthern part of China sold their tea at the Capital and

transferred their money to liaison offices or agencies ofprovincial governments located at the Imperial Capital wherethese revenues were used to pay taxes due from theseprovinces to the central government. These courts issuedcertificates indicating amount paid by the merchants who,upon their return, would present them to their provincialgovernment for payment of an equivalent sum of money .

This system benefits both the local government and themerchants since neither had to travel with cash. As I willdemonstrate later in the case of Hawala, with the migrationto other regions of China, the system spread as well.Migrants sent part of their salary home to support theirfamilies which had stayed behind. With the increasingmigration that passed the borders, the system changed froma domestic to an international dimension.

Hawala-The Invisible Financing System of Terrorism


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The events of September 11, 2001 have changed the worldsperception of terrorism and brought focus on terrorist supportstructures and funding. The attacks of September 11 could not havetaken place without the movement of funds through the globalfinancial system.

Terrorist groups need money to motivate people to join their activities,

to procure materials like arms and ammunition and to keep theirnetwork going.

The experience of the Indian subcontinent in dealing with terroristoutfits operating in Jammu and Kashmir shows that they get theirresources mainly from two sources-from the intelligence agencies ofPakistan and the Kashmir diaspora spread across the world. It is now

an open secret that Kashmiri organizations located in places likeLondon and New York raise resources through donations, extortionsand collections in mosques. In addition, they also channel money fromagencies of countries like Pakistan.


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sourcing agencies adopt two methods: by personallycarrying through the land borders by couriers; secondly,through the traditional Hawala method.

Hawala is a system through which money is transferredfrom one part of the world to another without following thenormal banking channels. Though no one perhaps knows

how and when this method of money transfer started, itappears, it is as old as the beginning of monetarytransactions themselves.

This system has been in existence for a long time in Iranand other Asian countries especially in Persian Gulfcountries same UAE & Iran.


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As an alternative remittance system working in parallelwith the normal banking channels, Hawala has twocategories.

(1) Domestic Hawala.(2) Transnational Hawala.

Methods of Hawala


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In the course of normal business transactionsbetween two parties located in different cities withinIran, unaccounted payments are made throughHawaladars (Hawala operators) in these cities. This

job is normally done by Saraf who are people whorun shops. These shops are unofficial institutionsthat act as Coins, postal couriers for letters, parcelsand money, among different cities. They also makeHawala payments for the concerned parties locatedin different cities without carrying the money

through various cash holdings/transfers.

Domestic Hawala

Transporter Hawala


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In transporter Hawala, money moves across internationalborders without being physically carried. The payments aremade by Hawaladars located in Iran to the friends andrelatives of expatriates working abroad. The Iranian Hawalaoperator has his counterpart outside Iran who receivespayments in foreign currency from these expatriates andpasses on instructions for distribution in Iran in Iranian Rails.

Similarly, unaccounted payments are made from Iran toforeign parties through this system, particularly in cases ofunder-valuation of imports. People in Iran & UAE havinglarge unaccounted tax-evaded money also transfer moneyoutside Iran through Hawala to safe places abroad. Suchmonies may finally find a place in banks located in tax

havens; and, may be transferred to other places in duecourse of time depending upon business requirements ormay find its way to Iran as legitimate inflow afterundergoing the laundering process.

Transporter Hawala(International Hawala)


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Principles underlying our handling of allegations ofcharities' involvement with Terrorism , Money Laundry& Corruption. Some of charities in Iran has airplane,shipping, holding investment, chain market and ..Unfortunately Muslim Money Launder pay some part oftheir profit under the plea of Islamic tax Khums to

religious authority and then their money will be clean&ceremonially clean. The government has no control onthese amounts because the religious authorityhierarchyascertain by Muslim people and Khums is economy

poverty of religious leaders.


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Islamic Tax

Khums: A religious tax imposed under the Islamic Law on

Muslims"Khums" literally means "one-fifth or 20%". InIslamic legal terminology, it means "one-fifth of certainitems which a person acquires as wealth, and which must

be paid as an Islamic tax". The Qur'an mentions it in thefollowing verse:

Know that whatever of a thing you acquire, a fifth of it is forAllah, for the Messenger, for the near relative, and theorphans, the needy,


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Items which are eligible for khumsare seven

The profit or the surplus of the income. The legitimate wealth which is mixed with some

illegitimate wealth.

Mines and minerals. The precious stones obtained from sea by diving. treasures. The land which a dhimmi kafir (Dry farming) buys

from a Muslim.

The spoils of war.


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Export and import operations


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Export and import operationsThe scheme of money laundering through importoperations is as follows. Illegally acquired funds areremitted to accounts of dummy firms and then foreigncurrency is transferred abroad to pay import contracts.

The further bankroll manipulations take place there.Money is transferred from one account to another untilit become legal.

Among well-known ways of illegal enrichment are toembezzle credits , deceive partners, make "pyramids",attract public funds and cause a bank failure, privatizeindustry and trade, etc. Those banks developing in arapid way during a primary accumulation of capital andthen failing, in reality, transferred some money to

foreign bank accounts. Then these funds were put in alegal business abroad or in Iran.(1500 Iranian Co withmore than $250 Billion assets in UAE)


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As a rule, criminals officially register "fictitious" or "transit" firmsfor dummies, military men, prisoners, as well as needy andmentally ill persons. Real machination organizers transfer moneyto their accounts on legal grounds. Further, these firms vanish andorganizers make no claims (or at least formal ones) on breakingcontracts. These firms are of a short-term nature. Tax bodies startshowing interest in their activity only in three months when it is

time to check the accounts. Tax officers can suspend themovement of funds to the account that is practically not requiredby that time and carry out the revision. Fictitious firms are takenunder the currency control after ninety days. All computationsshould be accomplished within this time. Information on breakersis obtained too late because of an imperfect mechanism of theinteraction between Iran's local bank and commercial banks. Bythis, the firm had ceased to exist for a long time, its managers

disappeared and documents are lacking. In such cases, it isimpossible to audit an enterprise, impose a fine and search out itsmanagers.


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According to the export operation scheme, goodsare delivered to bought or established firmsabroad. As a rule, foreign firms are supplied withraw materials but Iranian ones obtain no money.Funds do not return to Iran and they are legalizedabroad. False firms can be also used in these

cases. Many of import are transit to Afghanistan &CIS countries. They are easy to replace in 45 days,guilty persons being difficult to find then. Thischannel is widely used because it results indecreasing export prices.

Fictitious services and transfe


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Fictitious services and transfe

It is quite risky to establish dummy firms. Therefore, swindlersoften use a fictitious service payment scheme. The currencycontrol cannot be taken of this sphere because the criminal can bearrested if the whole scheme of obtaining illegal revenues isexposed before their legalization.

As a rule, cash money is illegally transferred when locally

exchanging Rails or foreign currency to obtain it abroad.Foreigners who are engaged in a "shuttle" business deriveconsiderable incomes from import. However, they cannot bringback their receipts in RIALS or foreign currency unless they weredeclared. Therefore, firms or banks with partial or full foreigncapital are set up. Further, the scheme is very simple. Tradeearnings are exchanged and then firms transfer them to theirnative bank accounts abroad through import contracts. When the

audit starts, documents are destroyed or vanish, foreigners leaveIran and it is impossible to find managers. This problem will remainwhile there is a shuttle business.

Cash Circulation


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Cash Circulation

Taking into account a severe control of cash currency and thelegalization of an economic life (first of all, shady circulation),breakers often use the following scheme of encashing foreignexchange. Iranian businesspersons buy or establish firmsabroad, open their representative offices or branches in Iranand transfer large sums of foreign exchange to theseaccounts through foreign contracts. Although representative

offices must not realize an economic activity, they do it in avery active way. Some cash money is given to foreigners topay traveling or other expenses because they can get cashexchange on legal grounds. After encashing, a part of funds isput into a shady use or exported abroad.


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Very large money is put into a shady circulation through externaleconomic activities of enterprises (price and import volume

manipulations, illegal customs registration). In such cases, customsduty discharge is considerably reduced. It appears that many goods areillegally imported. In Iran, they are for overpriced sale and delta plusreceipts resulted from selling unregistered goods are partially or fullyput into a shady circulation and cannot be taken under control. Fundsremain to be in a shady use to evade taxes and avoid a penalty.

Finally, some cash funds are legalized, for example, by contributingthem as individual deposits to the enterprise capital stock. As a rule,they are partly deposited in large sums. In the same way, money istransferred to local or foreign deposit bank accounts; shares or othersecurities are purchased. Other ways of legalizing illegal incomes areconnected to definite losses. When a firm fixes ill-gotten money ascommercial receipts, it will have to pay many taxes. We suppose thatat present this way of legalizing money is not so widely used in Iran asin foreign countries because of many other more simple ones.

Conclusion


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Conclusion

Underground economic activities in Iran havean effect on the underdeveloped state of theeconomy, dual foreign policy standards andthe protracted democratic movement in the

domestic arena. Simply put, the economicmafia has managed to influence certainpower centers as well as decision-makers inall areas of governance. The influence of

many political activists derives from theirrents, monopolies and connections


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The establishment is aware of this realityand some political leaders from both ends

of the political spectrum have been tryingto change this state of affairs, despite theexisting associations with the operators ofthe underground economy. The reason forthis is that even these political leaders are

losing control over the activities of theseoperators, once loyal associates of therevolution. Moreover, the spillover effect ofthe growing unofficial sector in Iran has notonly severely undermined the economy buthas led to the creation of new power

centers that are actively affecting thecountrys foreign and domestic policies.


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The paradox lies in the fact that with the givenfamily and tribal connections a serious attemptto eradicate roots of underground economicoperations seems, at least under the currentcircumstances, a difficult task, if not animpossible one.

Nevertheless, the legislation against moneylaundering indicates that there are incentivesto reform the traditional economic system. Ifthe Guardian Council approves the act, one canassume that it has the blessing of thecountrys highest institutions.


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What will these new requirements


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mean to accountants?

These proposals, if implemented, will bring manyconsequences to the profession. One consequence, forexample, is the likely damage to the auditor-clientrelationshipa client might not be as open with anauditor if he or she knows that the auditor will reporteven suspected money laundering to the government.

The government will probably argue that auditors will,instead, benefit their clients by assisting them inidentifying money-laundering problems before theyget out of control and cause major damage to clientsreputations. Historically, the vast majority of moneylaundering has been carried out by individualemployees without top managements knowledge.


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Sources1- Anti money Laundry & Corruption lecture by Dr. Gh. Davani, Tehran.2002

2- Money laundry, Countering Drugs & Organized Crime in the Baltic region,Andreis Vilks (ECAD)3- Money laundry, Special report ML WLA-Magazine Money laundry, A bankers

guide to avoiding problem Dec. 2002.4- Financial action Task force on ML 20045- Hawala, Anti money laundering strategy Oct. 2004 HM Treasury.6- Business integrity & Anti-corruption initiatives of the world bank Sep. 2004,

US department of the treasury Anti terrorism.

7- Money laundry and banking system Farideh Tazhibi, 20058- Organized crime & the international strategist against it by: Shahal Moazami9- Law review An academic & primitive Journal on international law, vol. 29,

Fall 200310- Money laundering the journal of Iran parliament research centre, Vol. 10,

No- 37, spring 200311- Transnational organized crimes By: Dr. Sadegh Salami 200312- Mafia for beginners by Arnd Scheder & Oscar Zarat 1994

13- Switzerland the largest Money Laundering centre in the world, by: Dr. MediSahraean(the UN representative for GPLM in Iran) 200214- Special report Money Laundering, Val Magazine15- www.iranfocus.com

money laundry new-hong kong

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