The Washing Machine - Fighting Money Laundering in the
Middle East.
By Hany Abou-El-Fotouh, CAMS, CDIR
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:
1. Placement is the physical disposal of bulk cash proceeds derived from illegal
activity.
2. Layering is separating the illicit proceeds from their source by creating
complex layers of financial transactions. Layering confuses the audit trail and
provides anonymity.
3. 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.
About The Author
About The Author
Hany Abou-El-Fotouh is Chief of Staff & Group Board Secretary, CI Capital Holding - the investment
banking arm of Commercial International Bank which is the largest private bank in Egypt . He provides
advice and direction to the Board and management with respect to corporate governance practices and
formulates corporate policies.
Hany is a leading expert on money laundering and terrorist financing controls 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
Hany writes articles to different newspapers and journals on a variety of subjects. He is a public speaker
and professional trainer. Previously, he worked in various senior positions in leading banks in Egypt
and GCC countries like HSBC, Oman International Bank, Banque 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
http://www.linkedin.com/in/ hanyfotouh
hanyfotouh@yahoo.com
money laundering, middle east, terrorist financing, OFAC, compliance, hany abou el
fotouh, money, dirty money