Keeping Clean: How Islamic Banks Fight Money Laundering?

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  • Topic: Islamic banking, Sharia, Money laundering
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  • Published : October 7, 2011
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Keeping Clean: How Islamic Banks Fight Money Laundering?

By: Hany Abou-El-Fotouh

Money laundering is not a new trend. It is a process that takes illegal 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 money. The process is driven by criminal activities and conceals the true source, ownership, or use of funds.

No one can deny that money launderers may use Islamic banks as a place to clean their dirty money through the use of various financial instruments. In fact it is important to ensure that Islamic banks are well protected from being unwittingly used by money launderers. Additionally, the public at large should continue to maintain confidence on the credibility of the Islamic financial system. When did Money Laundering Start

In medieval times when the Catholic Church banned usury as not only a crime but also a mortal sin, merchants and moneylenders intent on collecting interest on loans engaged in a wide variety of hiding, moving and washing criminal money. The main objective was to make interest charges either disappear or disguise their nature. This trick could be made in many ways. When merchants negotiated payments over long distances, they would artificially increase the exchange rates sufficiently to cover interest payments as well. They would claim that interest payments were a special premium to compensate for risk. They would make interest appear to be a penalty for late payment, with lender and borrower agreeing in advance that such a delay would take place. They would pretend that interest payments were really profits by using something similar to today’s "shell companies" (companies that have no real operational role). Capital would be lent to the company and then taken back again, allegedly in the form of profits rather than of interest on the loan, even though no profits had really been made. All of these tricks to deceive the Church authorities have their rough equivalents today in the techniques used to launder criminal money.

The Size of the Problem

Today money laundering represents an estimated 2–5% of the world’s gross domestic product. According to International Monetary Fund, it is “one of the most serious issues facing the international financial community”. Worldwide money laundering estimates – US$ 800 Billion – US$1.6 Trillion where 47% of the dirty money use banks to clan the dirty money.

Three Stages of Money Laundering

Money laundering process comprises of three main stages. "Placement" is the first stage in the money laundering process. Physical currency is made to enter into the financial system during this stage. The illegal profits may derive from drug trafficking, prostitution rings, smuggling, illegal arms sale, kidnapping for ransom, bribery, computer-fraud schemes and smuggling of human beings and organs. It is here that the illegal proceeds are most vulnerable to detection.

The second stage is “layering”. It is the separation of the money from its illegal source by conducting a complex series of transactions. At each layer, the money looks more and more like legitimate funds. Launderers try to make any tracing back to the dirty source impossible. Examples include bank-to-bank transfers, wire transfers between different accounts in different names in different countries, often using shell companies and purchasing high-value items (boats, houses, cars, diamonds, and securities) to change the form of the money. The last stage is "Integration" i.e. to integrate the illegal proceeds back into the economy as legitimate funds through legitimate transactions such as business ventures, luxury assets, lending, financing and investing. This stage provides money a launderer with an apparently legitimate explanation for his/her Is Terrorist Financing Similar to Money Laundering?

Terrorist financing is the process of reverse laundering but tend to use smaller...
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