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...