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.

Hany Abou-El-Fotouh is Director Policy & Corporate Affairs, CI Capital Holding –

the investment banking arm of Commercial International Bank, Egypt. He is a
leading expert on money laundering and terrorist financing controls and corporate
governance best practices 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
hanyfotouh@yahoo.com