Anti Money Laundering Blog

Multibillion dollar drugs trade in Afghanistan is not a secret to anyone. According to the UN, in 2006 Afghanistan supplies about 92% of the world’s supply of opium, which is used to make heroin. Some estimates are provided in The Spoils of War: Afghanistan’s Multibillion Dollar Heroin Trade by Michel Chossudovsky. According to The Independent, in 2003 drug trafficking was the 3rd biggest global commodity in cash terms after oil and the arms trade. The IMF estimated global money laundering to be between USD 590 billion and 1.5 trillion a year, which represents 2-5% of global GDP. And it is worth remembering that a large share of global money laundering is related to the drugs trade.

However, tt appeared lately that there have been no convictions in Afghanistan against those who make hundreds of millions of USD at the top of Afghanistan’s drugs pyramid. According to Western counter-drugs officials, even in Western countries building such cases takes years. In Afghanistan, drugs industry is estimated at USD 3.4 billion, but it is suposed to have a corrupting influence on the government, therefore fighting drugs in Afghanistan is much harder. For example, President Karzai of Afghanistan recently pardoned 5 persons sentenced to 16-18 years for moving 120kg of heroin, and one of the released men was the nephew of the campaign manager to Mr Karzai’s election campaign. So, the Afghan drug mafia benefits from political protection. It is also suported by Afghanistan’s lawlessness and lack of infrastructure.

The drug-money trail is difficult to discover because of the hawala system of local money changers widely used by the drug mafia in preference to Western electronic banking. This system is based on trust. In this system, the only evidence of money transfer may be a phone call between 2 hawala dealers in different cities/countries who agree to settle the money transfer. This system is widely used across the Middle East.

Counter-drugs officials tried to arrest the 3 biggest hawala dealers in the province of Nangarhar 2 years ago, which brought the economy of the province to a halt and, as a result, the 3 criminals had to be released.

Currently, a construction boom may be seen in the capital, Kabul, which is the evidence of money laundering - laundering of drug billions into legitimate business.

Ireland moves towards implementing the European Union’s 3rd Anti-Money Laundering Directive, which it failed to implement earlier, with the publication of a new bill by the Minister of Justice. The draft legislation implements the requirements of the EU 3rd Anti-Money Laundering Directive, and has the purpose to integrate it into the Irish law.

Actually, the new document significantly changes anti money laundering regulations order in Ireland. It increases the obligations on financial institutions, lawyers, accountants and state agencies to monitor and report any suspicious activities. Also, all relevant bodies would have to implement specific anti-money laundering procedures and report suspicious transactions.

Sinead Ovenden, Director of Compliance and Regulation of Deloitte, said that the new anti-money laundering legislation has been much anticipated. In his opinion, the change to existing AML requirements means that financial services institutions can reduce the level of customer due diligence on a risk sensitive basis. The new approach will redirect resources within financial institutions to areas of higher risk.

A move towards a risk based approach to the prevention of money laundering is one of the most important changes in the Directive, which is not characteristic yet for the Irish money laundering regime.

However some specialists say that financial services institutions, particularly smaller enterprises, face a challenge if they are to implement the necessary changes before the bill is passed into law. The most controversial issue of the Directive is already named, and it is the obligation to make enhanced due diligence for politically exposed persons (PEPs).

Most banks and other financial institutions will be required to adopt the legislation once passed. This is expected to happen in the autumn. The Financial Regulator will supervise Financial Services entities under the new legislation.

Recently, media discussed the threat posed by mobile banking from a personal BlackBerry or iPhone. It appeared that mobile banking might cause threats to financial institutions because criminals look for a possibility to hide their money laundering or fraud crimes behind handheld devices. It should be noted that handheld devices are relatively anonymous.

According to Steve Solberg, Senior Product Manager for Fraud at Fortent, the risk and compliance specialist, moving from cash and checks to electronic payments and now to mobile banking is a very rapid change in the payments industry, and it not only provides increased convenience and value for customers but also present new elements of risk and fraud for them.

It is projected that the mobile banking channel will explode in the next 5 years. In the United States, it is predicted to increase from 1.1 million customers in 2007 to 42.3 million in 2012.

Mobile initiatives may take off even quicker in Hong Kong, South Korea, and Brazil, as companies there tend to offer everything through mobile devices – services from payments to stock trading.

However, it should be taken into consideration that mobile banking is still in its infancy, and therefore banks are working to protect themselves and their customers from possible money laundering.

After Lebanon was listed among non-cooperating counties by the Financial Action Task Force (FATF)  in 2000, it had to take strict procedures.

To be removed from this blacklist in 2002, Lebanon had to take several steps that included issuing the law 318/2001 aimed to help banks avoid being abused as media for laundering the “dirty” money.

On July 15, Secretary of the investigation authority Mohammad Baaresisaid that this authority played an important role in revealing and fighting money laundering operations. The investigation authority was set up in 2001 and it was headed by the governor of Lebanon’s Central Bank. Baaresisaid noted that law 318 does not violate the confidentiality of banks. He also said that about 200 cases are suspected t as money laundering and terrorism financing every year in Lebanon.

He also emphasized that Lebanon played a great role in establishing Middle East and North Africa Financial Action Task Force (MENAFATF) that is headquartered in Bahrain.

The process of money laundering has been discussed and it has been also indicated that the process of money laundering can be divided into basic 3 steps – placement, layering and integration. These steps can happen either one by one or simultaneously, or separately.

Below is one of the notorious cases of money laundering that clearly illustrates the three steps.

In the 1980s, Eddie Antar skimmed millions of dollars from the company to hide it from the IRS. He was the owner of Crazy Eddie’s Electronics who had a very original plan, anyway. But, eventually, he and his co-conspirators decided to make better use of the money if to send it back to the company disguised as revenue. This move would inflate the reported assets of the company in preparation for its IPO.

Having travelled to Israel a number of times, he carried millions of US dollars strapped to his body and in his suitcase.

The money laundering scheme worked out by Antar worked the following way:

PLACEMENT - Antar made a series of separate deposits to an Israeli bank. Once, “Crazy Eddie” made 12 deposits in a single day.
LAYERING - Before US or Israeli authorities noticed the unexpectedly huge balance in the account, he had transfered all the money from the Israeli bank to Panama, where bank secrecy laws are in force. From the account in Panama, Eddie Antar made anonymous transfers to numerous offshore accounts.
INTEGRATION - Antar slowly wired the money from the offshore accounts to the legitimate Crazy Eddie’s Electronics bank account, and in the account of the company the money mixed in with legitimate US dollars and documented as revenue.

All in all, “Crazy Eddie” laundered more than USD 8 million. Antar’s scheme boosted the initial offering stock price so that his company ended up worth USD 40 million more than it if the revenue would have not been added. When Eddie Antar sold his stock, he had USD 30 million in profit. In 1992, he was found by the authorities in Israel and extradited to the US to stand trial, where he received an 8-year prison sentence.

A US risk consultant based in North Carolina, Brendan Hewson, says that, in his opinion, the more financial industry rules and regulations are implemented by big countries, the better it is for offshore financial centers.

Hewson says that the greatest threat to established offshore centres like the British Virgin Islands, the Cayman Islands, the Bahamas and Bermuda is not the USA but competition among themselves as well as the threat posed by emerging financial centers like Singapore and Dubai. He suggests that, of the newer jurisdictions, Singapore and Dubai are the best-positioned to make changes in the offshore world at the expense of jurisdictions have some reputational problems.

Hewson suggests that the offshore center “with the biggest bulls-eye on its proverbial chest” currently is Bermuda. It is phenomenally financially successful and has peaked economically. However, according to Hewson, it will face a future decline caused by rampant political corruption and the real prospect of independence in the not-too-distant future. “There are striking similarities between what is currently taking place in Bermuda and what took place in the Bahamas in the 1960s and 1970s, when corruption, independence, and a lack of concern for the needs of international businesses contributed to a wave of insurers moving to Bermuda and banks to the Cayman Islands.”

Hewson thinks that the rival offshore centre that stands to benefit from Bermuda’s problems is Cayman that has professional expertise and intellectual capacity to compete with Bermuda, but its legislation is not good enough yet.

On January 1, 2008, US Securities and Exchange Commission published Anti-Money Laundering (AML) Source Tool, which represents a research guide. The guide compiles key AML laws, rules, and guidance that are applicable to broker-dealers.

As far as there is a great variety of related anti-money laundering guidance materials that assist broker-dealers, AML Source Tool summarizes and points out key anti-money laundering compliance materials and provides related source information.

The guide prepared by staff in the Office of Compliance Inspections and Examinations (OCIE), Securities and Exchange Commission includes the following topics:
- the Bank Secrecy Act;
- the USA PATRIOT Act;
- AML compliance programs;
- customer identification programs;
- Correspondent Accounts: prohibition on Foreign Shell Banks and Due Diligence Programs;
- Due Diligence programs for Private Banking Accounts;
- suspicious activity monitoring and reporting;
- other BSA reports;
- records of funds transfers;
- information sharing with law enforcement and financial institutions;
- special measures imposed by the Secretary of the Treasury;
- Office of Foreign Asset Control (OFAC) Sanctions Programs and other lists;
- selected additional AML resources;
- useful contact information.

It goes without saying that anti-money laundering regulations, rules and orders are subject to change and often they can change rapidly. Therefore, it is to be taken into account that the information summarized in the compilation is current as of January 1, 2008.

An insight into anti-money laundering is provided by A Preventive Guide for Small Business & Currency Exchanges in Canada published by the Royal Canadian Mounted Police, which is the Canadian national police service and an agency of the Ministry of Public Safety Canada.

The Guide indicates that one of the roles of the RCMP within Canada’s Initiative to combat money laundering is informing the public. Therefore it describes money laundering as something that can happen anywhere, anytime, and one may not even be aware of having been involved in it.

While defining money laundering is clear and similar to what has been repeatedly discussed previously, some issues related to money laundering discussed in the Preventive Guide have not been discussed yet. For example, the Guide provides a term “willful blindness” as a situation when a person who has become aware of the need for some inquiry does not make the inquiry as he/she does not wish to know the truth and prefers to remain ignorant. There is also an example of willful blindness in the Guide. It is as follows: “A salesperson encounters a customer who wants to buy a consumer good or service with $25,000 cash. The customer produces a gym bag containing $25,000 in $20 and $50 bills. In the vast majority of modern Canadian commerce, this is not a normal business transaction, and this method of payment is highly unusual. Though the salesperson instantly suspects something is out of the ordinary, they chose to ignore their suspicion so as not to jeopardize an easy sale.”

Terrorist financing may often be carried out through charitable organisations, therefore compliance officers should be cautious as regards some tips to identify terrorist financing.

Below is the list of “red flags” of terrorist Financing carried out through charities:

- the name is very similar to the name of a well-known or long-established existing charitable organisation;
- the activities of the charity are regulated on a limited basis, or even are not regulated by local authorities;
- the entity has not been officially registered with regulators as a charity;
-Â the objective of the charity is either unknown or unclear from published materials;
- the charity has frequently changed physical address, mailing addresses, or often replaced staff;
- the extremely limited amount of information that can be obtained on the charity through the Internet or from other public source;
- trustees, officers and directors also hold similar positions in other charities;
- the charity is closely connected with a political or religious organisation or party;
- funds transfers to other countries;
- cash transfers to other non-charitable organisations;
- an attempt at an audit of charity funds fails;
- the end recipients of the funding as well as their aims and activities are unknown.

The presence of at least several of the points indicated above should be a reason good enough to initiate an immediate investigation of the charity.

The threat of terrorist financing in India is considerable as this country is the world’s largest recipient of inward remittances. It is obvious that remittances from non-resident Indians have a positive affect on the country’s economy. Nowadays non-resident Indians transfer about USD 25 billion a year to their families residing in India. Now Mexico and China have become ex-leaders as regards remittances.

While positively affecting India’s economy, such amounts also increase the risk of exploiting India’s inward remittance system for terrorist financing.

According to the statistics provided by the US National Counterterrorism Centre, since 2001 terrorist attacks in India have claimed more lives than anywhere else. Therefore, to fight international terrorism, it is important to reduce the flow of funds and money to terrorist organizations.

Indian intelligence officials state that terrorists ore and more often use regular banking channels and wire transfers to send money. Inward remittances are send to India by varied means, the most common of them are electronic wire/ swift, personal cheques, traveler’s cheques and hawala.

The modern inward remittance system is vulnerable to terrorist activities, and that is why many Indian banks are implementing systems that increase the scrutiny of remittances, identify suspicious transactions and comply with anti-money laundering standards.