Saudi Arabia Financial Intelligent Unit Effectiveness

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Literature Review

Money laundering is one of the organized crimes of modern times that all economies in the world face (Henry & Sills 2006, p.263). There are many varied definitions of money laundering that have been advanced to understand its organization, execution, and its effect on the economy. However, the ambiguity of the definitions makes the concept of money laundering a relatively challenging task.

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According to a journal of the Saudi banking inspection department, money laundering is defined as any act either actual or attempted aimed at concealing illegally earned money or property to appear that they have been earned from legal transactions (Lippens & Ponsaers2006, p.529; Munshani, 2005, p.69). It is also defined as disguising proceeds from criminal activities to appear that they are legal proceeds (Munshani 2005, p.70). According to Passas (2005), money laundering is defined as an act of converting or cleansing property that has been acquired through criminal activities. Such criminal activities may include drug trafficking, prostitution, corruption, and other organized crimes.

According to Johnson (2005, p.1), money laundering usually has three processes; initially, the ill-gotten wealth undergoes placement where the illegally obtained funds are introduced into the banks. They then undergo a layering process where further concealment occurs through wire transfers to other banks etc, and finally, this wealth is then integrated into the economy through the purchase of assets, investment in real estate, and purchase of luxuries (p.2). Interpol on the other hand defines money laundering as “any act or attempted act or conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources” (Carroll 2004, p.6).

All the definitions highlighted above have identified the concept of money laundering to be related to illegally earned money. However, several pieces of evidence have shown not all money that gets transferred in the process is illegally earned as will be seen in the concept of Hawala banking in the subsequent parts of this review.

The global effect of money laundering is disastrous. Satkunasingam & Shanmugam (2006, p.99) argue that the penetration of international markets by professional money launderers has contributed to distortions of global terms of trade that are harmful to the world economies. In extreme cases, money laundering can destabilize the economic growth and social stability of nations (p.101). These professional money launderers operate illegally to reap maximum profits from the underground illegal activities that they carry out (Schramm & Taube 2003, p.42). To keep afloat in these activities the money launderers use threats and force, and Interpol says that these organized groups sometimes use intimidation and corruption to carry out their activities (Perkel 2004, p.237).

Hawala in Saudi Arabia

“Hawala” is an Arabic word to mean “to transfer” (Berkowitz & Woodward 2006, p.1). The financial activities of Hawala bankers are considered as some of the wider networks of informal economies since this loose organization provides money transfer services outside the mainstream of the formal money transfer. They operate without a license and thus have no government control (p. 3). Their activities are mainly considered money laundering activities as it relies a lot on activities outside the legal streamline and parallel to the formal banking and non-banking financial institutions (p.4)

The Hawala financial activities have attracted several interests especially among migrants and their relatives. World Bank recently estimated that migrants transfer a whopping $167 billion annually to the family members and other relatives from their country of origin, the majority of them from Saudi Arabia, accounting for 69% (World Bank, 2006, cited in IMF 2005, p.71). FATF (2003. p.3) says that the catch comes from the fact that Hawala banking services are non-bureaucratic, and the transacting parties need not reveal their identities hence proving popular with terrorists.

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A further reason for Hawala’s popularity is the fact that the official channels of money transfer are expensive, not available, or insufficient in remote areas especially in countries like Afghanistan, Yemen, and Somalia, delays due to holidays, rigid and strict exchange regulations, and inefficient banking infrastructure for international money transfer for some of the local banks (Pohoata & Caunic, n.d, pp. 3-4). However, most observers point out that Hawala’s success is largely from the fact that many of the transactions are based on trust and the extensive use of connections such as family ties or ethnic solidarity (Pohoata & Caunic, n.d., p.7).

International Response to money laundering

The international response to money laundering and activities of Hawala has been relatively swift, especially after the intensification of terrorism and drug trafficking activities in the recent past. Johnson (2005, p.1) discusses how the sprouting of drug trafficking and its profitability prompted the General Assembly of the United Nations at the 1988 Vienna Conventions to adopt a universal pledge to halt money laundering. Consequently, there was the formation of the Financial Action Task Force (FATF) by the G7 group of countries. Since then the FATF membership has grown to over 29 countries and two regional bodies.

Shanmugam (2004, p.45) draws practices from Malaysia on the fight against money laundering. In an attempt to protect itself from money laundering criminal activities, Malaysia thus joined the Asian Pacific Group of Money Laundering (APG), whose main objective is to provide a regional focus for organizations against money laundering. The group follows the guidelines offered by the FATF. Despite all these efforts, the problem of money laundering persisted within these states. Different countries thus decided to form special organizations to deal with the problem. Malaysia on this note formed established a National Coordination Committee (NCC) to help coordinate the anti-money laundering actives.

Following the FATF recommendations, different nations have attempted to adopt the recommendations for war on money laundering. For example, the first recommendation by FATF was “countries to apply the crime of money laundering to all the serious offenses, with a view of including the widest range of predicate offenses” (Cassin, 2006, p.25). Cassin observes that the international battle against money laundering is currently being fought through a solid framework created by the G7 countries (p.27).

Another country that moved quickly into war against money laundering is Ukraine by adopting the FATF recommendations. In this line, Ukraine changed its related laws to allow the sharing of information between banks and the authorities; lowering the suspicious transaction thresholds; criminalizing money laundering, failure to report any suspicious case, and tipping of the suspects (Cassin, 2006, p.26).

The Ukraine approach is more or less similar to the United States’ approach. The United States has specifically approached anti-money laundering from the perspective of placement stage, which targets suspicious deposits (Carroll 2004, p. 7). The US’s Bank Secrecy Act demand that the Currency Transaction Reports (CRTs) be filed for transactions between US$3,000 or US$10,000 and all the records kept (p.7) Again, the act requires that financial institutions dealing in currency, traveler’s checks, and money orders must report the identity of particulars of individuals who are making suspicious transactions (p.7). Morgan(2003, p.771) concurs with the counter laundering policy of the United States that supports heavy penalties on the criminals of money laundering while Watkins, Reynolds, Demara, Georgiopoulusn, and Eaglin (2003, p.163) suggest the use of data mining techniques to fight money laundering.

In a similar context, the Swiss authorities enacted legislation that were focusing on identifying the customer together with the beneficiary or recipient of the transaction (Carroll 2004, p. 7; Razavy 2005, p.277). The bank’s obligation would therefore be to ensure the customer clarifies the source of the money and assess the economic background of the customer as well as identify the reason for the transaction, especially if the transaction appears criminal.

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Because money laundering activities are mainly carried out through legitimate processes in the banking sector, the international community has constantly targeted the banks to squeeze the act of such transactions more difficult. Carroll (2004, p.7) observes that the initiatives undertaken by organizations as FATF, the United Nations, Interpol, the European Community, and commonwealth members are based on two primary components: increasing the preventive role for the financial sector by making laundering through banking system more difficult; and strengthening of the criminal laws where money laundering activities are concerned. Carroll further clarifies that out of the 40 recommendations by FATF, 22 of them deal with the role of the financial sector and several other areas call for stronger legislation as well legal corporation between nations.

Money Laundering in the Asian Context

In Asia and more specifically the Pacific region, the process is quite tricky. This is because money laundering is done through alternative means to reduce the risk associated with laundering through mainstream banking (Carroll 2004, p.8). Sandhu (2000, cited in Carroll 2004, p.8) points out that an alternative remittance system functions at all levels of the money laundering process. In this approach, it is noted that “placement is done through the incorporation of the criminal profits as the legitimate business deposits as well as expenses of an ethnic banker” (Carroll 2004, p.8). The last phase of transaction may involve a business approach; where investment is done in disguise as imports and exports, and subsequent transactions occur (p.8).

Interpol (2000, cited in Carroll, 2004, p.10) identifies the concept of an alternative remittance system in India and Pakistan in the process of separating the activities of the Hawala. In line with Carrol’s observation, it is noted that Hawala activities are distinct with four categories of alternative remittance; the first is the transfer of money between different locations without using the conventional banking channels, a process that is common with countries with direct connections with Asia. This process distinctively does not involve any paperwork but relies heavily on verbal commitments. The other approach is the issuing of receipts for the proof of transactions.

Preventing money laundering crimes is more difficult in Saudi Arabia because of the presence of more than 8 million foreign workers, with a majority of these workers coming from South Asia, where money laundering activities have been intense for quite a long time.

The Saudi Law enforcements agencies have fought money laundering especially approaching it through Hawala in collaboration with the international community (van de Bunt 2008, p.125; Henry & Sills 2006, p.264). In an attempt to increase the success of their war against money laundering, the Kingdom of Saudi Arabia became a member of the Middle East North Africa Financial Action Task Force (MENA-FATF) that was formed primarily to fight money laundering among the member nations (FATF 2003, p.2). Considering the inherent challenges, the Saudi government decided to adopt the 40 recommendations by FATF in fighting money laundering (p.2).

This is the same period when SAMA issued some specific guidelines for the prevention of money laundering to the Banks operating in Saudi, by specifically stating on their policy guideline titled “Know Your Customer Rules” (FATF 2003, p.4). Its basic components entailed identifying and reporting any financial deals within the bank to SAMA and the law enforcement authorities (van de Bunt 2008, p.126). The document also contained a very stringent rule to be applied when opening new bank accounts to its new members, particularly the ones from foreign countries (p.127).

Reference List

Berkowitz, S.D., Woodward, L.H (2006), “The use of formal methods to map, analyze and interpret hawala and terrorist-related alternative remittance system”, Journal of Anthropological and Related Science, Vol. 1 No.2, pp.1-15.

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Carol, C. (2004), Alternative remittance systems disguising sub-systems of ethnic money laundering in Interpol member countries on the Asian Continent. Interpol Information.

Cassin, R. (2006), Global Anti-money laundering: China lags as the US leads, Litigation Committee Newsletter, pp.25-27.

FATF (2003), Combating the use of alternative remittance systems: international best practices”. Web.

Henry, S. & Sills, S. (2006), “Informal economic activity: early thinking, conceptual shifts, patterns and persistent issues – a Michigan study”, Crime, Law and Social, Vol. 45, pp. 263-84.

IMF (2005), “Globalization and external imbalances”, World Economic Outlook: Globalization and External Imbalances, Ch. 3, International Monetary Fund, Washington, DC, pp. 69-84.

Johnson J (2002), 11th September, 2001: Will it Make a Difference to the Global Anti Money Laundering Movement? Journal of Money Laundering Control, Vol.6 No.1.

Johnson, R.B. (2005), “Work of the IMF in informal funds transfer systems”, in International Monetary Fund, Monetary and Financial Systems Department (Ed.), Regulatory Frameworks for Hawala and Other Remittance Systems, International Monetary Fund, Washington, DC, pp. 87-93.

Lippens, R. & Ponsaers, P. (2006), “Re-visiting the informal economy: introductory notes”, Crime, Law and Social Change, Vol. 45, pp. 529-61.

Morgan, J.S (2003) Dirty Names, Dangerous Money: Alleged Unilateralism in US Policy on Money Laundering. Berkeley Journal of International Law, Vol. 21 Issue 3, p771.

Munshani, K. (2005), The Impact of Global International Informal Banking on Canada, Nathanson Center for the Study of Organized Crime and Corruption, Ottawa.

Passas, N. (2005), Informal Value Transfer Systems and Criminal Activities, WODC, The Hague.

Perkel, W. (2004), “Money laundering and terrorism: informal value transfer systems”, American Criminal Law Review, Vol. 41, pp. 183-211.

Pohoata, I & Caunic, I (n.d), Informational value system- Hawala, “Alexandru Ioan Cuzo” University, Iasi.

Razavy, M. (2005), “Hawala: an underground haven for terrorists or social Phenomenon?”, Crime, Law and Social Change, Vol. 44, pp. 277-99.

Satkunasingam, E.B. and Shanmugam, B. (2006), “Underground banking in Malaysia: a case study of ROSCAs”, Journal of Money Laundering Control, Vol. 9 No. 1, pp. 99-111.

Schramm, M. & Taube, M. (2003), “Evolution and institutional foundation of the Hawala financial system”, International Review of Financial Analysis, Vol. 12, pp. 405-20.

Shanmugam, B. (2004), Hawala and money laundering: A Malaysian perspective, Journal of Money Laundering Control, Vol.8 No.1. pp.37-47.

van de Bunt, H.G. (2008), “The role of hawala bankers in the transfer of proceeds from organized crime”, in Siegel, D. and Nelen, H. (Eds), Organized Crime: Culture, Markets and Policies, Springer, New York, NY, pp. 113-26.

Watkins, R.C., Reynolds, K.M., Demara, R., Georgiopoulos,M., Gonzalez, A.and Eaglin, R.(2003) Tracing Dirty Proceeds: Exploring Data Mining Technologies as Tools To Investigate Money Laundering. Police Practice & Research. Vol. 4 Issue 2, p.163.

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