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1 Challenge In Money Laundering By: Dr Gholamhossein Davani Member of High Council of Iranian Association Of Certified Accountants (IACPA) IMA,AAA,IIA,CFE,BAA,EAA,CAAA,AIA,FMA.

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Presentation on theme: "1 Challenge In Money Laundering By: Dr Gholamhossein Davani Member of High Council of Iranian Association Of Certified Accountants (IACPA) IMA,AAA,IIA,CFE,BAA,EAA,CAAA,AIA,FMA."— Presentation transcript:

1 1 Challenge In Money Laundering By: Dr Gholamhossein Davani Member of High Council of Iranian Association Of Certified Accountants (IACPA) IMA,AAA,IIA,CFE,BAA,EAA,CAAA,AIA,FMA Chairman of Dayarayan Auditing&Finanacial Services Firm (Provisional member of RSM International)

2 2 Challenge In Money Laundering Part one

3 3 Money Laundering Money laundering is all about deception. Its aim is to deceive the authorities as to the origination, existence and/or application of illegal sources of income and the subsequent processing of that income to make it appear to have been legitimately earned. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organized criminal, the inside dealer, the tax evader as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. This 'facility' is the placing of the proceeds of such activities beyond the reach of asset forfeiture laws.

4 4 Money laundering is the process by which the proceeds of crime, and the true ownership of those proceeds, is changed so that the proceeds appear to come from a legitimate source. The ability to launder the proceeds of crime is vital to the success of criminal operations. Anti Money Laundering (AML) laws and systems are aimed at preventing criminals from being able to benefit from their actions, and at taking the profit out of crime. What is money laundering?

5 5 The term "Money laundering" is often said to have originated at the time of the famous American gangsters that arose originally out of Prohibition - the banning of alcoholic drinks. Several mechanisms were used to disguise the origins of the large amounts of money generated by the import and sale of alcohol and other "rackets" such as gambling, some of which was illegal. Ironically, one of the methods of concealing the source of the money was legal gambling. The major headache that gangsters faced was that the money was in cash, often in small denomination coins. If the coins were put into the bank, the questions would be asked. But the storage of large amounts of money in low value coins is a storage nightmare. So they created businesses, one of which was slot machines, and another of which was laundries - so, it is said, that the term "Money laundry" was born.

6 6 Money laundry is considered one of the most serious financial crimes due to its different effects on the mental, economic, social and ethical aspects whether on the level of individuals, society or institutions. It is one of the most complicated economic problems. Balance and settlement are the basic components in achieving a luxurious society. Any phenomenon that affects balance and settlement will affect the future of the societys development and progress..

7 7 Organized Crime in the 21.Century The trans-national problem International problem Dynamical problem Material – technical problem Global problem

8 8 Why Study Money Laundering? Governments are now realizing that the pursuit and confiscation of illegal monies from crime is as effective a way of attacking crime as arresting the felons, perhaps even more so given that many drug barons are able to continue to conduct business from their prison cells e.g. Pablo Escobar. So by seizing the rewards from crime it is hoped that such rent seeking activity is discouraged. The extent to which money laundering enables criminals to engage in activities harmful to the economy validates its study so as to prevent such activity.

9 9 Most financial institutions are unaware of the extent to which the world financial markets and banking system are being used to process illegal monies. Banks and financial institutions are at risk from being used for such activities as failure to observe their new legal responsibilities in combating money laundering leaves many of them open to criminal prosecution and the subsequent adverse publicity.

10 10 Therefore the study of money laundering as a means to countering crime, which imposes huge economic resource costs on society and threatens the proper functioning of the economy, as well as threatening the stability of the banking system, is a fully justified area of research.

11 11 It should be noted that money laundering is not merely confined to criminals. Many governments and their agencies engage in money laundering activities to provide a cover for various covert operations. The Central Intelligence Agency (CIA) is known to have used money laundering to forward money to support the Iran- Contra Rebels, while the British Government use of it in the Matrix Churchill Affair is widely known. However the size of such activities is dwarfed by illegal ones.

12 12 Money laundry generally means a group of procedures, methods or means that aim at hiding the real source of the money or possessions which come from criminal acts so that this money becomes legitimate and is used again in the economy. Generally speaking, the financial sector could be the most influenced sectors by the operations of money laundry. This is because this sector is the medium used by money launderers to hide the real source of the money and its profits.

13 13 Some researchers define money laundry as the operation of transferring and transporting money, which has been gained by illegal methods, has evaded legal obligations, or has any other form of keeping wealth, to cover up its source. In Islamic countries religious charities are involve in economic activities specially illegally and black market business.

14 14 The Money Laundering Cycle Money laundering is the process that disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. There are two reasons why criminals -- whether drug traffickers, corporate embezzlers or corrupt public officials -- have to launder money: the money trail is evidence of their crime and the money itself is vulnerable to seizure and has to be protected. Regardless of who uses the apparatus of money laundering, the operational principles are essentially the same.

15 15 Stages of Money Laundry Placement: It represents placing the dirty money into the financial or bank system by deposits. They are placed in different accounts in one or more banks whether in one or more countries. Layering: It means hiding the real source of this money, separating it from its suspicious source and giving it a legal and honest cover. Then, it is to be transported to professional companies. The money, thus, will be legally good for use in economic projects. Integration: This last stage represents giving the legal quality to the illegal money. It will be ready for investment for it will not be easy to discover it except by secret investigation through complicated channels.

16 16

17 17 Organized Crime Criminal groups have established international networks to carry out their activities more effectively through sophisticated technology and by exploiting today's open borders. The Global Programme against Transnational Organized Crime maps the latest trends among organized criminal groups and highlights their potential worldwide danger so that preventive action can take place.

18 18 Organized crime can be categorized: Theft and Fraud: Victimizing business: - Hijacking of cargo trucks - robbery - Bankruptcy fraud (also known as "bust-out") - Insurance fraud - stock fraud (Inside trading) Victimizing individual persons: - Car theft (either for dismantling at Chop shops" or for export) - burglary - Credit cards - stock fraud (pump and dump" scam) Victimizing state: - bid-rigging public projects - money counterfeiting - smuggling, manufacturing illegally (counterfeiting) or trading in untaxed alcohol (bootlegging) or cigarettes (buttlegging) - providing immigrant workers to avoid taxes

19 19 Providing illegal services and goods: - Loansharking - Gambling - Prostitution - Pornography - Drug trafficking - Weapons trafficking - Murder for hire - Toxic waste dumping (in Japan) - People smuggling - Trafficking in human beings Business and labor racketeering: - casino skimming (in Las Vegas) - setting up monopolies in rigid market low-tech industries (e.g. garbage collecting, cement pouring) - bid-rigging -abusing labor unions (in eastern USA): extortion (e.g. construction, transport, garment industry, longshoremen) getting "no-show" and "no-work" jobs using non-union labor and pocketing the wage difference - monopolizing the supply of immigrant workers with the associated people smuggling (Russian-Estonian Obtshak in Finland) Money laundering

20 20 Groups and of post-conflict and transitional societies Terrorism Terrorism constitutes a threat to international peace and security, and it is contrary to the purposes and principles of the United Nations. UNODC's Global Programme against Terrorism is an integral part of the United Nations' collective action against terrorism. The Programme, working closely with the Counter-Terrorism Committee of the Security Council, provides technical assistance to Member States and promotes international cooperation against terrorism.

21 21 Corruption Corruption is a complex social, political and economic phenomenon. The Global Programme against Corruption targets countries with vulnerable developing or transitional economies by promoting anti-corruption measures in the public sphere, private sector and in high-level financial and political circles. The Judicial Integrity Programme identifies means of addressing the key problem of a corrupt judiciary.

22 22 Cronyism and crony capitalism Bribery Nepotism Political Sleaze (UK Politics) Rent seeking Lobbying without public scrutiny Kleptocracy- a government so corrupt that no pretense of honesty remains Forms or aspects of corruption

23 23 Political scandals of the United States Hired Trucking Scandal Corruption scandals in the Paris region Illegal Logging Tangentopoli Corruption in Latin America Corruption in South Korea& Russian Sponsorship scandal Examples of corruption

24 24 Trafficking in Human Beings The smuggling of migrants and the trafficking of human beings for prostitution and slave labour have become two of the fastest growing worldwide problems in recent years. The Global Programme against Trafficking in Human Beings will enable countries of origin, transit and destination to develop joint strategies and practical action against the trade in human beings.

25 25 The Mafia, also referred to in Italian as Cosa Nostra, which is generally translated this thing of ours in the Italian language, is an organized criminal secret society which evolved in mid-19th century Sicily. An offshoot emerged on the East Coast of the United States during the late 19th century following waves of Italian immigration to that country. A member of the mafia is called in Italian a mafioso, and the plural is mafiosi. In Sicilian the word is mafiusu and mafiusi, respectively. Mafiosi like to think of themselves as a special society of "men of honor". "Mafia" is often used by extension to refer to any large group of people engaged in criminal racketeering activities, such as the Russian Mafia, Mexican Mafia, Japanese Yakuza, Irish Mob, Chinese Triads, Indian mafia, and the allegedly extinct Indian Thuggee.

26 26 The Russian Mafia "Red Mafia" is a name given abroad to groups of organized criminals of various ethnicity which appeared from the Soviet Union after its disintegration. Apart from ethnic Russians, the term comprises the Chechen, the Georgian, the Ukrainian, the Armenian, the Azeri mafiosi, as well as so called "mafia" groups from other former USSR republics. [For sake of the article, the terms "mafia" and "mafiya" will both be used.] The Russian Mafia appears to be organized in similar ways to the legendary Italian mafia. It is believed, however, to be a very loose organization with internal feuds and murders being commonplace. A particularly brutal practice rumored to be utilized by the Russian Mafia is the killing of not only of the individual who has "snitched" or turned against the Organizatsiya, but also the individual's family.

27 27 Many of the bosses and main members of the Russian mafia are believed to be ex-Soviet Army and ex-KGB officers who lost their posts in the reduction of forces that began in 1993 after the end of the Cold War. It is also believed that many of the groups' enforcers are ex- Russian Spetsnaz special forces, an organisation renowned for its brutality. Russian mobsters recruit sportsmen, too - boxers, martial artists, weightlifters, [as funding for sports had decreased sharply] and other olympic athletes. In some cases, the Russian Mafiya has recruited olympic sharpshooters to carry out hits.

28 28 Known Russian Mafia Personalities Zeev "Zevik" Rosenstein (extradited to the U.S. from Israel) Viktor Bout (former KGB Major turned arms merchant) Konstantin Golikov(notorious assassin, now has been killed) Sergei Mikhas Mikhailov Grigory Lushansky (leader of Nordex) Evsei "Little Don" Agron (killed) Ludwig "Tarzan" Fainberg (incarcerated in an Israeli prison) Valentin Chpelivia (involved in the Kremlingate according to Lucy Komisar) Vyacheslav "Yaponchik" Ivankov (incarcerated in an American prison) Alimzhan Tokhtakhounov (accused of fixing figure skating at the 2002 Salt Lake City Olympics). Sergei Belov (Boss of eurocorp)

29 29 Factors that affect money laundry are divided into two types 1- Factors that contribute in its appearance. Examples: confusion that affects the local economy, weak economic policies which are used, chaos that accompanies economic and security imbalances. 2- Factors that contribute in its increase. Examples :open-door policies, distorting the continued economic frame, open-door relation with international monetary markets. The international markets lead to money laundry prosperity by 25% of the size of operations which reached to US$250 billion per year.

30 30 Effects on politics, administration, and institutions Corruption poses a serious development challenge. In the political realm, it undermines democracy and good governance by flouting or even subverting formal processes. Corruption in elections and in legislative bodies reduces accountability and distorts representation in policymaking; corruption in the judiciary compromises the rule of law; and corruption in public administration results in the unfair provision of services. More generally, corruption erodes the institutional capacity of government as procedures are disregarded, resources are siphoned off, and public offices are bought and sold. At the same time, corruption undermines the legitimacy of government and such democratic values as trust and tolerance Money Laundry Effects

31 31 Economic effects Corruption also undermines economic development by generating considerable distortions and inefficiency. In the private sector, corruption increases the cost of business through the price of illicit payments themselves, the management cost of negotiating with officials, and the risk of breached agreements or detection. Although some claim corruption reduces costs by cutting red tape, the availability of bribes can also induce officials to contrive new rules and delays. Where corruption inflates the cost of business, it also distorts the playing field, shielding firms with connections from competition and thereby sustaining inefficient firms. Corruption also generates economic distortions in the public sector by diverting public investment into capital projects where bribes and kickbacks are more plentiful. Officials may increase the technical complexity of public sector projects to conceal or pave way for such dealings, thus further distorting investment. Corruption also lowers compliance with construction, environmental, or other regulations, reduces the quality of government services and infrastructure, and increases budgetary pressures on government.

32 32 Economists argue that one of the factors behind the differing economic development in Africa and Asia is that in the former, corruption has primarily taken the form of rent extraction with the resulting financial capital moved overseas rather invested at home (hence the stereotypical, but sadly often accurate, image of African dictators having Swiss bank accounts). Corrupt administrations in Middle East like Iran have often taken a cut on everything (requiring bribes), but otherwise provided more of the conditions for development

33 33 Measuring corruption Measuring corruption - in the statistical sense - is naturally not a straight- forward matter, since the participants are generally not forthcoming about it. Transparency International, the leading anti-corruption NGO, provides three measures, updated annually: a Corruption Perceptions Index (based on experts' opinions of how corrupt different countries are); a Global Corruption Barometer (based on a survey of general public attitudes toward and experience of corruption); and a Bribe Payers Survey, looking at the willingness of foreign firms to pay bribes. Transparency International also publishes the Global Corruption Report. The World Bank collects a range of data on corruption, including a set of Governance Indicators. Transparency International has performed perception surveys from time to time. The 10 least corrupt countries, according to one conducted in 2005, are (in alphabetical order): Australia, Austria, Denmark, Finland, Iceland, New Zealand, Norway, Singapore, Sweden, and Switzerland. According to the same survey, the 9 most corrupt countries are (in alphabetical order): Angola, Bangladesh, Chad, Côte d'Ivoire, Equatorial Guinea, Haiti, Myanmar, Nigeria, and Turkmenistan The rank of Iran for 2005 was 92 However, the value of that survey is disputed, as it is based on subjective perceptions. Sophisticated technology may be available to those countries considered by the public as "least corrupt" to conceal corruption from public view or disguise it as legitimate dealings. According to independed research Tehran,Mashhad,Shiraz and Isfehan are the four most corrupt states within the Iran.

34 34 Sources of illegal Money Money laundry is considered a complicated operation that has multiple sources. There are activities that seem to be the sources of money laundry, such as: - Smuggling goods without paying duties. - Trafficking in illegal and immoral goods and services. - Trafficking in human captives through kidnapping persons to get ransoms or benefits. - Bribes and administrative corruption and benefiting from public jobs. - Tax evasion and hiding the sources of profit. - Commissions gained by individuals or projects in return for striking big bargains in return for facilities and speed by ignoring times and conditions. - Incomes from fraudulence, deception and forgery of documents. - Trade fraud, trading spoiled goods, foreign trademarks counterfeit, stealing mental creativity and abusing individual ownership. - Embezzlement and stealing from public property under the pretext of reconstruction, projects or security reasons. Making use of official authorities to transfer money to the pocket of specific individuals instead of actually building schools or establishing projects.

35 35 The Magnitude of Money Laundering By its deceptive nature, the full extent of money laundering is unknown; estimates range from $500 billion to $1500 billion( US banks launder over $500 billion a year in dirty money) That is $5 trillion over 10 years. Internationally the figure is $1.5 trillion a year. The main bulk of monies to be laundered originate from the narcoeconomy and so by estimating the size of the narcoeconomy a good approximation of the size of global money laundering may be achieved. The Financial Action Task Force, (FATF), established in 1989 by the G7 and European Community to assess the problem of money laundering and prevent the financial system being used for its purposes, estimated in 1990 that in the US and Western Europe drug trafficking generated $85 billion annually from laundering and investment. Thus almost $233 million in drug money is available daily for laundering. The task force concluded in 1990 that, in the US and Western Europe, drug traffickers' profits probably yielded $232,115 per minute. One can get a feel for the size of the narcoeconomy by the fact that in 1990 approximately 20 per cent of Peru's Gross National Product was generated by narcotics, whereas legitimate exports accounted for only 14 per cent.

36 36 In America, Citibank is the biggest money launderer followed by JP Morgan Chase. Not only do they set up offshore accounts for their clients, they also launder trillions of dollars through correspondent banking. That's when a bank opens a correspondent account with an existing US bank and through that account offers services, which are bookkeeping entries. The International Monetary Fund (IMF) estimates that between 2 and 5 percent of global GDP may be involved in money laundering, making it the world's largest industry. The United Nations estimates that anywhere from US$100 billion to US$1 trillion in dirty money is funneled through the international banking system annually, with Asia accounting for at least US$100 billion to US$200 billion.

37 37 What is the Government's strategy? It is difficult to estimate how much money is laundered in the IRAN every year, but it is likely to be $5-6 billions. Money laundering is also a global problem. At one end of the scale it can involve the very simple conversion of criminal proceeds and at the other, the routing of complex transactions through many countries to disguise the illegal origin of the money. Accordingly AML in Iran controls have to be international if they are to be effective. Some of the recent changes to the Iran legislation covered in this Guidance flow from anti-money laundry. This Directive aims at improving AML controls throughout world-wide. The Persian Gulf (Specially UAE ) are major international financial and legal centre, with a high reputation for honesty and integrity. This means that the Persian Gulf financial and professional firms are attractive to money laundries. I amen's sure the local government wants to ensure that these firms are not used by launderers in spite of all of these countries have approved Anti-money Laundry Law.

38 38 Good governance Rule of law Transparency (humanities) Accountability Comitology

39 39 Which Countries are involve in Money Laundry Swiss UK USA Russian UAE Iran Qatar Turkey Luxemburg Offshore Zones

40 40 The Reputed Cocaine Bank Money Laundry Wizard For George Bush Family Arrested In Chicago By Sherman H. Skolnick The reputed cocaine bank money laundry wizard for former President George Herbert Walker Bush and two of his sons has been arrested in Chicago. The matter is tied as well reportedly to corrupt top IRS Officials, Chicago Region Office fingered by our work. Giorgio Pelossi, a prominent Swiss accountant, was arrested January 20, 2000, at O'Hare International Airport, after officials of the U.S. Immigration and Naturalization Service, INS, found he was wanted on an international arrest warrant issued in Milan, Italy, about a year previous. Pelossi, 61, was somehow actually traveling under his own name.

41 41 The Functional Construction of Organized Criminal Structures LEADER Brain center Managers Little Bosses Shadow area Criminal area Theft, robbery Racketeering Bribing, relations with administration and state Lawyer Consultant Legal business Money laundry Entrepreneurship Alcohol and drug trade Prostitution Gambling Terrorism

42 42 The "Golden Rules" remain the same as set out in earlier guidance The "Golden Rules" remain the same as set out in earlier guidance: Know the legislation; Know the professional guidelines; Know your client; Know your business; Train your staff; Monitor compliance.

43 43 Source:

44 44 Money Laundering In Iran Part 2

45 45 Iran new law & regulation 1-Regulations on Avoidance of Money Laundering(2004) 2- E. commerce law The Law of Using the Professional Services of the Certified Public Accountants (1993) 4- Bill Text of VAT in Iran (Non approved) 5- Article 49 of constitution law 6- Article 662 of Islamic criminal law 7- Convention Against Illicit Trafficking in Narcotic Drugs and Psychotropic Substances 1988

46 46 Article 49- The Government shall be required to take wealth derived from usury, usurpation, bribery, embezzlement, theft, gambling, misuse of pious endowments, misuse of Government contracts and transactions, sale of original Mavat (1) and Mubahat (2) centers of corruption and other illegitimate acts, and to return it to its rightful owner; in case the owner is not known, to return it to the Treasury. This provision shall be carried out by the Government by examining, investigating and substantiating the proof in accordance with the provisions of Sharia (3). 1.Ownerless barren lands 1.Ownerless Properties 2.Religious law The constitution of the Islamic republic of Iran

47 47 Legislation to combat money laundering in Iran was submitted to the Parliment on 8 October 2002 by Minister of Economic Affairs and Finance. The issue has attracted more attention from observers of Iran outside the country than from the Iranian public. Yet the decision to counter money laundering is of economic, domestic and foreign policy significance for Iranians. Moreover, it could play a crucial role in advancing the agenda of Irans reform movement. On 25 April,2006 the Parliment passed the act and it is now awaiting the approval of the hard line- dominated upper house, the Guardian Council. This article will elaborate on different aspects of countering money laundering in Iran. Iran Focus will elaborate on the content of the bill, its advantages and shortcomings in later issues.

48 48 Money laundering in Iran has been increasing since the end of the 1980–88 Iran–Iraq war. According to Iranian newspaper sources, the amount laundered in Iran rose from about 6% of GDP in the mid-1970s to close to 25-30% in the In 2003, a prominent Iranian banking official estimated that money laundering encompassed 20% of Irans economy. Money laundering, although not confined to developing countries, arises from extensive underground financial activities that are made easier when financial institutions are underdeveloped as is the case in Iran. From the $11.3 billion a year that is spent on smuggling commodities in Iran, some $6.1 billion is laundered by international criminal networks.

49 49 The decision to initiate an anti-money-laundering campaign falls under the Khatami governments policies of improving the underdeveloped economy. In this effort, the governments economic team has sought to strengthen the national currency, control inflation, promote the private sector, enact stringent banking regulation and monitor policies, and expand social and job-related insurance. All this marks the governments intention of clamping down on illegal financial activities, a strategy that it considers necessary to counter underground economic activities. However, what is in question is the extent to which such policies will face resistance from monopolists and those engaged in rent-seeking activities.

50 50 Drug trafficking one area where money laundering is extensively used is in drug deals, to which Iran is highly exposed. There are two main illicit opium-producing areas in Asia, the Golden Crescent (Iran, Pakistan and Afghanistan) and the Golden Triangle (Burma, Laos and Thailand). Iran has central strategic significance in the former but also serves as a transit route to the latter as a gateway to Europe, Turkey and Russia. The Islamic Republic has been zealously trying to combat drug trafficking in Iran. Against all the odds, this did not diminish after the fall of the Taliban, which used the cultivation of poppies in Afghanistan to destroy the younger generation in the West and among Iranian Shiites. Iran s specifics

51 51 In the past 10 years, some 1,600 members of the Iranian law enforcement forces have been killed in the battle against drug trafficking. Despite an extensive assault on the drugs trade, opium addiction in Iran is vast, with some 2% of the population of almost 70 million citizens addicted. The UN Office on Drugs and Crime estimates that 2.8% of the Iranian population aged over 15 used opiates in That makes Iran the third consumer worldwide. In 2002, the number of deaths from drug abuse increased by 370%, reflecting a shift in Iran to abuse of heroin. Opiate drug seizures during 2005 in Iran included almost 340 tones of opium. In that level of seizure, Iran ranked first in the world.

52 52 Illegal jetties Because of deficient trade regulations, many commodities are being smuggled into Iran. Some 62 jetties in Iran have been identified as illegal and are not supervised by customs authorities. So not only has there been a failure to stop illegal business but certain monopolists have been encouraged to import commodities. The fact that these commodities are illegal for import – for the sake of protection of domestic industry – but legal for trade at the market has encouraged unofficial economic activities for some monopolists and influential rent seekers.

53 53 Traditional interest-free funds Another factor that encourages Iran to tackle the issue of money laundering are the aspects of traditional economic activity that are deeply rooted in Iranian society. Even if traditional business systems do not necessarily mean that a society based on it is more exposed to fraud or corruption than a modern economy, the existence of such interest-free funds is a handicap for a country that is already suffering from all kinds of prejudice, accusations and lack of international legitimacy. These unofficial institutes, known as Sandoq-e Qarzolhasaneh, work parallel to the countrys official economic infrastructure. Their activities have reduced the governments control over liquidity and financial and monetary markets. These interest-free funds lack any operation permit from the Central Bank of Iran. This state of affairs has seriously undermined the governments monetary policies to contain inflation just as it has prevented the government from making efficient use of the peoples savings. Especially, the rising inflation rate has been a source of concern for international financial institutions such as the IMF.

54 54 The dilemma of Hawala is other component of the conventional economy is the use of the Hawala. This is an alternative remittance system. It operates outside Western banking or conventional financial channels. It is based on trust and extensive use of family connections or regional affiliations.

55 55 The source of the money is, however, not always illegitimate. Nor are recipients necessarily engaged in illicit activities. Yet, as against white Hawala, the term Black Hawala refers to illegitimate transactions, specifically money laundering. Black Hawala transactions are almost always associated with some serious offence such as narcotics trafficking, fraud or money laundering. However, what makes Western observers skeptical about the use of Hawala is that it has the underlying potential to offer channels for money laundering. Money laundering consists of three phases: placement, layering and integration. Since Hawala is a remittance system, it can be used at any of these phases.

56 56 Hawala across borders is endorsed by most of the Islamic banks as it is founded in the Quran. The threat to the non-Muslim international community lies in the fact that Islamic banks are becoming large enough to operate with Japanese and European banks. Moreover, the Islamic banks are now big enough to resist pressure from the US. Some observers are confident that the US will not be able to crack into the Islamic banks after the 9/11 incidents. The US economy, many Arabs believe, will be adversely affected if Islamic funds are touched.

57 57 Today, in Washington circles, Hawala is associated with the systematic money transactions used by outlaws such as Osama bin Laden for his business with diamonds and gold. The Hawala is today considered illegal not only in the US but also in Pakistan and India where it was very widely used. Also, World Trade Organization membership requirements specifically demand a ban on Hawala. It is noteworthy that Iran has already applied 16 times for WTO membership, but the US has vetoed this on every occasion.

58 58 The process of money laundering in Iran The procedure for money laundering in Iran is different from that in the West. For example, the international criminal networks in the Golden Crescent and Golden Triangle transfer the sums received from drug smuggling from local currencies to different types of commodities. These commodities are then transferred to their registered companies in the UAE, Hong Kong or Singapore. These firms place these products at the disposal of Iranian criminal operators who then use the illegal jetties to import them into Iran. These commodities or drugs are sold in the Iranian market. The amounts raised from these transactions are transferred to the traditional interest-free funds which through the Hawala or otherwise transfer these monies out of Iran.

59 59 operators who then use the illegal jetties to import them into Iran. These commodities or drugs are sold in the Iranian market. The amounts raised from these transactions are transferred to the traditional interest-free funds which through the Hawala or otherwise transfer these monies out of Iran. All this could explain why the unofficial economic sector (money laundering is part of it) in Iran contributes to something between 45% and 52% of GDP.

60 60 Iran, the international community and money laundering Iran-US The 9/11 attacks brought new dimensions to security issues since the attacks related money laundering to terrorism. US President George W Bushs State of the Union Speech in 2002, in which he designated Iran as part of an Axis of Evil, and the subsequent intensified accusations of terrorism against Iran, have placed the Islamic Republic in a difficult situation in various fields such as nuclear proliferation, money laundering and drug smuggling.

61 61 The mafia groups use an unusual mechanism for laundering dirty money in Iran. They spend money earned from drug trafficking to purchase goods on the domestic market and then export the goods to and sell them in Dubai, Afghan and CIS countries. Thus this money re-enters the same cycle. The total value of organized smuggling is estimated at $11.8 billion per annum. Some six billion dollars of this amount goes directly to foreign mafia networks. It is very unfortunate for a country with $23 billion of annual oil revenues to have $11.8 billion involved in smuggling.

62 62 The IMF and the World Bank focus on the degree of transparency in states economic policies. Several Middle Eastern states have voluntarily participated in IMF–World Bank-initiated processes of assessment of fiscal, monetary and financial policy transparency. Iran is among those whose legislation is assessed on anti- money laundering and combating of terrorist financing. Despite Irans hostility to the US, the Islamic Republic has been relentlessly trying to engage with the IMF, World Bank and WTO. Moreover, many of the Khatami governments economic policies have been in harmony with IMF criteria. Iran sees the end of its political isolation in an economic opening assisted by these multilateral institutions. (For more on Iran and these institutions

63 63 Simple Money Laundry in Iran Finance& refinance from Middle East bank especial UAE The Letter of credit without transfer money Over-invoice in Foreign transaction Tehran Stock exchange transaction Real state transaction Gun transaction (Iran-Contra) Drug (Opium) Non-bank financial institute (Gharzal-hasaneh funds) Religious Non-profit institutes Religious Charities Religious societies & Mission Iran Free Industrial &Commercial Zones

64 64 An unknown number of foreign businessmen, believed to be in the low thousands, mostly entrepreneurs and other high risk venture capitalists arrived in Iran during the early and mid 1990's, from all over the world, to seek their fortune and to cash in on the transition from a Governmental to a free market/capitalist society. This period in time in Iran was referred to by many of the businessmen as the Construction period Annual import from Dubai in 2005 was $ 21 Billion Foreign Businessmen and the Iran financial Mafia

65 65 Operation Scope of Translational Organized Criminal Groups (1) Drug business industry Organization of human trafficking and illegal migration The development of sexual industry The development of human body part and tissues trade and biomedicine Car theft and smuggling Modified racketeering Smuggling and illegal circulation of arms, ammo and explosives Terrorism Illegal circulation of nuclear and weapons of mass destruction (WMD) Organization and controlling of gambling business Armed attack to traffic transference, including sea pirates

66 66 Operation Spheres of Trans-national Organized Criminal Groups (2) Controlling of transit business sphere Cyber technology criminalization Fraudulence in crediting and insurance Smuggling or theft of cultural objects and artwork Copyright objects illegal using, selling and copying Exotic animal and plant contraband Radioactive and other hazardous waist gathering, storing un destroying Money laundering

67 67 In Iran, this phenomenon was not known before. Yet now it exists due to the rotating of the international economy and growth of international currency markets. It is one of the effects of the change that took place after 2003.

68 68 How money laundry do in Iran Buy-Sell Real state Tehran stock Exchange Private banking transaction Non-Banking institutions Drug market Arms smuggling Buy-Sell Governmental Bound ( $14.1 Billion ) Co-operatives of frontier inhabitants ($ 6.5 Billion ) Tax shelter (Tax haven)-Iran Free zones Oil Swap with Iraq &CIS countries Establish a company out of Iran(Foreign Co.),sell goods &Services to Iran with over invoice Religious Charities Establish Holding company Traveler's Cheque for financial transactions Foreign currency transaction by Hawala

69 69 Why charities & religious groups are vulnerable to Money laundry & Corruption Religious groups vary widely on the requirements of accountability - from audits on the regional level, to individual entity audits, to no audits at all. The reasons for the lack of accountability to national organizations frequently have their roots in theology or group history so it may cause problems to increase centralized oversight. Similarly, independent audits may be too expensive for some. According with Iran tax act &civil code and base of Islam theory all religious centers, foundations of the Islamic revolution, charities institution, and Islamic science schools have tax exemption and they are under hand of High Spiritual Leadership. Charities & Religious groups often lack independent audits or outside accountability.

70 70 General Circular of Money Laundry A drug dealer, has a large load of cash coming in from a sale but he first has to wash the soiled money. One of his agents, Alahmad, transports in Kish Free Zone, redenominated, and stores the money at a bank at the country's border. Alahmad later transfers the money to another agent, Alghassem, across the border through another bank. Yet another agent, Jassem, transfers the cash back across the border to the launderer's account in a third bank. This scheme, the cross-border cash movement, is just one of the several that money launderers use to bleach the stains out of dirty cash.

71 71 Millions of Afghan, Filipinos, Indians, Iranians, Pakistanis, and other people from Asia working in foreign countries use the system to send money home to relatives through the Hawala route. Intelligence officials believe that Hawala, in recent years happens to be the safest and fastest means to militants for transferring money across the globe as it leaves no evidence of its movement and is difficult to track. In most cases, only couriers get apprehended; they are merely a small part of a long chain

72 72 In regard to the Iran experience, there were basically two types of foreign businessmen, the lucky ones and the unlucky ones. For the lucky ones, huge fortunes were made and they were able to return to their native homeland with their life, limbs and money. Many clever foreign businessmen made huge profits early on, by good timing, chiefly by buying up products in nearly worthless Rubles, storing them for a time and after the introduction of the free market economy, later selling the same products for hard currency such as US Dollars. Many became millionaires, literally overnight.

73 73 Hawala has been in existence for a long time in Iran and other Asian countries especially in Persian gulf countries same UAE. Some Hawala operators feel that it is an extension of the Hundi system of money transfer that came into existence during the Mughal rule in India. This was started by the Sindhi community to avoid dacoity and highway robberies during money transfers. Later, sometime around World War II, Muslims going from Kerala to the Persian Gulf adopted the system of giving a coded message sent by post to deliver the money to people in Kerala. Since the Indian Rupee was legal tender in the entire region, the transaction did not suffer from cross currency exchange rates. With the revolution in communications, messages through post got replaced by telephone and later by fax; and, now by . In the process, the scope of Hawala transactions got enlarged.

74 74 Hawala transactions have been prevalent in Iran and Persian Gulf specially between worker class in Persian Gulf countries in one form or another for a long time. Operators of this illegal activity attracted little attention till it came to light that this mode of fund transfer was being used to fund terrorist activities in India and many other parts of the world. This paper focuses on the origin and growth of Hawala, its modus operandi, major cases and successes despite various flaws. The paper also throws light on the shortcomings in the legal, banking and commercial practices and the difficulties faced by the enforcement systems.

75 75 Hawala is an alternative banking system hundreds of years old, and is known in Iran, the Middle East and Pakistan as hundi. It involves Hawala brokers - often local small businessmen - all over the world who know each other. It enables people to transfer money from one part of the world to the other without having to go through banks. There is no paper trail and no money ever crosses a border. Discrepancies in the two-way flow are settled up at the end of the month, or perhaps every six month.

76 76 Hawala is an alternative banking system hundreds of years old, and is known in Iran, the Middle East and Pakistan as hundi. It involves Hawala brokers - often local small businessmen - all over the world who know each other. It enables people to transfer money from one part of the world to the other without having to go through banks. There is no paper trail and no money ever crosses a border. Discrepancies in the two-way flow are settled up at the end of the month, or perhaps every half year.

77 77 There are two historical systems, namely the Hawala/hundi and the fei chien. Hawala/hundi will be discussed later in this paper to a larger extent, but to compare and contrast the two, a closer look at the Chinese system fei chien will be helpful. As most other systems, the fei chien arose as a result of trade. During the Tang Dynasty, merchants from the southern part of China sold their tea … at the Capital and transferred their money to … liaison offices or agencies of provincial governments located at the Imperial Capital where these revenues were used to pay taxes due from these provinces to the central government. These courts issued certificates indicating amount paid by the merchants who, upon their return, would present them to their provincial government for payment of an equivalent sum of money. This system benefits both the local government and the merchants since neither had to travel with cash. As I will demonstrate later in the case of Hawala, with the migration to other regions of China, the system spread as well. Migrants sent part of their salary home to support their families which had stayed behind. With the increasing migration that passed the borders, the system changed from a domestic to an international dimension. Hawala-The Invisible Financing System of Terrorism

78 78 The events of September 11, 2001 have changed the worlds perception of terrorism and brought focus on terrorist support structures and funding. The attacks of September 11 could not have taken place without the movement of funds through the global financial system. Terrorist groups need money to motivate people to join their activities, to procure materials like arms and ammunition and to keep their network going. The experience of the Indian subcontinent in dealing with terrorist outfits operating in Jammu and Kashmir shows that they get their resources mainly from two sources-from the intelligence agencies of Pakistan and the Kashmir diaspora spread across the world. It is now an open secret that Kashmiri organizations located in places like London and New York raise resources through donations, extortions and collections in mosques. In addition, they also channel money from agencies of countries like Pakistan.

79 79 sourcing agencies adopt two methods: by personally carrying through the land borders by couriers; secondly, through the traditional Hawala method. Hawala is a system through which money is transferred from one part of the world to another without following the normal banking channels. Though no one perhaps knows how and when this method of money transfer started, it appears, it is as old as the beginning of monetary transactions themselves. This system has been in existence for a long time in Iran and other Asian countries especially in Persian Gulf countries same UAE & Iran.

80 80 The Hawala system is known to be exploited by militants all over the world for financing their activities, to purchase arms, to send funds (ISI, Mohammed Atta, Ibrahim, Mohammed Ansari(Dubai), etc. are a few well known names who have exploited this system for overt or covert funding of terrorist activities), and to finance films. Hawala code words used are khokas, paties, etc which mean crores (10 million) and lakhs (1,000,000) respectively. But these can and do change.

81 81 As an alternative remittance system working in parallel with the normal banking channels, Hawala has two categories. (1) Domestic Hawala. (2) Transnational Hawala. Methods of Hawala

82 82 In the course of normal business transactions between two parties located in different cities within Iran, unaccounted payments are made through Hawaladars (Hawala operators) in these cities. This job is normally done by Saraf who are people who run shops. These shops are unofficial institutions that act as Coins, postal couriers for letters, parcels and money, among different cities. They also make Hawala payments for the concerned parties located in different cities without carrying the money through various cash holdings/transfers. Domestic Hawala

83 83 In transporter Hawala, money moves across international borders without being physically carried. The payments are made by Hawaladars located in Iran to the friends and relatives of expatriates working abroad. The Iranian Hawala operator has his counterpart outside Iran who receives payments in foreign currency from these expatriates and passes on instructions for distribution in Iran in Iranian Rails. Similarly, unaccounted payments are made from Iran to foreign parties through this system, particularly in cases of under-valuation of imports. People in Iran & UAE having large unaccounted tax- evaded money also transfer money outside Iran through Hawala to safe places abroad. Such monies may finally find a place in banks located in tax havens; and, may be transferred to other places in due course of time depending upon business requirements or may find its way to Iran as legitimate inflow after undergoing the laundering process. Transporter Hawala (International Hawala)

84 84 Both the inward and the outward systems are complementary to each other. Besides evading tax, the system is fast, cost-effective, reliable and conceals the trail. In the war period between Iran & Iraq ( ), the black market rate of the local currency was very higher than the bank rate. It was therefore advantageous to resort to the Hawala route to transfer funds. In Iran, Hawala business centers are in Tehran, Shiraz, Mashhad, Isfehan,Kish and Qeshm.. Their share of the business is different and relate to other countries. For example 1 US Hawala from Iran to Dubai is cost Rails (1 USD=9110 Rails,2006)

85 85 $4 billion to $6 billion moved through the Hawala system annually between Iran and Dubai, USA, Canada, UK, Germany and Kabul. It is more than the amount of foreign transfers through the countrys banking system. Totally import from Dubai in 2005 was $ 21 Billion that estimated $ USD 7-9 Billion have been transited to Pakistan, Afghanistan and CIS countries. Total amounts of Money Laundry in Iran is about %25 GDP

86 86 Principles underlying our handling of allegations of charities' involvement with Terrorism, Money Laundry & Corruption. Some of charities in Iran has airplane, shipping, holding investment, chain market and ….. Unfortunately Muslim Money Launder pay some part of their profit under the plea of Islamic tax Khums to religious authority and then their money will be clean& ceremonially clean. The government has no control on these amounts because the religious authority hierarchy ascertain by Muslim people and Khums is economy poverty of religious leaders.

87 87 Islamic Tax Khums: A religious tax imposed under the Islamic Law on Muslims"Khums" literally means "one-fifth or 20%". In Islamic legal terminology, it means "one-fifth of certain items which a person acquires as wealth, and which must be paid as an Islamic tax". The Qur'an mentions it in the following verse: Know that whatever of a thing you acquire, a fifth of it is for Allah, for the Messenger, for the near relative, and the orphans, the needy,

88 88 Items which are eligible for khums are seven The profit or the surplus of the income. The legitimate wealth which is mixed with some illegitimate wealth. Mines and minerals. The precious stones obtained from sea by diving. treasures. The land which a dhimmi kafir (Dry farming) buys from a Muslim. The spoils of war.

89 89 Zakat A religious tax levied under the Islamic law on the Muslims Zakat is the amount of money that every adult, mentally stable, free, and financially able Muslim, male and female, has to pay to support specific categories people. Any owner of gold and silver who does not deliver from them their right, on the Day of Quiyamat (Day of Judgment), (the gold and silver) will be shaped as foils of fire. Then it will be heated in the fire of Hell; (and) then with it he will be ironed on his side, his forehead, and his back" (narrated by Muslim). Zakat is obligatory after a time span of one lunar year passes with the money in the control of it's owner. Then the owner needs to pay 2.5% (or 1/40) of the money as Zakat. (A lunar year is approximately 355 days).

90 90 Financial Mafia Gang in Iran( $ Billion 2005) Case of 123 Billion Tomans(1 USD=340 Toman) Saderat bank,1996 Case of Shahram Jazayeri 2002 (12,000,000 $) Smuggled goods yearly (4-5 billion $) Smuggled drug yearly (150 Million $) Drug transit in East&West yearly(1.3 Billion&) Oil Swap from CIS Countries yearly (250 Million &) Gas oil & Fuel import yearly (500 Million $) Weapon transactions (West $ South of Iran)?? Gas oil Import & Export yearly (400 million $) Antiques Export ???

91 91 Export and import operations The scheme of money laundering through import operations is as follows. Illegally acquired funds are remitted to accounts of dummy firms and then foreign currency is transferred abroad to pay import contracts. The further bankroll manipulations take place there. Money is transferred from one account to another until it become legal. Among well-known ways of illegal enrichment are to embezzle credits, deceive partners, make "pyramids", attract public funds and cause a bank failure, privatize industry and trade, etc. Those banks developing in a rapid way during a primary accumulation of capital and then failing, in reality, transferred some money to foreign bank accounts. Then these funds were put in a legal business abroad or in Iran.(1500 Iranian Co with more than $250 Billion assets in UAE)

92 92 As a rule, criminals officially register "fictitious" or "transit" firms for dummies, military men, prisoners, as well as needy and mentally ill persons. Real machination organizers transfer money to their accounts on legal grounds. Further, these firms vanish and organizers make no claims (or at least formal ones) on breaking contracts. These firms are of a short-term nature. Tax bodies start showing interest in their activity only in three months when it is time to check the accounts. Tax officers can suspend the movement of funds to the account that is practically not required by that time and carry out the revision. Fictitious firms are taken under the currency control after ninety days. All computations should be accomplished within this time. Information on breakers is obtained too late because of an imperfect mechanism of the interaction between Iran's local bank and commercial banks. By this, the firm had ceased to exist for a long time, its managers disappeared and documents are lacking. In such cases, it is impossible to audit an enterprise, impose a fine and search out its managers.

93 93 According to the export operation scheme, goods are delivered to bought or established firms abroad. As a rule, foreign firms are supplied with raw materials but Iranian ones obtain no money. Funds do not return to Iran and they are legalized abroad. False firms can be also used in these cases. Many of import are transit to Afghanistan & CIS countries. They are easy to replace in 45 days, guilty persons being difficult to find then. This channel is widely used because it results in decreasing export prices.

94 94 Fictitious services and transfer It is quite risky to establish dummy firms. Therefore, swindlers often use a fictitious service payment scheme. The currency control cannot be taken of this sphere because the criminal can be arrested if the whole scheme of obtaining illegal revenues is exposed before their legalization. As a rule, cash money is illegally transferred when locally exchanging Rails or foreign currency to obtain it abroad. Foreigners who are engaged in a "shuttle" business derive considerable incomes from import. However, they cannot bring back their receipts in RIALS or foreign currency unless they were declared. Therefore, firms or banks with partial or full foreign capital are set up. Further, the scheme is very simple. Trade earnings are exchanged and then firms transfer them to their native bank accounts abroad through import contracts. When the audit starts, documents are destroyed or vanish, foreigners leave Iran and it is impossible to find managers. This problem will remain while there is a shuttle business.

95 95 Cash Circulation Taking into account a severe control of cash currency and the legalization of an economic life (first of all, shady circulation), breakers often use the following scheme of encashing foreign exchange. Iranian businesspersons buy or establish firms abroad, open their representative offices or branches in Iran and transfer large sums of foreign exchange to these accounts through foreign contracts. Although representative offices must not realize an economic activity, they do it in a very active way. Some cash money is given to foreigners to pay traveling or other expenses because they can get cash exchange on legal grounds. After encashing, a part of funds is put into a shady use or exported abroad.

96 96 Very large money is put into a shady circulation through external economic activities of enterprises (price and import volume manipulations, illegal customs registration). In such cases, customs duty discharge is considerably reduced. It appears that many goods are illegally imported. In Iran, they are for overpriced sale and delta plus receipts resulted from selling unregistered goods are partially or fully put into a shady circulation and cannot be taken under control. Funds remain to be in a shady use to evade taxes and avoid a penalty. Finally, some cash funds are legalized, for example, by contributing them as individual deposits to the enterprise capital stock. As a rule, they are partly deposited in large sums. In the same way, money is transferred to local or foreign deposit bank accounts; shares or other securities are purchased. Other ways of legalizing illegal incomes are connected to definite losses. When a firm fixes ill- gotten money as commercial receipts, it will have to pay many taxes. We suppose that at present this way of legalizing money is not so widely used in Iran as in foreign countries because of many other more simple ones.

97 97 Conclusion Underground economic activities in Iran have an effect on the underdeveloped state of the economy, dual foreign policy standards and the protracted democratic movement in the domestic arena. Simply put, the economic mafia has managed to influence certain power centers as well as decision-makers in all areas of governance. The influence of many political activists derives from their rents, monopolies and connections

98 98 The establishment is aware of this reality and some political leaders from both ends of the political spectrum have been trying to change this state of affairs, despite the existing associations with the operators of the underground economy. The reason for this is that even these political leaders are losing control over the activities of these operators, once loyal associates of the revolution. Moreover, the spillover effect of the growing unofficial sector in Iran has not only severely undermined the economy but has led to the creation of new power centers that are actively affecting the countrys foreign and domestic policies.

99 99 The paradox lies in the fact that with the given family and tribal connections a serious attempt to eradicate roots of underground economic operations seems, at least under the current circumstances, a difficult task, if not an impossible one. Nevertheless, the legislation against money laundering indicates that there are incentives to reform the traditional economic system. If the Guardian Council approves the act, one can assume that it has the blessing of the countrys highest institutions.

100 100 What observers should take note of, however, is the content of the act once turned into law and efforts to change it. Both the Guardian Council and the Expediency Council can contribute to changes in this act. Moreover, the advantages and shortcomings of the act/law may as well indicate to which extent this effort will manage to address the hazard of underground economic activities in Iran. This law will probably not succeed in eradicating the roots of money laundering, let alone other underground activities that adversely affect the economy. To attain significant results in this area, Iran will primarily need an efficient, depoliticized and unbiased judicial system, something that is seriously lacking. The best that can be hoped of the new legislation is that it might give rise to a new trend that will put limits on certain illicit operations and accelerate the pace of economic reforms in Iran which is at the root of all the countrys political hazards. What serves as a signpost to an evaluation of the degree to which money laundering will be tackled in Iran are Tehrans interaction and cooperation with international forums on issues related to good governance, money laundering, drug trafficking, terrorism and international banking.

101 101 What will these new requirements mean to accountants? These proposals, if implemented, will bring many consequences to the profession. One consequence, for example, is the likely damage to the auditor-client relationshipa client might not be as open with an auditor if he or she knows that the auditor will report even suspected money laundering to the government. The government will probably argue that auditors will, instead, benefit their clients by assisting them in identifying money- laundering problems before they get out of control and cause major damage to clients reputations. Historically, the vast majority of money laundering has been carried out by individual employees without top managements knowledge.

102 102 Sources 1- Anti money Laundry & Corruption lecture by Dr. Gh. Davani, Tehran Money laundry, Countering Drugs & Organized Crime in the Baltic region, Andreis Vilks (ECAD) 3- Money laundry, Special report ML WLA-Magazine Money laundry, A bankers guide to avoiding problem Dec Financial action Task force on ML Hawala, Anti money laundering strategy Oct HM Treasury. 6- Business integrity & Anti-corruption initiatives of the world bank Sep. 2004, US department of the treasury Anti terrorism. 7- Money laundry and banking system Farideh Tazhibi, Organized crime & the international strategist against it by: Shahal Moazami 9- Law review An academic & primitive Journal on international law, vol. 29, Fall Money laundering the journal of Iran parliament research centre, Vol. 10, No- 37, spring Transnational organized crimes By: Dr. Sadegh Salami Mafia for beginners by Arnd Scheder & Oscar Zarat Switzerland the largest Money Laundering centre in the world, by: Dr. Medi Sahraean(the UN representative for GPLM in Iran) Special report Money Laundering, Val Magazine 15-


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