MONEY LAUNDERING AND ITS PREVENTION
WHAT IS REQUIRED FROM ISLAMIC FINANCIAL INSTITUTIONS?

Judith A. Lee, Esq.
Gibson, Dunn & Crutcher LLP
Washington, D.C.

March 2, 2003

Why is it Both Simple and Hard to Detect?

nGlobalization

nDigital Currency Transfers

What is Money Laundering?

nFunds (usually cash received in connection with criminal or terrorist activity) are converted into "clean money" that cannot be traced to the person originating the transaction or to the origin of the funds.

nTypically involves (1) placing criminally derived funds into a legitimate enterprise; (2) layering the funds through various transactions to obscure the original source; and (3) integrating the laundered funds into the legitimate financial world in the form of negotiable securities, loans, letters of credit or other financial instruments.

Cont.

nMoney laundering laws seek to bar monetary transactions in criminally derived property, which may include wire transfers, the use of monetary instruments or the transfer of title to any real property or vehicle. The underlying activity from which these funds are derived is not limited to conduct characteristic of organized crime (such as drug trafficking). It also extends to copyright infringement, environmental offenses, espionage, trading with the enemy, and conducting financial transactions with intent to violate the Internal Revenue Code. Any trade or business can become ensnared in money laundering schemes through faithless employees, agents or customers.

What Has Money Laundering Caused?

nCollapse of the Mexican Peso – 1994

nGovernment Collapses in Ecuador, Peru, Argentina

nDecapitalized Nations in Transition – Albania, Bulgaria, and Latvia

nNational Wealth Stolen – Congo/Zaire, Indonesia, Nigeria and Russia Cont.

nCorporate and Government Corruption – Japan, South Korea and Taiwan

nTrade in Diamonds fueling civil conflict –- Liberia, Angola, and Sierra Leone

nSustained narcotics trade and insurrections – Afghanistan, Burma and Columbia

International Response

nBasle Committee for Banking Supervision

nInternational Organization of Securities Commissions

nOECD

nFinancial Action Task Force

WHAT SHOULD ISLAMIC FINANCIAL INSTITUTIONS DO?

AML Program Should Include

§Internal policies, procedures and controls

§A designated compliance officer

§An ongoing training program

§An independent audit function

Internal Policies, Procedures and Controls

nEstablish compliance standards and procedures to be followed by employees and other agents that are reasonably capable of reducing the prospect of money laundering. Take reasonable steps to achieve compliance with its standards. This may include establishing and publicizing a reporting system whereby employees and other agents can report money laundering or suspicious activity. It may also include processes to gather and verify information respecting its customers so that they are properly identified and screened. Standards must be consistently enforced through appropriate disciplinary mechanisms, including the discipline of individuals for failure to detect an offense.

Establish a Firm Policy

nIt is the policy of the firm to prohibit and actively prevent money laundering and any activity that facilitates money laundering or the funding of terrorist or criminal activities. Money laundering is generally defined as engaging in acts designed to conceal or disguise the true origins of criminally derived proceeds so that the unlawful proceeds appear to have derived from legitimate origins or constitute legitimate assets.

Designation of a Corporate Compliance Officer

nA specific individual within high-level personnel of the organization should be assigned overall responsibility to oversee compliance with the organization's internal policies and procedures. Use due care not to delegate substantial discretionary authority to an individual whom the organization knows, or should know, has a propensity to engage in illegal activities. After money laundering or suspicious activity has been detected, take all reasonable steps to respond appropriately. The compliance officer would ordinarily be expected to initiate this process.

Designate Compliance Officer

nThe firm designates [Name] as its Anti-Money Laundering Program Compliance Officer, with full responsibility for the firm’s AML program. [Name] is qualified by experience, knowledge and training, including [describe]. The duties of the AML Compliance Officer will include monitoring the firm’s AML compliance, overseeing communication and training for employees, and [Add any other duties your firm will assign the AML Compliance Officer].

Ongoing Employee Training Program

nTake steps to communicate effectively its policies and procedures to all employees and other agents. This includes requiring participation in training programs. Disseminate, from time to time, publications that explain in a practical manner what is required. Publicize its reporting system whereby employees and other agents can report money laundering or suspicious activity without fear of retribution.

Independent Audit Function

nUtilize auditing systems reasonably designed to test programs and to detect money laundering by its employees, other agents and customers. The engagement of a competent outside consultant to design and conduct such auditing systems is an implicit requirement.

Know Your Customer/Investor

nHave and follow reasonable procedures to identify and verify the identity of their customers and investors. These procedures should address the type of information the firm will collect from the customer or investor and how it will verify their identity. These procedures must enable the firm to form a reasonable belief that it knows the true identity of its customers or investors.

Verify Information

nAfter obtaining identifying information from a customer or investor, take steps to verify the accuracy of that information to form a reasonable belief that you know the true identity of the customer or investor. Describe your firm’s procedures for verifying information, and whether you will complete a transaction before verification.

Screen Against Lists of Designated Individuals and Entities

nOFAC List

nUN List

nEU List

nAustralia List

Give Notice to Investors or Customers

nYou should notify investors or customers that you are requesting information from them to verify their identities. You may provide notice by a sign in your lobby, through other oral or written notice, or, for accounts opened online, notice posted on your Web site. No matter which methods of giving notice you chose, you should give it before an account is opened or trading authority is granted.