The Logistics of Laundering

In the world of money laundering, anonymity and a trusted supply chain remain essential

With a reputation as a global hub for the gold, diamond and property trade, Dubai has historically held a reputation as a haven for illicit money laundering. Each year, with billions of dollars flowing in and out, it remains difficult to trace how and where such funds are ascertained. In trying to clean up its image, the Dubai government has recently introduced stricter measures to clamp down on the shadowy cash trade, but the task has proved formidable.

Though as is often the case, the issue of global currency transactions and their respective legality is by no means black and white. While some move currency to legalise their clients’ unaccounted money, others use the money for trading, letters of credit and money laundering. Millions of dollars are known to be transferred electronically among operators in Singapore, Dubai and Hong Kong for these purposes, lawfully and unlawfully.

As a means of making money appear legal, embezzlers, fraudsters, drug traders and tax dodgers are fully aware of the logistical, as well as financial advantages that Dubai has to offer. Tales abound of Russian and Chinese ships coming into port, unloading shrinkwrapped pallets of greenbacks, with few questions being asked.

“‘Money launderers are no longer the criminals they used to be,” says Norman Inskter, the former president of Interpol. “Today they are astute business people and use the banking system as a way of moving money. When you look out at this sea of construction, you would like to know who owns it all.”

According to Eckart Woertz, a UAE based economist, the initial thirst for development gave local authorities little time to verify all the inflow of capital, which subsequently encouraged money laundering. “But, after achieving remarkable success in a short period of time, they are now realising the need to adopt corrective steps.”

One measure expected to have an impact is the UAE Central Bank recently ordering financial institutions to register details of anyone transferring as little as AED 2,000. At minimum, this will establish a paper trail for authorities to reference when looking into someone’s transaction history.

Last month, the Dubai Islamic Bank announced it purchased integrated antimoney laundering software from Norkom Technologies, with plans to introduce it across the bank’s operations in UAE and Pakistan. The DIB claims the software will “monitor customer transactions and identify suspicious behaviour”.

“The initiative demonstrates DIB’s commitment to improve its defences against money laundering and terrorist financing,” says Waheed Rathore, Head of Group Compliance at Dubai Islamic Bank. “Sustainable growth can only be achieved by maintaining high standards of regulatory compliance.”

In addition to the banks proactive solutions, the Dubai Multi Commodities Centre (DMCC) has pledged to fight against money laundering by ensuring transparent business in gems and other precious commodities.

Undoubtedly, one of the appeals for launderers in choosing Dubai remains its liberal free zone concept. With enticing tax exemptions and 100 per cent freehold ownerships, the areas are perceived by some as safe havens for illicit funds. However, Raymond Termini of Patton Boggs LLP, disagrees and feels established laws are coming on par with the US and Great Britain. Termini offers some advice about the current policies in place, “Within the UAE, there are four federal laws relating to money laundering and counter-terrorism, dating back to 1987,” says Termini. “Both the Ministry of Economy and Commerce and the Central Bank issue circulars on the subject, and the Central Bank issues Directives.”

“Within the DIFC, the Dubai Financial Services Authority (DFSA) has produced its own anti-money laundering rules. The DFSA is the independent regulator that governs the DIFC’s financial services companies, and also ancillary service providers such as law firms,” says Termini.

“Companies must appoint a Money Laundering Reporting Officer (MLRO) and a deputy to act in their absence. The regulations require that companies carry out due diligence checks on potential customers or beneficial owners of funds. They are required to complete a comprehensive customer profile, verify their integrity and locate the source of any funds to be deposited. This duty falls on both company employees and the MLRO.”

“For financial service companies, evidence obtained under the identification procedure must be kept for at least six years after the customers’ account is closed. Other authorised firms, such as law firms, must keep their identification evidence for at least six years after the consummation of any transaction they advised on,” says Termini.

Interestingly, says Termini, if someone is investigated for fraudulent activity, he or she is not allowed to know about it. “No firm or any of its employees may inform a suspected individual that their transactions are being scrutinised for money laundering. Failure to adhere to this policy may result in a fine or imprisonment.”

However, not all smuggled money whether laundered or squandered, has to pass through the mainstream western banking system. Organised crime in the Middle East and South Asia, have long since relied on informal money transfer networks, often between trusted third parties. This process, known as hawala dates back centuries and is considered by the some the basis of the modern day 3PL model.

The extensive use of trusted connections such as family relationships or regional affiliates, are the distinguishing components of the hawala system. Often referred to as ‘underground banking the system makes minimal use of any sort of negotiable instrument or record keeping. Transfers of money take place based on communications between members of a network of hawaladars and hawala dealers. Thus, money is transferred internationally, without actually moving it from one place to another.

Largely used by people working abroad for sending money home to relatives who may not have a bank account, hawala is often misused by those who seek to evade taxes, engage in money-laundering or hide the details regarding the source of funds or their owners. As the process leaves no paper trail (because there are no accounts, cheques, signatures or ATMs involved), hawala is essential to launderers who wish to remain anonymous. However, as hawala works faster and cheaper than conventional systems and reaches places where even post offices do not exist, many low-income workers in the Gulf continue to use it to make their remittances.

The UAE Central bank remains fully aware of the futility of attempting to ban the hawala system, however it says measures are underway to increase transparency. “The system can be used by those who have legitimate reasons for doing so and those who seek to abuse the system for illegal transactions will be identified and stopped by the authorities,” the bank said.

Woertz agrees, and says the efforts to crack down on hawala operators alone will not help. “Today’s banking system has enough loopholes for manipulators to channel unaccounted money and indulge in money-laundering activities,” he added, implying that the “practice will never be rooted out completely”.