BANKING AND MONEY LAUNDERING

Definition:  What is money laundering?   Money Laundering is a process, in which, money earned from various criminal activities, like smuggling, black marketeering, drug peddling, etc., is channelled into the Banking system, in the form of legitimate commercial transactions.   Money, thus parked, in a Bank, acquires a seemingly legitimate and legal status, and can be utilized, thereafter, for genuine commercial and other transactions.    Simply speaking, money laundering is the process of converting Bad Money into Good Money.

Of course, it is not an easy task, and the money launderers take considerable pains to accomplish their task!   The methods adopted in converting bad money into good money vary from place to place and time to time.   For example, in India, it may involve the money launderer  purchasing a winning lottery ticket from the genuine holder, by paying him the full amount of the lottery, and then substituting his bad money for the lottery money.   This way the criminal’s bad money becomes good, and the original winner of the lottery does not pay his taxes due on the winning ticket.   This is, but just one of the hundreds of ways in which criminals launder their ill gotten wealth into clean money, that can be used for engaging in regular business transactions.

The FATF:  FATF stands for Financial Action Task Force.   What is this organisation about, and what does it do?   The FATF is an international body of experts, promoted originally by  the members of the G7 group of countries, dealing in money laundering issues.   The body was set up in 1989, and presently has about 35 members.   Their key responsibility is to deliberate and come up with practical recommendations for preventing the misuse of the financial and banking system by criminals.

The job of the FATF can be summarised as:

1.  To act as a central agency and clearing house on all matters related to money laundering;  and to coordinate with national and international institutions, etc., in efforts to prevent money laundering through the financial system.

2.  To study the various techniques and modus operandi employed by criminals throughout the world, in the process of money laundering, and to come up with recommendations that can be practically implemented to combat the menace of money laundering.

3.  To follow up with member countries to ensure compliance of their recommendations, and where such recommendations pose a problem, to study the same further, and come up with suitable modifications, with the primary aim of countering money laundering.

4.  To act as a sort of pressure group to promote necessary legislation and regulations by the member states to fight money laundering.

5.  To cooperate with other international agencies engaged in similar work, for example, anti terror organizations,to exchange notes on their respective activities, and to help each other.

6.  Most of the member states of the FATF have set up specialized agencies to deal with the problem of money laundering.   These agencies coordinate with the FATF, and financial institutions, in effectively implementing the laws relating to money laundering.

Role of Banks:  What are the Banks expected to do, to detect and to prevent, the incidence of money laundering through their systems?   Simply speaking, Banks are expected to identify and stop transactions relating to money laundering, that are sought to be channellised through them.

For instance, money launderers may open accounts in a Bank, with the help of fictitious documents, in assumed names etc.   They may tempt the Bankers with promises of good business to them.   And seek the Bank’s ‘cooperation’, in opening such accounts and conducting business through them.   On the face of it, the documents and also the persons involved, may appear to be perfectly normal to the Bankers.   And so, in good faith, the Bankers, in their eagerness to get business, may patronise such customers, and get themselves into trouble.

The money launderers take advantage of the eagerness of the Bank to do business, and put through transactions of a dubious nature, by passing them through various layers of legitmacy, thereby misleading their Bankers, who accept the transactions as genuine.   This way, money earned in various criminal activities, gets into the Banking system, and acquires legal status.

Therefore, Banks are expected to take due precautions in opening accounts, and following all the laid down norms in this regard.   Being vigilant at the first point of the criminal’s entry into the Banking system would go a long way in preventing money laundering.

Regulatory authorities in different coutries have laid down elaborate systems and regulations, to be complied with, by the Banking industry, in the fight against money laundering.   Some such requirements to be followed by the Banking industry, include reporting of suspicious transactions, especially those of large value, particularly in cash.  Similarly, records pertaining to such transactions, are to be preserved for a longer duration than other records, for future reference.   It is expected, that by following these stipulations, Banks would be able to effectively deal with money laundering, and all the implications it has for the Banking industry.

Points to Ponder: 

1.  While fighting money laundering is everyone’s business, and concern, it must be noted that this process has come into prominence only after 911, which gives it a distinct American flavor.

2.   There is no uniform application of the Anti Money Laundering (AML) provisions in various countries, not only on account of differing systems, but also differing perceptions of what constitutes money laundering.   For instance, in Switzerland, the law makes a distinction between tax evasion and tax fraud.

3.  Dividing the world into the Western and Eastern Hemispheres, it is observed that money laundering is more prevalent in the Western side, whereas the focus of the West, especially the United States, is on the Eastern Hemisphere.

Some of the major centers of money laundering in the Western Hemisphere are Switzerland, Channel Islands, Guernsey Islands, The Bahamas, Luxembourg, etc.   Switzerland, perhaps, would win, the vote as the world’s largest money laundering center.   Of course, the Swiss have a different story to tell.   Or rather, they would not tell any story at all, citing “Banking Secrecy”.   But intense pressure from the United States is cracking open the secret world of the Swiss Banking System, for the world to see.

4.  Apart from the perceived geographic bias, as seen above, in the fight against money laundering, allegations abound, about how Islamic Countries, Institutions and Muslim individuals are being unfairly targetted under the guise of fighting money laundering as also terrorism.

5.  After about a couple of decades of fighting money laundering and especially after 911, the financial services industry has come to realize, that for all the troubles taken by them, and the enormous amounts of money spent in fighting money laundering, the end result does not appear to be encouraging.  

This fight against money laundering has given birth, in its wake, to a new software industry, that comes up with more and more sophisticated, and expensive  software, supposedly to counter this phenomena of money laundering, without actually giving the desired results.   This is causing a lot of heart burning in the financial services industry, whose transaction cost of conducting business has gone up many fold.

Conclusion:  From the above, we may conclude, that to make the fight against money laundering more meaningful, the perceived and or real religious and geographical bias must end.   It must be ensured that the AML procedures and measures are focussed on the actual extent of the problem without exaggerating it.   The emphasis of the AML measures must be towards catching the big fish first, then the smaller ones.  

The West, especially the United States, must take care not to be seen practising double standards, therby weakening the system.   Money laundering centers in the West, especially, countries like Switzerland, must be made to comply with the AML rules in letter and spirit.   Uniformity in application of the rules should be promoted for a more harmonious result from such efforts.

And last, but not the least, a cost-benefit analysis must be done, to see  what has been achieved so far, by spending huge sums of money on hi fi software systems and other expensive gadgets, in countering money laundering.    Wherever necessary, corrective action must be taken to prevent mutual recriminations among various states so that the focus of the joint effort is not lost.

AMERICAN POWER ON THE WANE?

Is America, the sole super power of the world, on the way to be a has been?   Is America losing its sting?   Is America on the decline?   Is American power on the wane?

Commentators around the world are debating this hot topic in the light of the continued crisis gripping the American economy, and its fabled markets.   Some are convinced that America, the super power, is truly and well on its way to demise.   And going by the increasingly negative news emanating from the United States, one cannot be blamed for imagining the worst.

Whether America can continue to hold its position as the sole super power of the world may depend on a very simple and mundane asset, namely, CASH!   How deep are America’s pockets?   In order to retain its present position in the comity of nations, America may have to go on spending cash, and more cash,  till it reaches a point when its economy finds its feet once again, and America can go back to strutting around on the world stage as the only super power!

What does America need to spend money on?   Here are some of the areas where the U.S. has to spend billions upon billions of dollars without really counting them (saves time!), in order to keep its number one position.

Take Care Of Own:  The American Government has to naturally take care of its own citizens first, like any good Government, and that requires a hell of a lot of money.   Its not an easy task for the American Government to keep its citizens happy, given their proclivity to wasteful spending, and lack of the savings habit.  

The American Government has not only to take care of the basic needs of its citizens, but also to pamper them with innumerable goodies.   Cheap gas, for one.   Americans are hooked to the automobile, and keeping them happy on the road costs the American state quite a packet!

America has to ensure unemployment within its population to the bare minimum, or pay unemployment doles to the unemployed.   On the other hand,it has also to provide job opportunities to a large number of aliens, in order to retain its competitive edge by attracting the best talent from all over the world.   Also a large number of aliens throughout the world, looking up to America for a better future, does its image a whale of good.   And the Social Security system that American citizens are entitled to, takes up a large chunk of the American State spending.

Military Power:  America has to maintain a vast, and first rate defence force, that has the capability of intervening in any part of the world, at short notice.  This entails maintaining and sustaining a steady supply of arms and ammunitions of every variety and description, in huge quanities, and of the best quality of course.   Land, Sea and Air based, and in future, space based weapons systems of the highest quality and accuracy are needed to project America’s muscle power before the rest of the world-to friends and foes alike.

Projecting Power Abroad:   Propping up friendly, even if brutal regimes with little or no concern for human rights, like Israel, and Egypt in the pursuit of its strategic interests, takes up a huge chunk of America’s resources.   Israel is the top beneficiary of American aid, so much so that every morsel of food that the Israelis consume, and every drop of water they drink is either partly or fully financed by America!  The second largest receipient of American aid is Egypt.

And then there are states like Pakistan and South Korea, that are supposed to act as a bulwark against perceived threats to not only American interests, but to world peace and prosperity.   Pakistan is supposed to counter the threat of the Taliban and Al Qaeda, and South Korea is supposed to halt the spread of red (communism) from North Korea!   Both these friendly states, especially Pakistan, swallow up a considerable amount of American money year after year.

As if this were not enough, America has a bounden duty to punish unfriendly regimes like Iraq and Afghanistan by occupying these states physically;  and subverting their systems to make them America-friendly requires a virtual pipeline of cash to be put in place between America and these countries.   In spite of all this, the end result may not be satisfactory for America, which means all the money spent going down the drain.

Intelligence gathering:  This is another area where America spends countless billions of dollars to maintain its ‘edge’ over the rest of the world, in the hierarchy of nations.   The American intelligence set up is said to be as expansive as it is expensive.  The cost of  maintaining and running such a vast network of intelligence gathering mechanism, both human and non-human can only be imagined, as a lot of the expenditure is of a secret nature, and not accounted for.

By no means, is the above, a complete list of the expenditure incurred by the American Government to maintain its power and prestige, and more importantly, its ’sole super power’ status.

The current economic crisis that has America in a vice like grip, refuses to ease up soon, thereby putting enormous pressure on the American system, and pushing America into more and more debt, thereby mortgaging the future of the coming generations of Americans.   If this situation continues, America may soon be left with the hard choice of saving its flesh and bones, by letting off its enviable, or hated, as you please, status, of the sole super power of the world.

ISLAMIC BANKING SERVICES:QARD E HASAN

Introduction:  Islamic Banking is based on the principles of the Islamic Religion, of those pertaining to the commercial transactions.   One of the defining principles of commerce in Islam is the absence of Interest in commercial transactions.   Interest is replaced with Profit-sharing as the incentive for commercial activity.

Definition of Qard E Hasan:  Qard e Hasan literally means the beautiful loan.   Or more to the point in commerce, it means, a benevolent loan.   The element of benevolence is incorporated in this type of loan, by eliminating even the profit sharing aspect from it.   That is, Qard e Hasan is a loan that is totally free of cost to the borrower!   The borrower has to repay only the principal amount of the loan, and nothing else.   Profit-sharing, which is the basis of Islamic commercial transactions, is not a part of this loan, because it is meant for the specific purpose of accomodating those sections of the society that cannot afford to borrow at all.

Some authorities hold the view that Qard e Hasan is the only truly Islamic loan!   However, practically speaking, a commercial organisation has to make profits to be in business;  it has to pay remuneration to its employees, it has to incur expenditure for other overheads, etc.   Hence this type of loan is not extended to one and all.

How It Works:  This type of loan, i.e. Qard e Hasan, is part of the Islamic Bank’s social committment to society.   To help the needy and the poor.   That section of the society, that would find it hard to get a loan from a Bank, because they do not have the necessary financial credentials, normally required to obtain a loan from a Bank.  

The Bank sets aside certain portion of funds at its disposal to carry out social activities, free of profit.   These funds are part and parcel of the operational funds utilized by the Bank for carrying out its other activities.   The only difference being that, this part of its funds do not bring in any revenues to the Bank.   Rather this money in spent in social activities, in the path of Allah, as a social and moral obligation.

Every society has a section within that is neglected, for various reasons,  and hence falls back in the matter of economic, social and educational development.   These are people without a regular source of income.   These are people that cannot fall back on social security, and family support.   These are people who might suffer various disabilities-physical and mental.   It is this section of society, that benefit from the Qard e Hasan mechanism.

As pointed out earlier, the Bank allocates a portion of its regular working funds for the purpose of lending under the Qard e Hasan scheme.   Apart from this, the Bank may also contribute funds out of its Zakah funds (charity funds).   Similar contributions may also be made by the general public and institutions.   All of these funds are clubbed together to utilize for the purpose of Qard e Hasan loans.   The poor, the destitue, those affected by natural calamities like floods, Tsunami etc are favored under this scheme.

As such there is no specific list of people that can be financed under this scheme of Qard e Hasan.   Generally speaking, these funds are meant to provide timely relief and funds to the neglected and overlooked sections of society.   This not only takes care of their needs, but also plays a important role in reducing immoral and unethical activities among the people, pushed to a  corner.

For instance, a youngster who could have taken to crime on account of lack of resources for continuing his education, is saved from the wrong path, with a timely loan under this scheme.   A widow without family support, who might have otherwise taken to prostitution to keep her body and sould together, may be saved from this fate by extending a loan to her under the Qard e Hasan scheme.   A physically handicapped person, who would otherwise end up as a burden on his family, and live a life bereft of self esteem, can start a new life confidently with the help of a Qard e Hasan.

   These are some of the examples of how the Qard e Hasan can be, and is being utilized by Islamic Banks, and other financial institutions, for the good of the society.   By any standard it is a commendable feature of Islamic Banking and Finance, worthy of emulation.

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