OBEJECTIVE OF STUDY

The objectives of those studies are as follows

1. To know what is money laundering, methods of money laundering?

2. To know the history of money laundering in different eras like before 9/11 & post 9-11.

3. What are the laws in different regions to control money laundering?

4. To know notable cases of money laundering all over the world.

The main objective of this study is to know money laundering & its effects on Pakistan. In this

way we searched the time line of money laundering in Pakistan also

1. Notable cases of money laundering in Pakistan.

2. Different methods of money laundering in Pakistan & sub-continent.

3. Regulations against money laundering in Pakistan.

4. Social, economics & cultural effects of money laundering.

MONEY LAUNDERING- AN INTRODUCTION

Money laundering is the practice of disguising the origins of illegally-obtained money.

Ultimately, it is the process by which the proceeds of crime are made to appear legitimate. The

money involved can be generated by any number of criminal acts, including drug dealing,

corruption, accounting and other types of fraud, and tax evasion.[1] The methods by which

money may be laundered are varied and can range in sophistication from simple to complex.

Many regulatory and governmental authorities quote estimates each year for the amount of

money laundered, either worldwide or within their national economy. In 1996 the International

Monetary Fund estimated that two to five percent of the worldwide global economy involved

laundered money. However, the FATF, an intergovernmental body set up to combat money

laundering, admitted that "overall it is absolutely impossible to produce a reliable estimate of the

amount of money laundered and therefore the FATF does not publish any figures in this

regard."[1] Academic commentators have likewise been unable to estimate the volume of money

with any degree of assurance. [2]

Regardless of the difficulty in measurement, the amount of money laundered each year is in the

billions and poses a significant policy concern for governments. [2] As a result, governments and

international bodies have undertaken efforts to deter prevent and apprehend money launderers.

Financial institutions have likewise undertaken efforts to prevent and detect transactions

involving dirty money, both as a result of government requirements and to avoid the reputational

risk involved.

METHODS OF MONEY LAUNDERING

Money laundering often occurs in three steps: first, cash is introduced into the financial system

by some means (“placement”), the second involves carrying out complex financial transactions

in order to camouflage the illegal source (“layering”), and the final step entails acquiring wealth

generated from the transactions of the illicit funds (“integration”). Some of these steps may be

omitted, depending on the circumstances; for example, non-cash proceeds that are already in

the financial system would have no need for placement. [2]

Money laundering takes several different forms although most methods can be categorized into

one of a few types. These include "bank methods, smurfing, [also known as structuring],

currency exchanges, and double-invoicing."[3]

Structuring: Often known as "smurfing," it is a method of placement by which cash is

broken into smaller deposits of money, used to defeat suspicion of money laundering

and to avoid anti-money laundering reporting requirements. A sub-component of this is

to use smaller amounts of cash to purchase bearer instruments, such as money orders,

and then ultimately deposit those, again in small amounts.[4]

Bulk cash smuggling: Physically smuggling cash to another jurisdiction, where it will

deposited in a financial institution, such as an offshore bank, with greater bank secrecy

or less rigorous money laundering enforcement.[5]

Cash-intensive businesses: A business typically involved in receiving cash will use its

accounts to deposit both legitimate and criminally derived cash, claiming all of it as

legitimate earnings. Often, the business will have no legitimate activity.[6]

Trade-based laundering: Under- or over-valuing invoices in order to disguise the

movement of money.[7]

Shell companies and trusts: Trusts and shell companies disguise the true owner of

money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose

its true, beneficial, owner.[6]

Bank capture: Money launderers or criminals buy a controlling interest in a bank,

preferably in a jurisdiction with weak money laundering controls, and then move money

through the bank without scrutiny.

Casinos: An individual will walk in to a casino or a horse race track with cash and buy

chips, play for a while and then cash in his chips, for which he will be issued a check.

The money launderer will then be able to deposit the check into his bank, and claim it as

gambling winnings.[5] If the casino is controlled by organized crime and the money

launderer works for them, the launderer will lose the illegally obtained money on purpose

in the casino and be paid with other funds by the criminal organization.

DRUG MONEY LAUNDRING

Real estate: Real estate may be purchased with illegal proceeds, and then sold. The

proceeds from the sale appear to outsiders to be legitimate income. Alternatively, the

price of the property is manipulated; the seller will agree to a contract that under-

represents the value of the property, and will receive criminal proceeds to make up the

difference.[6]

Terrorist Financing: Technically not money laundering at all; while money laundering

typically involves disguising the source of the money, which is illegal, terrorist financing

concerns itself with the disguising the destination of the money, which is illegal.[8]

Black salaries: Companies might have unregistered employees without a written contract

who are given cash salaries. Black cash might be used to pay them.

HISTORY OF MONEY LAUNDERING

The term "money laundering" is said to originate from Mafia ownership of Laundromats in the

United States. Gangsters there were earning huge sums in cash from extortion, prostitution,

gambling and bootleg liquor. They needed to show a legitimate source for these monies.

One of the ways in which they were able to do this was by purchasing outwardly legitimate

businesses and to mix their illicit earnings with the legitimate earnings they received from these

businesses. Laundromats were chosen by these gangsters because they were cash businesses

and this was an undoubted advantage to people like Al Capone who purchased them.

Al Capone, however, was prosecuted and convicted in October, 1931 for tax evasion. It was this

that he was sent to prison for rather than the predicate crimes which generated his illicit income

and according to Robinson this tale that the term originated from this time is a myth. He states

that:

"Money laundering is called what it is because that perfectly describes what takes place

- illegal, or dirty, money is put through a cycle of transactions, or washed, so that it

comes out the other end as legal, or clean, money. In other words, the source of illegally

obtained funds is obscured through a succession of transfers and deals in order that

those same funds can eventually be made to appear as legitimate income".

It would seem, however, that the conviction of Al Capone for tax evasion may have been the

trigger for getting the money laundering business off the ground.

Meyer Lansky (affectionately called ‘the Mob’s Accountant’) was particularly affected by the

conviction of Capone for something as obvious as tax evasion. Determined that the same fate

would not befall him he set about searching for ways to hide money. Before the year was out he

had discovered the benefits of numbered Swiss Bank Accounts. This is where money

laundering would seem to have started and according to Lacey Lansky was one of the most

influential money launderers ever. The use of the Swiss facilities gave Lansky the means to

incorporate one of the first real laundering techniques, the use of the ‘loan-back’ concept, which

meant that hitherto illegal money could now be disguised by ‘loans’ provided by compliant

foreign banks, which could be declared to the ‘revenue’ if necessary, and a tax-deduction

obtained into the bargain.

‘Money laundering’ as an expression is one of fairly recent origin. The original sighting was in

newspapers reporting the Watergate scandal in the United States in 1973. The expression first

appeared in a judicial or legal context in 1982 in America in the case US v $4,255,625.39 (1982) 551 F Supp.314.

 Since then, the term has been widely accepted and is in popular usage throughout the world.

 

BACKGROUNDMoney laundering as a crime only attracted interest in the 1980s, essentially within a drug

trafficking context. It was from an increasing awareness of the huge profits generated from this

criminal activity and a concern at the massive drug abuse problem in western society which

created the impetus for governments to act against the drug dealers by creating legislation that

would deprive them of their illicit gains.

Governments also recognized that criminal organizations, through the huge profits they earned

from drugs, could contaminate and corrupt the structures of the state at all levels.

Money laundering is a truly global phenomenon, helped by the International financial community

which is a 24hrs a day business. When one financial centre closes business for the day, another

one is opening or open for business.

As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of

crime, which to a large extent also mark the operations of organized and transnational crime,

are its global nature, the flexibility and adaptability of its operations, the use of the latest

technological means and professional assistance, the ingenuity of its operators and the vast

resources at their disposal.

In addition, a characteristic that should not be overlooked is the constant pursuit of profits and

the expansion into new areas of criminal activity.

The international dimension of money laundering was evident in a study of Canadian money

laundering police files. They revealed that over 80 per cent of all laundering schemes had an

international dimension. More recently, "Operation Green Ice" (1992) showed the essentially

transnational nature of modern money laundering.

MONEY LAUNDERING AFTER 9-11

The first strike against terrorism after the September 11 attacks on the World Trade Center and

the Pentagon was a financial one. Not two weeks had passed since the attacks when President

Bush signed an executive order freezing the U.S. assets of 27 entities that included terrorist

organizations, individual terrorist leaders, a corporation alleged to be a front for terrorism, and

several nonprofit organizations. In the days and weeks that followed, policies to impede the

covert flow of illicit funds through the global financial system were among the measures at the

heart of Congressional debates on how to fight terrorism.

This response should come as no surprise. Measures against money laundering have

increasingly become an important front in the fight against crime. Such measures can facilitate

detection of financial trails that provide important sources of evidence, potentially linking the

members of a criminal organization and leading to convictions of the ring leaders—who are hard

to connect to the day-to-day criminal operations. Moreover, finding and seizing money or assets

that result from criminal activity can also serve to take the motive out of crime. And, in the case

of terrorist financing, it can make it more difficult to commit future acts.

Even before September 11, banks and other financial and nonfinancial institutions in the United

States had been required to keep increasingly detailed records of financial transactions and

report suspicious dealings. International organizations have worked on designing common

standards to fight money laundering and have begun to pressure countries with lax regulations

to adopt stricter laws.

Anti-money laundering policies promise to become even more stringent in the aftermath of

September 11. The U.S. Congress passed the USA PATRIOT Act, which expanded antimoney

laundering provisions. It will affect a broad range of companies, such as securities brokers and

dealers, commodity firms, and investment companies. It also imposes more exacting

requirements for U.S. financial institutions dealing with foreign customers and institutions, and

provides for greater scrutiny to open new accounts at U.S. financial institutions. Many foreign

countries are following suit.

But, fighting money laundering is no easy task. With increasing globalization and advances in

banking technologies, moving money around the world has become easier and, with the growth

in international capital flows, it has also become easier to mask illegitimate monies in the stream

of legitimate transfers. Even as nations such as Switzerland and the Cayman Islands have

begun to restrict their coveted bank secrecy regimes, nations with under regulated financial

systems, such as the Pacific island nation of Nauru, have emerged as centers of importance in

the realm of global finance.

Similarly, as new domestic laws have made money laundering more difficult in particular areas

of the financial system, criminals have sought new ways to disguise their loot. And, when it

comes to terrorism finance, authorities have to think very differently about the issue. Instead of

looking for dirty money in the process of being cleansed, they now also have to detect funds

that may have legitimate origins but are destined for criminal ends.

Criminals have always tried to hide their money. The greater the amount illegally earned, the

more difficult it becomes to camouflage its origins and enjoy the proceeds of crime. Sudden,

inexplicable wealth can draw the attention of authorities. And, ever since Al Capone was put

behind bars for tax evasion, criminals have known that handling and using the spoils of their

endeavors can be one of their weakest links.

The practice of disguising wealth, whether legitimate or illegitimate, from government attention

has a long history. More than 3,000 years ago, merchants in China protected their wealth from

government confiscation using some of the same schemes in use today: converting money to

movable assets; moving cash outside a jurisdiction to invest in a business; and trading at

inflated prices to expatriate funds, according to a study cited by money laundering expert Nigel

Morris-Cotter rill.

Today, nobody knows for sure how much money is laundered globally. It is difficult to know if

money is being counted more than once as it cycles through the system and harder still to know

how much goes undetected. Nonetheless, experts believe the amounts are large. The most

cited figure is between 2 and 5 percent of global GDP—or between $600 billion to $1.5 trillion

per year. Still, this is an admittedly rough estimate based on extrapolations of the global sales of

illegal drugs on the lower bound, and estimates of the size of underground economies on the

upper bound.

To disguise the unlawful nature of funds, criminals must go through a process that varies from

crime to crime but that generally involves three separate stages. First, cash must be converted

into a more portable and less suspicious form—sometimes achieved by using cashier’s checks

or money orders—and then it is entered into the financial system. Once there, it goes through a

series of transactions that resemble legitimate activity and often involve crossing several

national borders, making it more difficult for law enforcement agencies to follow the trail. Finally,

the funds must be integrated into the legitimate financial system.

Of course, not every criminal act calls for the profits to be laundered. Petty criminals can get

away with working in cash. But bigger criminals have to resort to increasingly elaborate methods

to create the illusion of legitimate wealth.

Take, for example, the drug trade. Illegal drug trafficking is believed to be the largest source for

laundering in the United States and accounts for 60 to 80 percent of all federal money

laundering prosecutions, according to James Richards, author of Transnational Criminal

Organizations, Cybercrime, and Money Laundering. Just the bulkiness of drug money creates

logistical problems. Justice Department officials have estimated that the weight of cash

generated by drug sales is about ten times that of the drug itself for heroin and six times for

cocaine. While traffickers only need to smuggle and distribute about 22 pounds of heroin to net

$1 million, they then have to contend with 220 pounds of street cash.

Not surprisingly, the assets of drug traffickers and other criminals who produce vast volumes of

cash are believed to be most vulnerable to detection at the stage of placing cash into the

financial system. Thus, they often try to avoid triggering the mandatory reporting requirements

of large cash transactions by U.S. banks, or steer clear of U.S. financial institutions altogether.

Bulk cash smuggling across international borders is perhaps the most widespread way of doing

this. Smuggling is done in a variety of ways, from employing an army of couriers who physically

transport loads of concealed cash to using trucks and containers.

Once the dollars leave the United States, they can be placed in banks in countries that have

weaker controls. Or, cash can simply be brought back into the United States, points out

Richards. In this scheme, cash smuggled out of the country is brought back in, this time

declared at the border supported by false invoices and receipts. As the funds are recognized by

U.S. Customs, they can be deposited at any U.S. bank without raising red flags. There is some

evidence this technique is widespread: Brownsville, Texas, and Nogales, Arizona, had the most

funds declared upon entry into the United States from the Mexican border—$8 billion and $5

billion, respectively, between 1988 and 1990—amounts much higher than would be justified by

their population or flow of commerce, according to the Financial Crimes Enforcement Network of

the U.S. Treasury Department (FinCEN), as cited by Richards.

Launderers have also sought ways to use the U.S. financial system without raising suspicion.

Some criminals break down the cash earned into many smaller wads for deposit. This technique

came to be called “smurfing” by law enforcement officials in Florida after the little blue cartoon

characters. In this method, many people—the smurfs—make large numbers of deposits, always

below $10,000, at several different institutions on a daily basis, thus avoiding triggering U.S.

bank reporting regulations. (See section on the Colombian Black Market Peso Exchange.)

Front companies are another common way of placing cash in the system. By running cash-

intensive businesses, such as restaurants or liquor stores, launderers can blend legal and illegal

profits and make large cash deposits into banks without eliciting questions. In addition, criminals

may look beyond banks to businesses such as foreign exchange bureaus, money remittance

businesses, and check cashers to convert cash into easier-to-handle instruments or to send the

funds abroad.

And, there is also the option of using underground banking structures such as Hawala. Hawala

is an old system that originated in South Asia but now operates in many countries. Such

informal financial networks are very attractive to those seeking to transfer money without

government notice because the transactions leave no paper trail. A person who wants to send

money abroad takes the cash to an underground banker who gives him a marker or some form

of receipt. The broker in turn, informs his contacts in the transfer’s destination so that the

designated receiver can claim the money at the other end, minus a commission. The money

does not physically need to be transported abroad, as two-way flows support the exchange:

Cash for the payment is provided by customers wanting to send money in the opposite

direction.

LAWS BY DIFFERENT REGIONSMany jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as

a "self launderer".

Afghanistan

The Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA) was

established as a Financial Intelligence Unit (FIU) under the Anti Money Laundering and

Proceeds of Crime Law passed by decree late in 2004. The main purpose of this law is to

protect the integrity of the Afghan financial system and to gain compliance with international

treaties and conventions. The Financial Intelligence Unit is a semi-independent body that is

administratively housed within the Central Bank of Afghanistan (Da Afghanistan Bank).The main

objective of FinTRACA is to deny the use of the Afghan financial system to those who obtained

funds as the result of illegal activity, and to those who would use it to support terrorist activities.

In order to meet its objectives, the FinTRACA collects and analyzes information from a variety of

sources. These sources include entities with legal obligations to submit reports to the

FinTRACA when a suspicious activity is detected, as well as reports of cash transactions above

a threshold amount specified by regulation. Also, FinTRACA has access to all related Afghani

government information and databases. When the analysis of this information supports the

supposition of illegal use of the financial system, the FinTRACA works closely with law

enforcement to investigate and prosecute the illegal activity. FinTRACA also cooperates

internationally in support of its own analyses and investigations and to support the analyses and

investigations of foreign counterparts, to the extent allowed by law. Other functions include

training of those entities with legal obligations to report information, development of laws and

regulations to support national-level AML objectives, and international and regional cooperation

in the development of AML typologies and countermeasures.

Bangladesh

In Bangladesh, this issue has been dealt with by the Prevention of Money Laundering Act, 2002

(Act No. VII of 2002). In terms of section 2, "Money Laundering means (a) Properties acquired

or earned directly or indirectly through illegal means; (b) Illegal transfer, conversion,

concealment of location or assistance in the above act of the properties acquired or earned

directly or indirectly through legal or illegal means." In this Act, “Properties means movable or

immovable properties of any nature and description”. To prevent these Illegal uses of money

Bangladesh Govt. has introduced the Money Laundering Prevention Act. The Act was last

amended in the year 2009 and all the Financial Institutes are following this act. Till today there

are 26 Circulars issued by Bangladesh Bank under this act. To prevent Money laundering a

banker must do the following:

While opening a new account, the account opening form should be duly filled up by all

the information of the Customer.

The KYC has to be properly filled up

The TP (Transaction Profile) is mandatory for a client to understand his/her transactions.

If needed, the TP has to be updated at the Client’s consent.

All other necessary papers should be properly collected along with the Voter ID card.

If there is any suspicious transaction is notified, the BAMLCO (Branch Anti Money

Laundering Compliance Officer) has to be notified and accordingly the STR (Suspicious

Transaction Report) reporting has to be done.

The Cash department should be aware of the Transactions. It has to be noted if

suddenly a big amount of money is deposited in any account. Proper documents will be

required if any Client does this type of transaction.

Structuring, over/ under Invoicing is another way to do Money Laundering. The Foreign

Exchange Department should look into this matter cautiously.

If in any account there is a transaction exceeding 7.00 lac in a single day that has to be

reported as CTR (cash Transaction report)

All the Bank Officials must go through all the 26 Circulars and must use in doing the

Banking.

European Union

The EU directive 2005/60/EC[9] on the prevention of the use of the financial system for the

purpose of money laundering and terrorist financing tries to prevent such crime by requiring

banks, real estate agents and many more companies to investigate and report usage of cash in

excess of €15,000.

India

The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005.

Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to

maintain records detailing the nature and value of transactions which may be prescribed,

whether such transactions comprise of a single transaction or a series of transactions integrally

connected to each other, and where such series of transactions take place within a month; (b) to

furnish information of transactions referred to in clause (a) to the Director within such time as

may be prescribed and t records of the identity of all its clients. Section 12 (2) prescribes that

the records referred to in sub-section (1) as mentioned above, must be maintained for ten years

after the transactions finished.

The provisions of the Act are frequently reviewed and various amendments have been passed

from time to time.

The recent activity in money laundering in India is through political parties corporate companies

and share market.

United Kingdom

Money laundering and terrorist funding legislation in the UK is governed by four Acts of primary

legislation:-

Terrorism Act 2000[10]

Anti-terrorism, Crime and Security Act 2001[11]

Proceeds of Crime Act 2002[12]

Serious Organized Crime and Police Act 2005[13]

The Proceeds of Crime Act 2002 contains the primary UK anti-money laundering legislation,

[14] including provisions requiring businesses within the 'regulated sector' (banking, investment,

money transmission, certain professions, etc.) to report to the authorities suspicions of money

laundering by customers or others. [15]

Money laundering is widely defined in the UK. [16] In effect any handling or involvement with

any proceeds of any crime (or monies or assets representing the proceeds of crime) can be a

money laundering offence. An offender's possession of the proceeds of his own crime falls

within the UK definition of money laundering.[17] The definition also covers activities which

would fall within the traditional definition of money laundering as a process by which proceeds of

crime are concealed or disguised so that they may be made to appear to be of legitimate origin.

[18]

Unlike certain other jurisdictions (notably the USA and much of Europe), UK money laundering

offences are not limited to the proceeds of serious crimes, nor are there any monetary limits, nor

is there any necessity for there to be a money laundering design or purpose to an action for it to

amount to a money laundering offence. A money laundering offence under UK legislation need

not involve money, since the money laundering legislation covers assets of any description. In

consequence any person who commits an acquisitive crime (i.e. one from which he obtains

some benefit in the form of money or an asset of any description) in the UK will inevitably also

commit a money laundering offence under UK legislation.

This applies also to a person who, by criminal conduct, evades a liability (such as a taxation

liability) – referred to by lawyers as "obtaining a pecuniary advantage" – as he is deemed

thereby to obtain a sum of money equal in value to the liability evaded. [16]

The principal money laundering offences carry a maximum penalty of 14 years imprisonment.

[19]

Secondary regulation is provided by the Money Laundering Regulations 2003[20] and 2007.[21]

They are directly based on the EU directives 91/308/EEC, 2001/97/EC and 2005/60/EC.

One consequence of the Act is that solicitors, accountants, and insolvency practitioners who

suspect (as a consequence of information received in the course of their work) that their clients

(or others) have engaged in tax evasion or other criminal conduct from which a benefit has been

obtained, are now required to report their suspicions to the authorities (since these entail

suspicions of money laundering). In most circumstances it would be an offence, 'tipping-off', for

the reporter to inform the subject of his report that a report has been made.[22] These

provisions do not however require disclosure to the authorities of information received by certain

professionals in privileged circumstances or where the information is subject to legal

professional privilege.

Professional guidance (which is submitted to and approved by the UK Treasury) is provided by

industry groups including the Joint Money Laundering Steering Group [23] and the Law Society.

[24]

However there is no obligation on banking institutions to routinely report monetary deposits or

transfers above a specified value. Instead reports have to be made of all suspicious deposits or

transfers, irrespective of their value.

The reporting obligations include reporting suspicions relating to gains from conduct carried out

in other countries which would be criminal if it took place in the UK.[25] Exceptions were later

added to exempt certain activities which were legal in the location where they took place, such

as bullfighting in Spain.[26]

There are more than 200,000 reports of suspected money laundering submitted annually to the

authorities in the UK (there were 240,582 reports in the year ended 30 September 2010 – an

increase from the 228,834 reports submitted in the previous year [27]). Most of these reports

are submitted by banks and similar financial institutions (there were 186,897 reports from the

banking sector in the year ended 30 September 2010[28]).

Although 5,108 different organizations submitted suspicious activity reports to the authorities in

the year ended 30 September 2010 just four organizations submitted approximately half of all

reports, and the top 20 reporting organizations accounted for three-quarters of all reports.[29]

The offence of failing to report a suspicion of money laundering by another person carries a

maximum penalty of 5 years imprisonment.[19]

Bureaux de change

All UK Bureaux de change are registered with Her Majesty's Revenue and Customs which

issues a trading licence for each location. Bureaux de change and money transmitters, such as

Western Union outlets, in the UK fall within the 'regulated sector' and are required to comply

with the Money Laundering Regulations 2007.[21] Checks can be carried out by HMRC on all

Money Service Businesses.

United States

The approach in the United States to stopping money laundering is usefully broken into two

areas: preventive (regulatory) measures and criminal measures.

Preventive

In an attempt to prevent dirty money from entering the US financial system in the first place, the

United States Congress passed a series of laws, starting in 1970, collectively known as the

[Bank Secrecy Act]. These laws, contained in sections 5311 through 5332 of Title 31 of the

United States Code, require financial institutions, which under the current definition include a

broad array of entities, including banks, credit card companies, life insurers, money service

businesses and broker-dealers in securities, to report certain transactions to the United States

Treasury. Cash transactions in excess of $10,000 must be reported on a Currency Transaction

Report (CTR), identifying the individual making the transaction as well as the source of the

cash. The US is one of the few countries in the world to require reporting of all cash transactions

over a certain limit, although certain businesses can be exempt from the requirement.

Additionally, financial institutions must report transaction on a Suspicious Activity Report (SAR)

that they deem “suspicious,” defined as a knowing or suspecting that the funds come from

illegal activity or disguise funds from illegal activity, that it is structured to evade BSA

requirements or appears to serve no known business or apparent lawful purpose; or that the

institution is being used to facilitate criminal activity. Attempts by customers to circumvent the

BSA, generally by structuring cash deposits to amounts lower than $10,000 by breaking them

up and depositing them on different days or at different locations also violates the law.[30]

The financial database created by these reports is administered by the U.S.’s Financial

Intelligence Unit (FIU), called the Financial Crimes Enforcement Network (FinCEN), which is

located in Vienna, Virginia. These reports are made available to US criminal investigators, as

well as other FIU’s around the globe, and FinCEN will conduct computer assisted analyses of

these reports to determine trends and refer investigations.[31]

The BSA requires financial institutions to engage in customer due diligence, which is sometimes

known in the parlance as “know your customer.” This includes obtaining satisfactory

identification to give assurance that the account is in the customer’s true name, and having an

understanding of the expected nature and source of the money that will flow through her

accounts. Other classes of customers, such as those with private banking accounts and those

of foreign government officials, are subjected to enhanced due diligence because the law

deems that those types of accounts are a higher risk for money laundering. All accounts are

subject to ongoing monitoring, in which internal bank software scrutinizes transactions and flags

for manual inspection those that fall outside certain parameters. If a manual inspection reveals

that the transaction is suspicious, the institution should file a Suspicious Activity Report.[32]

The regulators of the industries involved are responsible to ensure that the financial institutions

comply with the BSA. For example, the Federal Reserve and the Office of the Comptroller of the

Currency regularly inspect banks, and may impose civil fines or refer matters for criminal

prosecution for non-compliance. A number of banks have been fined and prosecuted for failure

to comply with the BSA. Most famously, Riggs Bank, in Washington D.C., was prosecuted and

functionally driven out of business as a result of its failure to apply proper money laundering

controls, particularly as it related to foreign political figures.[33]

In addition to the BSA, the U.S. imposes controls on the movement of currency across its

borders, requiring individuals to report the transportation of cash in excess of $10,000 on a form

called Report of International Transportation of Currency or Monetary Instruments (known as a

CMIR).[34] Likewise, businesses, such as automobile dealerships, that receive cash in excess

of $10,000 must likewise file a Form 8300 with the Internal Revenue Service, identifying the

source of the cash.[35]

Criminal sanctions

Money laundering has been criminalized in the United States since the Money Laundering

Control Act of 1986. That legislation, contained at section 1956 of Title 18 of the United States

Code, prohibits individuals from engaging in a financial transaction with proceeds that were

generated from certain specific crimes, known as “specified unlawful activities” (SUAs).

Additionally, the law requires that an individual specifically intend in making the transaction to

conceal the source, ownership or control of the funds. There is no minimum threshold of money,

nor is there the requirement that the transaction succeed in actually disguising the money.

Moreover, a “financial transaction” has been broadly defined, and need not involve a financial

institution, or even a business. Merely passing money from one person to another, so long as it

is done with the intent to disguise the source, ownership, location or control of the money, has

been deemed a financial transaction under the law. However, the lone possession of money

without either a financial transaction or an intent to conceal is not a crime in the United States.

[36]

In addition to money laundering, the law, contained in section 1957 of Title 18 of the United

States Code, prohibits spending in excess of $10,000 derived from an SUA, regardless of

whether the individual wishes to disguise it. This carries a lesser penalty than money

laundering, and unlike the money laundering statute, requires that the money pass through a

financial institution.[36]

According to the records compiled by the United States Sentencing Commission, in 2009, the

United States Department of Justice typically convicted a little over 81,000 people; of this,

approximately 800 are convicted of money laundering as the primary or most serious charge.

INTERNATIONAL ENFORCEMENT AGAINST MONEY LAUNDERING

The first defense against money laundering is the requirement on financial intermediaries to

know their customers—often termed KYC know your customer requirements. Knowing one's

customers, financial intermediaries will often be able to identify unusual or suspicious behavior,

including false identities, unusual transactions, changing behaviour, or other indicators of

laundering. But for institutions with millions of customers and thousands of customer-contact

employees, traditional ways of knowing their customers must be supplemented by technology.

Many Companies provide software and databases to help perform these processes. Bank and

corporate security directors can also play an important role in fighting money laundering.

[clarification needed]

Technology

Information technology can never be a replacement for a well-trained investigator, but as

money laundering techniques become more sophisticated, so too does the technology used to

fight it. Anti-money laundering software filters customer data, classifies it according to level of

suspicion, and inspects it for anomalies. Such anomalies would include any sudden and

substantial increase in funds or a large withdrawal. Smaller transactions that meet certain

criteria may be also be flagged as suspicious. For example, structuring can lead to flagged

transactions. The software will also flag names that have been placed on government

"blacklists" and transactions involving countries that are thought to be hostile to the host nation.

Once the software has mined data and flagged suspect transactions, it generates a report.

[citation needed]

The various software packages are capable of name analysis, rule-based systems, statistical

and profiling engines, neural networks, link analysis, peer group analysis, and time sequence

matching. Also, there are specific KYC solutions that offer case-based account documentation

acceptance and rectification, as well as automatic risk scoring of the customer taking account of

country, business, entity, product, transaction risks that can be reviewed intelligently. Other

elements of AML technology include portals to share knowledge and e-learning for training and

awareness.[citation needed]

This software is not used exclusively to track money laundering, but more often the common

theft of credit cards or bank details. Unusual activity on an account may trigger a call from the

card issuer to make sure it has not been misused.[citation needed]

FATF: Financial Action Task Force against Money Laundering

Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering

(FATF) is an intergovernmental body whose purpose is to develop and promote an international

response to combat money laundering. In October 2001, FATF expanded its mission to include

combating the financing of terrorism. FATF is a policy-making body, which brings together legal,

financial and law enforcement experts to achieve national legislation and regulatory AML and

CFT reforms. Currently, its membership consists of 34 countries and territories and two regional

organizations. In addition, FATF works in collaboration with a number of international bodies

and organizations. These entities have observer status with FATF, which does not entitle them

to vote, but permits full participation in plenary sessions and working groups.[38]

FATF has develop 40 Recommendations on money laundering and 9 Special

Recommendations regarding terrorist financing. FATF assesses each member country against

these recommendations in published reports. Countries seen as not being sufficiently compliant

with such recommendations are subjected to financial sanctions.[39]

NOTABLE CASES OF MONEY LAUNDERING

Bank of New York: $7 billion of Russian capital flight laundered through accounts

controlled by bank executives, late 1990s [40]

Nauru: $70 billion of Russian capital flight laundered through unregulated Nauru offshore

shell banks, late 1990s[41]

Sani Abacha: $2–5 billion of government assets laundered through banks in the

U.K.,Luxembourg, Jersey (Channel Islands), and Switzerland, by president of Nigeria.[42]

Bank of Credit and Commerce International: Unknown amount, estimated in billions, of

criminal proceeds, including drug trafficking money, laundered during the mid-1980s.[43]

MONEY LAUNDERING- A PAKISTANI PERSPECTIVE

Pakistan is not considered a regional or offshore financial center; however, financial crimes

related to narcotics trafficking, terrorism, smuggling, tax evasion, corruption and fraud are

significant problems. Pakistan is a major drug-transit country. The abuse of the charitable

sector, smuggling, trade-based money laundering, hawala, and physical cross-border cash

transfers are the common methods used to launder money and finance terrorism in Pakistan.

Pakistani criminal networks play a central role in the transshipment of narcotics and smuggled

goods from Afghanistan to international markets. Pakistan does not have firm control of its

borders with Afghanistan, Iran and China, facilitating the flow of smuggled goods to the

Federally Administered Tribal Areas (FATA) and Baluchistan. Some goods such as foodstuffs,

electronics, building materials, and other products transiting Pakistan dutyfree under the Afghan

Transit Trade Agreement are sold illegally in Pakistan. Counterfeit goods generate substantial

illicit proceeds that are laundered. Private unregulated charities are also a major source of illicit

funds for international terrorist networks. Madrassas have been used as training grounds for

terrorists and for terrorist funding. The lack of control of madrassas, similar to the lack of control

of Islamic charities, allows terrorist and jihadist organizations to receive financial support under

the guise of support of Islamic education. Money laundering and terrorist financing are often

accomplished in Pakistan via the alternative remittance system called hundi or hawala. This

system is also widely used by the Pakistani people for informal banking purposes, although

controls have been significantly tightened since 2002. In June 2004, the State Bank of Pakistan

required all hawaladars to register as authorized foreign exchange dealers and to meet

minimum capital requirements. Despite the State Bank of Pakistan’s efforts, unlicensed

hawaladars still operate illegally in parts of the country (particularly Peshawar and Karachi), and

authorities have taken little action to identify and enforce the regulations prohibiting

nonregistered hawaladars. Most illicit funds are transacted through these unlicensed operators.

Fraudulent invoicing is typical in hundi/hawala counter valuation schemes. However, legitimate

remittances from the roughly five million Pakistani expatriates residing abroad, sent via the

hawala system prior to 2001, now flow mostly through the formal banking sector and have

increased significantly to U.S. $5.5 billion in 2006-2007. Pakistan has established a number of

Export Processing Zones (EPZs) in all four of the country’s provinces. Although no evidence

has emerged of EPZs being used in money laundering, inaccurate invoicing is common in the

region and could be used by entities operating out of these zones. In 2007, the Directorate

General of Customs Intelligence (DGCI) investigated a well-known Pakistani business group

involved with trade-based money laundering. The business over-invoiced the value and quantity

of the exports of garments and textiles to Dubai and Saudi Arabia. The chairman of the

business group and his partners held 49 percent shares in the Dubai-based company that

imported many of the goods. The investigation also revealed that the business group used

hawala to transfer large amounts of money and value through a prominent foreign exchange

company based in Karachi. From 2001-2007, the value of the trade consignments totaled U.S.

$330 million. Pakistan has adopted measures to strengthen its financial regulations and

enhance the reporting requirements for the banking sector to reduce its susceptibility to money

laundering and terrorist financing. For example, financial institutions are required to follow “know

your customer” provisions and must report within three days any funds or transactions they

believe are proceeds of criminal activity. Pakistan became a member of the Asia/Pacific Group

on Money Laundering (APG) in 2000, therefore accepting the APG requirement that members

develop, pass and implement anti-money laundering and counter-terrorist financing legislation

and other measures based on accepted international standards. A high-level APG delegation

visited Pakistan in early July 2007 to discuss Pakistan’s long-delayed passage of

comprehensive anti-money legislation. At its July plenary, APG members agreed that INCSR

2008 Volume II 356 unless Pakistan enacts and proclaims into force consolidated AML

legislation or issues a Presidential Ordinance prior to December 31, 2007, Pakistan’s

membership could be suspended. On September 8, President Musharraf signed an ordinance

to implement the long-awaited AML bill through a presidential ordinance. While creating this

ordinance averted suspension of membership in the APG, Pakistan still has work ahead to meet

international standards, especially the core FATF Recommendations related to the

criminalization of money laundering and suspicious transaction reporting. Some of the

weaknesses identified in the new AML Ordinance include the following: Not all of the FATF

designated categories of offenses (e.g., smuggling, racketeering, trafficking in persons, sexual

exploitation, arms trafficking, and environmental crime) are covered as predicate offenses. The

intent and knowledge requirement required to prove the offense of money laundering is not

consistent with the standards set out in the Vienna and Palermo Conventions. Only the

concealment of criminal proceeds is an offense, not the transfer of legitimate money to promote

criminal activity. The definition of what constitutes a suspicious transaction is not adequate as it

does not cover cases where an individual “suspects” or “has reason to suspect” that funds are

the proceeds of criminal activity. The Ordinance also does not contain any specific requirement

to report transactions in relation to terrorist financing. The forfeiture procedures set forth in the

law are cumbersome and will inhibit the successful seizure and confiscation of property involved

in offenses. Lastly, the reporting structure of the Financial Monitoring Unit may affect its

independence and effectiveness. The AML ordinance formally establishes a Financial

Monitoring Unit (FMU) to monitor suspicious transactions. However, it is subject to the

supervision and control of the General Committee, comprised of several Government of

Pakistan (GOP) cabinet secretaries, thus limiting its independence. Because Pakistan has

lacked a central repository for the reporting of suspicious transactions and the lack of protection

from liability for reporting, very few suspicious transactions have been reported or utilized. From

July 2006 through June 2007, 22 suspicious transactions were reported to the State Bank of

Pakistan by various banks and five referred to law enforcement agencies for investigation.

Currently, the FMU has yet to be fully staffed and investigators have not been adequately

trained. Several law enforcement agencies are responsible for enforcing financial crimes laws.

The National Accountability Bureau (NAB), the Anti-Narcotics Force (ANF), the Federal

Investigative Agency (FIA), and the Directorate of Customs Intelligence and Investigations (CII)

all oversee Pakistan’s financial enforcement efforts. In addition to the 2007 Anti-Money

Laundering Ordinance, major laws in these areas include: The Anti-Terrorism Act of 1997,

which defines the crime of terrorist finance and establishes jurisdiction and punishments; the

National Accountability Ordinance of 1999, which requires financial institutions to report

corruption related suspicious transactions to the NAB and establishes accountability courts; and

the Control of Narcotics Substances Act of 1997 which criminalizes acts of money laundering

associated with drug offenses and requires the reporting of narcotics related suspicious

transactions. The NAB, FIA, ANF and customs have the ability to seize assets whereas the

State Bank of Pakistan has the ability to freeze assets. The ANF shares information

about seized narcotics assets and the number of arrests with the USG. Pakistan has also

adopted measures to strengthen its financial regulations and enhance the reporting

requirements for the financial sector to reduce its susceptibility to money laundering and terrorist

financing. The State Bank of Pakistan and the Securities and Exchange Commission of

Pakistan (SECP) are the country’s primary financial regulators. They have established AML

units to enhance

financial sector oversight. However, these units often lack defined jurisdiction and adequate

resources to effectively supervise the financial sector on AML/CTF controls. The State Bank of

Pakistan has introduced regulations on AML that are generally consistent with the FATF

recommendations in the areas of “know your customer” and enhanced due diligence

procedures, record retention, the Money Laundering and Financial Crimes

357 prohibition of shell banks, and the reporting of suspicious transactions. The Securities and

Exchange Commission of Pakistan, which has regulatory oversight for nonbank financial

institutions, has also applied “know your customer” regulations to stock exchanges, trusts, and

other nonbank financial institutions. Pakistan has specifically criminalized various forms of

terrorist financing under the Anti-Terrorism Act (ATA) of 1997. Sections 11H-K provide that a

person commits an offence if he is involved in fund raising, uses and possesses property, or is

involved in a funding arrangement intending that such money or other property should be used,

or has reasonable cause to suspect that they may be used, for the purpose of terrorism.

Pakistan has the ability to freeze bank accounts and property held by terrorist individuals and

entities. Pakistan has issued freezing orders for terrorists’ funds and property in accordance

with UN Security Council Resolutions 1267 and 1373. The State Bank of Pakistan circulates to

its financial institutions the list of individuals and entities that have been included on the UN

1267 Sanctions Committee’s consolidated list. The ATA of 1997 also allows the government to

proscribe a fund, entity or individual on the grounds that it is involved with terrorism. This done,

the government may order the freezing of its accounts. Section 11B of the ATA specifies that an

organization is proscribed or listed if the GOP has reason to believe that it is involved with

terrorism. In 1997, 16 names were listed in annex to the ATA; none have been added since. As

of 2006, bank accounts of 43 individuals and entities had been frozen under various UNSCRs.

However, there have been some deficiencies concerning the timeliness and thoroughness of

the asset freezing. A Charities Registration Act has been under consideration by the Ministry of

Welfare for some time. Currently, the Economic Affairs Division of the Ministry of Finance is

reviewing the draft text and will then forward the bill to the Ministry of Law for review. The bill will

then require approval by the cabinet and National Assembly, unless issued as a Presidential

Ordinance by the President. Under this bill, charities would have to prove the identity of their

directors and open their financial statements to government scrutiny. Currently, charities can

register under one of a dozen different acts, some dating back to the middle of the nineteenth

century. The Ministry of Social Welfare hopes that when the new legislation is enacted, it will be

better able to monitor suspicious charities and ensure that they have no links to designated

terrorists or terrorist organizations. Current efforts to crack down on the flow of illicit funds via

charitable organizations are limited to closure of the charity. There is little follow-up on suspect

individuals associated with charities in question, thus allowing them to operate freely under

alternate names. The court system has also failed to affirm Pakistan’s international obligations

and maintain closure of UN-proscribed charitable organization. In one such case, a provincial

court in Karachi permitted a charity to continue operating in the face of a closure order, provided

the charity in question only engaged in humanitarian operations. The GOP failed to aggressively

appeal this court decision. Reportedly, bulk cash couriers are the major source of funding for

terrorist activities. According to the Pakistan Central Board of Revenue, cash smuggling is an

offense punishable by up to five years in prison. The State Bank of Pakistan legally allows

individuals to carry up to U.S. $10,000 in dollars or the foreign currency equivalent. In tracking

the cross border movement of currency Pakistan currently has reporting requirements only for

the exportation of currency not the importation of currency. Although there is no requirement for

the inbound reporting of currency, Pakistan is in compliance with FATF’s Special

Recommendation IX as they have the ability to ask anyone entering Pakistan if they are bringing

in any currency. There are joint counters at international airports staffed by the State Bank of

Pakistan and Customs to monitor the transportation of foreign currency. As a result of cash

courier training received by Pakistan in 2006, their efforts to stop and seize the illicit cross-

border movement of cash have increased. For example, during 2007 authorities made a number

of significant cash seizures at the international airports in Karachi, Lahore and Peshawar as well

as land border crossings. INCSR 2008 Volume II 358 Pakistan is party to the 1988 UN Drug

Convention and the UN Convention against Corruption and has signed, but not ratified, the UN

Convention against Transnational Crime. Pakistan is not a signatory to the UN International

Convention for the Suppression of the Financing of Terrorism. Pakistan is ranked 138 out of 180

countries monitored in Transparency International’s 2007 Corruption Perception Index. Although

the Government of Pakistan has adopted a long-awaited AML ordinance by presidential decree

after years of delay and stall tactics, the GOP needs to amend the current AML Ordinance or

pass additional legislation to remedy the number of deficiencies which exist, ensure that the

legal provisions are made permanent, and make it fully compliant with international standards.

The Presidential Ordinance was valid for only four months and was due to expire in early

January 2008. At expiry, the AML Ordinance must be “re-enacted” or ratified by the National

Assembly. Pakistan’s Financial Monitoring Unit (FMU) needs to be further staffed and

strengthened and should be given operational autonomy rather than subject to the supervision

and control of the General Committee, comprised of political ministers. The GOP should also

issue implementing regulations to consolidate and de-conflict the reporting obligations of

suspicious transactions contained in various laws and regulations. Since few suspicious

transaction reports are filed, Pakistan should not become dependent on these reports to initiate

investigations but rather law enforcement authorities should be proactive in pursuing money

laundering in their field investigations. In light of the role that private charities have played in

terrorist financing, Pakistan must work quickly to conduct outreach, supervise and monitor

charitable organizations and activities, and close those that finance terrorism. In accordance

with FATF Special Recommendation IX, Pakistan should implement and enforce cross-border

currency reporting requirements and focus greater efforts in identifying and targeting illicit cash

couriers. Pakistan should also become a party to the UN Convention against Transnational

Organized Crimeand the UN International Convention for the Suppression of Terrorist

Financing.

TIME-LINE HISTORY OF MONEY LAUNDERING IN PAKISTAN AFTER 9-11

 2001

2001 - State Bank of Pakistan introduced stringent measures to curb money-laundering and

bring foreign currency remittances into official banking channels after joining the US-led war on

terrorism in 2001. For generations, money had been transferred through an unofficial system

known as hawala, that allows money to be exchanged between traders through a handshake, a

piece of paper or on trust.

 2003

Aug 2003 - In August 2003 the US Attorney's Office for the District of Maryland announced the

indictment of 11 individuals in connection with an international heroin trafficking and money

laundering operation with ties to Canada, Pakistan, the United Kingdom, and the United States.

Suppliers in Pakistan transported heroin via commercial aircraft from Pakistan through the

United Kingdom for further transport to the United States and Canada.

 2004

Nov 2004 - 120. There is currently no concerted legal framework for addressing money

laundering in Pakistan, largely due to official resistance to criminalizing tax evasion and

corruption, both of which are highly lucrative.

 2006

Jul 2006 - The impact clearly helped Pakistan when the remittances of overseas Pakistani

workers started flowing into the country through banking channels, which multiplied the volume

of inflows reaching a record $5.5 billion in 2006-07. With the passage of time the monitoring by

the US relaxed and the non-involvement of any Pakistani bank in money laundering also made

the harsh check on Pakistan relatively soft.

2007

Nov 15, 2007 - The National Assembly is completing its 5-year term on November 15, 2007 and

it will be appropriate if the National Assembly passes the bill in its remaining two months. A

delay in the passage of the bill may not be in the interest of Pakistan as it may create

unnecessary doubts in the mind of international community regarding the resolve of

Government of Pakistan to combat and prevent Money Laundering.

2008

Feb 28, 2008 - The FATF reaffirms its public statement of 28 February 2008 regarding the

money laundering and financing of terrorism risks posed by Pakistan and Sao Tome and

Principe. The FATF welcomes the significant progress made in the northern part of Cyprus and

notes that the northern part of Cyprus has substantially addressed the AML/CFT deficiencies

that the FATF had identified.

 2010

Mar 31, 2010 - A giant portrait of Pakistan's President Asif Ali Zardari is on display on a fense

near Supreme Court, backdrop, in Islamabad, Pakistan on Wednesday, March 31, 2010.

Pakistan has sent a letter to Swiss authorities asking that they reopen a money-laundering case

against Zardari after an amnesty protecting him from graft prosecution was struck down by the

Supreme Court, a government lawyer said.

DIFFERENT METHODS OF MONEY LAUNDREING IN PAKISTAN AND SUB-CONTINENT

HAWALA OR HUNDI

What is hawala?

Hawala (1) is an alternative or parallel remittance system. It exists and operates outside of, or parallel to 'traditional' banking or financial channels. It was developed in India, before the introduction of western banking practices, and is currently a major remittance system used around the world. It is but one of several such systems; another well known example is the 'chop', 'chit' or 'flying money' system indigenous to China, and also, used around the world. These systems are often referred to as 'underground banking'; this term is not always correct, as they often operate in the open with complete legitimacy, and these services are often heavily and effectively advertised.

The components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships or regional affiliations. Unlike traditional banking or even the 'chop' system, hawala makes minimal (often no) use of any sort of negotiable instrument. Transfers of money take place based on communications between members of a network of hawaladars, or hawala dealers (2).

ORIGINS

Hawala has its origins in classical Islamic law and is mentioned in texts of Islamic jurisprudence as early as the 8th century. Hawala itself later influenced the development of the agency in common law and in civil laws such as the aval in French law and the avallo in Italian law. The words aval and avallo were themselves derived from Hawala. The transfer of debt, which was "not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages." The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent." In Roman law, the "contractor himself was considered the party to the contract and it

took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him." On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general."[1]

Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century. Today, hawala is probably used mostly for migrant workers' remittances to their countries of origin.

 

How does hawala work?

Hawala works by transferring money without actually moving it. In fact 'money transfer without money movement' is a definition of hawala that was used, successfully, in a hawala money laundering case.

An effective way to understand hawala is by examining a single hawala transfer. In this scenario, which will be used throughout this paper, Abdul is a Pakistani living in New York and driving a taxi. He entered the country on a tourist visa, which has long since expired. From his job as a taxi driver, he has saved $5,000 that he wants to send to his brother, Mohammad, who is living in Karachi (3).

Even though Abdul is familiar with the hawala system, his first stop is a major bank. At the bank, he learns several things:

The bank would prefer that he open an account before doing business with them;

The bank will sell him Pakistani rupees (Rs) at the official rate (4) of 31 to the dollar; and

The bank will charge $25 to issue a bank draft.

This will allow Abdul to send Mohammad Rs 154,225. Delivery would be extra; an overnight courier service (surface mail is not always that reliable, especially if it contains something valuable) can cost as much as $40 to Pakistan and take as much as a week to arrive. Abdul believes he can get a better deal through hawala, and talks to Iqbal, a fellow taxi driver who is also a part-time hawaladar.

Iqbal offers Abdul the following terms:

A 5% 'commission' for handling the transaction;

35, instead of 31, rupees for a dollar; and

Delivery is included.

This arrangement will allow Abdul to send Mohammad Rs 166,250. As we will see, the delivery associated with a hawala transaction is faster and more reliable than in bank transactions. He is about to make arrangements to do business with Iqbal when he sees the following advertisement (5) in a local 'Indo-Pak' newspaper (such advertisments are very common):

Abdul calls the number, and speaks with Yasmeen. She offers him the following deal:

A fee of 1 rupee for each dollar transferred;

37 rupees for a dollar; and

Delivery is included.

Under these terms (6), Abdul can send Mohammad Rs 180,000. He decides to do business with Yasmeen.

The hawala transaction proceeds as follows:

Abdul gives the $5,000 to Yasmeen;

Yasmeen contacts Ghulam in Karachi, and gives him the details;

Ghulam arranges to have Rs 180,000 delivered to Mohammad.

This diagram summarizes the transaction:

Even though this is a simple example, it contains the elements of a hawala transaction. First, there is trust between Abdul and Yasmeen. Yasmeen did not give him a receipt, and her recordkeeping, such as it may be, is designed to keep track of how much money she owes Ghulam, instead of recording individual remittances she has made. There are several possible

relationships she can have with Ghulam (these will be discussed later); in any case she trusts him to make the payment to Mohammad. This delivery almost always takes place within a day of the initial payment (a consideration here is time differences), arid the payment is almost always made in person. Finally, in some scenarios, he trusts her to repay him the equivalent of either $5,000 or Rs 180,000.

Connections are of equal importance. Yasmeen has to be connected to Ghulam in Karachi to arrange this payment. As her advertisement indicates, she also offers service to India, so she either knows, or has access to, someone who can arrange payment there. Hawala networks tend to be fairly loose, communication usually takes place by phone or fax (but email is becoming more and more common).To complete this discussion, there are two related issues to be addressed. The first is the relationship between Yasmeen and Ghulam, and the second is how Ghulam 'recovers' the money that he paid to Mohammad on Abdul's behalf.

As was stated above, hawala works through connections. These connections allow for the establishment of a network for conducting the hawala transactions. In this transaction, Yasmeen and Ghulam are part of the same network. There are several possible ways in which this network could have been constructed.

The first possibility is that Yasmeen and Ghulam are business partners (or that they just do business together on a regular basis). For them, transferring money is not only another business in which they are engaged but a part of their normal business dealings with one another. Another possibility is that, for whatever reason, Ghulam owes Yasmeen money. Since many countries make it difficult to move money out of the country, Ghulam is repaying his debt to Yasmeen by paying her hawala customers; even though this is a very 'informal' relationship, it is quite typical for hawala. A third (and by no means the final) possibility is that Yasmeen has a 'rupee surplus' and Ghulam is assisting her in disposing of it.

In the last two cases, Ghulam does not need to recover any money; he is either repaying an existing debt to Yasmeen, or he is handling money that Yasmeen has entrusted to him, but is unable to move out of the country. In the first case, where Yasmeen and Ghulam are partners, a more formal means of balancing accounts is needed.

One very likely business partner scenario is an import/export business. Yasmeen might import CDs and cassettes of Indian and Pakistani music and 22 carat gold (7) jewelry from Ghulam, and export telecommunications devices to Ghulam. In the context of such a business, invoices can be manipulated to 'conceal' the movement of money.

If Yasmeen needs to pay Ghulam the Rs 180,000 that he has given to Mohammad, she can do it by 'under invoicing' a shipment to him. She could, for example, send him $20,000 worth of telecommunications devices, but only invoice him for $15,000. Ghulam pays Yasmeen $15,000 against this invoice. The 'extra' value of goods, in this case $5,000 (the equivalent of Rs 180,000) is the money that she owes him.

In order to move money the other way (in this case, from Pakistan to New York)',over invoicing' can be used. For this example, it is assumed that Ghulam owes Yasmeen $5,000. She could buy $10,000 of telecommunications devices, and send it to Ghulam with an invoice for $15,000. Ghulam would pay her $15,000; this covers the $10,000 for the telecommunications devices as well as the other $5,000.

Since many hawala transactions (legitimate and illegitimate) are conducted in the context of import/export businesses, the manipulation of invoices, as discussed above, is a very common means of settling accounts after the transactions have been made.

 

Why would anyone bother with hawala?

When compared to a 'traditional' means of remitting money, such as obtaining a check or ordering a wire transfer, hawala seems cumbersome and risky. In this section, we will examine the motivations for using the hawala system.

The primary reason is cost effectiveness. As was shown in this example, Abdul was able to obtain nearly Rs 30,000 more (averaging exchange rates, this is about US$ 880), a significant savings by using the hawala system. Some of the reasons for this cost effectiveness, namely low overhead, exchange rate speculation and integration with existing business activities, will be discussed in the next section of this paper.

The second reason is efficiency. A hawala remittance takes place in, at most, one or two days. This can be contrasted with the week or so required for an international wire transfer involving at least one correspondent bank (as well as delays due to holidays, weekends and time differences) or about the same amount of time required to send a bank draft from North America to South Asia via a courier service (surface mail is not a reliable option where the contents are valuable, and it can also take several weeks to arrive).

The third reason is reliability. Complex international transactions, which might involve the client's local bank, its correspondent bank, the main office of a foreign bank and a branch office of the recipient's foreign bank, have the potential to be problematic. In at least once instance reported to the authors, money for a large commercial transaction (money being sent from the United States to South Asia) was lost 'in transit' for several weeks while trying to conduct such a transaction. When the bank located the money, it was returned to the customer. He enlisted the services of a local hawaladar, who was able to complete the transaction in less than a day.

The fourth reason is the lack of bureaucracy. Abdul is living and working in the United States on an expired student visa; he does not have a social security number (and since he deals almost exclusively in cash, he really does not need one). It would be difficult, if not impossible for him to open a bank account as he does not have adequate identification. In addition, he does not completely trust banks and would prefer not to use them if at all possible. Iqbal and Yasmeen do not operate in a 'bureaucratic' framework, making them a preferable alternative to the bank.

The fifth reason is the lack of a paper trail. Even though Abdul earned the money that he sent to Mohammad legally, he would prefer to remain anonymous (this is a much more important consideration in illicit hawala transactions). Since it is rare for hawaladars to keep records of individual transactions, it is unlikely that Abdul's remittance will ever be identified as part of the business dealings between Yasmeen, Ghulam and their associates.

The sixth reason is tax evasion. In South Asia, the 'black' or parallel economy is 30%-50% of the 'white' or documented economy. Money remitted through official channels might invite scrutiny from tax authorities - hawala provides a scrutiny-free remittance channel.

 

Why does hawala work?

In brief, hawala 'works' - or competes effectively with other remittance mechanisms - because of its cost effectiveness. A secondary consideration is that hawala is often related or even integral to existing business dealings.

One reason for hawala's cost effectiveness is low overhead. A business like Yasmeen's 'Music Bazaar and Travel Services Agency' operates out of a rented storefront as opposed to a bank building (which has expensive vaults and alarm systems), and may even share space with another business (e.g. a sari or gold shop), further reducing rental expenses. Yasmeen's employees are paid less than bank officers, and they probably do not have insurance or access to a retirement plan. Some hawaladars operate with even less, using a table in a tea shop as an office and having little more than a cellular phone and notebook as overhead expenses.

The second reason is exchange rate speculation. In India, for example, the Foreign Exchange Regulation Act (FERA), 8(2) (8) states that '(e)xcept with the previous general or special percussion of the Reserve Bank, no person, whether an authorised dealer or a moneychanger or otherwise, shall enter into any transaction which provides for the conversion of Indian currency into foreign currency or foreign currency into Indian currency at rates of exchange other than the rates for time being authorised by the Reserve Bank'. Since hawala dealers do not, in many if not most cases comply with such regulations, their transactions may be illegal (a more detailed discussion of the legality of hawala follows).

Depending on one's perspective (and possibly jurisdiction), hawaladars are either engaging in foreign exchange speculation or black market currency dealing. In any case, they exploit naturally occurring fluctuations in the demand for different currencies. This enables them to turn a profit from hawala transactions (which, in addition to being remittances, almost always have a foreign exchange component), and they are also able to offer their customers rates that are better than those offered by banks (most banks will only transact at authorized rates of exchange).

The rates cited in this paper (35 Rs/$ for Iqbal, 37 Rs/$ for Yasmeen and the official rate of 31 Rs/$ as cited by the bank) reflect a difference of 12-19% over the official rate. These may actually be a little high. A U.S. hawaladar (9) involved in the laundering of drug proceeds as well as legitimate remittances told one of the authors of this paper that he could still make a profit on an exchange rate margin as small as 2%, making him much more competitive than a bank.

In addition, since many hawaladars are also involved in businesses where money transfers are necessary, providing remittance services fits well into these businesses' existing activities. Monies from remittances and business transfers are processed through the same bank

accounts, and few, if any, additional operational costs are incurred by a business that offers hawala remittance services.

Finally, an important component of hawala is trust. Hawala dealers are almost always honest in their dealings with customers and fellow hawaladars. Breaches of trust are extremely rare. It is worth noting that one of the meanings attached to the word hawala is 'trust'!

 

Is hawala legal?

Since hawala is a remittance system, this question really addresses regulations governing remittance services (10) and the circumstances of the remittance. The assumption here, of course, is that these remittances are like Abdul's, and 'legitimate'; the illicit use of hawala in money laundering is discussed in the next section of this paper.

Even though hawala is illegal from a regulatory standpoint in some U.S. jurisdictions, hawaladars advertise their services widely in a variety of media (ethnic newspapers have been the traditional place to find them, now some are using the Internet). Enforcement of these regulations is difficult with respect to hawala. The advertisements are often printed in foreign languages, and wording like 'sweet rupee deals' does not necessarily suggest remittance services. Moreover, businesses like Yasmeen's do not conduct remittances as their primary activity.

In South Asia, the situation is more complicated. Many South Asian nations (such as India and Pakistan) have laws that prohibit speculation in the local currency, prohibit foreign exchange transactions at anything other than the official rate of exchange, and impose strict licensing requirements on money remitters and foreign exchange dealers. In addition, there are regulations governing inbound and outbound remittances.

A detailed discussion of these regulations is beyond the scope and intent of this paper. It is, however, possible to state 'hawala is illegal in India and Pakistan' with nearly complete accuracy.

The important point for our purposes is that the existence of these regulations is another reason hawala is still used. Many people in these countries have money that they would like to move to another country due to concerns about stability, to pay for education or medical treatment. Hawala provides a ready means of doing this, and its use as a facilitator of 'capital flight' on both large and small scales is very common. The existence of these laws also explains, in part, the prevalence of invoice manipulation as part of hawala schemes.

Another aspect of these regulations is the use of the United Arab Emirates, specifically Dubai, for hawala transactions. There are two main reasons for this. The first is the large population of expatriate workers from India and Pakistan; they use hawala to send money home. The second is Dubai's large gold market, which is the source of much of the gold sent (licitly and illicitly) to India and Pakistan. Dubai, unlike many other South Asian nations, allows essentially unregulated financial dealings. Because of this, many South Asian businessmen maintain

offices in Dubai, and money is often wired there to circumvent regulations elsewhere. In addition, Dubai offers a neutral meeting place for Indian and Pakistani businessmen, as tension between these countries makes travel between them difficult if not impossible.

This paper should not, however, be considered a condemnation of the economic policies of India or Pakistan, both of which have taken concrete steps to combat money laundering. The efficiency and cost effectiveness of hawala make it an attractive means of remitting money under almost any regulatory regime.

 

How is hawala used to launder money?

Up to this point, no distinction has been made between hawala transactions where the source of the money is legitimate (e.g. Abdul's remittance to his brother) and where the source, and intent, of the transactions is illegitimate. Following Indian and Pakistani usage, the term 'white hawala' is used to refer to legitimate transactions, such as Abdul's. The term 'black hawala' refers to illegitimate transactions, specifically hawala money laundering (11).

This distinction is valuable for money laundering enforcement. Many 'white' hawala transactions are essentially remittances, and, while illegal under Indian and Pakistani law, are not illegal in other jurisdictions. `Black' hawala transactions, however, are almost always associated with some serious offense (e.g. narcotics trafficking, fraud), that is illegal in most jurisdictions.

Money laundering consists of three phases: placement, layering and integration. Since hawala is a remittance system, it can be used at any phase.

In placement, money derived from criminal activities is introduced into the financial system. In many money laundering schemes, the biggest 'problem' here is handling cash. Some jurisdictions, such as the United States, require reporting by financial institutions of cash transactions over a certain amount (in the U.S. it is US$ 10,000) (12), and attempting to circumvent such reporting requirements by making smaller transactions is an offense.

Hawala can provide an effective means of placement. In the example, Abdul gave Yasmeen US$ 5,000 in cash. Since she also operates a business (and also performs remittance services for others), she will make periodic bank deposits consisting of cash and checks. She will justify these deposits to bank officials as the proceeds of her legitimate business. Even though she might prefer it if reports were not filed, she will not object to this as it would arouse suspicion at the bank (and her business provides more than adequate justification). She may also use some of the cash received to meet business expenses, reducing her need to deposit that cash into her bank account.

In the layering stage, the money launderer manipulates the illicit funds to make them appear as though they were derived from a legitimate source. A component of many layering schemes has been seen to be the transfer of money from one account to another. Even though this is done as carefully as possible, when it is done through the 'traditional' banking system it presents two problems to the money launderer. First, there is the possibility that a transaction could be

considered to be suspicious and reported as such. Related to this is the paper trail created by these transactions. If any portion of the laundering network is examined, the related paper trails could lead a diligent investigator directly to the source of the criminal proceeds and unravel the money laundering network.

Hawala transfers leave a sparse or confusing paper trail if any. Even when invoice manipulation is used, the mixture of legal goods and illegal money, confusion about `valid' prices and a possibly complex international shipping network create a trail much more complicated than a simple wire transfer.

Both of the authors of this paper have investigated hawala money laundering, and have found that even 'basic' hawala transfers can be difficult to trace and tie to the original, criminal source of money. There is no reason, however, why hawala transfers could not be 'layered' to make following the money even more difficult. This could be done by using hawala brokers in several countries, and by distributing the transfers over time.

In the final stage of money laundering, integration, the launderer invests in other assets, uses the funds to enjoy his ill-gotten gains or to continue to invest in additional illegal activities. The same characteristics of hawala that make it a potential tool for the layering of money also make it ideal for the integration of money. This is when money seems to become legitimate, and, as we have seen, hawala techniques are capable of transforming money into almost any form, offering many possibilities for establishing an appearance of legitimacy.

Given hawala's close ties to business activities, there is no reason why money cannot be 'reinvested' in a legitimate (or legitimate appearing) business. Yasmeen could very easily arrange for the transfer of money from the United States to Pakistan, and then back to the United States, apparently as part of an investment in a business there.

 

What are some indicators of hawala?

As has been shown in this paper, hawala is actually quite simple; much of the complexity associated with and ascribed to hawala money laundering comes from the nearly infinite number of variations that are encountered in hawala transactions.

This complexity of variation makes it nearly impossible to lay out a straightforward guide to recognizing hawala money laundering as part of a criminal undertaking. It is, however, possible to provide a few indicators that may be useful.

One of the most consistent and valid indicators of hawala activity in investigations conducted in the United States is seen in bank accounts. A 'hawala' bank account almost always shows significant deposit activity, usually in the forms of cash and checks, which are often from one or more ethnic communities (e.g. Afghan, Bangladeshi, Indian, Pakistani, Somali) associated with the hawaladar. These checks may be made out to the primary account holder, or some secondary entity (often outside the United States) somehow associated with the account. These checks may also have some sort of notation, consisting of a name (presumably of the person to

whom the money is remitted to) or something supposedly indicating what was 'bought' with the money. In one case, many checks were seen with the word 'bangle' written on them; this was done apparently in order to make it appear as though the checks, which were almost all for even dollar amounts, had been written to purchase jewelry.

These accounts will also almost always show outgoing transfers (usually by wire) to a major financial center known to be involved in hawala. Three of the most common locations are Great Britain, Switzerland, and, as discussed previously, Dubai. Given the flexible and casual nature of the hawala business, hawala accounts will not always be seen to balance. The following diagram summarizes 'hawala account' behavior:

As has been discussed, certain businesses are also more likely than others to be involved in hawala. Once again, it is not possible to give an exhaustive list, but the following is a starting point:

Import/ExportTravel and Related ServicesJewelry (gold, precious stones)Foreign ExchangeRugs/CarpetsUsed CarsCar Rentals (usually non-chain or franchise)Telephones/Pagers

Laws in India, Pakistan and other countries make it difficult to convert foreign currency (or foreign currency instruments, such as travelers' checks). Criminal activities in these countries may often involve foreign currency (especially dollars), which pose something of a problem. A 'solution' that has been seen to this problem is the shipment of these negotiable instruments from South Asia to the United States. Even though such shipments may violate both courier policies and U.S. law, the money launderers accept these risks rather than try to attempting to place these instruments into their local economies.

NOTABLE MONEY LAUNDERING CASES IN PAKISTAN

Munaf Kalia and Javed Khanani, directors of Khanani and Kalia International (KKI), the largest Foreign Exchange company of Pakistan, were arrested by FIA on the charges of money laundering and illegal money transfer of 10 Billion Dollars.

The main charge against them is that they were involved in ‘physical’ transfer of foreign currency from Pakistan and ran the illegal ‘Hawala or Hundi business’.

According to the News, Special Investigation Group (SIG) of FIA Lahore prepare a report in April 2008 about the flight of dollars from the country, fearing that a forex crisis would hit the country in the near future. The report also recommended strong and instant action against persons involved in the Hundi and Hawala business.

According to FIA officials, Lahore, Gujranwala, Karachi and Peshawar are the main cities where a majority of money changers were running the Hundi and Hawala business and anyone could send any amount anywhere in the world without any check.

FIA officials said during initial interrogation Javed Khanani has disclosed the names of some very influential people whose money he had sent abroad.

Today, the State Bank of Pakistan has suspended with immediate effect the license of Khanani & Kalia International (KKI) for a period of 30 days for violation of its (SBP) rules and regulations.

According to SBP, the exchange company, its head office, branches, franchises, payment booths and currency exchange booths have been debarred from undertaking any kind of business activity during the suspension period.

Talking to a TV channel, Forex Association of Pakistan President Malik Bostan said that the foreign exchange dealers bring eight billion dollars in the country everyday and such action against them was unjustifiable.

Bostan said that Munaf Kalia informed him that his company was not involved in Hundi or Hawala business, but the owner of Dunya Moneychangers, Faisal, who has taken the franchise of the Khanani & Kalia Company, was involved.

KKI, as per its web site, claims to be Pakistan’s first ISO 9001 and 27001 certified Exchange Company. They also have an online due diligence manual, Know-Your-Client Policy and a Franchise Policy.

It is quite alarming if, in spite of all certifications and operating procedures in place, KKI was unable to trace and stop the illegal transaction by its franchise. Also, what the State Bank of Pakistan was doing when the Dollar was elevated in open market from 70 rupees to 90 rupees within a span of few weeks.

The case of Khanani and Kalia is still in progress. We have to see if real culprits behind “flight of dollar” are taken to justice or this turns out to be another facade. The government and media have to be very cautious in handling of this case as any false move will further derogate the image of Pakistan abroad and amplify the ongoing financial crisis.

ASIF ALI ZARDARI CASE

The Facts

The second case history involves Asif Ali Zardari, the husband of Benazir Bhutto, former Prime Minister of Pakistan. Ms. Bhutto was elected Prime Minister in 1988, dismissed by the President of Pakistan in August 1990 for alleged corruption and inability to maintain law and order, elected Prime Minister again in October 1993, and dismissed by the President again in November 1996. At various times, Mr. Zardari served as Senator, Environment Minister and Minister for Investment in the Bhutto government. In between the two Bhutto administrations, he was incarcerated in 1990 and 1991 on charges of corruption; the charges were eventually dropped. During Ms. Bhutto’s second term there were increasing allegations of corruption in her government, and a major target of those allegations was Mr. Zardari. It has been reported that the government of Pakistan claims that Ms. Bhutto and Mr. Zardari stole over $1 billion from the country.

During the period 1994 to 1997, Citibank opened and maintained three private bank accounts in Switzerland and a consumer account in Dubai for three corporations under Mr. Zardari’s control. There are allegations that some of these accounts were used to disguise $10 million in kickbacks for a gold importing contract to Pakistan.

Structure of Private Bank Relationship.

Mr. Zardari’s relationship with Citibank began in October 1994, through the services of Kamran Amouzegar, a private banker at Citibank private bank in Switzerland, and Jens Schlegelmilch, a Swiss lawyer who was the Bhutto family’s attorney in Europe and close personal friend for more than 20 years. According to Citibank, Mr. Schlegelmilch represented to Mr. Amouzegar that he was working for the Dubai royal family and he wanted to open some accounts at the Citibank branch office in Dubai. Mr. Schlegelmilch had a Dubai residency permit and a visa signed by a member of the Dubai royal family. Mr. Amouzegar agreed to introduce Mr. Schlegelmilch to a banker in the Citibank branch office in Dubai.

According to Citicorp, Mr. Schlegelmilch told the Citibank Dubai banker that he wanted to open an account in the name of M.S. Capricorn Trading, a British Virgin Island PIC. The stated purpose of the account was to receive money and transfer it to Switzerland. The account was opened in early October 1994.

According to Citibank, Mr. Schlegelmilch informed the Dubai banker that he would serve as the representative of the account and the signatory on the account. Under Dubai law, a bank is not required to know an account’s beneficial owner, only the signatory. Citibank told the

Subcommittee staff that Mr. Schlegelmilch did not reveal to the Dubai banker that Mr. Zardari was the beneficial owner of the PIC [Private Investment Company: an offshore company often used to launder money], and the account manager never asked him the identity of the beneficial owner of the account. Instead, according to Citibank, she assumed the beneficial owner of the account was the member of the royal family who had signed Mr. Schlegelmilch’s visa. According to Citibank, the account manager actually performed some due diligence on the royal family member whom she believed to be the beneficial owner of the account.

Shortly after opening the account in Dubai, Mr. Schlegelmilch signed a standard referral agreement with Citibank Switzerland private bank guaranteeing him 20% of the first three years of client net revenues earned by the bank from each client he referred to the private bank.

On February 27, 1995, Mr. Schlegelmilch, working with Mr. Amouzegar, opened three accounts at the Citibank Switzerland private bank. The accounts were opened in the name of M.S. Capricorn Trading, which already had an account at Citibank’s Dubai branch, as well as Marvel and Bomer Finance, two other British Virgin Island PICs established by Mr. Schlegelmilch, according to Citibank. Each private bank account listed Mr. Schlegelmilch as the account contact and signatory. Citibank informed the Subcommittee that the Swiss Form A, a government-required beneficial owner identification form, identified Mr. Zardari as the beneficial owner of each PIC.

Lack of Due Diligence.

The decision to allow Mr. Schlegelmilch to open the three accounts on behalf of Mr. Zardari, according to Citibank, involved officials at the highest levels of the private bank. The officials were: (a) Mr. Amouzegar, the private banker; (b) Deepak Sharma, then head of private bank operations in Pakistan; (c) Phillipe Holderbeke, then head of private bank operations in Switzerland (who became head of the Europe, Middle East, Africa Division in February 1996); (d) Salim Raza, then head of the EMEA Division of the private bank; and (e) Hubertus Rukavina, then head of the Citibank private bank. Mr. Rukavina told the Subcommittee staff that when he was asked about opening the Zardari accounts, he did not make the decision to open them, but rather directed that the matter be discussed with Mr. Sharma. According to Mr. Rukavina, he never heard whether the accounts were ultimately opened. Mr. Rukavina left the private bank in 1996 and left Citibank in 1999.

Citibank informed the Subcommittee staff that the private bank was aware of the allegations of corruption against Mr. Zardari at the time it opened the accounts in Switzerland. However, Citibank reasoned that if the charges for which Mr. Zardari had been incarcerated for two years had any merit, they would not have been dropped. Bank officials also believed that the family wealth of Ms. Bhutto and Mr. Zardari was large enough to support a large private bank account, even though Citibank was not able to specify what actions were taken to verify the amount and source of their wealth. Citibank said that bank officials were also aware of the M.S. Capricorn Trading account in Dubai, and they were comforted by the fact that there had been no problems with that account. According to Citibank, Mr. Amouzegar informed his superiors that Mr. Zardari was the beneficial owner of the Capricorn account in Dubai when they were considering the request to open the accounts in Switzerland. Inexplicably, however, the Dubai account manager was apparently still operating under the assumption that the beneficial owner of the Dubai Capricorn account was a member of the Dubai royal family. Subcommittee staff have been unable to determine whether Citibank officials were unaware of or inattentive to the serious inconsistency between Citibank Switzerland and Citibank Dubai with respect to the Capricorn

Trading account. Citibank also informed the Subcommittee staff that bank officials had some concerns that if they turned down the accounts, their actions may have implications for the corporation’s operations in Pakistan; however, they said they never received any threats on that issue.

Citibank told the Subcommittee staff the private bank decided to allow Mr. Schlegelmilch to open the three accounts for Mr. Zardari on the condition that the private bank would not be the primary accounts for Mr. Zardari’s assets and the accounts would function as passive investment accounts. Citibank told the Subcommittee staff that Mr. Holderbeke signed a memo delineating the restrictions placed on the accounts, including a $40 million aggregate limit on the size of the three accounts, and transaction restrictions requiring the accounts to function as passive, stable investments, without multiple transactions or funding pass-throughs. None of the Citibank personnel interviewed by Subcommittee staff could identify any other private bank account with these types of restrictions. Other private banks interviewed by the Subcommittee staff were asked if they had ever accepted a client on the condition that certain restrictions be imposed on the account. The banks all said they had not. One bank representative explained that if the bank felt that it needed to place restrictions on the client’s account, it didn’t want that type of client. The existence of the restrictions are in themselves proof of the private bank’s awareness of Mr. Zardari’s poor reputation and concerns regarding the sources of his wealth.

Movement of Funds.

Citibank told the Subcommittee staff that, once opened, only three deposits were made into the M.S. Capricorn Trading account in Dubai. Two deposits, totaling $10 million were made into the account almost immediately after it was opened. Citibank records show that one $5 million deposit was made on October 5,1994, and another was made on October 6, 1994. The source of both deposits was A.R.Y. International Exchange, a company owned by Abdul Razzak Yaqub [since then, the owner of several ARY television channels that, incidentally, have been providing favorable coverage of Ms. Bhutto's recent political activities], a Pakistani gold bullion trader living in Dubai.

According to the New York Times, in December 1994, the Bhutto government awarded Mr. Razzak an exclusive gold import license. In an interview with the New York Times, Mr. Razzak acknowledged that he had used the exclusive license to import more than $500 million worth of gold into Pakistan. Mr. Razzak denies, however, making any payments to Mr. Zardari. Citibank could not explain the two $5 million payments. Ms. Bhutto told the Subcommittee staff that since A.R.Y. International Exchange is a foreign exchange business, the payments did not necessarily come from Mr. Razzak, but could have come from a third party who was merely making use of A.R.Y.’s exchange services. The staff invited Ms. Bhutto to provide additional information on the M.S. Capricorn Trading accounts, but she has not yet done so.

On February 25, 1995, a third deposit of $8 million was made into the Dubai M.S. Capricorn Trading account. Records show that the payment was made through American Express, with the originator of the account listed as “Morgan NYC.” Citibank indicated it does not know who Morgan NYC is, nor does it know the source of the $8 million.

All of the funds in the Dubai account of M.S. Capricorn Trading were moved to the Swiss accounts in the Spring of 1995. On March 6, 1995, $8.1 million was transferred; and on May 5, 1995, another $10.2 million was transferred. Both transfers involved U.S. dollars and were

routed through Citibank’s New York offices. Citibank informed the Subcommittee staff that M.S. Capricorn Trading closed its Dubai account shortly after the last transfer was completed.

Citibank has indicated that significant amounts of other funds were also deposited into the Swiss accounts. As described below, the $40 million cap was reached, and millions of additional dollars also passed through those accounts. However, Swiss bank secrecy law has prevented the Subcommittee from obtaining the details on the transactions in the Zardari accounts.

Account Monitoring.

Citibank told the Subcommittee staff that, in 1996, the Swiss office of the private bank conducted a number of reviews of the Zardari Swiss accounts, finally deciding in October to close them.

The first review was allegedly in early 1996, triggered by increasing publicity about allegations of corruption against Mr. Zardari. Citibank told the Subcommittee staff that Messrs. Holderbeke, [Salim] Raza, Sharma and Amouzegar participated in the review, and apparently concluded that the allegations were politically motivated and that the accounts should remain open. The Subcommittee staff was told that the review did not include looking at the accounts’ transaction activity.

In March or April, 1996, Mr. Amouzegar asked that the overall limit on the Zardari accounts be increased from $40 million to $60 million, apparently because the accounts had reached the previously imposed limit of $40 million. Citibank told the Subcommittee staff that Mr. Holderbeke considered the request, but declined to increase the $40 million limit.

In June, press reports in the United Kingdom that Mr. Zardari had purchased real estate in London triggered still another review of the Zardari accounts. Citibank private bank told the Subcommittee staff that its Swiss office internally discussed the source of the funds for the property purchase. Mr. Amouzegar and Mr. [Salim] Raza then met with Mr. Schlegelmilch, who allegedly informed them that funds had been deposited into the Citibank accounts, transferred to another PIC account outside of Citibank and used to purchase the property. Mr. Schlegelmilch allegedly indicated the funds had come from the sale of some sugar mills and were legitimate. Citibank told the Subcommittee staff it is not sure if anyone at the private bank attempted to validate the information about the sale of the sugar mills. In addition, even though this account activity violated the condition imposed by Citibank that the accounts were not to be used as a pass through for funds, the accounts were kept open.

Closing the Accounts.

In July 1996, after Mr. Amouzegar left the private bank to open his own company, another private banker, Cedric Grant, took over management of the Zardari accounts. Citibank told the Subcommittee staff that Mr. Grant began to review the Zardari accounts about one month later to familiarize himself with them. He also reviewed the transactions that had taken place within the accounts.

In September and October 1996, press accounts in Pakistan repeatedly raised questions about corruption by Mr. Zardari and Ms. Bhutto, as Ms. Bhutto’s re-election campaign increased its activities prior to a February election date. In September, Ms. Bhutto’s only surviving brother, Murtaza Bhutto, was assassinated, and Ms. Bhutto’s mother accused Ms. Bhutto and Mr.

Zardari of masterminding the murder, because the brother had been leading opposition to Ms. Bhutto.

In October, Mr. Grant completed his review of the Zardari accounts and provided a written analysis to Messrs. Holderbeke, Sharma and [Salim] Raza, according to Citibank. Mr. Grant had found numerous violations of the account restrictions imposed by Citibank, including multiple transactions and funding pass-throughs. Citibank told the Subcommittee staff that the accounts had functioned more as checking accounts than passive investment accounts, directly contrary to the private bank’s restrictions. Apparently, well over $40 million had flowed through the accounts, though Subcommittee staff were unable to ascertain the actual amount because Swiss bank secrecy law prohibits Citibank from sharing that information with the Subcommittee. Citibank indicated that Mr. Amouzegar had either ignored or did not pay attention to the account activity. Mr. Grant recommended closing the accounts, and they were closed by January 1997.

[Note: In May 1997, Mr. Shaukat Aziz was transferred at Citibank's New York headquarters, from his position as head of credit card operations to head of private banking. In November 1996, Mr. Farooq Laghari had dismissed the government of Ms. Benazir Bhutto-Zardari; and in February 1997, Mr. Nawaz Sharif became Prime Minister.]

Legal Proceedings.

On September 8, 1997, the Swiss government issued orders freezing the Zardari and Bhutto accounts at Citibank and three other banks in Switzerland at the request of the Pakistani government. Since Citibank had closed its Zardari accounts in January 1997, it took no action nor did it make any effort to inform U.S. authorities of the accounts until late November 1997. Citibank contacted the Federal Reserve and OCC [Office of the Comptroller of the Currency, the banking supervision arm of the US Department of Treasury] about the Zardari accounts in late November, in anticipation of a New York Times article that eventually ran in January 1998, alleging that Mr. Zardari had accepted bribes, and that he held Citibank accounts in Dubai and Switzerland. On December 8 and 11, 1997, Citibank briefed the OCC and the Federal Reserve, respectively, about the accounts and the steps it had taken as a result of the Zardari matter. These steps included: closing all of the accounts that had been referred by Mr. Schlegelmilch to the private bank and terminating his referral agreement; reviewing all of the accounts opened in the Dubai office; and tightening up account opening procedures in Dubai, including requiring the Dubai office to identify the beneficial owner of all Dubai accounts. Citibank did not identify any changes made or planned for the Swiss office, even though the majority of the activity with respect to the Zardari accounts had taken place in Switzerland.

On December 5, 1997, Citibank prepared a Suspicious Activity Report on the Zardari accounts and filed it with the Financial Crimes Enforcement Network at the U.S. Department of Treasury. The filing was made fourteen months after its decision to close the Zardari accounts; thirteen months after Mr. Zardari was arrested a second time for corruption in November 1996; and nearly two months after the Swiss government had ordered four Swiss banks (including Citibank Switzerland) to freeze all Zardari accounts.

In June 1998, Switzerland indicted Mr. Schlegelmilch and two Swiss businessmen, the former senior executive vice president of SGS and the managing director of Cotecna, for money laundering in connection with kickbacks paid by the Swiss companies for the award of a government contract by Pakistan. In July 1998, Mr. Zardari was indicted for violation of Swiss

money laundering law in connection with the same incident. Ms. Bhutto was indicted in Switzerland for the same offense in August 1998. A trial on the charges is expected.

In October 1998, Pakistan indicted Mr. Zardari and Ms. Bhutto for accepting kickbacks from the two Swiss companies in exchange for the award of a government contract. On April 15, 1999, after an 18-month trial, Pakistan’s Lahore High Court convicted Ms. Bhutto and Mr. Zardari of accepting the kickbacks and sentenced them to 5 years in prison, fined them $8.6 million and disqualified them from holding public office. Ms. Bhutto, who now lives in London, denounced the decision. Mr. Zardari remains in jail. Additional criminal charges are pending against both in Pakistani courts.

On December 11, 1997, Citicorp’s Chairman John Reed wrote the following to the Board of Directors:

“We have another issue with the husband of Ex-Prime Minister Bhutto of Pakistan. I do not yet understand the facts but I am inclined to think that we made a mistake. More reason than ever to rework our Private Bank.”

Mr. Reed told the Subcommittee staff that it was the combination of the Salinas and Zardari accounts that made him charge Mr. [Shaukat] Aziz [currently, Prime Minister of Pakistan], the new private bank head, with taking a hard look at the bank’s public figure policy and public figure accounts.

The Issues

The Zardari case history raises issues involving due diligence, secrecy and public figure accounts. The Zardari case history begins with the Citibank Dubai branch’s failure to identify the true beneficial owner of the M.S. Capricorn Trading account. As a result, the account officer in Dubai performed due diligence on an individual who had no relationship to the account being opened. In Switzerland, Citibank officials opened three private bank accounts despite evidence of impropriety on the part of Mr. Zardari. In an interview with Subcommittee staff, Citigroup Co-Chair John Reed informed the Subcommittee staff that he had been advised by Citibank officials in preparation for a trip to Pakistan in February 1994, that there were troubling accusations concerning corruption surrounding Mr. Zardari, that he should stay away from him, and that he was not a man with whom the bank wanted to be associated. Yet one year later, the private bank opened three accounts for Mr. Zardari in Switzerland. Mr. Reed told the Subcommittee staff that when he learned of the Zardari accounts he thought the account officer must have been “an idiot.”

Citibank has been unable to confirm that bank employees verified that Mr. Zardari had a level of wealth sufficient to support the size of the accounts that he was opening. In addition, the Swiss private banker took no action to validate the legitimacy of the source of the funds that were deposited into the account. For example, there was no effort made to verify the claims that some of the funds derived from the sale of sugar mills.

Citibank also performed no due diligence on the client owned and managed PICs that were the named accountholders. Because the PICs were client-created, the bank’s failure to perform due diligence on the PICs meant that it had no knowledge of the activities, assets or entities involved with the corporations. One of the PICs, Bomer Finance, has been determined to have been a repository for kickbacks paid to Mr. Zardari, and those kickbacks tainted funds deposited at the

Geneva branch of Union Bank of Switzerland. Documentation has not been made available to determine whether Bomer Finance also used its Citibank account for illicit funds.

Another due diligence lapse was the private bank’s failure to monitor the Zardari accounts to ensure that the account restrictions imposed on them were being followed. When officials were presented with evidence in 1996 that the restrictions were being violated, they nevertheless allowed the accounts to continue.

The Zardari accounts in Switzerland were opened one day before Raul Salinas was arrested. The account was repeatedly reviewed in 1996, after the Salinas scandal became public. Yet there is no evidence that anyone in the private bank had been sensitized to the problems associated with handling an account of a person suspected of corruption.

The Zardari example also demonstrates the practical consequences of secrecy in private banking. Citibank claims that its decisionmaking in the Zardari matter cannot be fully explained or documented, since all Citibank officials are subject to Swiss secrecy laws prohibiting discussion of client-specific information. In light of the fact that U.S. banks are supposed to oversee their foreign branches and enforce U.S. law, including anti-money laundering requirements, this inability to produce documentation related to a troubling case again highlights the problems with U.S. banks choosing to operate in secrecy jurisdictions.

Pattern of Poor Account Management.

The Zardari case history took place during a series of critical internal and federal audits between 1992 and 1997 of the Swiss office which, during most of that time, served as the headquarters of the private bank. The shortcomings identified in the audits included policies, procedures, and problems that affected the management of the Zardari accounts. They included:

failure of the “corporate culture” in the Swiss office to foster ” ‘a climate of integrity, ethical conduct and prudent risk taking’ by U.S. standards”;

inadequate due diligence; “less than acceptable internal controls”; lack of oversight and control of third party referral agents such as Schlegelmilch; and inadequate monitoring of accounts;

all of which resulted in “unacceptable” internal audit ratings. In December 1995, the Swiss office received the lowest audit score received by any office in the private bank during the 1990s. These audit scores indicate the office’s poor handling of the Zardari accounts was part of an ongoing pattern of poor account management.

NATIONAL ASSEMBLY ACTS AGAINST MONEY LAUNDERING IN PAKISTAN

The National Assembly adopted Anti-Money Laundering Bill 2009 suggesting one to ten years imprisonment and a fine up to Rs 1,000,000 on violation of the law.Moved by Minister of State for Finance and Revenue, Hina Rabbani Khar, the 46-clause bill was adopted with a majority vote thought there was no amendment in any of the reported clauses of the Bill.Mentioning to objectives of the bill, the Minister of State stated, Financial Action Task Force (FATF) and Asian Pacific Group which are responsible for monitoring compliance of AML/Combating Financing Terrorism (CFT) regime by member countries, had raised serious

reservations on certain provisions of AML Bill 2007. “This required necessary review and changes in the law to bring it in line with international standards,” she stated.She said amendments in AML Bill 2007 were also part of conditionalities under Pakistan’s Accelerating Economics Transformation Programme of ADB.Similarly, she said, in order to meet requirements indicated by internal bodies and lending institutions, the proposed amendments address and broadly provide for AML law’s applicability in the area of countering financing of terrorism, expansion in the list of predicate offences and modifying the definition of money laundering in line with the internationally accepted standards.For punishments, the bill provides, whosoever commits offences of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than one year but may extend to ten years and shall also be liable to fine which may extend to Rs one million and shall also be liable to forfeiture of property involved in the money laundering.It further provides that the aforesaid fine may extend to Rs five million in case of a company and every director, officer or employee of the company found guilty under this section, shall also be punishable under this section.

PAKISTAN TO INTRODUCE ANTI-MONEYLAUNDERING LAWS.

The Pakistani government will introduce anti-moneylaundering laws with assistance from the U.S. government in a bid partly to prevent "financing of terrorism," a Pakistani daily reported Tuesday.A high-level U.S. team will arrive in Islamabad next month to help the Pakistani government map out new rules under which both local and foreign banks will be required to disclose full information about large cash transactions, the News said.The English-language daily quoted "a credible source" as saying the government is especially concerned about the role of foreign banks in Pakistan as they are the least bothered to get themselves involved in knowing the sources of money that they transfer to their foreign branches.The source told the daily that the anti-moneylaundering laws are totally new and the government intends to promote their enactment delicately "so that neither banks nor the clients get afraid of this exercise."Pakistan has been keen to get the support of Western countries for recovery of vast sums of money sent out of the country to foreign financial institutions by corrupt rulers, officials and businessmen.The U.S., meanwhile, has since Sept. 11 called for the building of a "global coalition against the financing of terrorism" in which it says terrorist assets - like the terrorists themselves - must have no safe harbor.On Dec. 4, the U.S. Treasury Department said that 196 countries and jurisdictions have committed to join this effort, with 139 countries now have blocking orders on terrorist assets in force, and more than $61 million in terrorist assets having been frozen globally since Sept. 11.

CURRENT SITUATION OF MONEY LAUNDERING

IV. MONEY LAUNDERINGMoney laundering is an integral part ofTransnational Organized Crime. TheTransnational Criminal Organisationshave resorted to money laundering in

different countries in an effort to legitimisethe proceeds of crime. The extent of moneylaundering is difficult to estimate since itis an illegal trade for which no statistics isavailable. A rough estimate is that about2-5% of the global GDP is the dirty moneythat enters the capital market every year.Experience in various countries shows thatthe general techniques to launder moneyare:(i) investing the dirty money m thelegitimate business either throughshell companies or throughgenuine companies in pseudoname;(ii) acquisition of assets by paying therequisite taxes;(iii) deposit of money in banks in noncooperativecountries andremittances through bankingchannels to the host country;(iv) use of non-banking channels intransfer of money;(v) over invoicing of goods inseemingly normal businesstransactions;(vi) routing of money through taxhaven countries.One of the popular methods ofremittance among the Asian communitiessettled abroad who have to send moneyback home is hundi or hawala, analternative non-banking remittancechannel. The money is deposited with thelocal agent, who sends instructions to hiscounterpart in the native country to paythe money to the recipient. This is a fastand convenient method for transfer ofmoney. This method is in vogue for anumber of years. It has also been used bymoney launderers since there is no auditor accounting as the system works on trust.For example, in China, Triads have usedthis system and in India, Organizedcriminal gangs have used this system tolaunder their drug and illicit armsproceeds.In Brazil, international Mafia have usedghosts beneficiaries, front and fictitiouscompanies for money laundering. In India,money laundering is indulged in by

corporate houses to evade taxes as well asby the Organized criminal groups tolaunder dirty money. Money launderingt e c h n i q u e s i n c l u d e s m u r f i n g ,establishment of front companies,acquisition of commercial andnoncommercial properties, remittancesthrough Hawala (Non-banking channel),over-invoicing and double invoicing,legitimate business and foreignremittances.226RESOURCE MATERIAL SERIES No. 58Furthermore, in Nigeria, moneylaundering has correlation with attempt tolegitimise the proceeds of crime byconcealing their true origin and ownership.The Organized criminal groups involved indrug trafficking repatriate money fromabroad by direct purchase and re-sale ofluxury items like cars and jewelry. Theother methods include over invoicing ofgoods and trading in stocks and shares.In Pakistan, money laundering haslinkage with drug trafficking, smuggling,tax evasion and corruption. The methodsadopted, amongst others, include hawala,investment in real estate, over invoicing ofexports and under invoicing of imports.There have been about ten cases ofmoney laundering in Japan since 1992when the law on money laundering wasenacted. An Iranian group was reportedto have remitted proceeds of drugtrafficking to Middle East through bankingchannels. Boryokudans have also indulgedin laundering of the proceeds of sale ofstimulant drugs. Chinese ’Snakeheads’have used underground banks in theirhuman trafficking activities in Japan formoney laundering.Undeniably, money laundering is anessential financial activity of TransnationalCriminal Organisations to evade detectionand enjoy the proceeds of theirunwholesome activities. Therefore, the roleof authorities in pursuing the money trailis becoming increasingly cumbersome.

ISLAMIC PERSPECTIVE OF MONEY LAUNDERING

Money laundering as Economic Crime under Islamic LawThere is no gain saying that money laundering has become a global phenomenon with relevantregional and international institutions working tirelessly in formulating legal framework tocombat it. Although money laundering is a contemporary crime, conceptual wise it has beenaddressed over 1,400 years ago under the Islamic jurisprudence.22 Although there is no specificdefinition of the economic crime of money laundering in Islamic jurisprudence however, theessential justification for prohibiting money laundering are well embedded under Islamic law.Money laundering is all about illegal criminal activities, illegal commercial operations whichaim to convert massive amount of money that are derivable from illegal activities (for examplecorruption, embezzlement, drug trafficking, terrorist activity, prostitution, fraud and so on), intolegitimate proceeds.23 In other words it is a process of transforming proceeds from illegalactivity into proceeds from legal activity.The Islamic ruling on money laundering can be garnered from relevant the Qur’anic injunctionsand the Sunnah. Money laundering involves the process of concealing the origin of proceedsfrom illegal activity by giving it the appearance of legal sources.24 It was well reported that theProphet Muhammad (SAW) prohibits any activity funded by money derived from Soht (unlawfultrade or ill-gotten property). Thus; “Any activity built from Soht, will be caste into fire.25Money or property that is acquired through illegal means is patently unclean (haram) andunlawful which must not be put into use by anyone either for himself or for the benefit ofothers.26 The Prophet (SAW) was also reported to have warned that prayers and supplications ofthe one who lives on property or income derived from unlawful means will not be accepted byAllah and in case he does good deeds, they will not avail him.27The common method of concealing the origin or identity of proceeds from illegal activities isthrough bank deposit or structured transactions. Money laundering activities are not restricted toconventional banks and financial institutions. Proceeds from illegal activities could also bedeposited in Islamic banks and financial institutions in form of banking deposit (al-wadiah).However, the fundamental question here is, “how does Islamic jurisprudence view the contractof al-wadi’ah (banking deposit)? And “how far does it insist on business ethics and moralprinciples?28 To address these posers in light of money laundering activities within Islamicbanking and finance, it is imperative to attempt the definition of the contract of al-wadiah. Theterm wadiah is derived from the verb “wada’a” which means to leave, lodge or deposit. Wadiahin its ordinary meaning means leaving something for safekeeping in somebody’s custody. In thelight of the above definitions, wadiah in a pure legal sense means a thing entrusted to the care ofanother. The proprietor of the thing is known as mudi (depositor), the person entrusted with it is3rd International Conference on Postgraduate Education (ICPE-3 ’08, Penang-Malaysia, 2008) 2008known as wadi’ or mustawda” (custodian) and the deposited asset is wadiah. Money launderingthrough bank deposit (al-wadiah) is obviously a bogus transaction. Thus, the intention of thelaunderer who deposits money in Islamic bank and financial institutions is not for safe custodybut rather to take advantage of the facilities offered by Islamic banks to actualise his/her criminalactivity.29 The Islamic law position with regard to such bank deposit (contract of al-wadiah) isthat such contract would be regarded as void since it is tainted with fraud (tadlis, taghrir),concealment of information and illegality. Ibn Qayyim was reported to have said that “Islamiclaw and its rules specify that the intention and the motive behind contract is an essential

consideration and affects their validity”.30Money laundering as an economic crime is totally prohibited in Islam. The Islamic economicsystem is premised on a comprehensive system of moral and divine principles regulating socialcum economic affairs of the people in terms of their “business conducts; consumption andprotection, wealth creation and distribution”.31 Any other manner of unlawful wealthacquisition, which is incongruous to the well being of the society, is prohibited in Islam.However, Islam never objects to wealth creation and acquisition provided it is pursued throughlawful means. This submission is amply justified by the saying of the Holy Prophet (SAW) that,“Anybody raised an unlawful provision will be fuel for the fire of Hell on the Day ofJudgment”.32 In another narration, the Prophet (SAW) stated; “Whoever gathered unlawfulriches and then gave out in charity, he will have no reward; on the contrary he will have to bearthe burden of his evil deed”.33 In another similar narration, the Messenger of Allah says;“When a servant of Allah earns property in an unlawful manner and then gives it in charity, itwill not be accepted by him. There will be no blessing in that he spends and that he leavesbehind, but it becomes a provision for the fire of Hell. In reality, Allah does not wipe out evilwith evil, but erases evil with good action. Undoubtedly, dirt does not clean dirt”34

 

RECOMMENDATIONS

The Effects of Money Laundering

Currency of ChoiceFor decades, the U.S. dollar has been the most popular currency for launders to use. Its popularity is due to its wide acceptance and the volume of worldwide transactions that use the currency -- a few million extra dollars changing hands doesn't attract attention. However, the euro has slowly gained a foothold in the laundering industry since its introduction into common use in 2002. As far as money laundering goes, the euro could be the perfect currency: It is the main legal tender of more than a dozen countries, meaning it circulates in tremendous volume and moves regularly across borders without any notice at all.

Depending on which international agency you ask, criminals launder anywhere between $500 billion and $1 trillion worldwide every year. The global effect is staggering in social, economic and security terms.

On the socio-cultural end of the spectrum, successfully laundering money means that criminal activity actually does pay off. This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions. This means more fraud, more corporate embezzling (which means more workers losing their pensions when the corporation collapses), more drugs on the streets, more drug-related crime, law-enforcement resources stretched beyond their means and a general loss of morale on the part of legitimate business people who don't break the law and don't make nearly the profits that the criminals do.

The economic effects are on a broader scale. Developing countries often bear the brunt of modern money laundering because the governments are still in the process of establishing regulations for their newly privatized financial sectors. This makes them a prime target. In the 1990s, numerous banks in the developing Baltic states ended up with huge, widely rumored deposits of dirty money. Bank patrons proceeded to withdraw their own clean money for fear of losing it if the banks came under investigation and lost their insurance. The banks collapsed as a result. Other major issues facing the world's economies include errors in economic policy resulting from artificially inflated financial sectors. Massive influxes of dirty cash into particular areas of the economy that are desirable to money launderers create false demand, and officials act on this new demand by adjusting economic policy. When the laundering process reaches a certain point or if law-enforcement officials start to show interest, all of that money that will suddenly disappear without any predictable economic cause, and that financial sector falls apart.

Some problems on a more local scale relate to taxation and small-business competition. Laundered money is usually untaxed, meaning the rest of us ultimately have to make up the loss in tax revenue. Also, legitimate small businesses can't compete with money-laundering front businesses that can afford to sell a product for cheaper because their primary purpose is to clean money, not turn a profit. They have so much cash coming in that they might even sell a product or service below cost.

The majority of global investigations focus on two prime money-laundering industries: Drug trafficking and terrorist organizations. The effect of successfully cleaning drug money is clear: More drugs, more crime, more violence. The connection between money laundering and terrorism may be a bit more complex, but it plays a crucial role in the sustainability of terrorist organizations. Most people who financially support terrorist organizations do not simply write a personal check and hand it over to a member of the terrorist group. They send the money in roundabout ways that allow them to fund terrorism while maintaining anonymity. And on the other end, terrorists do not use credit cards and checks to purchase the weapons, plane tickets and civilian assistance they need to carry out a plot. They launder the money so authorities can't trace it back to them and foil their planned attack. Interrupting the laundering process can cut off funding and resources to terrorist groups.

CONCLUSION

Money laundering is the major financial crime that affects the economic & social system of the country. Although governments, all over the world have taken many steps to eradicate money

laundering in their respective countries but there are many to crush the head of money laundering crime.

On the basis of our study, we want to present recommendations to eradicate money laundering in Pakistan.

RECOMMENDATIONS

1. INVOLVEMENT OF HIGHER AUTHORITIES MUST BE MONITOR & CRUSH :- As we know that money laundering is the crime that can’t be happen on a large scale without the help of government officials. We have many examples in this regard like khanani & kalia case, Asif ali Zardari – Swiss case etc. so law enforcement agencies like Police, NAB must have an eye on government officials, to stop their involvement in this crime.

2. DRUG TRAFFIKING FROM AFGHA-PAKISTAN BORDER MUST BE ERADICATED:-Drug trafficking from Pak-afghan border is not a new phenomenon in this region. We are experiencing this evil from the era of Afghan Jihad. This money of drug trafficking is use by Terrorist for money laundering & to finance their weapons. Government of Pakistan with the help of Afghan government must try to step this drug trafficking from Afghanistan side into Pakistan in order to stop money laundering.

3. STOP HAWALA OR HUNDI Government of Pakistan & financial institutions must try to convince the people of Pakistan living abroad to send their money into Pakistan through proper financial channels, not by means of Hawala or Hundi. As we have mentioned in our study that majority of people are sending their money through Hawala or Hundi that severally effects the economy of Pakistan give incentives to Pakistanis living abroad to adopt the proper financial channel to send their money to their loved ones in Pakistan in order to stop money launderings.

4. ENFORCEMENT OF LAWS WITHOUT HESITATION:- In Pakistan we have laws for different crimes but the major problem arises when there is a matter of their enforcement. In money laundering perspectives, Govt. must enforce the laws of Anti-money laundering without absorbing any kind of pressure.

5. ISLAMIC LAWS MUST BE IMPLEMENT:- As the major source of money laundering is drug trafficking which is absolutely illegal according to Islam so money obtained or laundered in this way is also illegal according to Islamic point of view. We must follow Islam not just in our personal life but also social & economic sectors of our economy. So we can eradicate money laundering if we follow Islamic rules & regulations.

6. INCENTIVES TO BUSINESS COMMUNITY:- Government must give incentives to the business community. In Pakistan, there are no major incentives for business community, so they try to obtain money from illegal business laundering taxes they use money laundering techniques.

Government must give different incentives & facilities to business community, not just in order to increase business activities in the country but also to decrease money laundering.

7. SERVE PUNISHMENTS:- There must be serve punishments for the peoples involved in money laundering so that people must not follow their footsteps.

WE KNOW THAT IT IS VERY DIFFERENT TO ERADICATE MONEY LAUNDERING BUT IF WE TRY TO FOLLOW THE ABOVE MENTIONED RECOMMENDATIONS IN OUR SOCIETY

THEN WE WILL BE ABLE TO DECREASE THIS EVIL FROM OUR SOCIETY.