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.

BACKGROUND
Money 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 REGIONS

Many 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/Export
Travel and Related Services
Jewelry (gold, precious stones)
Foreign Exchange
Rugs/Carpets
Used Cars
Car 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 LAUNDERING

Money laundering is an integral part of
Transnational Organized Crime. The
Transnational Criminal Organisations
have resorted to money laundering in
different countries in an effort to legitimise
the proceeds of crime. The extent of money
laundering is difficult to estimate since it
is an illegal trade for which no statistics is
available. A rough estimate is that about
2-5% of the global GDP is the dirty money
that enters the capital market every year.
Experience in various countries shows that
the general techniques to launder money
are:
(i) investing the dirty money m the
legitimate business either through
shell companies or through
genuine companies in pseudo
name;
(ii) acquisition of assets by paying the
requisite taxes;
(iii) deposit of money in banks in noncooperative
countries and
remittances through banking
channels to the host country;
(iv) use of non-banking channels in
transfer of money;
(v) over invoicing of goods in
seemingly normal business
transactions;
(vi) routing of money through tax
haven countries.
One of the popular methods of
remittance among the Asian communities
settled abroad who have to send money
back home is hundi or hawala, an
alternative non-banking remittance
channel. The money is deposited with the
local agent, who sends instructions to his
counterpart in the native country to pay
the money to the recipient. This is a fast
and convenient method for transfer of
money. This method is in vogue for a
number of years. It has also been used by
money launderers since there is no audit
or accounting as the system works on trust.
For example, in China, Triads have used
this system and in India, Organized
criminal gangs have used this system to
launder their drug and illicit arms
proceeds.
In Brazil, international Mafia have used
ghosts beneficiaries, front and fictitious
companies for money laundering. In India,
money laundering is indulged in by
corporate houses to evade taxes as well as
by the Organized criminal groups to
launder dirty money. Money laundering
techniquesincludesmurfing,
establishment of front companies,
acquisition of commercial and
noncommercial properties, remittances
through Hawala (Non-banking channel),
over-invoicing and double invoicing,
legitimate business and foreign
remittances.
226
RESOURCE MATERIAL SERIES No. 58
Furthermore, in Nigeria, money
laundering has correlation with attempt to
legitimise the proceeds of crime by
concealing their true origin and ownership.
The Organized criminal groups involved in
drug trafficking repatriate money from
abroad by direct purchase and re-sale of
luxury items like cars and jewelry. The
other methods include over invoicing of
goods and trading in stocks and shares.
In Pakistan, money laundering has
linkage with drug trafficking, smuggling,
tax evasion and corruption. The methods
adopted, amongst others, include hawala,
investment in real estate, over invoicing of
exports and under invoicing of imports.
There have been about ten cases of
money laundering in Japan since 1992
when the law on money laundering was
enacted. An Iranian group was reported
to have remitted proceeds of drug
trafficking to Middle East through banking
channels. Boryokudans have also indulged
in laundering of the proceeds of sale of
stimulant drugs. Chinese ’Snakeheads’
have used underground banks in their
human trafficking activities in Japan for
money laundering.
Undeniably, money laundering is an
essential financial activity of Transnational
Criminal Organisations to evade detection
and enjoy the proceeds of their
unwholesome activities. Therefore, the role
of authorities in pursuing the money trail
is becoming increasingly cumbersome.
ISLAMIC PERSPECTIVE OF MONEY LAUNDERING

Money laundering as Economic Crime under Islamic Law

There is no gain saying that money laundering has become a global phenomenon with relevant
regional and international institutions working tirelessly in formulating legal framework to
combat it. Although money laundering is a contemporary crime, conceptual wise it has been
addressed over 1,400 years ago under the Islamic jurisprudence.22 Although there is no
specific
definition of the economic crime of money laundering in Islamic jurisprudence however, the
essential justification for prohibiting money laundering are well embedded under Islamic law.
Money laundering is all about illegal criminal activities, illegal commercial operations which
aim to convert massive amount of money that are derivable from illegal activities (for example
corruption, embezzlement, drug trafficking, terrorist activity, prostitution, fraud and so on), into
legitimate proceeds.23 In other words it is a process of transforming proceeds from illegal
activity into proceeds from legal activity.
The Islamic ruling on money laundering can be garnered from relevant the Qur’anic injunctions
and the Sunnah. Money laundering involves the process of concealing the origin of proceeds
from illegal activity by giving it the appearance of legal sources.24 It was well reported that the
Prophet Muhammad (SAW) prohibits any activity funded by money derived from Soht (unlawful
trade or ill-gotten property). Thus; “Any activity built from Soht, will be caste into fire.25
Money or property that is acquired through illegal means is patently unclean (haram) and
unlawful which must not be put into use by anyone either for himself or for the benefit of
others.26 The Prophet (SAW) was also reported to have warned that prayers and supplications
of
the one who lives on property or income derived from unlawful means will not be accepted by
Allah and in case he does good deeds, they will not avail him.27
The common method of concealing the origin or identity of proceeds from illegal activities is
through bank deposit or structured transactions. Money laundering activities are not restricted to
conventional banks and financial institutions. Proceeds from illegal activities could also be
deposited 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 contract
of al-wadi’ah (banking deposit)? And “how far does it insist on business ethics and moral
principles?28 To address these posers in light of money laundering activities within Islamic
banking and finance, it is imperative to attempt the definition of the contract of al-wadiah. The
term wadiah is derived from the verb “wada’a” which means to leave, lodge or deposit. Wadiah
in its ordinary meaning means leaving something for safekeeping in somebody’s custody. In the
light of the above definitions, wadiah in a pure legal sense means a thing entrusted to the care
of
another. The proprietor of the thing is known as mudi (depositor), the person entrusted with it is
3rd International Conference on Postgraduate Education (ICPE-3 ’08, Penang-Malaysia, 2008)
2008
known as wadi’ or mustawda” (custodian) and the deposited asset is wadiah. Money laundering
through bank deposit (al-wadiah) is obviously a bogus transaction. Thus, the intention of the
launderer who deposits money in Islamic bank and financial institutions is not for safe custody
but rather to take advantage of the facilities offered by Islamic banks to actualise his/her criminal
activity.29 The Islamic law position with regard to such bank deposit (contract of al-wadiah) is
that 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 “Islamic
law and its rules specify that the intention and the motive behind contract is an essential
consideration and affects their validity”.30
Money laundering as an economic crime is totally prohibited in Islam. The Islamic economic
system is premised on a comprehensive system of moral and divine principles regulating social
cum economic affairs of the people in terms of their “business conducts; consumption and
protection, wealth creation and distribution”.31 Any other manner of unlawful wealth
acquisition, 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 through
lawful 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 of
Judgment”.32 In another narration, the Prophet (SAW) stated; “Whoever gathered unlawful
riches and then gave out in charity, he will have no reward; on the contrary he will have to bear
the 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, it
will not be accepted by him. There will be no blessing in that he spends and that he leaves
behind, but it becomes a provision for the fire of Hell. In reality, Allah does not wipe out evil
with evil, but erases evil with good action. Undoubtedly, dirt does not clean dirt”34

RECOMMENDATIONS

The Effects of Money Laundering

Currency of Choice
For 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.