Applications Report on Money Laundering via Electronic Means

December 2017

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Money Laundering and Combating the Financing of Terrorism (ML/CFT) for the Middle East and North Africa Region December 2017

Contents

Topic	Page Number
Executive Summary	5
Introductory Chapter	8
Chapter One: Concept of Money Laundering and Electronic Means	11
Section One: Overview of the Concept of Money Laundering	11
Section Two: Electronic Payment Means	17
Chapter Two: Exploitation of Electronic Means in Money Laundering	32
Section One: Factors Attracting the Use of Electronic Means in Money Laundering	32
Section Two: Patterns and Methods Used in Money Laundering via Electronic Means	33
Section Three: Challenges and Risks Associated with Using Electronic Means in Money Laundering	36
Section Four: Proposed Preventive Measures to Address Risks and Challenges Resulting from the Misuse of Electronic Means, Tools, and Payment Systems in Money Laundering	39
Chapter Three: International Efforts and National Legislations in Combating Money Laundering via Electronic Means	43
Section One: At the Level of International Standards and Efforts	43
Section Two: At the Level of Other Regional Initiatives	49
Chapter Four: Practical Cases and Results of the Information Request Questionnaire Analysis	62
Section One: Practical Cases	62
Section Two: Analysis of Practical Cases	81
Results and Recommendations	86
References	92

Executive Summary of the Project

The phenomenon of money laundering is an international phenomenon, and the era of globalization has contributed to the development of the methods and ways in which money laundering operations are carried out. These crimes are no longer limited to their traditional known forms but are now carried out via modern electronic means, especially those involving the use of the Internet.

The exploitation of this technology in committing various crimes has become a serious phenomenon that troubles legislative, supervisory, and governmental bodies in countries around the world, due to its negative economic and social effects that impact the status and standing of these countries. This has necessitated the growing need to confront this type of organized international crime and its associated money laundering activities, and to study effective means to combat it.

The crime of money laundering via electronic means is defined as a process or series of processes through which advanced monetary and financial systems are used to legitimize funds derived from illegal sources via the Internet or any other similar means in this context.

The crime of money laundering via electronic means is characterized by the ease of concealing the crime's traces, the difficulty of tracking its perpetrators, and the high level of professionalism required by those carrying it out, which demands a high degree of intelligence and knowledge. This requires close supervision of counter-measures.

Generally, several characteristics can be attributed to the crime of money laundering via electronic means, such as:

1. The use of computers, communication devices, and other electronic devices as tools in committing this crime through the use of electronic applications running on these devices.
2. The Internet represents the most widespread environment for this type of crime.
3. This type of crime has no geographical or temporal boundaries.
4. It generally leaves no trace after commission, making it difficult to detect and track.

Furthermore, financial transaction tools, instruments, and electronic payment services have become more widespread in recent times, as they currently serve as a better alternative to traditional payment means in many countries around the world. This is especially true given the interest of financial circles and their pursuit of achieving financial inclusion and integrating different segments of society, particularly in developing countries. This includes millions of individuals and institutions, especially those with low credit ratings or financial solvency, or those excluded from traditional financial systems for one reason or another, due to the multiple advantages they offer in executing transactions. This has led to a steady increase in their use, especially in light of advancements in electronic communication systems, electronic methods, techniques, and related applications in general, and the increased pace of life in various fields. This required financial transaction methods and payment ways to keep pace with this speed and movement. As usual, perpetrators of financially rewarding criminal activities have kept pace with this technological development and exploited the characteristics of these means to execute money laundering operations and attempt to legitimize the proceeds of their illegal activities.

In light of the aforementioned reasons, and the desire to identify the methods and patterns that may facilitate money laundering operations, as well as the importance of this topic and the need to focus on it due to its significant impact on the state's economy and the integrity of its financial institutions, the 23rd General Meeting of the Middle East and North Africa Financial Action Task Force (MENAFATF) to combat money laundering and the financing of terrorism, held in Doha in April 2016, approved the recommendation of the Applications and Technical Assistance Working Group to launch an "Applications Project on Money Laundering via Electronic Means," based on a proposal submitted by the Kingdom of Saudi Arabia. A working group was formed, and the Kingdom of Saudi Arabia and the Sultanate of Oman were selected to lead the group and the project, with the participation of the Arab Republic of Egypt, the State of Qatar, the Republic of the Sudan, and the Hashemite Kingdom of Jordan as members.

This project aims primarily to uncover and understand the methods of money laundering via electronic means, identify the risks resulting from their misuse, and determine the best ways to address these risks and mitigate their effects, through:

• Clear understanding of the extent and scope of the problem of money laundering via electronic means by collecting data and reviewing various papers and publications by regional and international institutions and bodies.

• Identifying electronic methods, tools, and payment systems and how they are exploited in money laundering operations.

• The relationship between the crime of money laundering and electronic technology means.

• Identifying the crime of money laundering via electronic means and whether it constitutes a phenomenon.

• Examining the legislative and regulatory frameworks of member states in the Group and those issued by regional and international institutions, and assisting member states in implementing them and utilizing them to develop their national systems and legislations, and their interaction and integration with international standards in combating money laundering using these means.

• Identifying the main challenges and problems arising in the context of detecting money laundering operations through these modern technologies.

• Linking cybercrime with the crime of money laundering via electronic means, and the predicate crime.

• Identifying aspects of international cooperation in combating the crime of money laundering via electronic means.

• Studying methods for recovering funds resulting from money laundering operations via electronic means.

• Providing realistic examples of practical cases that highlight patterns and methods and clarify the measures applied to detect, confront, and address money laundering cases using electronic means.

• Identifying a list of indicators, signs, and any information that can be used by concerned authorities to confront them.

• Reaching, through the study, results and recommendations that help member states of the Group regulate the use of these means and limit the possibility of their misuse in money laundering operations.

In the framework of the project's work plan, and to obtain the required information, it was agreed to prepare a questionnaire to request information and practical cases, and distribute it to member states in the Group to obtain information and practical cases. Twelve countries participated in completing the questionnaire and providing practical cases, including: the Hashemite Kingdom of Jordan, the Kingdom of Saudi Arabia, the Republic of the Sudan, the Republic of Iraq, the Sultanate of Oman, the State of Palestine, the State of Qatar, the State of Kuwait, the Lebanese Republic, the Arab Republic of Egypt, the Kingdom of Morocco, and the Yemeni Republic.

Introductory Chapter

Introduction to the Project:

Our era has witnessed rapid development on all levels, especially at the technical level, where modern technologies have emerged that were previously unknown, enabling the execution of financial transactions quickly, with great flexibility, at any time and any place without the need for physical presence at the service location through various electronic means. Individuals and institutions can now obtain services and execute deals across all corners of the world with ease and convenience. Despite the importance of these means and their benefits to individuals, various business sectors, and society as a whole, they have become exploited by money launderers and those executing terrorist financing operations to achieve illegal objectives, taking advantage of the characteristics and advantages that electronic means offer in executing financial transactions in secrecy and speed.

Given the risks associated with money laundering and terrorist financing using modern electronic means, MENAFATF approved a proposal to study the Applications Project on Combating Money Laundering via Electronic Means, to shed light on aspects of exploiting electronic means in money laundering operations, the factors attracting the use of these means in money laundering crimes, the patterns and methods used, and the associated risks and challenges. Additionally, it aims to support preventive measures and raise awareness of these risks among concerned authorities.

The difference and diversity in financial authorities, services, and electronic means used have contributed to the diversity and development of money laundering methods, necessitating the identification of indicators and trends of money laundering and terrorist financing through these means.

Importance of the Project:

Studying money laundering trends through various means, including electronic ones, is of great importance to concerned authorities. This is to identify the advanced mechanisms and tools used by money launderers in committing their crimes by exploiting modern electronic means, and to determine the indicators and trends of these crimes. It aims to assist concerned authorities in formulating appropriate legislations and taking suitable measures to address them, with the goal of developing supervisory controls and regulations to limit their misuse by criminals. The project seeks to produce recommendations that encourage all relevant sectors to collaborate in finding a secure electronic financial system that is difficult for money launderers to exploit.

Project Objectives:

The project aims primarily to uncover and understand the methods of money laundering via electronic means and the associated risks, and the ways to address these risks.

The main objectives of the project are detailed as follows:

• Better understanding of the extent and scope of the problem of money laundering via electronic means through data collection and reviewing available research and studies.
• Identifying the electronic methods and tools used in money laundering and providing a set of examples and practical cases.
• Identifying the main challenges and problems arising in the context of detecting laundering operations through modern technologies.
• Identifying a list of suspicious indicators or signs and any other information that can be used by concerned authorities.

Most Important Sources and References Used:

1. Practical cases provided by member states, and the participation of experts from member states in the Group, where the number of practical cases covered by the study reached 26 cases of money laundering through various modern electronic means.
2. Information request questionnaire.
3. Joint workshop between MENAFATF and the Asia/Pacific Group on Money Laundering (APG) on Applications and Capacity Building – Jeddah, Kingdom of Saudi Arabia, end of 2016.

Scope of the Project:

The scope of this study includes three basic determinants as follows:

• Subject Determinants: Focusing on money laundering operations using electronic means and proposing appropriate recommendations to combat this type of crime.

• Spatial Determinants: Related to member states in MENAFATF where electronic means are used to execute financial transactions.

• Temporal Determinants: The study took into account all modern electronic means that appeared or were used in the aforementioned Group countries to execute financial transactions from the time of their appearance until the date of preparing the study, and what was exploited from them to execute money laundering operations based on practical cases.

Methodological Approach Followed in Preparing the Report:

• Descriptive (Analytical) Method: By collecting all data and information regarding the phenomenon of using electronic means in money laundering operations, especially those collected through the information collection questionnaire and practical cases provided by member states in MENAFATF, and analyzing them to extract results.
• Inductive (Deductive) Method: By researching the roots and causes of the problem and finding appropriate solutions, leading to the derivation of results.
• Historical Method: By considering the history of the emergence of electronic means as tools for money laundering operations and producing a logical historical analysis and linkage.

Chapter One
Concept of Money Laundering and Concept of Electronic Means

Section One: Overview of the Concept of Money Laundering:

Banks and financial institutions constitute the lifeline of modern life in providing financial services, executing and completing financial transactions, trade services, executing transfers and financial settlements, and other services, whether through traditional methods or by using modern methods and techniques, including electronic ones. Consequently, they are not immune from money laundering crimes, whether carried out through traditional methods or modern electronic means. Combating them has become a vital subject for their work, especially with the emergence of Financial Technology (Fintech) used by these banks and financial institutions, opening their operational horizons to the whole world.

Money laundering crimes are among the most dangerous crimes facing the era of the digital economy, making them the real challenge for banks, financial institutions, and businesses. They also test the ability of the legal and regulatory frameworks established by countries to achieve a real confrontation with criminal activities and combat their various patterns. Money laundering is considered an accessory crime to criminal activities that have generated illegal financial returns. Those acquiring these funds resort to laundering them by using them in legitimate business activities, attempting to legitimize criminal proceeds, or what is known as "dirty money," to allow their easy use without facing accountability.

This section will discuss the concept of the crime of money laundering, its stages, characteristics, and the methods that can be resorted to in executing it, and finally, the consequences resulting from these crimes, as follows:

Subsection One: Concept of Money Laundering:

Although the crime of money laundering is as old as history, its concept has acquired a deceptive and ambiguous character, requiring clarity of concepts. It is referred to as the crime of whitening dirty money or laundering illegal money. It is a crime of a special nature; although it appears simple in its general concept, it is complex and intricate in its specific aspects.

The crime of money laundering is referred to as the process resorted to by those engaged in drug trafficking, organized or unorganized crime, etc., to conceal the true source of illegally acquired funds and carry out other acts to disguise and obscure their identity within the official financial system, so as to legitimize these funds obtained from criminal acts. In this case, it becomes difficult to determine whether these funds are actually derived from legitimate or illegitimate activities.

The crime of money laundering is not an ordinary crime that can be committed randomly or unthinkingly like other crimes; rather, it is a crime that requires a network, or networks, of organized criminals who practice crime with a high degree of professionalism, coordination, planning, and global spread. Thus, money laundering operations are a crime committed through an institutional organization comprising a number of professional individuals working within a strict system for distributing roles and assuming leadership positions, according to a highly precise, complex, and secretive structure. It is a crime that creates and arises from manufacturing a false reality that appears real, with the main goal of converting cash liquidity resulting from illegal and unlawful activities into other forms of assets. This helps secure the flow of these illegal financial returns so that they can later be used or invested in new legitimate and legal business activities, removing any suspicions about them without the risk of confiscation by government authorities and security agencies.

In addition to the concept of intent, the other important concept in defining money laundering is "knowledge." The presence of intent and knowledge is required to prove the crime of money laundering, including the concept that mental state can be inferred from "actual objective circumstances." Some judicial authorities have recognized that "willful blindness" is a legal principle that can be applied in money laundering cases, where courts define it as the deliberate avoidance of knowing facts or deliberate indifference.

Courts have recognized that "willful blindness" to facts is equivalent to actual knowledge of the illegal source of funds or knowledge of the client's intent and desire to launder money.

In conclusion, the crime of money laundering requires continuous review in formulating its concept and definition from time to time. This is because this crime evolves over time with increasing technological and scientific progress and various electronic means, including the spread of e-commerce and virtual currencies, and the new methods and tricks criminals invent to escape the consequences of crimes, in addition to the huge returns they can gain from committing these crimes, which motivate them to dedicate human intellect to innovating new methods to achieve their goals.

Regarding terrorist financing, its concept is manifested in performing any act that collects funds and provides them to individuals, groups, and terrorist organizations to finance their terrorist operations inside or outside the country, whether the source of these funds is legitimate (such as commercial, industrial, and financial activities, or charitable donations that contribute to financing terrorism) or illegitimate (such as financing terrorism through criminal activities like drug trafficking, smuggling, extortion, prostitution, etc.).

The crime of terrorist financing is an intentional crime, meaning the perpetrator must know that their activity contributes to financing terrorism and that their will is directed towards this financing to achieve specific political or religious objectives resulting from a specific ideology.

Here, it is important to distinguish between two important stages of terrorist financing: The first stage is the collection of funds, where funds are collected through various channels and for reasons that are mostly innocent or humanitarian, such as helping refugees, aiding disaster victims, assisting the poor, and other charitable works. Therefore, an ordinary person who makes a donation cannot be considered a participant in financing terrorism due to the absence of knowledge regarding the ultimate goal of the fund's origin. In the second stage, these funds are directed to finance terrorist activities and operations, and those involved in this activity possess the element of knowledge. The ultimate goal of providing financing is to commit a crime, which is contrary to money laundering, whose ultimate goal is to conceal the traces of a crime.

Despite the differences between the crime of money laundering and the crime of terrorist financing in several aspects, they often exploit the same weaknesses in financial systems that allow an inappropriate level of anonymity and lack of transparency in executing financial transactions.

Subsection Two: Stages of Money Laundering:

The crime of money laundering is a multi-stage crime based on mixing funds resulting from criminal activity with other legitimate funds and injecting them together into the financial system, making it difficult to reach their original criminal sources. Thus, the criminal can reinvest and spend them for legitimate purposes that are not subject to confiscation. The money laundering process goes through different stages:

First Stage (Placement): In this stage, suspicious or illegal funds are disposed of by depositing, investing, or placing them directly into components of the official financial system through banks and other financial institutions, or indirectly through activities that allow investing or dealing in funds, such as real estate, precious metals, gemstones, and other activities.

Second Stage (Layering): In this stage, funds are separated from their original illegal activities through a series of complex and successive operations aimed at concealing the sources of the funds.

Third Stage (Integration): In this stage, laundered funds are merged into the components of the macroeconomy, making it difficult to distinguish them from funds with legitimate sources, due to the legalization of the proceeds of criminal activities.

Subsection Three: Characteristics of Money Laundering:

The crime of money laundering is characterized by features that differ from traditional crimes, although it shares most of these characteristics with organized crime, such as arms trafficking and smuggling, counterfeiting and forgery, terrorism, and other crimes. The characteristics of the crime of money laundering include:

1. Integrality, Comprehensiveness, and Connection: This crime is characterized by close connection between its components. It requires integrated elements where each link completes the other, starting from the placement stage, then the layering stage, and ending with the integration stage.

2. Organization, Planning, and Control: It is subject to elements of organization, planning, and control, with precise and skilled performance of roles, leaving no room for improvisation.

3. Preventive Nature: It is among the crimes that can be prevented by preventive measures. All possible means and methods should be followed to dry up the sources of this crime before it occurs and significantly limit its effects afterward.

4. Global and International Dimensions: The revolution in communications and advanced information technology, and their use in banking and financial operations, have given the crime of money laundering global and international dimensions. It is no longer bound by borders or continents, nor does it stop at the geography of a specific country. This makes local national efforts insufficient to confront this phenomenon in its various aspects and dimensions, and no country can consider itself immune from the challenges and dangers of this phenomenon.

5. Intentional Crime: The crime of money laundering is an intentional crime that extends to anyone who possessed, held, assisted, facilitated, mediated, or intervened in any stage of this crime, provided that the element of intent (purpose) and knowledge is present, whether by individuals or banking or financial institutions, which contributes to concealing the source of laundered or intended-to-be-laundered funds.

6. Liability of Financial Institutions: The crime of money laundering entails liabilities for banking and financial institutions when related to error and unintentional negligence, such as negligence in monitoring laundered funds, failure to track them, negligence in supervision, or failure to apply laws, regulations, and systems related to them.

7. Accessory but Independent Crime: The crime of money laundering is an accessory crime to a previous crime from which the illegal funds to be laundered originated. However, it is an independent crime in its criminal description from the crime that generated it, and it is subject to a penalty different from the penalty of the crime itself.

Subsection Four: Traditional Money Laundering Methods and Modern Methods:

Money laundering methods vary between traditional methods and modern technological methods. The latter have emerged as one of the fast means for money laundering operations, making it difficult to monitor the source of these funds. The importance of modern electronic means, which resulted from the huge revolution in the information and communications technology sector and the development of its network, is highlighted through comparing traditional means and modern means in the stages of money laundering operations as follows:

• In traditional means, reliance is placed on deposits at banks and other financial institutions and smuggling across unsecured borders for deposit operations. In contrast, modern electronic means are used, such as electronic payment systems, tools, and channels, protected by encryption systems to ensure the secrecy of deposit operations.
• Regarding placement, in traditional means, it is done through financial transfers or via non-cash payment means such as checks drawn on banks abroad. In modern electronic means, it is done through a series of complex, fast, and successive financial operations that allow separating them from their illegal sources.
• Regarding the integration stage, in traditional means, it is done through fictitious deals, account lists (invoices), fake invoices, casino operations, brokerage, etc. In modern electronic means, it is done through purchasing physical assets and playing casino games using credit payment cards, as well as through personal accounts without bank intermediation, with a degree of precision, speed, and secrecy that makes tracking them difficult.

Subsection Five: Consequences of Money Laundering:

Money launderers attach great importance to finding appropriate cover for the movement of their capital and achieving its legitimacy, without paying attention to the economic viability of large amounts of money or the consequences resulting from it, whether negative or positive. This reflects a direct disturbance in the investment climate. Money laundering operations have impacts in all fields, especially the monetary and banking field. Some of these impacts can be outlined as follows:

First: Impacts in Economic, Social, Political, and Security Fields:

(a) The exit of legitimate funds through illegal means deprives the country of positive returns that society could obtain, such as the value added to national income, associated employment generation, unemployment treatment, availability of commodity supply, and associated stability of local prices.

(b) It can lead to an increase in consumption rates exceeding national income and contribute to a structural economic imbalance due to the decrease in savings with increased consumption without corresponding growth in Gross Domestic Product (GDP).

(c) Engaging in illegal activities leads to the redistribution of income among different social classes, by transferring incomes from some productive social classes to other non-productive classes, causing an increase in the gap between the rich and the poor in society.

(d) These operations lead to social and political disturbances, such as the spread of criminal organizations and their activities, including armed robbery, murder, and theft, which turns society into a crime scene and deprives its members of security and peace of mind. It also contributes to political coups, undermining security and stability.

[Note: The provided text ends here. The subsequent pages regarding Chapter Two, Three, Four, and References are not included in the source text.]