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1 Annexes 1/ Memorandum of Understanding 2/ Best Practices Concerning the Charities 3/ Best Practices Concerning the Cash Couriers 4/ Best Practices Concerning the Hawala

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9 ANNEX 2 Best Practices Concerning the Charities Introduction The establishment and spreading of non-profit charitable associations and institutions have become one of the most positive phenomena in modern society. In fact, charitable associations/institutions play a significant role within the communities to which they belong by: (1) strengthening social unity and social ties between the various social classes; (2) contributing to the establishment of healthy and united communities that develop and ensure a respectable standard of living, taking care of needy people such as the poor and the orphans; and (3) supporting and spreading volunteering work, a pillar of social self-empowerment and a vital component of the national economy. The spreading of charitable associations/institutions and their role are one of the characteristics of the MENAFATF member countries, due to specific religious, social, and economic aspects of the region where each country has to review and develop the procedures, legislation and regulations governing the work of charitable associations/institutions, in addition to the methods and criteria of controlling the legitimacy of their transactions and the origin of their funds. The purpose is to ensure that donations reach the real beneficiaries, and that charitable associations/institutions are not misused for illicit or criminal activities/transactions. The purpose of encouraging member countries to develop their procedures, legislation and regulations concerning the work of charitable associations/institutions is undoubtedly not to undermine, diminish or impede these activities but rather to preserve their vitality and integrity, to reinforce public confidence in them through financial transparency and accurate information, and, consequently, to contribute to an increase and diversification of their noble activities. This paper has been prepared as an advisory and technical assistance guide, with a view to acquaint MENAFATF countries with the best practices that help charities reach their goals, in conformity with AML/CFT standards. It sets a comprehensive framework that may be adapted and implemented through adequate methods by each country, in consistency with its particular legislation, regulations and circumstances. In this paper, charitable associations/institutions mean all non-profit, public and private, charitable institutions, associations and committees that are established as legal entities and depend on benefactors contributions. They aim at providing individuals or specific parties with charitable services in the social, religious, educational, cultural, and health fields, offered in cash (financially) or in kind by any party with humanitarian concerns.

10 Risk of misusing charities In view of the unique characteristics and the nature of charity-related activities, which consist in raising funds from various sources and using, transferring or disbursing them to beneficiaries, and since these charitable associations/institutions and their staff can move freely, raise and transfer funds and carry out worldwide transactions with great flexibility, due to the wide scope of their activities on the domestic and international levels, the positive characteristics of charitable activities have recently attracted, throughout the world, criminals and terrorists - individuals and organizations who seek to infiltrate these entities and take advantage of their characteristics, particularly their social and humanitarian aspect. Moreover, in contrast with their noble goals, these institutions may be misused without the knowledge of their benefactors or trustees and, as a result, lose the confidence and contributions of citizens. Thus, being aware of the significant risks stemming from such a situation, many countries and international bodies have recently adopted a number of measures to review the organization and procedures of those charitable associations/institutions, in order to overcome the weaknesses that may be exploited by criminal or terrorist individuals and organizations, and to strengthen the confidence of citizens in the institutions and their trustees. FATF Special Recommendation VIII sets a comprehensive framework to help countries protect their non-profit institutions from being abused by: 1- Terrorist organizations posing as legitimate entities. 2- The misuse of legal entities as conduits for terrorist financing, for the purpose of, inter alia, escaping freezing measures. 3- Concealing or disguising, under legal cover, the real objective of fund transfers to terrorist organizations. The FATF paper on international best practices for fighting the misuse of nonprofit institutions 1 is a valuable reference that helps countries in developing and supervising the working mechanisms of these institutions, and protecting them from being misused for illicit purposes or activities. Procedures proposed by the Committee for organizing the work of charities: If charitable associations/institutions are to achieve their goals with more transparency and confidence, regulatory and supervisory mechanisms must be developed in accordance with the legislation and regulations in force, in order to avoid any misuse. These mechanisms must be simultaneously implemented by member countries in the following domains, based on their internal procedures: html 10

11 I- Legal aspects The development of legislation and regulations regarding the party in charge of supervising the charity sector in the concerned country, the granting of licenses for establishing such institutions, and the definition of their work procedures are among the most important aspects in this field. Special attention should be given to the issuing of regulations governing the establishment, work procedures and supervision of charitable associations and institutions. They should include: 1- The specification of the party (governmental or civil) in charge of monitoring and supervising the charity sector, and of its duties, responsibilities and powers. 2- The verification of procedures and conditions to be met before licensing any charitable association/institution, including the following issues: a- A definition of the goals and activities of the institution. b- A review of all candidates for membership of the Board, and their compliance with established criteria of competence and good reputation. c- The resources available to the charitable association/institution, their uses, and the financial audit procedures. d- Empowering the supervisory body to impose the appropriate sanctions on violating institutions, and to dismiss any incompetent trustee or staff member. II- Supervision and Control The designation of a competent authority (governmental or civil) to monitor and supervise the charity sector in the concerned country is a basic condition for verifying that active charities are complying with supervision standards and working in line with their explicit objectives, away from any misuse. The supervisory bodies may carry out their mission and achieve their goals through the setting of specific standards, rules and conditions that are to be observed by charities operating in their jurisdiction, such as: 1- Reinforcing transparency and disclosure standards: Charitable work is a non-profit, volunteering activity, essentially based on confidence. Charitable associations/institutions seek to raise funds from donors and benefactors, in order to use them for charitable purposes or disburse them to needy beneficiaries. Accordingly, transparency and disclosure standards are of paramount importance. They help supervisory bodies in carrying out their tasks, and contribute to buttress the confidence of citizens and benefactors concerning the strict use of donations in consistency with the primary objectives of charitable 11

12 associations/institutions, consequently avoiding any misuse by trustees or any use in the interest of beneficiaries or activities other than those announced in raising funds. 2- Implementing specific selection standards: The appropriate selection of trustees is one of the most important factors of success and soundness of charitable activities, based on the confidence of the community in the selected persons. Supervisory bodies that grant licenses and supervise charity work in the various countries may set the standards to be met in selecting trustees, in order to guarantee the selection of the right people and define the basic rules of their work. 3- Reinforcing control: In order to monitor the work of charities and verify their compliance with relevant regulations and instructions, specific procedures should be implemented, particularly on-site inspection, off-site supervision, and mandatory annual financial statements to be disclosed after verification by external auditors. Moreover, charitable associations/institutions with significant activities may be compelled to establish internal regulatory units that monitor their work, submit periodical reports to the supervisory bodies, and help them draft by-laws and accounting standards covering records, files and balance sheets. The supervisory body may also decide to support charities by bearing, in whole or in part, the cost of external auditors, and by forbidding fund investment without its approval and direct supervision. III- The financial aspect: Fund raising and spending are the main activities carried out by most charities. Therefore, the control of these activities is essential to prevent misuse. Supervisory bodies in the concerned country can achieve this goal by regulating these operations, mandating, for instance, the replacement of cash operations with bank accounts, which make it possible to control spending operations and related documents. On the other hand, it is possible to regulate the raising and spending of funds, and the opening and running of bank accounts, through coordination between the supervisory bodies overseeing the charity sector and those overseeing the banking sector. Following are some of the rules to be observed in this respect: 1. Non-profit, charitable associations/institutions may not open bank accounts before being authorized by the competent supervisory body, after meeting all the regulatory requirements, including approval by the banking sector supervisory body. Furthermore, these accounts should be opened in the name of the institution and not in the name of any chairman, manager or member of the Board. 2. Charitable associations/institutions should cease the raising and spending of funds in cash, using bank accounts for all their operations and activities. Moreover, disbursements should be made only by checks, 12

13 to be exclusively paid to first beneficiaries through bank account deposits. 3. The bank accounts of a charitable association/institution should be consolidated in a single account, through which spending operations are executed, in order to facilitate follow-up and supervision, with the possibility of opening subsidiary accounts, when necessary, for the sole purpose of receiving donations. 4. External transfer operations from the accounts of charitable associations/institutions must be approved by the competent supervisory body. 5. Bank accounts of charitable associations/institutions may be used only with joint signatures by two authorized persons, after ascertaining their identity and personal information, and those of the members of the Board. 6. When deposits or withdrawals are made to and from the accounts of charitable associations/institutions, the identity of donors and beneficiaries must be ascertained. 7. Banks should be directed to apply the Know Your Customer rule, and to follow adopted supervisory policies and measures in dealing with the accounts of charitable associations/institutions concerning donations and disbursements, in addition to implementing policies and measures about the control of operations, the notification of suspicious operations, and the implementation of standards governing high-risk accounts. External charity operations: In addition to their local activities, some charitable associations/institutions carry out similar activities outside their home country, but such activities may be dangerous and must be subjected to special regulations. In fact, it is difficult to monitor these activities and make sure that donations are received by qualified beneficiaries, as stated by the charitable association/institution itself. Following are some of the most important measures to be adopted for controlling such operations: 1. External transfer operations from the accounts of charitable associations/institutions must be approved by the competent supervisory body in the home country. 2. Aids sent abroad must be restricted to charitable associations/institutions that are officially authorized in their respective countries, in coordination with each government. Aids should not be directly sent to individuals, institutions or small foreign charities that are not subjected to regulations and supervision by their own countries, due to inherent risks and to the difficulties of supervising them. 13

14 3. To make sure, before allowing aids to external parties, that all licenses granted to the beneficiary parties are effective, including: (1) the licenses to carry out their activities; (2) the licenses to execute the projects for which the aid is provided; and (3) the license to raise donations or aid from abroad, issued by the competent authorities of the foreign country. 4. The provision of aid should be focused on the implementation of specific projects, programs and activities that are under the supervision of competent authorities in the beneficiary countries, or the supervision of an international organization or institution. 5. The disbursement of aid in cash should be completely abandoned. Disbursements should be restricted to checks made exclusively to the order of first beneficiaries, and deposited in their bank accounts at home through correspondent banks. ******************* 14

15 ANNEX 4 Best Practices Concerning the Cash Couriers Introduction Carrying cash across borders emerged initially as a justifiable means to justifiable needs such as travel, tourism, seeking investment opportunities and making profits, searching for better investment environment, and as an attempt to avoid administrative obstacles, bureaucracy and corruption. Moreover, tight regulatory systems and the embargo set on transferring foreign currencies abroad can incite investors to move their funds to foreign banks. Some people may carry cash for illegal objectives as is the case with smuggling illicit monies generated from various crimes like drug dealing, bribery, undue influence, political and administrative corruption, theft, tax evasion or illegal commissions. Such money is usually carried abroad to conceal its sources and avoid confiscation, freezing or any similar sanctions. This type of trafficking is certainly the one related to money laundering transactions. Therefore, regional and international agencies and organizations, as well as all the countries of the world, keen on combating money laundering and terrorist financing considered carrying cash across borders as a matter of utmost importance. National, regional and international efforts paid in this regard aimed at: Insuring that criminals or terrorists cannot finance their activities or launder the proceeds of their crimes by carrying the money and the bearer negotiable instruments physically across borders, concealing their source and moving them to be laundered in another country. Using information available about money and bearer negotiable instruments carried cross-borders without restricting trade payments between countries for goods and services exchanged or freedom of capital movements in any way. Cash carrying risks a. Traveler- specific risks: Travelers or money couriers may encounter some risks. These risks vary according to money source (legal or illegal), way of transfer, quantity and the currency in which carried monies are denominated, etc. Some of these risks are: - Normal risks: loss of the money or potential exposure to supervision laws applied in some countries. In such cases, the traveler may be

16 sanctioned by law and his money confiscated or he may put himself in trouble with the legal authorities. - Money could be smuggled for particular purposes. The traveler is subject to the sanctions applied by the customs or to other applicable penal laws. - Money carried across borders may be forged. The traveler can be sanctioned by penal or criminal laws. - Travelers may face the risks of falling under AML rules and terrorist financing combat, especially when they carry large amounts of money without carrying proof of legality. b. Country- specific risks: Monies carried into a country for travel and tourism - of whatever nature- or for investment purposes could justifiably lead to an economic recovery by providing a source of national income and this shall have a positive effect on the country's economy and balance of payment. However such effect becomes negative when the money in question is carried for illegal purposes such as smuggling, money laundering or terrorist financing. These criminal activities introduce many risks into the country, some of which cause prejudice to the national economy, negatively affecting the monetary and fiscal policy and the banking system, and leading to inflation and devaluation of the national currency. Other risks have also a negative effect on social factors: they prevent a good distribution of wealth and compromise social concepts such as work, production and investment. On the political level, smuggled money can be used in supporting or financing terrorism and the risks can even compromise the country's international status and position (especially if it becomes liable to being on the NCCT list according to FATF standards). Historical background of disclosure systems Many years ago, several countries have implemented a disclosure/declaration system for money carried by travelers across their borders, either by land, air, or sea. At a time when money laundering was not that wide-spread, the common factors that led to the implementation of this measure can be summarized as follows: 1) Protecting the society and its financial, commercial and economic institutions, as well as individuals from any crimes, since the money brought to a country could proceed from criminal activities and could facilitate the way in for criminals or their accomplices, causing prejudice to society. 16

17 2) Countries which were or are still imposing monetary restrictions on hard currencies, the trade and holding thereof, or any limitations to the national currency movement, had applied or are still applying such disclosure or declaration measures to travelers to guarantee the implementation of such restrictions. 3) Some countries applied such a system and forbade at the same time the acceptance of any deposit of foreign currencies with banks and other financial institutions unless a copy of the customs declaration or disclosure statement is provided, in order to contain the black market of foreign currencies which may have an adverse impact on the national currency value and its purchasing power. 4) Some countries implemented the disclosure or declaration system to secure a good flow of foreign currencies through banks and financial institutions, in order to reinforce foreign currencies resources and use the proceeds to pay for commercial transactions with other countries, especially state-directed economies. International directives on cash couriers Due to the overturn of some economic systems over the past few years, the adoption of the free economy, the economic openness of some countries towards others regardless of their political trends, the phenomenon of globalization prevailing worldwide, the free trade principles endorsed by the World Trade Organization (WTO), some so far unknown patterns of economic crimes such as money laundering and terrorist financing emerged. The world became aware of the necessity of being united to face these crimes through cooperation and the adoption of new measures and procedures to combat them, especially in light of the threat they represented to their economies and social and political systems. Recognizing the necessity to implement measures to combat money laundering and terrorist financing, the FATF issued its Special Recommendation IX, in addition to the eight previous. These recommendations combined with the FATF Forty Recommendations on money laundering set out the basic framework to detect, prevent and suppress money laundering and terrorism financing acts. Special Recommendation (9): Cash Couriers On October 22, 2004, the FATF issued the Special Recommendation IX concerning cash couriers. The text is as follows: - "Countries should have measures in place to detect the physical crossborder transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation. - Countries should ensure that their competent authorities have the legal authority to stop or restrain currency or bearer negotiable instruments 17

18 that are suspected to be related to terrorist financing or money laundering, or that are falsely declared or disclosed. - Countries should ensure that effective, proportionate and dissuasive sanctions are available to deal with persons who make false declaration(s) or disclosure(s). In cases where the currency or bearer negotiable instruments are related to terrorist financing or money laundering, countries should also adopt measures, including legislative ones consistent with Recommendation 3 and Special Recommendation III, which would enable the confiscation of such currency or instruments" Types of systems that may be implemented to address the issue of cash courier Countries may meet their obligations under Special Recommendation IX by implementing one of the following types of systems: a. Declaration system: According to this system, all persons making a physical cross-border transportation of currency or bearer negotiable instruments, which are of a value exceeding a pre-set threshold, are required to submit a truthful declaration to the designated competent authorities. If it appears that the transported amounts are not in conformity with the value declared, these persons shall be liable to legal proceedings. All travelers should absolutely present such a declaration. Countries that implement a declaration system should ensure that the pre-set threshold is sufficiently low to meet the objectives of Special Recommendation IX. b. Disclosure system: According to this system, all persons making a physical cross-border transportation of currency or bearer negotiable instruments are required to make a truthful disclosure to the designated competent authorities upon request. Disclosure application form will be demanded on: - a random basis. - a targeted basis, based on intelligence or suspicion information. Suggested implementation mechanism a. Under the declaration system: The mechanism should include the following aspects: 18

19 1/1 Utilizing a legislative tool embodied in the issue of a special law or introducing a new paragraph to a promulgated law. The importance of such legal text governing and organizing cash carrying across borders lies in the presence of a legal framework for procedures taken in this regard and in the attempt to achieve the following objectives: Allowing countries to monitor carrying of actual cash and bearer negotiable instruments. Producing a legal text confirming the legal rights of the concerned authorities in stopping or confiscating these monies and tools suspected of being related to money laundering and terrorism financing. Imposing preventive and effective sanctions on money laundering or terrorist financing criminals upon any connection between these monies and instruments on the one hand and those criminal activities on the other. The imposed sanctions will allow the concerned authorities to confiscate these monies if needed. Collecting information and data about individuals or institutions involved in money or bearer negotiable instruments in order to use it in case concerned law-enforcers received information about any illegal source of money. 1/2 Entrusting a specific government agency with the task of issuing an administrative order on the implementation mechanism in all its aspects including the following: 1- For natural persons: - Setting the limit of cash amounts (of currencies and bearer negotiable instruments) allowed to be carried across borders with no need for declaration thereon. - Promulgating a legal text compelling all couriers of cash amounts exceeding the predefined limit to declare them by filling in the related form. - The form must include the following basic data: Date. Traveler's name. Passport number/identity card number. Nationality. Date of voyage, destination and country of departure. Carried cash amount quoted in local or foreign currencies (in case of diversity). Purpose of cash carrying. Address in country of residence. Address in destination country. Signature. Endorsement of customs official. 19

20 The predefined limit and declaration form are applicable to natural persons (individuals) in these two cases: Carrying cash or bearer negotiable instruments by the traveler. Carrying cash or bearer negotiable instruments on behalf of natural persons by way of cargo, postal parcels or transportation firms packages. 2- Banks, money exchange agencies or other financial institutions Regardless of the amount of cash and bearer negotiable instruments carried on behalf of banks, exchange firms or other financial institutions/companies by way of cargo, postal parcels or transportation firms packages, they should be asked to fill in a special form including basic data such as: Date. Importing firm's name. Address in residence country. Permitted business activity. Declared cash amount denominated in local currency (particulars of currencies are outlined in case of variety in an additional statement). Name and address of the cargo firm. Signature of the deputy receiver for confirming cash receipt. 1/3 Obligations of customs' inspectors and officials: According to the system of declaration mentioned above, customs' inspectors and officials at airports, sea ports and land border points are obliged to comply with the following: - Asking travelers carrying cash or bearer negotiable instruments exceeding in amount the predefined limit to fill in the related form, and collecting the filled forms. - Making sure at all times that all regulations and procedures mentioned in the declaration system are abided by. - Keeping sufficient quantities of such declaration forms at their disposal at all times to provide travelers or senders of cargo or postal parcels therewith. - In case of default or untrue declaration, and if there are non declared cash amounts or bearer negotiable instruments exceeding in value the set limit, customs' officials have to investigate reasons. In case they are not sufficiently convinced or have suspicions that inspected monies come from illegal sources or are connected to money laundering and terrorism financing, they must confiscate the money and inform the financial intelligent unit in order for it to take the adequate legal action. 20

21 This procedure shall not prevent the application of the customs' law if the act involved a smuggling crime or customs violation. 1/4 Objectives of the declaration system of cash amounts carried across the country's borders: There is no restriction on in-bound or out-bound transportation of large amounts of cash money. The declaration system aims at examining particulars of cash and bearer negotiable instruments couriers to make use thereof later when some new information emerge indicating illegality or relatedness of such money to money laundering or terrorist financing. Making use of information available on cash money brought into the country in statistics about the financial and economic sectors. 1/5 Customs inspection methods: a- Travelers: Random inspection. Voluntary declaration by the cash bearer. Inspecting some specific travelers in case of availability of security intelligence about their dubious involvement. b- Luggage: Luggage is inspected at customs points at airports through sophisticated electronic detectors to reveal contents. c- Postal parcels and transportation firms packages: Random inspection. Infra red inspection of postal packages to detect money and verify cash amounts before entering the country. 1/6 Sanctions or penalties are imposed on violators of the aforementioned Resolution. b. Under the disclosure system: The mechanism shall follow the same aspects outlined in the declaration system, taking into account the following discrepancies: Using the term disclosure term instead of declaration throughout the executive administrative resolution. Not specifying a predefined limit on cash money and bearer negotiable instruments allowed to be carried without declaration. Prescribing obligation on all travelers to disclose all cash money and bearer negotiable instruments in their possession regardless of their amount, when asked by a customs official. 21

22 Responsibilities of customs officials: They should ask travelers to disclose cash money or bearer negotiable instruments in their possession through filling in the related form. The committee reminds of what has been reported in the interpretative note 1 to Special Recommendation IX for Additional elements applicable to both systems, declaration or disclosure, regardless of the applied system. These aspects are summarized hereinafter: 1. Apply procedures to in-bound and out-bound transportation of currency and bearer negotiable instruments. 2. Upon discovery of a false declaration/disclosure of currency or bearer negotiable instruments or default in declaring/disclosing such, customs authorities should have the authority to request and obtain further information from the carrier with regard to the origin and the purpose of the currency or bearer negotiable instruments. 3. At the domestic level, countries should ensure that there is adequate co-ordination among customs, immigration and other competent authorities. 4. In the following two cases, customs authorities should be able to stop or restrain cash or bearer negotiable instruments for a reasonable time in order to ascertain whether evidence of money laundering or terrorist financing may be found: where there is a suspicion of money laundering or terrorist financing; where there is a false declaration or false disclosure. 5. The declaration/disclosure system should allow for the greatest possible extent of international co-operation and assistance in accordance with Special Recommendation 5 and Recommendation

23 Recommendations 1- The cash couriers committee submits the working paper and suggests deliberation on the possibility of implementation by MENAFATF member countries. However, the committee stresses on the fact that any system considered for application should accommodate three precepts in particular: Objective of the system is to detect the physical transportation of currency to pinpoint economic impacts and insure that the country is away from risks of physical transfer of illegal money or the risks of illegal employment of money. Assurance of competent authorities' possession of sufficient legal power to take all administrative and legal measures against dubious money. Possession of judicial or administrative instruments to define involved parties, measures to be taken for implementation, responsibilities and authorities, and sanctions applicable upon law violation, especially in relation to money laundering and terrorist financing. 2- The committee highlights the right of every member country to choose its own system (declaration or disclosure). 3- As for member countries willing to implement the declaration system, the committee considers giving freedom to each country to define the limit of disclosure of travelers' surplus cash money in accordance with its economic situation and administrative and legislative systems. The minimum limit of US/Euro applied by FATF can be utilized as benchmark. As for the disclosure system, customs' officials should have enough experience in and acquaintance with the applied standards and measures to handle cash money suspected in relation with money laundering and terrorist financing. 4- The committee assures the need for inserting in the declaration and disclosure forms the text obligating travelers to disclose or declare, so that travelers can take knowledge of applied measures. 5- As for golden bullions, precious metals and gems in possession of travelers, the committee recommends that member countries put similar instructions organizing such materials movement across borders, lest they are used in money laundering or terrorist financing activities. ******************* 23

24 First: Hawala definition Best Practices Concerning the Hawala An informal remittance system that does not require transferors identity verification, or detecting and reporting suspicious transactions. The transfer of money is carried out through unregulated network with no physical or electronic movement of money. The settlement takes place between the hawaladar (intermediary commander) and the other hawaladar (intermediary receiver) from whom the money is received. Second: Characteristics of the Hawala 1- Anonymity: Hawala hinges on complete secrecy of transactions carried out thereby in terms of content, form and procedure. 2- Oral: Transactions are executed orally. 3- Trust: Absolute trust among parties is a vital condition for transferring via hawala. Third: Parties to the Hawala A- Transferor: The holder of the money which is being transferred. B- Hawaladar (intermediary commander): The service provider who collects the money intended to be transferred in return for a small percentage charge. C- Hawaladar (intermediary receiver): The service provider who distributes the value on behalf of the transferee upon the order of the intermediary commander. D- Transferee: The receiver of the hawala amount denominated in the agreed-upon currency from the intermediary receiver. Fourth: Reasons of Prevalence 1- The lack of banking and financial services in remote areas which funds are being transferred to. 2- High fees and charges of formal transfer through licensed banks and financial institutions in comparison with low fees and charges of informal money transfer. In addition to evading customs, income and consumption taxes and other levies in some countries. 3- The speed of transfer through the informal transfer system at times in comparison with the speed via official conducts (licensed banks and financial institutions) and the need for transferring funds outside the official working days. 4- Discrepancies between official and unofficial exchange rates at times in favor of transferors. 5- Strict monetary restraints in some countries lay on money movement or transfer abroad. 24

25 6- The largely increasing number of immigrants and/or expatriate workforce, wishing to transfer money to their native countries. 7- Incapability to meet the standards of verifying identities of transferors or transferees, and the required measures of due diligence. 8- Traditions and social values in many societies which bestowed credibility on these systems. 9- Difficulties facing illegal immigrants in opening personal bank accounts at foreign banks. 10- Some exporters find themselves compelled - as a result of economic sanctions opposed on some countries- to seek informal transfer systems to get the return for their goods and services. 11- Informal transfer systems are used for illegal activities such as money laundering, terrorism financing and tax evasion. Fifth: Hawala Risks - The informal remittance system does not require verifying the identity of transferors or detecting and reporting suspicious transactions, in addition to the lack of control or record keeping, transparency and accountability. Since large sums of money are being handed over through this system, there is a potential for misusing it in illegal activities. - There are many economic impacts on the informal transfer system, either of which those related to the monetary policy and exchange rates, the fiscal policy, or the patterns of consumption and expenditure: 1- Monetary policy and the exchange rate: Transactions carried out in foreign exchange outside the limits of regulated markets of exchange rates may have adverse effects on the balance between foreign currencies and the national currency, and this can negatively affect investment flows in the national economy and consequently paralyze growth. 2- Fiscal policy: Informal transfer systems adversely impact macroeconomic fiscal policy. Preliminary, the circulation of these amounts of money outside of the official economic cycle causes losses to the national resources represented by the inability to levy any taxes or duties on those amounts. 3- Expenditure and consumption patterns and wealth drain: Informal transfer of money leads to paralyzing the authorities' ability to implement macroeconomic policies due to the abating reliability of available economic data and statistics in light of a weak capability to measure and forecast the size of such transactions. These informal transfers cause disruptions to resources and wealth distribution and in the economy, not to mention the chances they open to wealth and capitals drain and smuggling to the outer world without leaving any minor evidence or trace thereon in the country of origin, and that by itself causes severe damage to the national economy. 25

26 Sixth: 1- Forty recommendations on Money laundering: Recommendation (23) implies the following: "Other financial institutions should be licensed or registered and appropriately regulated, and subject to supervision or oversight for antimoney laundering purposes, having regard to the risk of money laundering or terrorist financing in that sector. At a minimum, businesses providing a service of money or value transfer, or of money or currency changing should be licensed or registered, and subject to effective systems for monitoring and ensuring compliance with national requirements to combat money laundering and terrorist financing." 2- Nine special recommendations on Terrorist Financing: The sixth SR prescribes the following: "Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and nonbank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions." The focal point of this recommendation consists of the following three core elements: a. Jurisdictions should require licensing or registration of persons (natural or legal) that provide money/value transfer services, including through informal systems b. Jurisdictions should ensure that money/value transmission services, including informal systems are subject to applicable FATF Forty recommendations and the nine SR. c. Jurisdictions should be able to impose sanctions on money/value transfer services, including informal systems, which operate without a license or registration, make illicit transfers and fail to comply with relevant FATF Recommendations Interpretative Note to SR VI: Alternative Remittance: 26

27 Seventh: Hawala international conferences (1) The First International Conference on Hawala hosted by the United Arab Emirates in Abu Dhabi on May 15 and 16, 2002 produced at its conclusion the Abu Dhabi Statement on Hawala which included the following: The word Hawala comes originally from the Arabic language and means transfer or remittance, but in this context refers specifically to informal money or value transfer systems or networks outside the formal financial sector. The conference participators agreed that hawala and other informal remittance systems have many positive aspects and that most of the activities conducted by hawaladars (Hawala Operators) relate to legitimate business. Hawala provides a fast and cost effective method for worldwide remittance of money or value, particularly for persons who may be outside the reach of the financial sector. The participators also raised concerns about hawala and other informal remittance systems, noting that a lack of transparency and accountability, as well as the absence of governmental supervision present a potential for abuse by criminal elements. In light of these concerns, the participators agreed to issue the following recommendations: Countries should adopt the FATF Forty Recommendations on Money Laundering and the Special Recommendations on Terrorist Financing in relation to transferors, including hawaladars and other alternative remittance providers, as well as any other international recommendations or guidance. Countries should designate competent supervisory authorities to monitor and enforce the application of these recommendations to hawaladars and other alternative remittance providers. Regulations should be effective but not overly restrictive. The continued success in strengthening the international financial system and combating money laundering and terrorist financing requires the close support and unwavering commitment of the international community. The international community should remain seized with this issue and should continue to work individually and collectively to regulate the Hawala system and other informal remittance systems for legitimate commerce and to prevent its exploitation or misuse by criminals and others. (2) The Second International Conference on Hawala was held in Abu Dhabi between April 3, 2004 and April 5, The final statement of the conference identified the challenges facing the informal remittance systems that are not subject to official regulatory supervision and requested the implementation of the best procedures and practices related to hawala system and other informal remittance systems. 27

28 The statement requested also the countries, as a first step, to register and/or license the informal remittance systems. Further anti-money laundering and terrorist financing requirements should then be implemented by countries according to their capacity. The statement encouraged also the Financial Action Task Force (FATF) and the international financial institutions or other international organizations to develop further guidance in this regard. (3) The Third Hawala Conference was held on April 2 and 3, 2005 in Abu Dhabi. The final statement emphasized on the important achievements that were achieved during the first and second hawala conferences. The conference insisted on the main social and economic roles of the hawala and the other informal remittance systems in facilitating the transfer of funds, especially those of the expatriate workforce. One of the main results of the conference resides in the awareness that it has promoted about the role of informal remittance systems. The informal remittance systems, in similarity to the other components of the financial system, can be also misused /abused for criminal purposes. Therefore, it is highly important to increase transparency in this sector and implement procedures to face those risks according to international standards and best practices in this regard, especially SR XI of the FATF. The conference highlighted the importance of continuing the work in the following fields and undertaking the following: Enhance the exchange of information and international cooperation including mutual legal assistance. Deep understanding of informal remittance systems functioning and how they carry out settlements mainly regarding commercial transactions and cash flows. Ensure that the informal remittance systems can freely have access/use the banking services. Effectively regulate this sector without restricting the free access of hawaladars to the financial services. Train the informal remittance systems intermediaries on the requirements of applicable monitoring systems. The conference encouraged each country to assess the risks defined in its informal remittance systems to combat money laundering and terrorist financing as well as other crimes. The conference also encouraged the Financial Action Task Force (FATF) to take into consideration those recommendations when reviewing the international standards. 28

29 Eighth: Best Measures applied in regulating alternative remittance service: 1- Registration/licensing: The informal transfer service is to be registered or licensed. Transferring service providers' registration shall be confirmed at a competent regulatory authority such as the Financial Intelligence Unit or the financial sector regulatory agency. Registration is relatively less costly than licensing. 2- Enhancing awareness and recognition: a- Recognition strategies: - Observation and watching various mass media to find advertisements relating to informal transfer service providers in order to reach and inform them of the necessity of registration or licensing. - Attention should be paid to the fact that money transfer services are usually used when large amounts of money are being transferred, especially when money smugglers are involved; informal money transfer providers can be traced by pinpointing those smugglers. - Attention should be paid especially to reports about suspicious and unusual local operations, as well as all to local or international reports indicating large movement of money, which in turn can help reveal a potential link with informal transfer services. b- Awareness enhancing campaigns: - Informal transfer service providers should receive awareness training and compliance-oriented programs which may include on-site visits to agencies probably providing informal transfer services in order to advise them on the necessity of registration or licensing and reporting. - Potential clients should be informed about the risks they take when using informal transfer services and on the role these services play in terrorist financing and money laundering. - Agencies providing transfer services should be asked to present their licenses or registration documents to their clients; it has to be noted that legal dealers usually prefer to have their transaction done through formal service providers. - A list of registered/licensed agencies and people providing money transfer service should be prepared and made available to the public. - Law enforcers should be aware of compliance requirements relating to money transfer and of the procedures used for illegal purposes. 29

30 3- AML instructions: - Instructions monitoring money transfer services should not be overly restrictive in order not to constitute a burden on transfer intermediaries and to compel them to have recourse to hidden informal transfer systems where it becomes difficult to trace money laundering and terrorist financing transaction. This instruction should be able to help detecting people who misuse money transfer systems. Such measure should be accomplished through: a- Customer due diligence: - According to the recommendation 5 of the forty recommendations, money transfer service providers should complete all information necessary to identify the customer and to verify customer s identity such as passports, identity cards, driving licenses or similar documents. It is important to refuse carrying out the transfer when the service provider is unable to complete this kind of information. The provider must also report any suspicious transaction, knowing that such measures constitute a minimum level of CDD. - Conducting transactions by telephone, fax, or via internet can be done only after having verified the customer identity as aforementioned, otherwise the transaction must not be executed. b- Record-keeping: - Money transfer service providers should keep records enabling investigation agencies to trace transactions and identify their conductors so that these agencies can proceed to investigate money laundering and terrorist financing activities. However a certain balance must be preserved between the burden of record-keeping and the needs of regulatory agencies for information and records. - Countries should take due measures to compel financial institutions, including providers of money transfer services, to provide accurate information about the transferor (name, address, account number) and any related letters and documents when carrying out a transfer. This information should be maintained at all stages of the payment process. - Money transfer service providers should keep records of all transactions, domestic or international, for five years at least. Basic requirements as to the form of such records should be defined. 30

31 c- Reporting suspicious transactions: The obligation of reporting suspicious transactions imposed on service providers must be in conformity with obligations imposed on banking and financial institutions in this regard, taking into consideration the definition and characteristics of suspicious transactions as specified in the special guide set out by regulatory agencies. 4- Compliance monitoring: Regulatory agencies must monitor money transfer services and define informal service providers and cases in which criminals and terrorist groups use these services. Countries may apply one of the following options: 1- Competent authorities must be authorized to audit unregistered agencies suspected of being involved in money transfer services. 2- Regulatory agencies and supervisory authorities shall be given the auditing authority on licensed and registered money transfer services, and the right of paying sudden visits to money transferring service providers in a way that enables them to audit details of registers and inspection records. In the latter case, due care should be given to the requirements of keeping records. Ninth: Experience and systems of MENAFATF countries: Hawaladar registration and reporting system applicable in the United Arab Emirates. In light of the Hawala international conference held in May 2002 and Abu Dhabi statement on Hawala, the UAE Central Bank issued and published in the press a regulation for licensing hawaladars and supervising their activities, inviting them to register with the Central Bank and to obtain a free certificate, requesting hawaladars to provide the Central Bank with details about the transferors and transferees in a form prepared for that purpose. They were also requested to submit reports about suspicious transfers to the anti-money laundering and suspicious cases unit at the Central Bank. The Central Bank promulgated the regulation about registration and reporting systems of Hawaladars on April 1, Main characteristics of the Hawaladar registration and reporting regulation: - The system has been made simple for registration and reporting and not overly restrictive. 31