Does the SAFIU Comply with International Standards - Research Paper Example

Question 1 – How effective is SAFIU in receiving and analysing money laundering reports? Saudi Arabia is perceived to be among the nations spearheading anti-money laundering activities in the world. In fact, in its 2004 review of Saudi Arabia, FATF concluded that Saudi Arabia has in force financial controls that “probably go further than any country in the world” (Cordesman, 2009, p. 299). In the same year, FATF ascertained that there were 62 successful prosecutions for money laundering. In addition, during the same period five cases had been initiated for terrorism financing, three of which were mentioned in the introduction of this proposal. The discussion below highlights how the reports are received and analyzed. The planned research will also aim to look at how an analyzed report is acted upon in terms of the pending investigation. a) Receiving reports SAFIU comprises seven divisions: Information Collection and Analysis Division; Report Division; Information and studies Division; Information Exchange and Follow-up Division; Financial and Administrative Affairs division; Training Division and IT Division (FATF, 2010). The Report Division receives STRs and checks them for comprehensiveness. When the reports are found complete, they are forwarded to the Information and Studies Division. At this stage, the information is enriched with details obtained from SAFIU’s own databases and the details from databases of other government entities that SAFIU has direct access to. At the second stage, once the report is considered final, it is submitted to the evaluation committee that determines the viability of forwarding the report for further money laundering and terrorist funding analysis by the Information Gathering and Analysis Division. This evaluation committee comprises intelligence, financial and legal experts as well as the deputy director who chairs SAFIU in making the final decision (FATF, 2010). A significant number of reports have been received by SAFIU since 2005 as shown in table 1. Table 1: STRs from Reporting Entities 2005 - 2009 Year FIs DNFBPS Government Individuals Total 2005 311 30 - - - 5 4 350 2006 418 12 - - - 13 8 451 2007 303. 13 1 4 9 14 61 405 2008 546 20 3 8 21 45 100 743 2009 769 18 2 6 20 133 71 1,019 Total 2,347 93 6 18 50 210 244 2,968 Source: Financial Action Task Force, 2010 (b) Analyzing reports: The STRs are analysed through a number of stages Within SAFIU, the evaluation committee analysis report received through stages and phases. In the initial stage, the reports are analyzed with respect to: i) social features and characteristics of the phenomenon such as nationality, age, place of residence, and other civil status data; ii) any other details or criminal records in the security database; iii) car registry; iv) cross-border money transfer; and v) data on immigration authority and reports in the FIU. It is important to note that when defining the commitment to report suspicious dealings, the benchmark should be put in place in such a way that the smallest probable number of transactions are overlooked in the reporting process, and that the number of reports that later turn out not to be suspicious is small. Importantly, it should be noted that it is not the function of the reporting entities to scrutinize suspicious transactions beyond putting together the basic facts required to ascertain that indeed, a given transaction is suspicious. Therefore, it is always expected that a large proportion of the reports will be discovered, upon the scrutiny of the FIU, not to be linked to criminal activity (Forget, Hočevar & International Monetary Fund, p. 43). The key details of the reports under analysis, which need to be verified, include the details of the disclosing organization, the person subject of the disclosure, company subject of disclosure, as well as any other information that may not be captured in the aforementioned fields (World Bank, 2009, p. 20). General effectiveness of the process SAFIU submits standard reporting forms to all reporting entities. Effective reporting is achieved by the availability of fax and postal services as well hand delivery of mails. According to FATF, the use of phones to handle STR issues has made the reposting process easier and more efficient. Further, to enhance unlimited reporting, SAFIU operates on a 24 hour basis seven days a week, making it possible to report any issue on any day of the week. SAFIU also provides copies of a Guidance manual that contains simplified information on the manner of reporting, information related to the obligation to report, as well as the number of typologies. The Guidance has details that enable the reposting entities to file their reports (Paul, 2006). (do not wary about this I will cheek it) SAFIU maintains a public website that highlights background information for interested individual and reporting parties. Through this website, information on annual reports, guidance manual and reporting forms for corporate, banks and accountants can be retrieved. The Analysis Division of the SAFIU counterchecks all incoming information STRs (mostly by phone) to confirm that they are complete. This enhances prompt handling of such reports. Despite the perceived effectiveness of handling STRs, independence is not substantially secured as SAFIU often handles reports that contain relatively insufficient information as regards the typology of money laundering and terrorist financing. Such information often fails to suit the needs of the receiving agencies (Congress, n.d, p. 20643). This in line with the view of FATF that although the SAFIU is well equipped and well resourced in receiving and disseminating information regarding STRs, it faced a backlog of about 30 percent of the suspicious reports between 2008 and 2009. This points to some inefficiency in acting on the reports. FAFTF thus recommended that the backlog accumulation required steady management attention and monitoring in order to process the STRs in a timely manner (FATF, 2010). Question 2 – How effective is SAFIU in administering money laundering activities with other government and non-government agencies such as finance and banking institutions? There is collaboration between SAFIU and the United States in dealing with money laundering and terror funding activities has led to the creation of a task force that apparently has two components: one focused on financing and the other that deals with intelligence. The intelligence unit shares intelligence information relating to terror threats to the United States. On the other hand, the financing unit shares information that relates to terrorist financing, which includes requests for bank records, sharing financial leads, sharing information on accounts, and so forth (Prados & Blanchard, 2004, p. 19-20). Currently there is not much information regarding the operation of SAFIU but a general overview of how other FIUs operate will help understand this. Generally, sharing of information between FIUs and other agencies starts when banks, money remitters, and other financial institutions provide STRs. These institutions may also provide other reports, and receive feedback from the FIU. Financial reporters are required to report to the FIU financial information, including suspicious transactions revealed in the course of monitoring of financial institutions, and may also receive financial intelligence and details on breaching of anti-money laundering laws as part of entities subject to their jurisdiction from the FIU. Further, police and prosecutors avails law-enforcement information to the FIU and receive financial intelligence (through police FIUs). Other government agencies such as company registrars and motor-vehicle registration offices also provide raw data to the FIU. Finally, tax authorities, customs and excise agencies, anti-corruption agencies, may (if legislation allows) receive financial intelligence information from the FIU and also provide related information to the FIU (Forget, Hočevar & International Monetary Fund, p. 63). Saudi Arabia has signed a number of bilateral and multilateral agreements to combat money laundering and terrorism financing. For instance, under the auspices of the Arab league, it signed the several agreements in 1998 to fight terrorism. This is in addition to many other agreements signed between Saudi Arabia and non-Arab countries to deal with security matters including money laundering and terrorism financing. The Kingdom also set up a real-time communication system between the Ministry of Interior and SAMA, so as to deal with matters relating to terrorist financing activities. Further, Saudi Arabia participates regularly in the G-20 conferences, and has put in force all the relevant recommendations issued by the G-20 groups in relation to terrorist financing (SAMA, 2004, p. 5). In addition, although Saudi Arabia is a member of the MENAFATF, which strives to adopt all the recommendations stipulated by FATF, MENAFATF is considered as one of the bodies that still need financial and technical support from countries such as the United Kingdom support to achieve full capacity against money laundering and terrorist financing (The Stationery Office U.K., 2009, p. 65; Cortright & Lopez, 2007, p. 170). Given the high complexity of transactions around the world because of the opportunities offered by technological innovation and economic globalisation, it is typically more difficult to interpret money laundering activities (Arnone & Borlini, 2010, p. 236). Further, to prosecute financially literate money launders requires much more differentiated and specific skills than what conventional policing mechanisms can avail. Discussing this issue, Merlonghi (2010, p.210) notes that the evolution of the information technology world has a direct influence on the payment instruments across the world both in the operational options available for users and payment systems. And as often happens, the hypothetical neutrality of the systems does not prevent them from being subject to misuse for illegal and ambiguous purposes. Thus, Merlonghi (2010, p. 210) suggests that this is one issue that central banks and FIUs (such as SAFIU) across the world have to deal with in the intent of giving space to innovations that do not jeopardize the stability of the systems, but which at the same time protect the systems from infiltration of financial crimes such as money laundering and terrorist financing. In Saudi Arabia, SAFIU refers all matters that require investigation to SAMA. In addition, all financial institutions must take note of and report all suspicious transactions to SAFIU. Under the collaboration between SAFIU and SAMA, new account holders have to identify themselves formally and anonymous financial and commercial transactions are prohibited. Additionally, non-resident individuals or companies must obtain specific authorisation from SAMA before they can open accounts (Cordesman, 2003(b)). Under the watch of SAMA and SAFIU, Saudi banks have been computerising their systems to ensure ease of identification of various types of money laundering activities, magnitudes of these activities, the geographical location of these activities and so forth. Those found in violation of the laws and regulations stipulated by SAMA and SAFIU are subject to severe financial penalties and imprisonment. In addition, money laundering crimes are dealt with as high profile crimes and all mentioned cases are referred to a senior court (SAMA, 2004). The collaboration between SAFIU and other agencies against money laundering led to the freezing of 38 bank accounts that belonged to four individuals, which totalled about $3,722,180.00 (Cordesman, 2010). Question 3 – How effective is the co-ordination of money laundering activities between SAFIU and Financial Intelligence Units (FIUs) in other countries? The major international body that deal with money laundering is the FATF. This body works alongside the financial stability forum’s Working Group on Offshore Financial Centres and various FIUs such as the SAFIU. Like all FIUs, SAFIU should be actively engaged in financial information exchange, information analysis and dissemination of financial information analyses to regional or domestic agencies. SAFIU is one of the sixty-nine FIUs in countries around the world, which are collectively identified under the Egmont Group. The functioning of these units is enhanced by the United States Financial Crimes Enforcement Network (FinCEN), which is also in charge of supporting cooperation among the units (Blanchard, 2010, p. 24). Although deemed to be supportive of the international measures to curb money laundering and terrorist financing, SAFIU has faced a number of obstacles - according to some authors. For instance, (Ho, 2005, p. 682) notes that “even countries with the best intentions (to curb money laundering and terrorist financing) face different political, cultural, and legal constraints in enforcing anti-money laundering measures.” Examples of such countries include Saudi Arabia, United Arab Emirates and Bahrain. Ho (2005) further notes that “these countries have only half-hearted support for the American quest to freeze terrorist-related finances (belonging to groups such as Hezbollah and Hamas) lest they risk the outrage of their domestic population” (p. 682). Along the same line, Cordesman (2006, p.33) notes that governmental efforts to curb terrorist financing have sharp boundaries and have probably reached the point of diminishing returns. There is therefore an indication that these considerations are likely to hamper SAFIU’s collaboration with other FIUs around the world. Ideally, the SAFIU should be in a position to collect Suspicious Activity Reports (SARs) and communicate the information with other units through the Egmont Group Information System. This process enables financial information to move smoothly for cooperative investigation the world over. In order to enhance the communication between various FIUs, the Egmont Group established Working Groups on a needs basis to develop, co-operate, and share expertise. Currently there are five Working Groups, and each unit determines its own internal organization and operating procedures. The Working Groups meet regularly and report about their activities to the heads of FIUs. There is also the Egmont Secure Web system that features a high, multi-level security to facilitate international co-operation and communications and foster mutual assistance among the different FIUs in the war against money laundering. Saudi Arabia is one of the countries that are on the frontline of formulating the FIU security project together with India, Japan, South Africa, Belgium, the United States, Israel, Philippines and Honduras. This project is expected to document best practices for managing FIUs in June 2011 (Egmont Group, 2010, p. 5-6). It is however difficult to assess what each country is doing through its FIU because of the lack of dedicated institutions that focus on sanctions enforcement and review (Winer, 2008, p. 123). It is along this line that the research will seek to reveal how the SAFIU collaborates with other FIUs and whether the strategies it employs meet international standards. According to Winer (2008, p. 123), the lack of institutional structure for enforcing sanctions remains a real gap in dealing with terrorist financing Question 4 – How effective is the current Saudi legislation in limiting money laundering and terrorism? Saudi Arabia’s legislation with regard to money laundering and terrorist financing is mainly pegged on the effectiveness of SAMA. SAMA was established in 1952 and its founding charter stipulated that it would conform to Islamic law (Ramady, 2009, p. 237). This law prohibits any form of money laundering activities (Sanusi, 2008, p. 254) and is therefore the first step to limiting money laundering and terrorism. Saudi Arabia is a member of the FATF via the Gulf Cooperation Council. This is one pointer to the criticism of the effectiveness of the Saudi law in combating money laundering and terrorist financing. By comparison, European Union (EU) member states are affiliated to FATF through the European Commission but are also members of the Task Force as individual states. In contrast, none of the six members of the GCC (Saudi Arabia, Bahrain, Kuwait, Qatar, Oman and the United Arab Emirates) is a member of FATF in their own right (Gilmore, 2004, p. 136). Thus, it is possible to question Saudi Arabia’ commitment to the policies, especially those formulated by FATF, to counter money laundering. Further, there has been a constant need “to discuss how to improve the implementation of effective anti-money laundering systems in the Gulf Region,” (Gilmore, 2004, p. 136) which includes Saudi Arabia’s law. Even though some aspects of the Saudi legislation may be questioned by some authors over its effectiveness in dealing with money laundering, the international actions that have so far been taken by the Kingdom toward countering the vice point out to some commitment to curbing the financial crimes. Such include joining many multilateral and bilateral agreements such as the Vienna Convention and ratifying the Executive Rules of the UN Convention. In addition, as it was earlier stated, the Kingdom has so far endorsed the 40 recommendations made by the FATF, and there is evidence of coordination between the Kingdom’s ministries to contain money laundering and terrorist financing. The Money Laundering Law that came into force on August 23, 2003 (Royal Decree No. M/39) specifically deals with the two crimes. Further, Saudi Arabia issued strict guidelines and instructions to the Kingdom’s commercial and financial sectors for dealing with money laundering activities, such as the “Rules Governing Anti-Money Laundering and Combating Terrorist Financing” that were issued on May 27, 2003. There are also units within the Ministry of Commerce which are specifically aimed at collaborating with the SAFIU to counter money laundering and terrorist funding activities (SAMA, 2004, p. 13-14). A FATF report released in July 2004 indicated that Saudi Arabia had made 62 successful prosecutions on related to money laundering and had initiated five cases related terror funding (Cordesman, 2009, p. 299). As early as 2003, Saudi Arabia established training programmes for bankers, judges, prosecutors, customs officers and other officials from government agencies and departments (Cordesman, 2003a). Further, Saudi Arabia has been collaborating with the United States to train SAFIU personnel. The United States treasury and FBI provide extra training on FIUs (Merritt, 2010, p. 30). Question 5 - What recommendations can be provided to SAFIU to enable it develops policies that better detect money laundering and terrorism finance? In order to better understand the areas that need to be investigated further with regards to the measures put in place by Saudi Arabia and hence provide recommendations for improvement, it is important to revisit all the issues mentioned above. For instance, there is need to ensure that organs such as the Saudi Charities Commission (which never stood) becomes operational. There have been concerns by the United States that come charitable organizations in Saudi Arabia are not covered by Saudi regulations, but Saudi government officials that such organizations are adequately covered by their regulations. Blanchard and Prados (2007, p. 26) mentioned dilatory action, the accountability of private donors involved in various activities in Saudi Arabia, currency controls and cash courier activities, Palestinian funding and Saudi Arabia’s actual international efforts to counter money laundering and terrorist financing as some of the factors that hamper the implementation of effective anti-money laundering policies. The following recommendations will help address these issues. Dilatory action: United States has complained in the past that Saudi Arabian officials have been slow at taking action against entities and organisations implicated in terrorist financing. Private donor accountability: United States officials have indicated that the Saudi government should give more importance to demanding personal responsibility for financiers of terrorist activities and act against those who promote or tolerate financing of terrorist activities. Currency controls and cash couriers: A FATF report called on Saudi officials to increase the amount of information required for conversion of foreign currency transactions at money remittance systems in the country. This indicates the existence of many loopholes in the current system. There is need to improve the capacity of the Saudi government in controlling the use of cash couriers by terrorist financiers and circumvention of cash. The situation as it is currently is that the Saudi government has a limited capacity to handle the aforementioned issues (GAO, 2009) Palestinian funding: Ordinarily Saudi donations to Palestine went to the Palestinian Authority and not Hamas; but with the victory of Hamas in the 2006 legislative elections, the system of donations become complicated. There are fears that the donations may get into the hands of terrorists. International efforts: The United States State department has noted with concern that Saudi Arabia has signed but not ratified the International Convention for the Suppression of the Financing of Terrorism as adopted by the UN General Assembly in December 1999 (Blanchard & Prados, 2007, p. 26-27). Recommendations will therefore be made based on the findings regarding the weaknesses of SAFIU as identified in the points above. The recommendations will seek to ensure that Saudi Arabia speeds up its response to dealing with money laundering and terrorist funding activities, encourages more accountability in private donor funds, promotes intelligence in currency controls and cash couriers, ensures that the funds donated by Saudi Arabia to Palestinians are used for the intended purpose, and ratifies the International Convention for the Suppression of the Financing of Terrorism. According to this Convention, there are three main obligations for contracting states. First is that states parties must create the offence of funding terrorist acts in their criminal legislation. Second, the states must be involved in wide-ranging collaboration with other states and parties and offer them legal assistance in matters covered by the Convention. Third is that the contracting states must enact certain requirements relating to the role of financial institutions in the exposure and reporting of evidence of funding of terrorist acts (International Monetary Fund, 2003, p. 5). Recommendations to SAFIU can also be based on the issues identified by (Verdugo-Yepes, 2008, p. 22), which the author perceives to hamper international cooperation against money laundering and terror financing activities. These are (1) tensions between financial regulation and political will, (2) difficult interaction between international standards and the process of implementation at the domestic level, and (3) tension between government financial and non-financial institutions. Hence, there is need to ensure that in addition to ratifying the International Convention for the Suppression of the Financing of Terrorism, Saudi Arabia should commit itself more to financial regulation as opposed to political interests as it was earlier noted that Saudi Arabia is one of the countries that are characterised with political, cultural, and legal constraints that hamper interventions against money laundering and terror funding. New References Forget, L., Hočevar, V. Š. & International Monetary Fund 2004, Financial Intelligence Units: An Overview, International Monetary Fund, Geneva Egmont Group 2010, Annual Report June 2009-July 2010, The Egmont Secretariat, Toronto, Canada. Shehu, A.Y. 2010, ‘Promoting financial sector stability through an effective AML/CFT regime,’ Journal of Money Laundering Control, Vol. 13, No. 2, pp. 139-154. GAO 2009, Combating Terrorism: U.S. Agencies Report Progress Countering Terrorism and Its Financing in Saudi Arabia, but Continued Focus on Counter Terrorism Financing Efforts Needed, United States Government Accountability Office, Washington, DC. Merritt, Z.D. 2010, Combating Terrorism: U. S. Agencies Report Progress Countering Terrorism and Its Financing in Saudi Arabia, But Continued Focus on Counter Terrorism Financing Needed, Diane Publishing, New York. FATF 2010, Mutual Evaluation of the Kingdom of Saudi Arabia, Available from http://www.fatf-gafi.org/document/62/0,3343,en_32250379_32236963_45537790_1_1_1_1,00.html (19th October, 2010). Verdugo-Yepes, C. 2008, ‘Enhancing International Cooperation in the Fight Against the Financing of Terrorism,’ Journal of Global Change and Governance, Vol. I, No. 3, Summer 2008. Cortright, D. & Lopez, G. A. 2007, Uniting against Terror: Cooperative Nonmilitary Responses to the Global Terrorist Threat, MIT Press, Massachusetts. World Bank 2009, Combating Money Laundering and the Financing of Terrorism: A Comprehensive Training Guide, Volume 2, World Bank Publications, New York. Congress (not dated), Congressional Record, Government Printing Office, New York. Read More