D. D EXCHANGE COMPANY (PVT) LTD

ANTI-MONEY LAUNDERING POLICY

Total goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money Laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is a critical importance, as it enables the criminals to enjoy these profits without jeopardizing their source.

When criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the people involved. Criminal does this by disguising the sources, changing the form or moving the funds to a place where they are less likely to attract attention.

How is money Laundered?

The Process of money laundering normally involves three stages :

Placement:

The first stage is when the criminal introduces the proceeds of his crime into the financial system. This is usually done by breaking up large sums of cash into smaller, less conspicuous amounts that are then deposited into a bank account or used to purchase financial instruments such as checks, money orders or securities

Layering:

This second state involves a series of transactions to convert or transfer the funds, usually to other foreign jurisdictions and financial institutions, including offshore financial centers. Such conversion or transfer typically occurs through wire transfers and the purchase and sale of investment instruments. Often, such conversion or transfers are disguised as payments for goods or services through false invoicing so as to give them the appearance of legitimacy

Integration:

In the third and final state, the funds re-enter the legitimate economy as “clean” money. The criminal then freely uses this money to invest in a variety of assets such as real estate including office buildings and houses, automobiles, yachts and jewellery, or to enter into new business ventures.

Because of the clandestine nature of money laundering, it is very difficult to determine the precise magnitude of the money laundered globally on an annual basis. The international monetary fund places the estimate at between two and five percent of the world?s gross domestic product. Using 1996 figures, this translates to between $600 billion and $1.5 trillion.

Emerging Trends in money laundering

In the Asian and pacific region, criminal proceeds tend to originate from a number of different sources. The Golden Triangle encompassing the region including Myanmar, Thailand and Laos has been notorious as a center for the trafficking of drugs. Organized crime, gambling, corruption, prostitution and trafficking in children are some of the other sources of criminal proceeds in this reign. On the other hand, in the Pacific islands, thee is growing evidence that foreign crime syndicates, including Russian criminal groups (Russia Now became member of Financial Action Task Force (FATF), (what a dramatic change) and South American drug kingpins have used these small countries to launder their illicit funds through a variety of channels including offshore financial centers, shall companies, trusts and international business companies using false account names or local process. Several Pacific Islands have also been identified by the Organization for Economic Cooperation and Development (OECD) as engaging in harmful tax practices, including serving as tax haven for wealthy foreign individuals and corporations seeking to evade axes in their own countries.

Hawala System

The major drawback in the efforts to track down, freeze and confiscate the proceeds of crime is that some of these are moved through informal financing channels or alternative remittance systems that pre-date the arrival of Western-style banking systems. One good example of this is the hawala system (meaning “in trust”, in Hindi) used mainly in India, Pakistan and the Middle East for transferring money or value across borders without involving any physical movement of money or paper transactions. Such transactions thereby escape the attention or scrutiny of financial regulators and law enforcement authorities. Hawala brokers (hawaladars) usually work out of small storefront operations. This is how the hawala system works: A Pakistani living in Baltimore approaches a hawaladar in this city with a request to transfer $5000 to his brother in Quetta, Pakistan. He negotiates a fee and the exchange rate, and then delivers $5000 in cash plus the fee to the hawaladar. This hawaladar immediately instructs (usually by telephone) another hawaladar in Quetta to deliver the rupee equivalent of the funds to the brother under a pre-arranged code, usually a set of numbers. The transaction takes one to two days, which is faster than most bank wire transfers. The whole transaction is consummated without leaving a paper trail. There is no opening of accounts and no maintenance of records. While this informal system is widely used for transfers of legitimate funds, such as remittances by overseas workers to their families at home, it is also believed to be one of the key channels for money laundering and the financing of terrorism because of the anonymity that it provides.

Evils Of Money Laundering Developing Countries

1. Increases Crime and Corruption

Money laundering makes criminal activates profitable. This trend attracts criminals and promotes corruption. They bribery is enhanced and cost of living increased, which have an adverse impact on Economy. It affects social structure adversely and makes the rich richer and poor become poorer, thus creates a wider gape between peoples. It creates socio economic problems in the country.

2. Damaged Reputation and International Consequence

Money laundering could cause significant adverse consequence for development in a country. The private investors hesitate to invest in a country, which have weak system of anti-money laundering. For developing nations, eligibility for foreign governmental assistance is also likely to be severally limited. These factors proved barriers in the path of development in a country.

3. Weakened Financial Institutions

Money laundering and terrorist financing can harm the soundness of a country?s financial sector, as well as the stability of individual financial institutions in multiple ways. This may adversely effects mainly on banking, insurance, securities and investment management institutions.

4. Compromised Economy and Private Sector

The front companies are used by money launderers. These front companies are the business enterprises that appear legitimate and engage in legitimate business but are in fact controlled by criminals. These companies co-mingle the illicit funds with legitimate funds in order to hide the ill-gotten proceeds. Their access to illicit funds, allows them to subsidize their products and services, even at below market prices. As a consequence, legitimate enterprises find it difficult to compete with such front companies. This may create financial risk for them, thus creating adverse impact on economy.

5. Damaged Privatization efforts

The privatization process of a country could be affected adversely by the money launderers. The criminal organizations are capable of outbidding legitimate purchasers of former state-owned enterprises. When illicit proceeds are invested in this manner, criminals increase their potential for more criminal activities and corruption, as well as deprive the country of what should be legitimate, market-based, tax paying enterprises.

6. Fostering Terrorist activities

it has been noticed that the money generated through money laundering activities is used in financing of terrorist activities. In this way it causes panic and unrest which adversely effects economic growth.

7. Establishment of Financial Action Task Force (FATF)

In response to increasing concern over money laundering the Financial Action Task Force (FATF) on money laundering was established by the G-7 summit in Paris in 1989 to develop a coordinated international response. The FATF is a multi-disciplinary body that brings together the policy-making power of legal, financial and law enforcement experts from its members. The FATF monitors members progress in implementing anti-money laundering measures, reviews and reports on laundering trends, techniques and counter measures, and progress the adoption and implementation of FATF anti-money laundering trends globally. FATF include 31 countries so far as well as Gulf Co-operation Council and European Commission, more than 20 observers, Five regional bodies and more than 15 other international organizations or bodies. The 31 member jurisdictions of the FATF are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Switzerland, Sweden, Turkey, the United Kingdom, and the United States, Russia, and South Africa.

Forty-eight Recommendations

One of the fist tasks of FATF was to develop 40 Recommendations, which set out the measures national governments should take to implement effective money laundering programs. These 40 Recommendations were drafted in 1990 and revised in 1996 and now recently revised in June, 2003. these Recommendations are a comprehensive blue print for action against money laundering. They over the criminal justice system and law enforcement, the financial system and its regulation and international cooperation.

enhanced measures for higher risk customer and transactions including correspondent banking and politically exposed persons, the expansion of the customer due diligence process for financial institutions Each FATF member has made a firm political commitment to combat money laundering based on them. These Recommendations are recognized as the international standards for anti-money laundering programs. A number of non-FATF member countries have used them in developing their efforts to address the issue. The FATF has also formulated 8 special recommendations to combat terrorist financing in 2001.

Non-Cooperative Countries and Territories (NCCT)

In addition to the Forty Recommendations, the FATF has also established twenty-five criteria for defining Non-Cooperative Countries and Territories, and undertaken two major reviews in 2000 and 2001 to identify NCCTs. The criteria seek to identify detrimental rules and practices, which impede international cooperation in the fight against money laundering. These criteria are divided into four board categories:

1. loopholes in financial regulations,

2. obstacles raised by other regulatory requirements,

3. obstacles to international cooperation, and

4. inadequate resources for preventing and detecting money laundering activities.

Once a country or territory is classified as an NCCT, it is required to take concrete measures to remove these detrimental rules and practices within a specified time frame. Failure to do so could result in the application of counter-measures or sanctions against the NCCT by the members of FATF. As per the figure upto 14th February, 2003 the number of Non-Cooperative Countries and Territories are 10, which are Cook, Island, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippine, St. Vincent and the Grenadines and Ukraine. The Basel committee on Banking Supervision (previously called the Basel Committee on Banking Regulation and Supervisory Practices), established by the Central Bank Governors of the G-10 Countries in 1974, issued a Statement on prevention of Criminal. Use of the banking system for the purpose of money laundering in 1988. this statement set out some based polices and procedures that the managements of banks should implement with a view to suppressing money laundering through the banking system. In 1997, the Basel Committee issued the Core Principles of Banking Supervision. Core Principals 15 states as follows: “Banking supervisors must determine that banks have adequate polices, practices and procedures in place, including strict „know-your-customer? rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.” In the area of international banking supervision, the Basel Committee has also taken steps to issue recommendations to banking institutions to adopt strong internal measures to prevent financial abuse of the banking system. It is important to note that, while the Basel Committee essentially represents the G-10 industrial countries and its principles and recommendations are advisory in character, its recommendations are given great weight by national bank supervisory bodies throughout the world.

The Egmont Group

The Egmont Group of Financial Intelligence Units (FIUs),e established in 1995, serves as a forum to promote exchange of financial intelligence on money laundering among its member jurisdictions, including assisting countries with the establishment or strengthening of financial intelligence units. Financial intelligence units is a central, national agency responsible for receiving (and, as permitted requesting), analyzing and disseminating to the competent authorities, disclosure or financial information: (i) concerning suspected proceeds of crime, or (ii) required by national legislation or regulation, in order to counter money laundering.

FIU can be independent bodies or part of an existing regulatory or law-enforcing agency. For example in Malaysia the FIR exists in central bank “Bank Negara Malaysia”. In USA the FIU is called Fin CEN (Financial Crimes Enforcement Network). It is a separate body. Fin CEN provides training and technical assistance to countries around the globe in the development and operation of Financial Intelligence Units and the formulation and implementation of counter-money laundering strategies. In 1996, there was less then handful of FIUs in the world. There are 69 jurisdictions upto July, 2003 that comprises the Egmont Group of FISs from all over the world.

Pakistan’s Position

State Bank of Pakistan has issued Prudential Regulations XII, which contains the instructions, framed on the basis of basic principles, which are the essence of FATF Recommendations. In terms of this Regulations, certain guidelines are issued to safe guard banks against their involvement in money-laundering activities and other unlawful trades.

Similarly the BNFI Rule 22 was issued by State Bank to NBFIs to safe guard them against their involvement in money laundering activities and other unlawful trades.

SBP has also modified Prudential Regulation XI vide circular No. 10 dated the 29th march, 2003. in terms of which, certain guidelines were issued to reinforce the checks and controls already developed by banks as also to ensure that de diligence (know your customer procedure) is done while starting relationship with a new customer and maintaining and continuing relationship with existing customers. The Anti-Money Laundering Law is also under consideration by the Government of Pakistan.

Beside Prudential Regulations of SBP, other laws such as “Control of Narcotic Substance (CNS) Act, 1997” and “National Accountability Bureau (NAB) Ordinance 1999” contains provisions to curb the money laundering activities.

Pakistan is member of Asia Pacific Group on Money Laundering (APGML) and has actively participated in their meetings / workshops. APGML is a regional FATF styled body. The purpose of the Group is to facilitate the adoption, implementation and enforcement of internationally accepted standards against money laundering and the terrorist Financing, in particular the Forty Recommendations and Eight Special Recommendations on Terrorist Financing of the FATF.