Cleaning up dirty money

As the government steps up its efforts to crack down on money laundering with a new law, Gamal Essam El-Din explores the murky areas of finance in Egypt
On 24 September, President George W Bush unveiled sweeping plans to freeze the assets of the 27 people and organisations appearing on the US administration's terrorism blacklist. Topping the list is Osama Bin Laden's Al-Qa'ida [The Base] group -- who the United States accuses of mounting the 11 September deadly attacks on New York and Washington.
Alongside the move to freeze assets of alleged terrorists, President Bush urged "civilised countries" to introduce tougher regulations and laws aimed at tracking down "dirty money" and preventing it from crossing national borders.
The US Justice Department said that fighting dirty money throughout the world is a fundamental step towards halting terrorism. The Justice Department, citing International Monetary Fund statistics, said that the amount of dirty money being circulated in the international financial system is between $500 billion and $1.5 trillion a year -- equivalent to almost five per cent of gross world product.
President Bush's call to put an end to money laundering has prodded many countries into a flurry of law-making. Washington was the first to take such measures as the Senate is preparing to vote this week on the most extensive package of anti-money laundering legislation to be introduced to the American legislature in more than a decade. The bill will give greater powers to the US treasury secretary to act against foreign banks from countries determined to be money laundering havens.
The Group of Seven (G7) leading industrial nations last week pledged to stiffen sanctions against financial centres that fail to comply with international anti-money laundering guidelines and report on suspicious financial activities.
In Egypt, the government has been delivering tough talk about the problem for years, but has done little about it. "The size of our economy does not justify the drafting of such a law," Economy Minister Youssef Ghali told parliamentarians two years ago.
Egypt's tepid reaction, however, began to change with the decision a year ago by the G7 to compose a list of the top 15 offending countries. The campaign was launched by the G7-affiliated Financial Action Task Force on Money Laundering (FATF). The FATF, established in 1989 under the umbrella of the Paris-based Organisation for Economic Cooperation and Development (OECD), surprised Egypt this June when it removed four countries from the list and added another six. Among these newly listed offenders are Hungary, Indonesia and Egypt. The FATF warned in its annual report that offenders may face punitive measures, the most stringent of which would be to bar banks in FATF member countries from doing business with institutions in offending countries. After the 11 September terrorist attacks, the FATF indicated that it is contemplating sanctions on non-compliant countries.
The FATF's decision about Egypt drew fiery responses from the Egyptian state. Senior officials at the Ministry of Economy described the FATF's June report as part of "a campaign aimed at defaming the Egyptian economy." Minister Ghali reiterated that "the extent of liberalisation and openness which the Egyptian economy has achieved is insufficient to foster the growth of wide-scale money laundering operations in Egypt."
In contrast, opposition circles responded favorably to the FATF's announcements. Ismail Sabri Abdallah, a prominent leftist writer and a former planning minister, asserted that "the FATF report is entirely founded and Egypt is really a safe haven for money laundering."
As the war of words mounted, the FATF surprised the government by pointing out that the information in its report about Egypt was mainly derived from a well-documented academic study prepared by an Egyptian researcher. The study, entitled "Money Laundering in Egypt and the World," was prepared in late 1998 by Hamdi Abdel-Azim, director of the research department at the Sadat Academy for Administrative Sciences.
In his study, Abdel-Azim estimated that LE17.1 billion is laundered each year in Egypt -- a figure that comprises approximately five per cent of the country's gross domestic product. Abdel-Azim suggested that drug-trafficking is the source of 70 per cent of this dirty money. He went on to predict that by 2004 the amount of dirty money flowing through Egypt would amount to LE24 billion.
Infuriated, Economy Ministry officials lashed out at Abdel-Azim's study saying that its figures were "too inflated and derived from completely unreliable sources." Mahmoud Mohieddin, Minister Ghali's senior adviser, attempted to placate public opinion by announcing that representatives from four ministries (economy, finance, interior and justice) will soon hold meetings to prepare a draft anti-money laundering bill.
Subsequently the Economy Ministry was informed that Abdel-Azim's study was one of the main sources of information consulted in the 1998 anti-money laundering bill proposed by parliamentarian Amin Hamad.
Hamad, a member of the ruling National Democratic Party (NDP) in the outgoing People's Assembly (1995-2000) for the delta city of Tanta, submitted his bill to the Assembly's Proposals and Complaints Committee. Hamad's eight- article bill, which was discussed and approved by the committee during the period from February-April 1999, was considered the first serious legislative attempt to fight money laundering in Egypt.
Hamad, in an interview with Al-Ahram Weekly, argued that the introduction of an anti-money laundering law in Egypt is important to safeguard the national economy. "The reluctance of the government to enact a tough law aimed at confronting this crime is shameful for Egypt," the former parliamentarian said.
According to Hamad, the Economy Ministry is the main obstacle to the enactment of the bill. "Minister Ghali acknowledged that businesses such as fast-food restaurants and retail supermarkets were used by money launderers to hide or 'wash' cash obtained illegally by means such as drug trafficking. Hamad asserted that in light of international developments, the Economy Ministry should rethink Ghali's argument that Egypt's economy is too small to justify such a law. "The Economy Ministry knows quite well that money has been channelled through banks to Islamist terrorists in Egypt to fund their operations. For that reason it should join the world in its current war against this criminal activity," said Hamad.
Unlike the Economy Ministry's passive attitude, Hamad said the Interior and Justice Ministries expressed strong support for his bill. The Proposals' Committee report on the bill cited Ahmed El-Sawwan, then first assistant to the Interior Minister and currently the governor of Daqahliyya, as saying that money laundering is "globalisation's major crime." Al-Sawwan agreed with Farouq Abbas, the director of the Financial Crimes Investigation Office, that Egypt needs an anti-money laundering law. "Egypt is a new market for foreign direct investment and this could tempt some international criminals to use Egyptian banks as a vehicle for laundering their dirty money. Money launderers could easily open accounts in Egyptian banks with minimal information about the source of their money," Abbas said.
Abbas's presentation to parliament's Proposals' Committee argued that the main obstacle to enacting a law to crack down on money laundering in Egypt is the protection of bank customers by privacy laws. Maissa El-Gohary, a senior undersecretary at the Economy Ministry, told the Proposals' Committee that Hamad's bill contravenes the secrecy of bank accounts law (Law No. 205 of 1990). "This law was introduced in 1990 -- when Egypt decided to seriously adopt an ambitious economic reform programme -- with the objective of attracting greater domestic savings and foreign cash to Egyptian banks," El- Gohary said. Only in special cases, she added, the prosecutor-general is empowered by the law to reveal the details of a specific bank account. "The Appeal Court has also the right to order banks to provide it with information about a specific bank account if its holder is implicated in a financial crime," El-Gohary said. For clamping down on money laundering, El-Gohary explained, the state depends in large part on the efforts of the Socialist Prosecutor-General (SPG) and the Justice Ministry's Office for Fighting Illicit Profits (OFIP) (established under Law No. 11 of 1986).
In his bill, Hamad called for the setting up of an independent agency to combat money laundering. "SPG and OFIP fight financial malfeasance at home. We need an independent agency to coordinate nationwide efforts and act as an effective watchdog that is aimed at fighting dirty money and tracing its roots," Hamad said.
Currently, argues Hamad, tracking down dirty money in Egypt is like waging a war of attrition. "To obtain information on bank accounts requires legal permission and this can take many years. It is like looking for a needle in a haystack," Hamad said.
Among the types of businesses Hamad suggested were fronts to launder money were fast- food restaurants, tourist villages, newly privatised entities, brokerage houses, import and export companies, mobile phone importing companies, gambling casinos and some publications.
The parliamentary committee's debate on Hamad's bill concluded that most dirty money in Egypt is generated through drug trafficking and administrative corruption. El-Sawwan, then with the Interior Ministry, told parliament that among the other sources of dirty money are prostitution, tax evasion, arms sales, bank loans obtained without adequate collateral, commercial fraud, cheque forgery, trading in substandard food, forging local currency and speculating on the stock market.
While a new law is being prepared, the Central Bank of Egypt (CBE) is issuing a new set of guidelines generally called "know-your-customer rules." In one of his last announcements as CBE governor before he retired last week, Ismail Hassan said that banks falling under CBE's supervision are required to ensure that they know the true identity of their customers, as well as the origin of their funds and the nature of their businesses. The CBE, however, instructed banks that the implementation of these rules should not contravene the secrecy of banking accounts law. "The banks should use these rules to take the initiative in reporting suspicious transactions to the Interior Ministry's Anti-Money Laundering Unit and exchange information among themselves on the nature of these transactions," Hassan said.
Along with its adoption of know-your- customer rules, the CBE is setting up an independent anti-money laundering unit that will receive and analyse the banks' reports about suspicious transactions. Hassan indicated that a training programme will be initiated to acquaint CBE and the other bank employees with the techniques adopted by the G7 countries to clamp down on dirty money and prevent it from crossing national borders.
CBE officials also said that the new rules will apply to branches of Egyptian banks in Gulf states. "This is essential because there is the potential that these banks could become a gateway for terrorist organisations to channel cash to their activist members at home or for some criminals to launder their cash obtained from illegal activities such as drug trafficking," a CBE statement said.
Another CBE statement indicated this week that banks were instructed to inform the Interior Ministry of any bank deposits or transfers exceeding LE500,000 ($120,000).
Hassan indicated that FATF was informed last week of all these measures. "We also told them that these measures will be complemented very soon by the drafting of an anti- money laundering law," Hassan said.
Hassan said that all Egyptian banks were informed of President Bush's decision to freeze the assets of the 27 persons and organisations appearing on the US blacklist. "The CBE has so far received no reports that any of these [people or organisations] hold accounts in Egyptian banks," Hassan said.
Head of the FATF secretariat Patrick Moulette asserted that clamping down on terrorist funds is the responsibility of central banks and governments alike. Moulette told some British newspapers that terrorist organisations, such as the Egyptian Jihad, have long depended on private charities and individual donations in funding their operations. "In this case, the money starts off 'clean,' becoming dirty only when the terrorist crime is committed later on," Moulette said. He also said that Arab terrorist organisations depended on what is known in Egypt and other Arab states as the hewala, a money transfer system through banks and post offices that does not require that transferees hold bank accounts.
A UN resolution, approved unanimously last week, demanded that governments criminalise raising funds, directly or indirectly, that could be used to commit terrorist acts.
Another anti-money laundering measure taken by the Economy Ministry two weeks ago is aimed at amending the executive regulations of the Capital Market Law (Law no. 95 of 1992). This amendment is directed at preventing money launderers from investing their dirty money in shares floated on the stock market. According to the new amendment, brokerage houses and mutual funds will be compelled to report to the CBE and the Capital Market Authority (CMA) all transactions over LE100,000. "All companies and funds which conduct transactions over LE100,000, should do this through an account in one of the banks subject to the CBE's supervision. They should also, from now on, have databases about their clients and report to the CMA complete information about any suspect transactions," the new amendment stated.
The Economy Ministry's new measures caused a considerable uproar in financial and business circles. Some argued that they are very cumbersome for brokers and mutual funds to implement, while others suggested they could scare investors away from the stock market.
Economic pundits expressed hopes that the measures will finally galvanise support for an anti-money laundering law.
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