The solutions to money laundering as a crime in the banking sector in Zimbabwe ;;o;; ;; ;;o;; ;; ;;o;; ;;;.;;.;;.;;.;; .;;.;;.;;.;;.;;;.;;.;;.;;.;;.;;.;;.;;.;;.;;; ;;o;; ;; ;;o;; ;; ;;o;; ;;;;;.;;..;;...;; ....; ;.....; ;......; ;.......; ;........;

;;.;;.;;.;;.;;.;;.;;.;;.;;.;;; ;;o;; ;; ;;o;; ;; ;;o;; ;;; ;;.;;.;;.;; .;;.;;.;;.;;.;;;.;;.;;.;;.;;.;;.;;.;;.;;.;;; ;;o; ;;;;;o;;;;;;o;;;;;;;o;;;;;;;;;;;;;;;;;;;o;;;;;;;;;;;;;;;;; ;;o;;;;;;o;;;;;;o;;;;;;;o;;;;;;o;;;;;;o;;;;;;;.;;..;;...;; ....; ;.....; ;......;

;.......; ;........; ;;;;o;;;;;;o;;;;;;o;;;;;;;o;;;;;;o;;;;;;o;;;;;;;.;; ..;;...;; ....; ;.....; ;......; ;.......; ;........;

;;;;o;;;;;;o;;;;;;o;;;;;.;;.;;.;;.;; .;;.;;.;;.;;.;;;.;;.;;.;;.;;.;;.;;.;;.;;.;;;;;o;;;;;;o;;;;;;o ;;;;;;;o;;;;;;o;;;;;;o;;;;;;;o;;;;;;o;;;;;;o;;;;;CHAPTER ONE 1.1 Introduction The new global economy fuelled by advances in information and communication technology (ICT) holds potential benefits and opportunities for countries world wide. However, these opportunities also have their own challenges. Among these challenges include crimes related to the information economy which is seen as an increasing source of concern within the international financial community. The proceeds from these crimes are camouflaged to give it a legal appearance and this process is known as money laundering. The seriousness of money laundering is reflected in the aggregate volume of funds laundered which has been estimated by the International Monetary Fund (IMF) to be around 2-5 percent of global gross domestic product. Giving reference to the Ministry of State Enterprises, Anti-Corruption & Anti-Monopolies (Zimbabwe), Money Laundering is a global phenomenon that affects all countries in varying degrees. Although there is no single definition of money laundering most descriptions commonly

Tafadzwa Murungu, May 2010 MSU

R06405048

1

The solutions to money laundering as a crime in the banking sector in Zimbabwe refer to it as a process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities. If undertaken successfully, it allows the criminals to maintain and control these proceeds and ultimately provide a cover for their source of income. By its nature money laundering is a hidden activity perpetuated in secrecy. The Bank Use Promotion and Suppression of Money Laundering Act (Chapter 24:24) No 2/2004 (Zimbabwe), Part 1 section (2) A reference in this Act: (b) Money laundering or laundering the proceeds of a serious offence means any act, scheme, arrangement, device, deception or artifice whatsoever by which the true origin of the proceeds of any serious offence is sought to be hidden or disguised. According to Tim Hidle (1999; 131), money laundering is the process of turning ill-gotten money gains into seemingly legitimate cash, passing dirty money through clean places (such as Switzerland) in order to disguise where it came from or to shield it from the gaze of the tax inspectors. The term, money laundering can also be defined as conduct/acts designed in whole or in part to conceal or disguise the nature, location, source, ownership or control of money (can be currency or equivalents, eg. checks, electronic transfers, etc.) to avoid a transaction reporting requirement under state or federal law or to disguise the fact that the money was acquired by illegal means. Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. In US law it is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money. In UK law the common law definition is wider. The act is defined as taking any action with property of any form which Tafadzwa Murungu, May 2010 MSU R06405048 2

The solutions to money laundering as a crime in the banking sector in Zimbabwe is either wholly or in part the proceeds of a crime that will disguise the fact that that property is the proceeds of a crime or obscure the beneficial ownership of said property. (http://www.laundryman.u-net.com.page2-wisml.html 15/02/10 1950hrs). The term Money laundering refers to the process of changing the appearance of large amounts of money obtained from serious crimes, such as drug trafficking, into origination from a legitimate source. It is a crime in many jurisdictions with varying definitions. It is a key operation of the underground economy (http://en.wikipedia.org/wiki/money_laundering 15/02/10 2000hrs). The phrase money laundering is said to risen from the practice of the most infamous money launderer in the 20th century. The launderer, Al Capone was a dealer in elicit drugs in the 1920s, and the drug was alcohol during the time of prohibition. He went on to set a number of laundries for clothes cleaning as legal business which he could pass cash which he had earned from other illegal businesses that is cleaning the money. It is estimated that 20% of the money that is moved around the world is secret money. This form of money is believed to be Money that arises from individuals who place money in secret bank accounts to avoid tax or public criticism. Money from companies and government that wish to have slush funds that they can use to pay for certain services or assistance. They rather not have such kind of payments known about. Criminal money that is the result of illegal activities for example fraud, drug dealing. The criminals have to clean this money before the use and this is done through passing it through clean places like financial institutions.

Tafadzwa Murungu, May 2010 MSU

R06405048

3

The solutions to money laundering as a crime in the banking sector in Zimbabwe Money laundering and other financial-related crimes have significant economic and social consequences for nations worldwide. It weakens the financial systems which are the main players for global financial transactions. This in turn will jeopardize the socioeconomic development of these nations. For money laundering activities to be carried out, a medium to launder the illicit funds is required. The preferred medium chosen by money launderers is the financial institutions due to its efficiency and its low cost in carrying out financial transactions. To develop a robust economy and sustained standard of living, countries should undertake all efforts to combat money laundering activities. In this context, good governance is vital for ensuring the integrity of the financial systems. Countries across the world have developed laws and regulations to curb money laundering. Anti-money laundering efforts world-wide were focused on enhancing the resilience of the financial institutions against money laundering and other related financial crimes.

1.2 Background of the study In money laundering the fraudster disguises the existence, nature, source, ownership, location and disposition of property derived from criminal activity. Currency is a popular commodity in criminal activity; it is fungibleone dollar looks just like anotherand further loses its identity when entering the economic stream. Zimbabwe Allied Banking Group is being affected by the cases of laundering. There are cases of a fraudster in Harare ZABG Head Office Samora and Kadoma Branch within the same institution. There were some employees who were involved in the crime.

Tafadzwa Murungu, May 2010 MSU

R06405048

4

The solutions to money laundering as a crime in the banking sector in Zimbabwe On February 12 2010, ZABG was defrauded USD141 836. The culprit allegedly "suppressed" a suspense account to conceal funds he allegedly transferred from the bank to his "friends". The funds where transferred so that they will lose identity and will not draw attention on making withdrawals. The fraudster opened three forex accounts providing fake identity cards; he then funded the accounts as a process of cleaning the ill-gotten proceeds. He also deposited some of the funds in a Redan Petroleum account with Stanbic Bank. The transfer of funds was to conceal the source and ownership of funds. In a different scenario, ZABG bank employee at Kadoma branch has been arrested on allegations of defrauding clients of more than US$3 000. "Investigations carried out revealed that the accused was allegedly making fraudulent cash transfers from the bank's clients, and crediting cash into his staff account," said the officer-incharge CID Kadoma. He said investigations had so far established that offender allegedly defrauded clients a total US$3 194 and nothing was recovered. The Herald understands that the offender allegedly defrauded three identified clients, the first client was defrauded more than US$2 200 and the second over US$900. The offences are believed to have been committed between October and December 2009 and it is believed that more clients could have been prejudiced. According to the Zimbabwe Independent of Thursday, 18 February 2010, in January 2010: Investigations at FBC Bank unearth a massive US$1 million fraud at its Mutare branch. The bank says it has established that it has lost US$500 000. Junior workers defrauded the bank in collusion with senior managers and most of the suspects have since been arrested. The fraud was discovered when the bank was carrying out month-end reports for January, and the accounts

Tafadzwa Murungu, May 2010 MSU

R06405048

5

The solutions to money laundering as a crime in the banking sector in Zimbabwe would not balance. The employees made fictitious deposits to three accounts they had opened to facilitate the fraud and would withdraw the money, then deposit it again into the personal accounts of accomplices. This unique fraud occurs because both junior and some identified senior staff were acting in collusion; hence the dual control system was compromised. The purpose of making these transfers where to conceal the source of the funds to the public. If he had made the withdrawals straight from above account it was going to quickly draw attention of the tellers and other staff members within the institution who were not part of the gang.

1.3 Statement of the problem Money laundering is continuously being committed in the financial sector and involving some of the employees within the organization. This raises the question whether the employees are willing and able to prevent money laundering. The researcher is going to analyse whether the employees are willing and able to prevent money laundering.

1.4 Statement of hypothesis This study seeks to test the following claim; There is an ultimate way to resolve money laundering in Zimbabwe.

1.5 Objectives of the study

Tafadzwa Murungu, May 2010 MSU

R06405048

6

The solutions to money laundering as a crime in the banking sector in Zimbabwe To find the extent to which money laundering can be prevented in the banking sector in Zimbabwe. To establish the relationship between corporate governance and employees willingness to prevent money laundering. To find out if there is any relationship between the level of motivation and the reason for committing the crime. To find the ways of educating the public and employees in the financial services about money laundering law. To find out on the major challenges in preventing money laundering. To expose the most used channels and methods of laundering money.

1.6 Significance of the study The research, if successful, will bring benefits to ZABG and the Zimbabwean economy at large. The benefits will include the following: Being in a position to prevent money laundering, ZABG will increase investor confidence. The investors will know that there funds are safe thereby raising business for ZABG. At the same time, this will raise confidence in customers to do business with ZABG. This shall not apply to ZABG alone but the whole industry. The study will also help ZABG in raising employee ability to report any suspicious transactions through education and training concerning money laundering. The research will have figured out

Tafadzwa Murungu, May 2010 MSU

R06405048

7

The solutions to money laundering as a crime in the banking sector in Zimbabwe whether the employees are in a position to report any suspicious transactions. There may be some channels that we do not suspect but being used to clean the dirty money that is being generated within the country and outside the country but being used here in Zimbabwe. This means that ZABG will not be used such for such crime and will have a good reputation. A successful research will help ZABG to direct resource where there is the need. This will come after identifying the challenges faced in solving money laundering and therefore appropriate measures are to be taken to overcome them. This will see the resources being directed to the place at the right time. There will be increased revenue to the Government. This is true in the sense that all those who are dodging the payment of taxes will be paying or will not operate at the expense of the government. The government raises its money from taxes which is the major source. The tax will be collected in all forms including income tax and duties. Given that then research is a success, our local manufacturers and providers of services will perform in a fair environment. Those monies that are cleaned are usually gained with less expense meaning the services and products supplied are cheaper than those provided in a clean way.

1.7 Delimitations of the study The researcher will contact his research within the following delimitations: The period of the research is ranging from 01 February 2009 to 30 March 2010.

Tafadzwa Murungu, May 2010 MSU

R06405048

8

The solutions to money laundering as a crime in the banking sector in Zimbabwe The target population is the ZABG Retail Banking Division employees in Harare, Kwekwe and Gweru branches, Corporate Banking and Stock Brokers.

1.8 Limitations The researcher will also be limited by financial factors as we are using currency that is not ours and is a scarce resource.

1.9 Research assumptions This is what the researcher assumes as he gets into the filed during the research period: All the research questionnaires will be returned to the researcher. All questionnaires will be answered in honesty. The conducted population will be willing to participate.

Tafadzwa Murungu, May 2010 MSU

R06405048

9

The solutions to money laundering as a crime in the banking sector in Zimbabwe

CHAPTER 2

LITERATURE REVIEW 2.0 Introduction This chapter serves to provide an overview of money laundering. A number of variables were looked into during the past researches in an attempt to curd money laundering in different parts of the world. Different aspects of money laundering will be looked at, and these include the definition, instruments for money laundering, ways of solving money laundering, challenges faced in solving money and targeted channels for laundering money.

2.1 Defining money laundering In its definition, the Ministry of State Enterprises, Anti-Corruption & Anti-Monopolies (Zimbabwe), Money Laundering is a global phenomenon that affects all countries in varying degrees. Although there is no single definition of money laundering most descriptions commonly refer to it as a process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities. If undertaken successfully, it allows the criminals to maintain and control these proceeds and ultimately provide a cover for their source of income. By its nature money laundering is a hidden activity perpetuated in secrecy. The Bank Use Promotion and Suppression of Money Laundering Act (Chapter 24:24) No 2/2004

Tafadzwa Murungu, May 2010 MSU

R06405048

10

The solutions to money laundering as a crime in the banking sector in Zimbabwe (Zimbabwe), Part1 section (2) A reference in this Act to (b) Money laundering or laundering the proceeds of a serious offence means any act, scheme, arrangement, device, deception or artifice whatsoever by which the true origin of the proceeds of any serious offence is sought to be hidden or disguised. Combining the two definitions with that of the Ministry of State Enterprises, Anti-Corruption & Anti-Monopolies, both definitions have the element of concealing the true origin and ownership of criminal proceeds. According to Ping He (2004), Money laundering is a sort of criminal activity trying to conceal the illegality of proceeds of crime by disguising them as lawful earning. In another definition, money laundering is the process of turning ill-gotten money gains into seemingly legitimate cash, passing dirty money through clean places (such as Switzerland) in order to disguise where it came from or to shield it from the gaze of the tax inspectors (Tim Hidle 1999; 131). The definitions talk of concealing the prices of criminally gotten proceeds. The aspect of concealing the origins of money is also stated in this definition as stated by Ping He (2004) and Tim Hidle (1999; 131). Other definitions include the sources of money or the crimes committed such as fraud, drug trafficking and smuggling. This is also shown in the following definition, Money laundering is the process of changing the appearance of large amounts of money obtained from serious crimes, such as drug trafficking, into origination from a legitimate source, (http://en.wikipedia.org/wiki/money_laundering 15/02/10 2000hrs). Ministry of State Enterprises, Anti-Corruption & Anti-Monopolies pointed out that Professor Louis de Koker suggests that the concept of money laundering overlaps with certain common law offences, for example fraud, forgery and uttering and statutory offences such as corruption and

Tafadzwa Murungu, May 2010 MSU

R06405048

11

The solutions to money laundering as a crime in the banking sector in Zimbabwe exchange control offences. It does this by involving itself in a wide variety of criminal activities such as bribery, drug trafficking (Pinner, 1994) embezzlement, fraud, illegal arms sales (Baldwin, 2004), insider trading, prostitution rings, smuggling, terrorism (Linn, 2005; Baldwin, 2004) and by obscuring illegal origins of profits by making them appear legitimate. According to Samah Al Agha, (2007) in Islamic perspective, Although money laundering is a contemporary crime, over 1,400 years, it has been addressed through many provisions in Quran and Sunna that contain the conception of money laundering. For example, prophet Mohamed prohibits any activity funded by money derived from Souht (unlawful trade or ill-gotten property). He said: Any activity built from Souht, will be casted into Fire (Saleh and Saleh, 2006). Furthermore, Prophet Mohamed prohibited the use of money generated from illegal activities even if it goes to poor people or to charities. He said: Sadakah comes from theft are not acceptable. Samah Al Agha,(2007), However, the scale of prohibitions in Islam is much wider than the scale of prohibition in any other secular laws. For example, whereas gambling (which means Qimar and Mysar in Islam) is allowed in too many countries, it is prohibited by Islamic law. In addition, while Paghy (prostitution) is legal in some jurisdictions, it is illegal in Islamic law, so Islamic law illegalizes the money that comes from prostitution. Prophet Mohamed explicitly prohibited taking the money earned by prostitution. There are two scales of prohibitions by Islamic law: general provisions and specific provisions of prohibitions. This view was also taken from a biblical point of view where the money is being regarded as evil as it was prohibited from being taken.

Tafadzwa Murungu, May 2010 MSU

R06405048

12

The solutions to money laundering as a crime in the banking sector in Zimbabwe B Shanmugam et al (2003), money laundering is generally referred to as the process by which the proceeds of elicit sources of money are brought into legitimate and organised system. The end result is that the money is illegally gotten. Antony Whitehouse ( 2003) The FSMA goes on to specify that financial crime includes any offence involving handling the proceeds of crime.

2.2 Stages in laundering money The complete process of it consists of placement stage, layering stage, and integration stage (Gilmore, 1995). Money laundering is a complicated activity, in which the source and nature of dirty money are disguised in order to make the money look lawful and then become usable, transferable, and negotiable. The stages where also stated in the studies of B Shanmugam et al (2003). They involve breaking the large amounts of cash into less conspicuous amounts and putting them into the financial system as the placing stage. The money then moves to the next stage of conversions and movements and then re-entering the legitimate economy

2.3 Forms of laundering 2.3.1 Cash smuggling In November 1991, the first money-laundering case by smuggling cash in human body was reported by John F Kennedy International Airport customs authority. A female Ghana immigrant, under interrogation of customs officers, acknowledged carrying $9,000 in cash, just under the customs declaration point of $10,000. Nevertheless, customs officers found $24,000 small bank notes packed in some sheets in her luggage, $224,000 in 100 cash rolls hided in

Tafadzwa Murungu, May 2010 MSU

R06405048

13

The solutions to money laundering as a crime in the banking sector in Zimbabwe shampoo bottles, and $53,000 in small bags in her stomach, which was detected by X-ray test (Dupuis-Danon, 2006, p. 56). The traditional cash smuggling is still in use, this is supported by Ping He (2004), in the following quotation, Cash smuggling is a method of money laundering in which the proceeds of crime are stealthily moved cross border, and then deposited in banking institution, paid for real estate or invested to establish companies. The reason is that the proceeds of crime are mostly cash, therefore cash smuggling is a simple way for the criminals to evade tracing of the authorities. This is seconded Ma Yu-Feng (2004) in the study of Taiwan when it was mentioned that Taiwan is cash oriented and hence makes is difficult to detect money laundering which is an indication that cash smuggling is still in use. Some studies by Stephen Schneider (2006) showed that according to police cases, the criminal proceeds are transported from Canada to off-shore locations in one of three ways and one of the ways is physically smuggling cash. This in it self is an indication that cash smuggling is one of the vehicles for money laundering. The Eastern and Southern Africa Anti-Money Laundering Group (2008), also supported the fact that cash smuggling is one of the major methods used by terrorist financiers, money launderers and organised criminals to move money derived through illegal means to support their activities. In cash smuggling operations, couriers will, inter alia, travel by road, through airports or by lake or sea with loads of cash, often stuffed into boxes, suitcases and concealed compartments in vehicles and on persons. They went a step ahead and how the cash is carried around the world.

2.3.2 Money laundering through banking institutions Tafadzwa Murungu, May 2010 MSU R06405048 14

The solutions to money laundering as a crime in the banking sector in Zimbabwe The most frequently used instrument by money launderers is banking institution. Ping He (2004), Financial institutions can provide multiple services, such as deposit, loan, acceptance, discount, foreign exchange, settlement, and the like. According to S Vaithilingam and M Nair (2007), In fact the FATF (2001) report on Money Laundering Typologies identifies online banking and internet as major money laundering vehicle. Accordingly, Chief Financial Officer (2002) report, Technology changes have influenced the operating strategies of many banks and non-banks as they seek to compete in the increasingly fast-paced and globally interdependent business environment. Alexander (2001) argued that these alternative payment technologies has open breaches that can be exploited for disguising profits from criminal activities, as money can be channeled through multiple accounts in a host of different sources. This poses problems relating to traceability of the individual transactions which requires vast amount of record keeping. Further more, due to difficulties in traceability, law enforcement intervention occurs only after the event has taken place (FATF, 1998). Philippsohn (2001) and Vargas and Backhouse (2003) argued that

legislation and regulation implemented to combat money laundering activities needs to deal with the use of new technology. Stephen Schneider (2006) had police cases which showed that criminal proceeds are transported from Canada to off-shore locations in ways which include transporting bank drafts, certified cheques, and other monetary instruments; or through electronic wire transfers. Proceeding with the studies, Ping He (2004) also added the principle of banking secrecy that exists in almost every country. Owing to these characteristics, financial institutions are the most vulnerable sectors for money launderers. M Toth and I L Gal (2004) also supported the same view, ., and in the next few years a very loose interpretation if the banking secrecy provided Tafadzwa Murungu, May 2010 MSU R06405048 15

The solutions to money laundering as a crime in the banking sector in Zimbabwe ideal conditions for money launderers. With the help of financial institutions, wittingly or unconsciously, criminals transfer capital through transferring accounts or remit funds into other countries, and eventually cover up or conceal the nature or source of the illegally obtained proceeds.

2.3.3 Money laundering through insurance institutions This is vehicle for money laundering in all countries. There is a case from Ping He (2004)s studies which goes on as follows: A drug trafficker purchased a life insurance policy with a value of US$80,000. The policy was purchased through an agent of a large life insurance company using a cashier's cheque. The investigation showed that the client had made it known that the funds used to finance the policy were the proceeds of drug trafficking. In light of this fact, the agent charged significantly higher commission. Three months following this transaction, the investigation showed that the drug dealer cashed in this policy (Financial Action Task Force (FATF), 2005). In this case, the money launderer disguised the illegal origin and nature of his proceeds by buying an insurance policy with proceeds of drug trafficking and then selling it to cash in. Meanwhile the agent of insurance company acted as a party to this conspiracy of money laundering. Explaining the view, Ping He (2004), Money laundering through insurance institutions is to disguise the origin and nature of illegal proceeds and gains obtained from it by buying, altering and surrendering insurance policies and filing insurance claim in order to avert the tracing of the authorities. From the case above we can see how money was laundered through the insurance institutions. Insurance institutions are also heavily employed by money launderers, the reasons Tafadzwa Murungu, May 2010 MSU R06405048 16

The solutions to money laundering as a crime in the banking sector in Zimbabwe for which can be attributed to the characteristics of insurance business and a comparatively weak interference of legal system in this market. In addition to Pings view, Stephen Schneider (2006), had a case of Canada in which the insurance sector was implicated in almost 65 percent of all cases, in the vast majority the offender did not explicitly seek out the insurance sector as a laundering vehicle. Instead, because motor vehicles, homes, companies, and marine vessels were purchased with the POC, it was often necessary to purchase insurance for these assets. The two agreed on the use of insurance companies for laundering money.

2.3.4 Money laundering through realty or lottery business According to his discoveries, Ping He (2004), noted that with the banking institutions, strengthening their anti-money laundering measures more and more, money launderers have got to search for new channels, among them are purchasing realty, rare metal, jewel, antique, and so on. Auction house and lottery are also often used by money launderers, because the people in these businesses are not ready to combat money laundering, and governments of many countries have not asked these industries to take the responsibility of anti-money laundering. To add more value, Stephen Schneider (2006) highlighted that real property was purchased to further the illegal activities of the criminal organization, in particular the acquisition of homes or rural land for marijuana cultivation. Findings from Canada, the case study used by Stephen Schneider showed that legalized gambling, in particular casinos and lotteries, were used to launder funds in five cases.

Tafadzwa Murungu, May 2010 MSU

R06405048

17

The solutions to money laundering as a crime in the banking sector in Zimbabwe 2.3.5 Money laundering through underground banks A report given by FATF use a special term standing for underground banks, alternative remittance systems, which described a remittance network out of the governance of the governmental financial supervision. The service mode of legal banks is an executive structure to an individual, while that of underground banks is an individual to an individual, which makes transaction much simpler (Dupuis-Danon, 2006, pp. 174-8). Some companies choose to make underground transactions because they are briefer and cheaper. The underground banks are much resorted to by money launderers, though not all underground banks have something to do with money laundering. In St Lucia, Alternative remittance systems, or underground banks, are considered to be operating in violation of Banking Law Article 29.

2.3.6 International trade-based money laundering Ping He (2010) gave a case of money laundering through International trade-based: A Brazilian company signs a contract to export soybeans to a German company who prepays the Brazilian company for the shipment. The Brazilian company immediately transfers the funds to a third party that is unrelated to the transaction. The soybeans that were purchased by the German company are never shipped (FATF, 2006). In this case, the German company transferred funds to the Brazilian company as an advance payment for a shipment of soybeans. Suspicions were raised when it was found that exports of soybeans were inconsistent with the scale of the company's operations. Further research by Ping He (2004) showed that money launderers often fake transactions or

Tafadzwa Murungu, May 2010 MSU

R06405048

18

The solutions to money laundering as a crime in the banking sector in Zimbabwe overstate the price of the subject matter in trade based money laundering. In general, the following features of international trade makes it highly attractive to money launderers: the tremendous quantity and value of the commodity which gives superior cover to the proceeds of crimes; the entire chain of international trade comprises many links including freight, insurance, foreign currency exchange, and so on, and more links give money launderers more chances; the cross-nation and cross-culture trade involves different legal system and financial mechanism which confronts anti-money laundering actions with a variety of difficulties like cross-language communications, information exchange, resources sharing, and application of different antimoney laundering law.

2.3.7 Money laundering through Shell Company or front company Shell Company refers to the company that does not have funds or enough funds required by law, do not have organizational structure or fixed premises for production and operation that is according to Ping He. Shell Company is fictitious because it has no real operating activities. The criminal has more control over the company being used, financial institution through which funds are passed may well view sizeable fluctuations in account activity with less suspicion than similar activity on a personal account and the links between the criminals and the company can be concealed by means of company ownership structures. In another study, R. Barry Johnston (2006), in setting-up offshore shell corporations, the use of third parties including family members and military officers and other measures aimed at disguising General Pinochet's ownership the funds. On another hand, Stephen Schneider (2006), mortgage financing actually came from a shell

Tafadzwa Murungu, May 2010 MSU

R06405048

19

The solutions to money laundering as a crime in the banking sector in Zimbabwe company controlled by the accused (and incorporate by the lawyer), while the mortgage payments originated from an account in the name of the accused. The chief focus of this move, then, has been to show that money laundering can be done through shell companies. Mitch Van der Zahn et al (2007), these transactions also involve a number of complex money laundering techniques including smurfing (avoiding detection by conducting transactions in amounts under $10,000), front companies, mis-invoicing, shell companies, wire transfers, mirror-image trading and parallel systems.

2.3.8Money laundering through offshore corporation or offshore financial center The findings of Ping He (2004), in recent years, the areas such as the Virgin Islands, Bahamas, and Bermuda have established several economic zones called offshore jurisdictional area with less strict regulations through legal methods. The corporations which are registered in these areas, whose investors are not required to go to the areas personally, and whose businesses can be directly operated anywhere throughout the world are called offshore corporations (Weimin, 2005a, p. 263). These are areas of no rules and businesses operate illegally. The studies of B Shanmugam et al (2003) in Malaysia showed that the activities of money laundering were in off-shore areas. The area mentioned is the Labuan have banks which were opened to cater for and developing the islands.

2.3.9 Money laundering through professionals such as lawyer or accountant Continuing with the study and the use of cases to explain, Ping in 2006 gave the following case

Tafadzwa Murungu, May 2010 MSU

R06405048

20

The solutions to money laundering as a crime in the banking sector in Zimbabwe with lawyers: In one country, a prominent attorney performed services for a whole clientele of launderers. A client with US$80 million, proceeds from an insurance fraud, used the lawyer to transfer the money to financial institutions in countries where there are few or no anti-laundering regulations. The attorney opened accounts in various banks under false names of individuals or corporations. The illegal funds were placed in the form of cash or checks in banks in the country in question, then wired to different accounts controlled by the attorney. It should be noted that because of his professional repute the domestic banks never considered it necessary to look more closely at the nature of the transactions in question. Ensuing with the researches, Ping He (2004), discovered that criminals have turned to the expertise of lawyers, accountants, and other professionals to aid them to minimize suspicion surrounding their criminal activities. Accordingly, Stephen Schneider (2006), in a 2002 report, the Financial Action Task Force (FATF), an international government agency initiated by the G7 Group of Nations to recommend and monitor national money laundering laws, wrote that lawyers play numerous roles and provide several benefits to those wishing to launder the Proceeds Of Crime (POC). Lawyers' trust accounts are used for the placement and layering of funds and through their specialized expertise, lawyers provide a gatekeeper service by creating the corporate vehicles, trusts, and other legal arrangements that facilitate money laundering. Lawyers also offer the financial advice that is a required element of complex money laundering schemes. The use of layers, people regarded as professionals do not raise suspicion. Criminal entrepreneurs have long been involved in establishing, purchasing, investing in, and selling companies and business

Tafadzwa Murungu, May 2010 MSU

R06405048

21

The solutions to money laundering as a crime in the banking sector in Zimbabwe assets for the purposes of money laundering (Edwards, 1990; New York Times, 1990; Nicaso and Lamothe, 2000; Quebec Police Commission, 1977; Royal Commission on Customs and Excise (Canada), 1928; Sher and Marsden, 2003)

2.3.10 Money laundering through electronic money and internet Referring to Ping He (2004), the development of high technology is a double-sided sword. He went on to talk about the emergence of electronic money, internet bank, internet casino which offer criminals wider space to commit money laundering. The features of these new products and services include increase speed of transmission of digitized information, facilitating the movement of funds and services transcending distance within and across national boundaries (Bradley and Steward, 2002) and anonymity (Philippsohn, 2001). Mishkin and Strahan (1999) and Berger (2003), speed, distance and anonymity are the key factors that are transforming the financial system. However, the new products and services which include electronic banking and the introduction of e-money technologies have made money laundering activities even more prevalent (Masciandaro, 1998, 1999; Philippsohn, 2001).

2.4 Target business to prevent laundering With reference to Ping He (2004), as a result, since 1980s, many international anti-money

Tafadzwa Murungu, May 2010 MSU

R06405048

22

The solutions to money laundering as a crime in the banking sector in Zimbabwe laundering documents have regarded banking institutions as the base of combat against money laundering, and emphasized the responsibilities banks shall assume to identify their clients, keep record and report suspicious transactions. In 2000, 11 major multinational banks including Chase Manhattan Bank, Society General Bank of France, Union Bank of Switzerland, Hong Kong and Shanghai Bank, and ABN AMRO Bank resolved to work together to control the rampantly growing money laundering in the world. R Alexander in (2004) had the regulations which were specifically addressed to the financial sector and relevant business was defined as: Deposit-taking business by banks and building societies. Wider banking services as set out in the Annex to the EU Second Banking Directive, the business of credit unions The business of the National Savings Bank Investment business as defined in the Financial Services act 1986 Insurance business

2.5 Preventive measures

Tafadzwa Murungu, May 2010 MSU

R06405048

23

The solutions to money laundering as a crime in the banking sector in Zimbabwe 2.5.1 Customer identification World Savings Banks Institute (WSBI, 2009), Members have launched initiatives to

overcome the problems caused by identification requirements: for example South Africa PostBank , PostBank accepts any valid documents reflecting the customers address, for the identification of clients regulated outside the scope of the entry-level Mzansi accounts. These are: utility bill; bank statement from another bank, recent lease or rental agreement; municipal rates & taxes invoice; retail account statement; telephone or cellular, telephone, account; valid television license; home loan statement from another financial institution; among other documents. In S Vaithilingam and M Nair (2007) research, the guidelines provide by the Joint Committee on the National Crime Authority (2001): included requesting proof of identity to open internet accounts. From another angle, M Toth and I L Gal (2004) also mentioned hat the legislation of financial institutions saw 90 percent of Hungrays savings accounts turning to named accounts which reduced the level of money laundering. Trifin J R and M Salak (2003: p77) also placed much emphasis on customer identification on account opening when he indicated that financial institutions should maintain accounts solely in the name of the account holder and failure to comply will result in a fine of $5, 000 or imprisonment for up to one year. Ian Carrington and R B Johnston (2006): also talked of customer identification through know your customer (KYC); know-your-customer (KYC) principles need to be applied on an ongoing basis during the course of a bank-customer relationship. Johnston also added that banks are expected to establish and maintain effective Customer Due Diligence (CDD) measures at the point of establishing a customer relationship. Ma Yu-Feng (2004), in his solutions to money

Tafadzwa Murungu, May 2010 MSU

R06405048

24

The solutions to money laundering as a crime in the banking sector in Zimbabwe laundering also placed emphasis on KYC at the same time tracking the patterns of customer transactions. To this juncture we can we see that customer identification of significance in combating money laundering. This is also pre-requisite in Zimbabwe in order for one to have a bank account to be opened. B Shanmugam et al (2003) also identified the use KYC as a means for money laundering. The central Malaysia provided know your customer guidelines in June 1989. The same guidelines were also revised in December 1993. On the other hand R Alexander (2004), talked of the requirement for customer identification, often referred to as the know your customer rule as perhaps the most familiar as it is certainly the most discussed. The author highlighted that the financial institutions must require from the customer satisfactory evidence of his identity.

2.5.2 Know Your Employee (KYE) According to Ma Yu-Feng (2004), the employer must know his employee. A number of things must be considered and investigations must be carried out. This is when an employee is reluctant to go for a vacation to which he or she is entitled to, an employee leads a lavish lifestyle that cannot be supported by his or her salary, and when an employee is associated with unexplained mysterious significant deposits to and or withdrawals from his or her account. The researcher went further beyond the factors considered by a number of researcher and came up with a unique idea.

2.5.3 Legislation

Tafadzwa Murungu, May 2010 MSU

R06405048

25

The solutions to money laundering as a crime in the banking sector in Zimbabwe Regulation refers to the means by which any activity, institution, organism of person is guided to behave in a regular way or to rule (Picciotto, 2002). A well-functioning legal system and efficient enforcement of laws and regulations are important precursors for a stable financial sector (Fergusson, 2006). This in turn can lead to effective implementation of international antimoney laundering programs. In another view, if the conduct of a certain economic actor is not as expected or hoped for, the reason must be sought by analyzing the game rules, formal and informal, that are represented primarily by the anti-money laundering laws (Masciandaro and Filotto, 2001). Backing legislation, Asselin indicated that one of the best ways to counter money laundering problems would be by creating legislative solutions that are capable of improving the fight against organized crimes. Two types of solutions were mentioned that is intermediate legislative measures and laws aimed directly and exclusively at eliminating organized crime. M Toth and I LGal (2004) also suggested the use of legislation as a means to prevent money laundering when a committee was set to do everything in Hungrays power to prevent money laundering and introduce relevant legislation acceptable to the community and other international forums operating in the region. In 2004, the GOZ passed more expansive legislation, the Anti-Money Laundering and Proceeds of Crime Act (The Act) that extended the anti-money laundering law to all serious offenses. The Act required banks to maintain records sufficient to reconstruct individual transactions for at least six years. It mandated a prison sentence of up to five years for being involved in money laundering activities.

Tafadzwa Murungu, May 2010 MSU

R06405048

26

The solutions to money laundering as a crime in the banking sector in Zimbabwe 2.5.4 Quality human capital According to Satha, quality of human capital is vital in the well being of the financial sector and the socioeconomic development of a country. The author went on to encourage developing economies to increase the number of skilled workers in the country and should also be able to retain these valuable human resources in their countries. Developing countries with the aid of the developed countries should, place high priority on identifying opportunities for mutual cooperation and resource sharing with developed countries; provide continuous education and develop appropriate training for financial regulators and employees of financial institutions on cutting-edge technology, new financial instruments and effective regulations in curbing money laundering and other financial crimes (Basel Committee, 1997).

2.5.5 Reporting suspicious transactions and record keeping As the research ensue, S Vaithilingam and M Nair (2007), the FATF (2001) has suggested the need to have good systems to improve customer identification and record-keeping so as to facilitate identification and reporting of any suspicious transactions especially in the case of multiple transactions (FATF recommendation 11). The information is suppose to be kept for a period ranging from six months to year and should be made available when carrying our criminal investigations. Ian Carrington and R B Johnston (2006) supported the fact of reporting suspicious transactions. Banks though required by there national legislation to keep records on, there objective is to provide the competent authorities with best quality information possible. The two went on to argue that reports from banks may not provide meaningful information and reports might not Tafadzwa Murungu, May 2010 MSU R06405048 27

The solutions to money laundering as a crime in the banking sector in Zimbabwe arise suspicion. In the view of Stephen Schneider (2006), several countries have already

implemented measures to bring legal professionals under the scope of suspicious and cash transaction reporting regimes ( Money Laundering Alert, 2002a). In Switzerland, lawyers that provide financial services are regarded as financial intermediaries and are subject to customer due diligence and large cash and suspicious transaction reporting obligations. In some studies Ma Yu-Feng (2004), supported the issue of record keeping of transactions and that any violation that rule should be reported to law enforcement with Ping He (2004) placing emphasis on the issue of suspicious reporting of transactions and the training of officers so that they will be able to detect money laundering activities. WSBI members argued that the

obligation for financial institutions to keep records on the identification data obtained through the CDD procedure, for at least 5 years (Recommendation 105) proves burdensome and not justified in a majority of cases. On the other had the FATF reviewed the keeping of information from a period of up to one year to at least 5 years (Recommendation 105) Much support to report suspicious transactions and record keeping came from other researchers, In this vein financial institutions play a central role in the war against money laundering (Masciandaro, 2005). Recommendation 16 of FAFT requires that if financial institutions suspect that funds are connected to criminal activity, they should be permitted or required to report promptly their suspicious to the competent authorities. The reporting of suspicious transactions and record keeping has proved to be of importance in combating money laundering. B Shanmugam et al (2003), proceeding with the research pin pointed that the Malaysian Act which incorporates the requirements of prohibition of nonanonymous accounts or accounts in fictitious names, proper record keeping, reporting suspicious

Tafadzwa Murungu, May 2010 MSU

R06405048

28

The solutions to money laundering as a crime in the banking sector in Zimbabwe and abnormal transactions (including currency transactions) which are above the amount specified by the Central Bank. Proving to be of importance, R Alexander also placed emphasis on record keeping. The

researcher indicated the need to keep customer record of identity for a period of up to 5 years. This is also in line with the FAFT 40 recommendations. He also indicated the keeping of transactions for money from gabling regardless of how much as long as they suspect that the gambler is involved in laundering.

2.5.6 Coping with technology Ma Yu-Feng (2004) encouraged a regular revision of the guidelines for the financial institution to hammer money laundering. The author went on to say that e-banking should have a cyber payment system to keep records and assist in tracing money laundering. In order to reduce money laundering through electronic money, we should control the utilization of this kind of money, for instance, limiting the function and capacity of smart cards, restricting the transfer among the holders of electronic money and establishing central data base to trace the transactions. As to money laundering through internet casino, it is necessary to require Internet Service Providers (ISPs) to maintain reliable subscriber registers with appropriate identification information, require ISPs to establish log files with traffic data relating internet-protocol number to subscriber and to telephone number used in the connection, require that this information be maintained for a reasonable period and ensure that this information may be made available internationally in a timely manner when conducting criminal investigations (He, 2008, pp. 21416).

Tafadzwa Murungu, May 2010 MSU

R06405048

29

The solutions to money laundering as a crime in the banking sector in Zimbabwe B Shanmugam et al (2003) encouraged the banks to implement a monitoring and reporting system which identifies potential money laundering activities. This enables the central bank (of Malaysia) to ensure that despite the development in the Information Communication and Technology (ICT), the integrity of the financial system is maintained and the abuse of money laundering is minimised. In another view, S Vaithilingam and M Nair (2007) has five key factors such as technology, quality of human capital, efficiency of the legal framework, ethical behavior of firms (corporate governance) and capacity for innovation in the economy on the pervasiveness of money laundering in a sample of developed and developing countries. S Vaithilingam and M Nair (2007), to this extent, the recommendations put forth by FATF should be taken seriously by developing nations. The FATF (2001) has reported the following suggestions: require internet service providers (ISPs) to maintain reliable subscriber registers with appropriate identification information; require ISPs to establish log files with traffic data relating to internet-protocol number to subscriber and to telephone number used in the connection; require that this information be maintained for a reasonable period (six months to a year); ensure that this information be made available internationally in a timely manner when conducting criminal investigations; and to have good systems to improve customer identification and record-keeping so as to facilitate identification and reporting of any suspicious transactions especially in the case of multiple transactions (FATF recommendation 11).

Tafadzwa Murungu, May 2010 MSU

R06405048

30

The solutions to money laundering as a crime in the banking sector in Zimbabwe Antony Whitehouse ( 2003) To be able to carry out effective monitoring firms will need to have client information at their fingertips to determine when something unusual or out of character has occurred, again this will inevitably mean more use of systems and databases, with the inevitable increase in costs. This is in support of the idea of keeping information about customers for easy identification. The operators in the financial sector should have adequate information

concerning there clients.

2.5.7 Education and training According to Stephen Schneider (2006), in their 2000 and 2001 National Money Laundering Strategy reports, the US Treasury and Justice Departments called for studies on the appropriate role of lawyers and accountants as gatekeepers (United States). Department of the Treasury and Department of Justice, 2001). Vienna convention and FATF (2003) among there recommendations to developing countries included developing or improving training programs for its law enforcement officers to ensure that they are updated on the changes in the way money is laundered. This view was also reinforced by M Toth and I L Gal (2004) when they encouraged the training of the police force on ways to detect money laundering identify suspicious transactions and file STRs as necessary and the use of comprehensive programs for the training of staff. On the job training to employees concerning money laundering was said to be vital in combating the problem by Ma Yu-Feng (2004). Despite the legislative moves, a pilot study by Jackson (2001) on attitudes of Western Australian accountants, real estate agents and solicitors to money laundering training revealed that of the three respondent groups, accountants have the least Tafadzwa Murungu, May 2010 MSU R06405048 31

The solutions to money laundering as a crime in the banking sector in Zimbabwe enthusiasm for training and that throughout the professions of accountancy, real estate agency and law there was a need to bring their knowledge and skills of anti-money laundering up to an acceptable level According B Shanmugam et al (2003) the central bank of Malaysia in collaboration with the institute of Malaysian banks has initiated a series of education and training programmes to the banking and financial service staff. This is vital for staff such that it will be able to identify and take necessary action on money laundering activities. Stephen Schneider (2006), and the others viewed the need for training on the professionals as well as law enforcement officers. R Alexander (2004), a further requirement is to provide anti-money laundering training to staff. On this point he agrees with the judgments of B Shanmugam et al (2003) as they also recommended on the training of banking staff. Alexander indicated that staff are to be trained on the reporting procedure, current laws and regulations relating to money laundering as well training in recognising transactions carried out by or, on behalf of, those who are engaged in money laundering. To add value to the issue of training and education, Antony Whitehouse (2003), what has been the immediate impact of the introduction of POCA on financial institutions? Most obviously there has been a general requirement to train all relevant staff in the changes to the law and, more importantly for them, their new liabilities under it.

2.5.8 Good corporate governance Accordingly, S Vaithilingam and M Nair (2007)s empirical analysis showed that efficient legal

Tafadzwa Murungu, May 2010 MSU

R06405048

32

The solutions to money laundering as a crime in the banking sector in Zimbabwe framework with good corporate governance lower the pervasiveness of money laundering activities and a high-innovative capacity contribute negatively to the pervasiveness of money laundering activities. S Vaithilingam and M Nair went on to emphasise that, good governance is vital for ensuring the integrity of the financial systems. In another research, Ian Carrington and R B Johnston (2006) cited that in the United States, the Sarbanes Oxley Act has sought to strengthen significantly the corporate governance framework for commercial entities in general and the Patriot Act to address vulnerabilities related to the financing of terrorism.

2.5.9 Offering Incentives to banks Ricardo Azevedo Araujo (2008), proposed the use of incentive-based approach to combat money laundering. However, even in environments in which the principle of bank secrecy is more flexible the efficiency of the anti-money laundering regulation based mainly on an incentive approach has been at doubt. According to this approach, if the conduct of a certain economic actor is not as expected or hoped for, the reason must be sought by analyzing the game rules, formal and informal, that are represented primarily by the anti-money laundering laws (Masciandaro and Filotto, 2001). This approach also shows that the efficiency of the anti-money laundering regulation may be reached if the ability of screening the bank willingness to cooperate increases. This effort has been performed by Financial Intelligence Units (FIU) hereafter, created to concentrate the efforts to combat money laundering. The same researcher, Ricardo Azevedo Araujo (2008) discovered that the central problem of anti-money laundering regulation is to design a system of procedures and incentives that induces the agent, that is, the financial institution, to act effectively with regard to the production of the

Tafadzwa Murungu, May 2010 MSU

R06405048

33

The solutions to money laundering as a crime in the banking sector in Zimbabwe information required by the principal, that is, the competent authority. According to Masciandaro (2005), over the past years many countries have created specialized agencies to deal with the money-laundering issue. This author approaches the anti-money laundering regulation by using a hierarchical principal-agent approach model in which the lawmaker, the FIU hereafter, and the intermediary must be considered simultaneously. The goal of the lawmaker is to build a legal setup that maximizes the incentives to FIU's and intermediaries to disclose promptly relevant information on suspicious activities of money laundering. Changing the angle of focus by Ricardo Azevedo Araujo (2008), here, we adopt an incentivebased approach but with a different focus: the relationship between the agency, that is, the FIU and the intermediary or financial institution. The aim is to analyze the efficiency of the existing anti-money laundering regulation by excluding the possibility of the collusion between the FIU and the intermediary. Let us assume that the financial institution has two possible actions: combat or not combat money laundering. This means that some financial institutions may decide to take the risk of not combating money laundering, a view that is according to an adapted concept of legal-criminal economy developed by Masciandaro (1999) in which banks are eligible for being involved in legal and illegal activities concomitantly.

2.5.10 Monitoring physical cross-border transportation. Ping He (2004), in the 2003 revised Forty FATF Recommendations, Article 19 provided that, Countries should consider Implementing feasible measures to detect or monitor the physical cross-border transportation of currency and bearer negotiable instruments. The author went on to say, smugglers surely would not report the true number of cash they carry, often hidden in some

Tafadzwa Murungu, May 2010 MSU

R06405048

34

The solutions to money laundering as a crime in the banking sector in Zimbabwe altered devices or certain places of their body hard to search. The issuing of 1,000-Canadian Dollar (or CAD) banknote has been terminated. And US$500 cash have been withdrawn from circulation since 1969 (Dupuis-Danon, 2006, p. 55). The removal of large denominations will make it difficult to carry huge amounts of hard cash. A report by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) (2008) showed that there was close monitoring of cross-borders. On 8 November 2007, a Zimbabwean national was arrested at Chirundu Border Post after he was found in possession of, Zimbabwean currency, Z$209 6000 000 in the pocket of his jacket. The money had not been declared to ZIMRA officials as required by law. The money was seized and subsequently forfeited to the State. The accused was prosecuted at Court.

2.5.11 Imposing sanctions on the FIs and fines Extending the research Ian Carrington and R B Johnston (2006): the year 2004 witnessed financial regulators imposing harsh sanctions on commercial banks in response to integrity related failures within these institutions. In 2004, Riggs Bank and Citigroup were subject to heavy sanctions from regulators in the United States and Japan, respectively. Riggs was subject to civil money penalties of $25 million and criminal penalties of $16 million. Supporting the vision, Ma Yu-Feng (2004) in his studies in Taiwan, went on to support this method of preventing money laundering in his Article when any financial institution that violet the provisions set in the Article was liable to be punished by a fine between NT$200, 000 and NT$1 million (Article 17). Placing emphasis on the imposing of sanctions on the FIs and fines, B Shanmugam et al (2003) Tafadzwa Murungu, May 2010 MSU R06405048 35

The solutions to money laundering as a crime in the banking sector in Zimbabwe indicated that the Malyasian act has a provision which provides for stiffer penalties to those who commit the crime. Those found guilty will be liable for a maximum fine of RM5m (US$1.321) or a maximum imprisonment for 5 years or both. This is the same view that was adopted by Ma Yu-Feng (2004) in the researches in Taiwan. Antony Whitehouse ( 2003) later, in August, 2001, there was the FSAs (still acting as the Securities and Futures Authority, SFA) unexpected enforcement action against BS/PaineWebber for failures in money laundering controls, leading to a then noteworthy fine of 350,000 plus an award of costs. In this way the regulators sent a very strong message that they would take the issue of money laundering systems and controls seriously even when no instances of money laundering were identified. This is showing the adoption of a fine a measure to combat money laundering making it a valuable measure.

2.5.12 Freezing or seizure of proceeds B Shanmugam et al (2003), once an entity is has been convicted of a money laundering offence, the Act requires the freeing, seizure and forfeiting of the properties (both movable and immovable) that have been deemed to be proceeds of such activities. Findings by Ping revealed the same point of freezing the proceeds. Allow law enforcement personnel to identify, freeze or confiscate proceeds from money laundering activities (FATF 7 and 35). Antony Whitehouse (2003) one of the main aims of POCA was to secure far more criminal

assets for the Treasury, but will far more seizures and criminal assets be seen to be recovered by the Asset Recovery Agency? The reality is that the UK has already had the powers to recover assets in relation to drug offences since 1986 and for all other offences since 1988, so why Tafadzwa Murungu, May 2010 MSU R06405048 36

The solutions to money laundering as a crime in the banking sector in Zimbabwe should POCA make a big difference here? n UK money laundering prevention

2.5.13 .General provisions that prohibit the ill-gotten money These were observed in the Islamic perspective by Samah Al Agha,(2007). There are many general Quranic provisions regarding prohibiting illicit activities and illegalizing the money derived from such activities. For example, in the Holy Quran, there is a Quranic verse that says: God will make lawful for them all good things and prohibit for them only the foul (Pickthall, 2005, verse 157). In addition, in An-Nisa Surah there is a Quranic verse says: O you who believe! Squander not your wealth among yourselves in vanity, except it be a trade by mutual consent, and kill not one another. Allah is ever merciful to you. Whoever does that through aggression and injustice, we shall cast him into fire. And that is ever easy for Allah (Pickthall, 2005, verse 29,30). To explain; God allows Muslim people to have or to do good and lawful as regards things, deeds, beliefs, persons, foods. And prohibits them as unlawful Al-Khabaith (i.e. all evil and unlawful as regards things, deeds, beliefs, persons and foods. For example, in relation to corruption and bribery, there is a general Quranic provision says: And eat not up your property among yourselves in vanity, not seek by it to gain the hearing of judges that you may knowingly devour a portion of the property of others wrongfully (Pickthall, 2005, verse 188). 2.6 Challenges in preventing money laundering 2.6.1 Privacy Privacy is in both the financial institutions and in the law and accounting firms. These keep Tafadzwa Murungu, May 2010 MSU R06405048 37

The solutions to money laundering as a crime in the banking sector in Zimbabwe information that will be useful to the detection of money laundering. Findings in the research, Ping H (2004), realised professional secrecy that exists in almost all countries is giving a challenge in solving money laundering. The secrecy exist in financial institutions as well as law firms. The use of internet has also brought about privacy because in this case it is difficult to implement customer identification and record transactions. This has also been facilitated by the easy to access internet and contact between customer and institution is personalized. Tadesse (2006), for example, suggests banking crises are less likely to occur in countries with greater regulated disclosures and transparency. This indicates the impact of privacy in the financial institutions.

2.6.2 Failure to record names in transactions According to Ping He (2004), money launderers aim at some features of insurance market: various insurance products, some of which can be bought by simply paying cash and some of which can be sold without recording the buyer's name, so giving cover to money launderers; despite insurance companies' requirement to identify their clients, there is no similar regulations for insurance agents, who are the ones contacting and negotiating with clients; strict regulations have been imposed upon insurance companies but not re-insurers which have enormous turnover each year (Dupuis-Danon, 2006, p. 170). Second, interference of legal system in anti-money laundering is weaker in non-banking financial institutions including insurance companies than in banking institutions. Naturally, money launderers turned from banks to easier games, like insurers.

Tafadzwa Murungu, May 2010 MSU

R06405048

38

The solutions to money laundering as a crime in the banking sector in Zimbabwe 2.6.3 Operating environment According to Ping He (2004), different jurisdictions have different languages, culture, legal systems, and taxation systems, criminals can fully take advantage of these differences while the investigation into money laundering undoubtedly meets lots of obstacles which also include secrecy. There is also high degree of freedom especially in the offshore businesses. It has strict confidential system. In many places, offshore corporation does not need to disclosure the information of its shareholders, equity ratio, earnings and so on to the public. On the other had, Ian Carrington and R B Johnston (2006): one of the key challenges will be implementing standards worldwide across continents and countries that are at very different stages of economic development. These factors make it difficult to trace and prevent money laundering activities.

2.6.4 Customer Due Diligence (CDD) requirements For WSBI members, the main financial inclusion challenge linked to the implementation of the AML/CFT rules is the Customer Due Diligence requirements (CDD), as stated in FATF Recommendation 53. In a number of developing countries, the way people are identified (name, address etc) makes full compliance with the Recommendation requirement a burdensome and costly process. Those financially vulnerable people, who form a significant part of the (potential) clientele of obligation to get information on the occupation of the clients and on the use of the funds leads to a heavy procedure for each of the transactions;

Tafadzwa Murungu, May 2010 MSU

R06405048

39

The solutions to money laundering as a crime in the banking sector in Zimbabwe obligation to get information on the occupation of the clients and on the use of the funds leads to a heavy procedure for each of the transactions; lack of proper identification documents (ID, Passport); lack of official proof of income and residence address. For instance, self-employed rural farmers would not be able to produce proof of income while poor living in rural areas and informal accommodations will not be able to justify their residence address; lack of appreciation by the unbanked of the need to supply the compliance information; customers do have the requisite documentation, but due to the lack of information they do not have them on their person when going to the bank to open accounts and would necessarily not be served. These prospective customers might be coming from places quite distant from the branches, and would obviously find it costly in terms of time and money to go back to the bank to open accounts. Some WSBI member banks may also face reputation risks resulting into a commercial challenge, since these CDD requirements are conflicting with their mandate to serve unbanked and under-banked people. A case was drawn from the Lesotho Post Bank: The impact of the introduction of AML/CFT requirements was measured by the sales comparison between the years 2005, when the bank started operating, and 2008, when the CDD/KYC process was implemented: LPB sales have been on an upward trend pre-KYC implementation, but dropped dramatically in 2008 when KYC was implemented. Sales decline could have been caused by economic pressures such as increased cost of living, but this decline

Tafadzwa Murungu, May 2010 MSU

R06405048

40

The solutions to money laundering as a crime in the banking sector in Zimbabwe would have been gradual and not sudden. Overall, the savings books new accounts recorded an average of 1,006 customers per month for 2008, as opposed to 1,700 average numbers of customers per month in 2007. Obviously the most vulnerable people are often those who lack the prescribed documents and too stringent requirements often turn them down from embracing formal banking services.

2.6.5 Conflicting interests In the simplified version of the capture theory of regulation (Stigler, 1971), a unified group of producers maximizes the wellbeing of its members at the expense of politically unorganized consumers. On the other hand, Peltzman's (1976) more general theory of regulation, regulators balance the interests of producers and consumers so that neither group gains all of the benefits of regulatory intervention, except when one of them is politically impotent and the model reduces to one of Stiglerian capture. Other students of economic and social regulation recognized, however, that the firms within an industry often have competing interests with respect to the outcomes of regulatory processes. The heterogeneous-firm model of regulation suggests that imposing the same regulatory standards on all of an industry's members can make the more efficient firms better off. Buchanan and Tullock (1975) were the first economists to construct such a theory of regulation (Tollison, 1991). Ping He posed a question, which is more important, banking secrecy or the fight against money laundering? This question rose from the fact that the requirement of banks and financial

institutions to perform with due diligence in the course of business, such as customer Tafadzwa Murungu, May 2010 MSU R06405048 41

The solutions to money laundering as a crime in the banking sector in Zimbabwe identification, recording keeping and suspicious transactions, the provisions set challenges the issue of banking secrecy.

2.6.6 Technological changes Ping He (2004) had the view that internet money laundering is so complicated that it is difficult to decide where it occurs. Ping had the questions like, Does it take place where the launderer is located, where the server is located or where the accounts are held? And also it is quite confusing to determine which authority has jurisdiction to investigate and prosecute the transnational crime. In another research, S Vaithilingam and M Nair (2007) found the fact that the FATF (2001) report on Money Laundering Typologies identifies online banking and internet as major money laundering vehicle. According to the Chief Financial Officer (2002) report, Technology changes have influenced the operating strategies of many banks and non-banks as they seek to compete in the increasingly fast-paced and globally interdependent business that can be exploited for disguising profits from criminal activities, as money can be quickly moved within the environment. Alexander (2001) argued that these alternative payment technologies have open breaches channeled through multiple accounts in a host of different sources. This poses problems relating to traceability of the individual transactions which requires vast amount of record keeping. Further, due to difficulties in traceability, law enforcement intervention occurs only after the event has taken place (FATF, 1998). Philippsohn (2001) and Vargas and Backhouse (2003) argued that legislation and regulation implemented to combat money laundering activities needs to deal with the use of new technology.

Tafadzwa Murungu, May 2010 MSU

R06405048

42

The solutions to money laundering as a crime in the banking sector in Zimbabwe

2.6.7 Unwillingness of banks to cooperate According to Ricardo Azevedo Araujo (2008), theoretically, speaking the problem is easier than handled in practice. The main difficulties faced by competent authorities range from an imperfect knowledge of the bank's intrinsic willingness or ability to cooperate by reporting suspicious activity to inadequate interpretation of the bank secrecy principle by courts. This viewpoint is also supported by Ping (2005, p. 253) who states that: although banks are the most vulnerable institutions to money laundering activities, according to the complex schemes of money laundering; it is not enough only to impose the obligation of reporting suspicious transactions on them but it is also necessary to create a legal environment in which they face incentives to disclose promptly information on any suspicious transactions. This view is also emphasized by Stessens (2000, p. 172) who states that: in order to obtain cooperation from financial institutions that they will not be held responsible, either civilly or criminally, if they inform the authorities responsible for combating money laundering of facts which are covered by banking secrecy. Ricardo Azevedo Araujo (2008), this approach also shows that the efficiency of the anti-money laundering regulation may be reached if the ability of screening the bank willingness to cooperate increases. This effort has been performed by Financial Intelligence Units (FIU) hereafter, created to concentrate the efforts to combat money laundering.

2.6.8 Underground banks

Tafadzwa Murungu, May 2010 MSU

R06405048

43

The solutions to money laundering as a crime in the banking sector in Zimbabwe Ping He (2004), as a channel for money laundering and capital fleeing, the underground banks shall be wiped out according to the following articles of PRC Criminal Law: Article 174 about the crime of establishing commercial banks or other financial institutions without due approval; Article 176 about the crime of illegal pooling of public deposits; Article 225 about the crime of illegal operation; Article 191 about the crime of money laundering. However, the battle against underground banks proved to be of poor cost efficiency and underground banks would never perish under such pressure. These banks also offer cheap services which are also faster than the normal and registered financial institutions. This means most people will still use them thereby giving them the influence to carry on functioning. Under such circumstances, money laundering will be difficult to combat.

2.6.9 Weak governance In S Vaithilingam and M Nair (2007)s research, According to the FATF (2006b) annual report, many illegal activities are associated with corrupt practices and lack of transparency, which will subsequently give rise to weak governance. This in turn results in poor and ineffective implementation of anti-money laundering programs. Operating in this environment means which ever effort you put in place will go in vain it will not be put into practice.

2.7 Recommendations

Tafadzwa Murungu, May 2010 MSU

R06405048

44

The solutions to money laundering as a crime in the banking sector in Zimbabwe The recommendations are mainly focused on developing countries which are in a greater battle to fight against money laundering.

2.7.1 Developing countries S Vaithilingam and M Nair (2007) identified developing countries having challenges in combating money laundering. The pooling of know-how experience and expertise by the regulatory and enforcement authorities is still lacking in these sample countries particularly in the developing countries, thus lacking an effective synergy. Most of the developing countries do have laws to curb financial crime and control criminal activities relating to money laundering activities. However, some of these countries have so far not criminalized money laundering. To this end, developing countries should focus on the following recommendations put forth by the Vienna convention and FATF (2003): Adapt its legislation to comply with international requirement. Develop or improve training programs for its law enforcement officers to ensure that they are updated on the changes in the way money is laundered. Should make an effort to coordinate and cooperate with other countries and international and regional agencies to enhance the effectiveness of law enforcement action to curb money laundering activities. Have laws to establish a regulatory and supervisory mechanism for financial institutions. This is to ensure that these financial institutions adhere with customer identification and verification procedures, minimum standards of record-keeping, cooperation among banks, supervisory and

Tafadzwa Murungu, May 2010 MSU

R06405048

45

The solutions to money laundering as a crime in the banking sector in Zimbabwe law enforcement agencies and mandatory reporting of suspicious transactions (FATF recommendation 11-13). Although the banking industry is obligated to implement customer identification (the know your customer (KYC) principle) under the Basel Committee on Banking Regulation and Supervisory Practices (Core principle 15) published its Core Principles for Effective Banking Supervision (1997), there has been constant opposition by banks as they feel that it burdens them financially. Allow law enforcement personnel to identify, freeze or confiscate proceeds from money laundering activities (FATF 7 and 35). To this extent, developed countries must provide the necessary support to developing countries with respect to finance, resources, technical support and training programs. Without this support, it will be a challenge for these developing countries to combat money laundering activities. B Shanmugam et al (2003), recommended a continuous research and development. The

researchers indicated that, there should be a continuous effort to assess money laundering activities, as the launderers will no doubt take loophole mining , that is, finding loopholes in the law and exploiting them to a maximum.

2.8 The targets for money launderers among other things are: Ping He (2004), as a result, since 1980s, many international anti-money laundering documents have regarded banking institutions as the base of combat against money laundering, and emphasized the responsibilities banks shall assume to identify their clients, keep record and report suspicious transactions. Casinos and lotteries were identified as placed for money

Tafadzwa Murungu, May 2010 MSU

R06405048

46

The solutions to money laundering as a crime in the banking sector in Zimbabwe laundering. Gambling areas were also identified by R Alexander. According to Samah Al Agha (2007), prophet Mohamed also highlighted gambling as an area for money laundering. Ministry of State Enterprises, Anti-Corruption & Anti-Monopolies identified the following as the targets for money launderers among other things: Countries with high level of corruption Countries with a fragile financial infrastructure Countries with lack of effective money laundering legislation Countries where law enforcement agents and banking staff are under-trained Countries that are desperate for foreign currency Money laundering is often associated with banks, however the sophisticated money launderer involves many other unwitting accomplices such as: Accountants Lawyers/Solicitors Surveyors Estate Agents Management Services Companies Antique Dealers Dealers in precious stones

Tafadzwa Murungu, May 2010 MSU

R06405048

47

The solutions to money laundering as a crime in the banking sector in Zimbabwe Foreign Currency Smugglers Car Dealers

2.9 Impact to the inclusive financial sector AML/CFT requirements place obligations on financial institutions that are expensive to meet (e.g. having compliance officers at different locations to verify day to day transactions), more forcefully in developing countries. Mass-market financial institutions such as WSBI member banks, consider that these regulations are not adapted to the local context and can be disproportionate in terms of costs and administrative burden, particularly when applied to small accounts and when they have to be repeated for each of the transactions performed. It is also important to tackle this issue in order to accompany the development of innovative ways of banking, particularly suited to the needs of low income people in developing economies. In this respect, branchless banking has proved very promising, both through partnerships between banks and retail outlets (agent banking) or through technologies such as mobile phones. The positive impact of these new ways of banking should not be weakened by regulatory obstacles raised by AML/CFT requirements.

Banks feel a financial burden Have laws to establish a regulatory and supervisory mechanism for financial institutions. This is to ensure that these financial institutions adhere with customer identification and verification procedures, minimum standards of record-keeping, cooperation among banks, supervisory and Tafadzwa Murungu, May 2010 MSU R06405048 48

The solutions to money laundering as a crime in the banking sector in Zimbabwe law enforcement agencies and mandatory reporting of suspicious transactions (FATF recommendation 11-13). Although the banking industry is obligated to implement customer identification (the know your customer (KYC) principle) under the Basel Committee on Banking Regulation and Supervisory Practices (Core principle 15) published its Core Principles for Effective Banking Supervision (1997), there has been constant opposition by banks as they feel that it burdens them financially. Money laundering is a crucially important globalised activity in contemporary financial society BINLEA, 2006). It avoids national controls and distributes dirty money around the world. A countrys financial controls and tax regime can be completely bypassed (Hampton and Sikka, (2005). Money laundering is a global phenomenon and a major obstacle in maintaining effective operating domestic and international financial systems (Buchanan, 2004). It, therefore, poses a significant problem to central banks as it damages the effective operations of national economies and promotes poor economic policies (Johnston and Abbott, 2005; Buchanan, 2004). Indeed, money laundering corrupts financial markets and erodes the publics confidence in the global financial system.

2.10 Failures cases The Anti-Money Laundering Act of 2001 in Nauru failed because the law it had failed to meet the FATF 40 recommendations and had 400 shell banks with no physical appearance in there jurisdiction. The Anti-Money Laundering Act 2001 of Malaysia was said to be not all that successful. This was mainly because of reporting institutions for instance complaining of R06405048 49

Tafadzwa Murungu, May 2010 MSU

The solutions to money laundering as a crime in the banking sector in Zimbabwe ignorance with respect to reporting requirements on currency transactions, monetary instruments and foreign accounts ( B Shanmugam et al 2003), the team went on to say soldiers are basically part of the staff in the financial institutions and that if they do not know the enemy, there is hardly no battle. They were not able to fight the crime as they lacked the necessary knowledge. The combating of money laundering in Malaysia was also made difficult by the staff that was not trained. According to B Shanmugam and others (2003), this is because the large volume of information collected about their customers will be of no use if the employees are not trained to detect attempts at laundering. Antony Whitehouse (2003) Bank of England, or the Financial Services Authority (FSA) after 1998, was a failure to combat money laundering. This may have been due in part to a lack of motivation by government, or a lack of public awareness of the issues, but probably the greatest underlying cause was the fact that there was no one organization with responsibility for policing, and more importantly, prosecuting breaches of, the Regulations.

2.11 Chapter summary Money laundering is crime that is as a result of cleaning illegally gotten money. This is supported by a number of definitions such as the one by Tim Hidle (1999; 131). The money is then passed through a number of placed that raise no suspicion such as lawyers hands who will make transactions on behalf of there clients. Shell companies are also used for laundering money. The challenges in combating money laundering include unwillingness of bank

Tafadzwa Murungu, May 2010 MSU

R06405048

50

The solutions to money laundering as a crime in the banking sector in Zimbabwe employees to cooperate, rapid changes in technology as well the existence of underground banks which offer affordable prices as compared to legal financial institutions.

CHAPTER THREE

RESEARCH METHODOLOGY 3.0 Introduction This chapter is describing the methodology that the researcher used in collecting data on ascertaining whether there will be ultimate solutions to money laundering Zimbabwe. The

Tafadzwa Murungu, May 2010 MSU

R06405048

51

The solutions to money laundering as a crime in the banking sector in Zimbabwe chapter reveals procedures and activities undertaken to gather the necessary data. Major areas of concern are research design, research population, research sample, data collection methods, instruments, the data presentation and analysis plan.

3.1 Research Design According to William G Zikmund and Michael Damico (1996; 157), research design is a master plan that specifically identifies what techniques and procedures that will be used to collect and analyze data relevant to the reach problem. The research design that the researcher used in this case is descriptive in nature. The researcher used descriptive research designs because of its ability to portray variables that answer the questions: who, what, and how questions. It can also describe respondents attitudes, intentions, and behavior. With this type of research, the researcher relies on the use of primary data and secondary data. 3.1.2 Descriptive research Its objective is to reveal any accurate profile events or situations. It is also undertaken in order to ascertain and be able to describe the characteristics of the variables of interest in a situation. A descriptive research design is concerned with high degree of accuracy to the subject. The method is appropriate and suitable in such cases where data is derived from interviews and questionnaires. The basis following the use of descriptive survey is that it describes the existing state of affairs of the research subject. Th