A fundamental tenet of Western political and legal philosophy is that internal legislation is representative of the character of a nation. A nation shows commitment to principles and practices through promulgation of laws at the domestic level. Contradictions in logic arise frequently, however. Doctrines of estoppels at common law are predicated upon the idea that actions speak louder than words, and for rhetorical purposes the purported de facto legality of an issue may be argued.

For example, in the State of Michigan in the USA, adultery is still a felony under the Penal Code Chapter V, although most commentators would argue that this is an outdated law which has through non-enforcement been abolished.

In other cases, civil rights abuses may be perpetrated by a government which relies upon sovereign immunity as its primary defense, thus suggesting that certain abuses are or were not in fact illegal insofar as the state is unwilling to acknowledge the criminality of its own behavior. Similarly, a wealthy private individual or large company may violate laws relating to contracts, or rights of workers, or of the environment, or in some aspect of its business administration such as accounting.

Sometimes these powerful persons and entities are caught and adjudicated under criminal statutes, but in many other cases involving torts - private abuses of rights - no real remedy may be available to injured parties due to the imbalance of power which exists between the parties.

The Holy Qur'an says at Surat Al-Baqarah 2:188, "And do not consume one another's wealth unjustly or send it [in bribery] to the rulers in order that [they might aid] you [to] consume a portion of the wealth of the people in sin, while you know [it is unlawful]."

This article posits that money laundering and terrorist fi nancing are both prohibited by law and are in fact forbidden among Muslims. International law is examined, then we take a brief glimpse at anti-money laundering and terrorist fi nancing (AML/TF) in Indonesia, Malaysia, Saudi Arabia, and United Arab Emirates (UAE). A 2012 case involving global banking giant HSBC is discussed for its implications in the MENA region and for the Islamic banking and business sectors. Finally, recommendations on compliance and corporate governance programs are provided.

GLOBAL PARTNERSHIPS ON AML/TF

Proceeds from bribery and illicit trades such as illegal drugs, arms, prostitution, human traffi cking, and gambling often need to be concealed and converted into what appears to be legitimate income. Globalization, new technologies, and offshore banking enable money launderers to conduct their affairs with greater ease, expediency, and confi dentiality.

Terrorism is another ubiquitous aspect of life in this age. Unfortunately for Muslims, especially those from the MENA region, terrorism has been mistakenly associated with the Islamic faith and Muslims have been unjustly prejudiced and stereotyped.

UNITED NATIONS AGREEMENTS

The United Nations and other intergovernmental organizations have on numerous occasions affi rmed and reaffi rmed commitments to anti-money laundering and terrorist fi nancing.

Long before the 9/11 World Trade Center catastrophe, in Resolution 51/210 of 1996, the UN General Assembly called upon nations to prevent and counteract direct and indirect fi nancing of terrorists and terrorist organizations. Movements of suspicious funds were expected to be prevented and counteracted while legitimate capital movements were not expected to be subjected to interference. This undoubtedly represented a major challenge for nations, considering that private institutions carry out the majority of fi nancial activities, some of which protect data under secrecy policies and laws. Information exchange was considered central to implementing new policy in 1996.

In order to combat money laundering and the fl ows of illicit money that directly or indirectly fund criminal activity, nations adopted treaties like the 2004 Convention against Transnational Organized Crime and the 1999 International Convention for the Suppression of the Financing of Terrorism.

The latter treaty considered an offense to occur if a person gives or receives money which they know will be used to carry out or attempt to carry out various terrorist acts which result in death, serious bodily injury, or which are intended to cause injury to civilians - willful and conscious fi nancing of terrorism. Security Council Resolution 1373 of 2001 dealt with the same fi nancing of terrorism issue. Terrorism is a wellknown term in 2012 and the defi nition need not be refreshed at this point.

Article 4 of the 1999 treaty required party states to establish criminal penalties for offenses. Article 5 addressed corporate liability in cases where management or legal controllers perpetrate offenses, which relates to concealment of fi nances and laundering. Article 8 prescribed measures for monitoring, detecting, freezing, seizure and forfeiture of funds. Article 9 required party states to take action upon a tip or notice that an offense has been committed in its territory. Offenses are established as extraditable, and international cooperation is mandated.

Articles 6 and 7 of the 2004 Convention require party nations to criminalize the laundering of proceeds of crime and to implement governmental regulatory and supervisory regimes for businesses. Legal persons may be held liable under Article 10. Confi scation and seizure procedures are required under Article 12. Other Articles provide for international cooperation.

IMPLEMENTING STATUTES AND REGULATIONS IN ISLAMIC NATIONS

There has apparently been some kind of mistake about the offi cial disposition of certain Muslim nations toward money laundering and terrorist fi nancing. For example, a July 2012 report from the US Senate Subcommittee on Investigations pertaining to HSBC's link to money laundering, drugs and terrorist fi nancing considered Saudi Arabia a "high risk" nation. While the methodology employed may not be invalid, it leaves open several questions about external verifi ability, considering that the USA could as easily be considered "high risk", although the report did not make such conclusions.

HSBC Bank Middle East (HBME) employs more than 5,000 people in the MENA region, and provides Islamic fi nancial services through its "Amana" division. Al Rajhi Bank, Saudi Arabia's largest private bank and correspondent of HSBC, was singled out in the report due to what were considered links to terrorist organizations and fi nancing of terrorism. The report found that "the bank's key founder was an early fi nancial benefactor of al Qaeda." HSBC apparently conducted multiple forms of research on the issue between 2005 and 2010, but results were inconclusive. Confl icting reports were authored by public bodies.

In 2003, the US Central Intelligence Agency (CIA) released a reported entitled "Al Rajhi Bank: Conduit for Extremist Financing", which concluded very clearly that the bank's founding family members "probably [knew] that terrorists use[d] their bank." According to a Wall Street Journal article cited in the US Senate report, the 2003 CIA report alleged that in 2000, Al Rajhi Bank couriers "delivered money to the Indonesian insurgent group Kompak to fund weapons purchases and bomb-making activities." According to the CIA, extremists "ordered operatives in Afghanistan, Indonesia, Pakistan, Saudi Arabia, Turkey, and Yemen" to use Al Rajhi Bank, which hid illicit transactions through charities.

Al Rajhi was a key relationship for HSBC. It has over 570 branches, including some in Malaysia, Kuwait, and Jordan. The US conclusion that Saudi Arabia is a "country of concern in the area of terrorist fi nancing" did not preclude HSBC's rights to conduct business there or with Al Rajhi absent local and international sanctions. In the complex world of international banking and fi nance, a bank like Al Rajhi - the world's largest Islamic bank - represents a crucial business opportunity, not a moral hazard. While suspicion of individual clients may be warranted, an attack against the character of the entire institution is probably not, as that would represent a question against the integrity of the entire Islamic banking system.

Private international law is directed by the territoriality principle. The laws of a particular jurisdiction are binding on natural and legal persons in that jurisdiction. Extraterritorial application of laws, including under the nationality principle, is a rarity. If an organization is engaged in money laundering or terrorist fi nancing, then the nation in which that organization is located holds jurisdiction. In the case of Al Rajhi, the Saudi law applies whereas the American law may not be extraterritorially applied without the consent of the Saudi government. Public international law may guide and orient efforts among nations, but aside from actions at bodies like the International Court of Justice and International Criminal Court, all law enforcement and adjudication takes place at the domestic level. That domestic law rather than the laws of foreign lands is what companies are obligated to comply with, regardless of what one or many foreign powers may assert. Therefore, it is important to refresh the memory on the all-important laws and regulations that strictly prohibit money laundering and terrorist fi nancing in Islamic nations.

MENAFATF

In November 2004, 14 countries from MENA established a regional Financial Action Task Force. Jordan, UAE, Bahrain, Algeria, Tunisia, Saudi Arabia, Sudan, Syria, Iraq, Oman, Qatar, Kuwait, Lebanon, Libya, Egypt, Morocco, Mauritania, and Yemen are the 2012 members of MENAFATF. There is no international treaty involved. The project is an effort among Muslim nations to implement the global FATF recommendations and special recommendations on money laundering and terrorist fi nancing. In addition to FATF objectives, the group agreed to implement relevant UN treaties and Security Council Resolutions relating to AML/TF.

FATF special recommendations I through V are of the most crucial importance. That is, ratifi cation and implementation of UN instruments (1999 Convention & Security Council Resolution 1373), criminalizing money laundering and terrorist fi nancing, freezing and confi scating terrorist assets, reporting suspicious transactions related to terrorism, and international cooperation.

INDONESIA

Article 2 of the 2002 Law No. 15 Concerning the Crime of Money Laundering criminalized proceeds of crimes valued at 500 million Rupiah (about $53,000) or more. Crimes included in Article 2 of the Act are corruption, bribery, smuggling of goods, smuggling of workers, smuggling of immigrants, banking-related offenses, narcotics, psychotropic substances, slavery and trade in women and children, illegal arms trading, kidnapping, terrorism, theft, embezzlement, and fraud. The crimes need not be committed inside of Indonesia for the law to apply.

Article 3 criminalizes the transfer, exchange, concealment, and other handling of assets reasonably suspected to have been from criminal activity. A minimum penalty of 5 years and maximum of 15 years are available. Accomplices may be charged under the same standards. Managers of corporations involved in the illegal activity may be charged individually, and corporations may be held liable under Article 4.

Reporting is required in Chapter IV. Financial Service Providers must report within 14 days any suspicious transactions and cash transactions of 500 million or more Rupiah conducted in one day.

Willful non-reporting is punishable under Article 8 by fi nes of between 250 million and 1 billion Rupiah.

Bank secrecy laws do not apply to these reporting requirements. Disclosure of such information is allowed under Shari'ah, as the Holy Qur'an states in Surat Al-Baqarah 2:283, "And do not conceal testimony, for whoever conceals it - his heart is indeed sinful, and Allah is Knowing of what you do."

Financial Service Providers are additionally required to record identities of all clients, and confi rm whether a party is acting on his or her own behalf or for another party. Records must be maintained for 5 years from the time business relationship with the user ends. FATF recommended at least 5 years for retention of records.

Article 25 of the Indonesian law authorizes international cooperation for the purposes of prevention and eradication of the crimes. The authority is responsible for collection of information, analysis and evaluation, monitoring, establishing guidelines for reporting, making recommendations and investigations. Chapter VI authorizes government agents to freeze assets. Confi scation and forfeiture may result if an accused party cannot prove the assets were not related to crimes.

MALAYSIA

The 2001 Anti-Money Laundering and Anti-Terrorism Financing Act contemplated a bigger threat than the Indonesian law. The more active fi nancial industry in Malaysia represents more opportunity for money launderers, and as such the law is more detailed and comprehensive than its ASEAN Islamic counterpart's.

The Act applies to any property under §2(2), whether in or outside Malaysia. Commission or abetting money laundering is an offense under §4 punishable by up to 5 years imprisonment and a fi ne of up to 5 million Ringgit (about US$1.58m). Informants are protected under §5.

Malaysian authorities are responsible for analyzing information, compiling statistics and records, making recommendation to enforcement and other agencies. The Minister may make agreements with foreign government for the purposes of cooperation, exchange of information, and investigation of money laundering or terrorist offenses.

Institutions are required to keep records of and report transactions involving currency above the amount specifi ed by the authority. Records must include identities and addresses of all parties involved, along with other transaction-specifi c information. Anonymous accounts or accounts bearing fi ctitious names are not permitted. Records must be retained for 6 years following the closure of accounts or completion of transactions under §17. Non-compliance with reporting and records standards is punishable by a fi ne of up to 1 million Ringgit or imprisonment of up to 1 year.

Institutions are required to develop and implement internal compliance programs under §19. Any reporting or activities relating to AML are exempt from other banking secrecy or information disclosure requirements. Compliance offi cers at institutions are obligated to ensure the programs are fully implemented under threat of up to 6 months imprisonment and or a fi ne of one hundred thousand Ringgit.

In 2004, the Malaysian Bar supported an article highly critical of applications of anti-terrorism laws like the Internal Security Act, Anti-Money Laundering Act, articles 121 and 125 from the Penal Code, stating "The new anti-terrorism measures introduce further layers to an already repressive regime in Malaysia without concomitant civil and political rights protections ascribed to the people of Malaysia as set forth in the International Bill of Rights." Eight cases were cited supporting the opinion. Suspension of rights in suspected cases of terrorism in Malaysia resembles the situation in the United States, where President Obama recently signed into law the National Defense Authorization Act, allowing indefi nite detention of terrorism suspects without charge and the jailing of American citizens without trial. Although these laws from Islamic nations are not nearly as long as the 926-page American Act, and despite condemnation by rights groups of unbridled executive power, similarities between Malaysia and the US suggest parity in the fi ght against terrorism rather than Muslim dissidence.

SAUDI ARABIA

Article 2 of the Anti-Money Laundering Law criminalizes any conduct of "transactions involving property or proceeds" known to have originated from "criminal activity or from an illegal or illegitimate source." Any handling, concealing, receiving, transfer of said property or proceeds, or action as an accomplice is a crime. Financing terrorism, terrorist acts and terrorist organizations are explicitly criminalized in Article 2(d). Directors, chairmen, and other corporate executives may be held liable for offenses under Article 3. Article 18 provides penalties of up to 2 years imprisonment or fi nes of up to SR500,000 for employees.

Similar to other laws reviewed, Article 4 requires businesses to maintain records of clients, and forbids carrying out any business activities under anonymous or fi ctitious names. Businesses must verify identities of clients. Records must be retained for 10 years under Article 5, the longest among nations under review herein.

Articles 6 and 10 require companies to develop and maintain internal ML/TF compliance and prevention programs. Article 7 requires immediate reporting of any suspicious activities to the authority. Article 8 makes such reporting exempt from other secrecy or confi dentiality requirements.

Article 15 provides for confi scation of assets. Money laundering offenses are punishable by up to 10 years imprisonment and a fi ne of up to SR5 million under Article 16. Under Article 17, penalties are increased to 15 years imprisonment and SR7 million if organized crime, violence, minors, corrupt public offi cials, charitable or educational institutions are involved, or if the offense is not a fi rst such instance. Articles 22 and 23 pertain to international cooperation. Article 23 authorizes the judiciary to order tracking of property, proceeds or instrumentalities upon request from a foreign country. This means that options were available to the US and other countries if there was compelling evidence against Al Rajhi Bank.

UAE

Federal Law No. 4 of 2002 Regarding the Criminalization of Money Laundering prohibits any conversion, transfer, deposit, concealment, acquisition or possession of proceeds of crimes listed in Article 2(2). These offenses include narcotics and psychotropic substances, kidnapping, piracy and terrorism, environmental law violations, illegal arms trading, bribery, embezzlement, fraud and "any other related offenses referred to in international conventions to which the State is a party."

Freezing of assets is available under Article 4. Suspicious transactions reporting requirements are discussed in Article 7. Article 11 requires businesses to establish compliance mechanisms, which include reporting protocols for suspicious cases. Matters of reporting for investigations are exempt from banking secrecy and other confi dentiality requirements under Article 12. Chapter 3 provides penalties of up to 7 years imprisonment or fi nes of AED30,000 to 300,000 for money launderers. Businesses may face penalties of between AED300,000 and 1 million plus confi scation of proceeds and property. Executives who fail to report may face penalties of AED10,000 to 100,000 or imprisonment. As per international standards and agreements, Chapter 4 grants authorities power to cooperate with foreign nations.

Dubai's Financial Services Authority (DFSA) issued an Anti-Money Laundering Module, reaffi rming commitments and principles contained in the UAE federal law, and those from international agreements. Chapter 3 requires businesses to maintain customer ID and transaction records for at least 6 years. Internal and external reporting requirements are essentially the same as those mentioned from other jurisdictions. Appendices state that fi rms are expected to assess risks associated with certain individuals or business contacts. Considering that Dubai's fi nancial industry is more developed than the nation on average, DFSA rules are more comprehensive than the federal AML law.

SIGNIFICANCE OF THE HSBC CASE

Clearly the world's largest Islamic bank had some problems with criminal clients, but this is not unique to Al Rajhi or something which disproportionately affects Islamic banks when compared to "conventional" banks. In fact, "conventional" Western banks are the usual suspects in money laundering cases. HSBC, one of the world's largest fi nancial institutions, clearly has its own problems with clients and employees, especially those in Mexico according to the US Senate report. HSBC's $1 billion fi ne for money laundering is a milestone for AML enforcement, but it represents only a fraction of the problem. Fines and investigations involving other major global banks have been consistently featured in news reports. For example, UBS was fi ned for money laundering in Ireland in 2012. In March 2012, the British Financial Services Authority levied a fi ne of £8.75 million against Coutts & Co. for failing to establish and maintain effective anti-money laundering controls. Criminal activity and global fi nance are apparently correlated.

The United Nations Offi ce and Drugs and Crime (UNODC) estimated that money laundering may be a $2 trillion a year industry, which is larger than the entire Islamic banking sector. HSBC is still billed "the world's neighborhood bank" despite the blemishes on its character that came from multiple fi nes and criminal investigations. While the MENA region and Islamic systems take fl ak from aggressive non-Muslim competitors, the biggest benefactors of money laundering, especially in drugs, are still occidental institutions. People who charter a fi shing expedition usually catch a fi sh or two. In this case, some suspicious activity was found at Al Rajhi Bank and throughout the MENA region, but those small fi sh were used to catch the big fi sh - HSBC - one of the world's neighborhood money laundries from the looks of things.

POLITICAL ECONOMIC EXPOSURE

Oversights and errors give power to people who argue the de facto nature of things. Those arguing Machiavellianism over ethicism also do so premised upon empirical evidence that crime pays, and that the wealthiest people in this world are those who "play the game" and win. Worldwide, we have a market-dominated system which is largely devoid of moral balance. Empirical evidence suggests that strong religious convictions are not often correlated with great monetary wealth, but rather that the religious people of the world are generally middle and lower class. These facts can be misconstrued to justify crime and malfeasance.

Drugs, not terrorist fi nancing is the single biggest root of most money laundering. Bribery also generates a trillion USD annually according to the World Bank. Finance is only one affected industry among many, which is why laws apply broadly to all businesses rather than to banks only. UNODC found that criminal fi nances are also channeled through small businesses such as restaurants, bars, coffee shops, boutiques, cars and transport companies.

Globally, the same UNODC report on illicit fi nancial fl ows found that nearly $85 billion in gross profi ts were generated from the cocaine trade in 2009, with nearly $53 billion available for laundering.

Although around 30% was attributable to Western Europe, and well over 60% of that cocaine money was generated in the Americas, with roughly 40% from North America, those nations are still the most vocal about AML Outspoken natures of wealthier nations are not the problem in and of itself, but the criticism so often comes exclusively of foreign nations and private international corporations, especially those in Muslim and developing nations, whereas domestic problems in countries like the US, UK, and EU are more easily overlooked. Such imbalance was refl ected upon by Iranian Human Rights Head Zohreh Elahian in March 2012, when he said, "Undoubtedly, time is ripe for the European Parliament to avoid double standard policies and make serious and practical efforts to counter terrorism. It should demonstrate its determination to the world in this regard."

RECOMMENDATIONS

Establishment and maintenance of effective compliance policies in private companies is the most essential feature of a reduction and suppression initiative. Public authorities cannot control private institutions on the daily level, and the global economy cannot grow and function properly without privacy rights for businesses. Privacy rights are guaranteed under Islam, as the Qur'an says at Surat Al-Hujurat 49:12, "O you who have believed, avoid much [negative] assumption. Indeed, some assumption is sin. And do not spy or backbite each other. Would one of you like to eat the fl esh of his brother when dead? You would detest it. And fear Allah; indeed, Allah is accepting of repentance and Merciful."

On one hand, big cases involving transnational money laundering and movements of terrorist fi nances in recent years show a need for program changes. On the other hand, those legal cases featured in the international media and on court dockets show the AML/TF system is working. We can learn from mistakes and move on toward a more positive future.

Continuous improvement is a staple of any good business plan. Multinational banks and other corporations clearly have serious problems with legal and ethical compliance. Greed has not been a virtue, nor has greed motivated socially rational and legally compliant behavior. The injustices and deviant habits of the largest organizations in the world represent opportunities for small and medium enterprises (SME), and for Islamic organizations which follow a stricter moral code. Opportunities created for Islamic banks and organizations undoubtedly further threaten western businesses in MENA and worldwide, which may infl uence fi ngerpointing and politically infl uenced legal posturing as may have been the case with the excessive criticism of Al Rajhi Bank. Competition should be expected in business.

Through these past years of scandal, recession, crises, and turmoil, a main lesson has emerged for people who are tired of the boom-and-bust cycle: "conventional" Western business methods have failed on numerous occasions, and they are therefore not very reliable. When designing and implementing a compliance program, businesses need to innovate and tailor their programs to their specifi c needs. The majority of academic literature in business administration today has origins in the US and EU, where compliance does not appear to be a pressing issue in practice, although literature often appears to value the concept of goodness.

With the failures of banks, bankruptcies of entire cities and states comes a shift in the way we must perceive our working realities. Whereas one variety of risk-taking has consumed many American and European professionals who led the world into panic, those same MBA and PhD holders that bet on the bubbles and told everybody to try new things are hostile toward the paradigm shift they need to continue with any greater successes. A big part of the world needs to focus on home, and on regional issues, and move onto better things away from the New York, London, Tokyo and other major capital markets. More and better competition is essential for improvement. That means new methods are needed.

Good business, like right living requires commitment to certain principles, and wholehearted continual application of those principles. In matters of AML/TF, a little inquiry goes a long way. At the world's largest institutions, personalized service can easily be lost, but in those organizations, more and better trained staff can mitigate risks and ensure compliance. SMEs are in a powerful position in matters of compliance on big issues like AML/TF, but there are associated weaknesses at SMEs too, because a few key customers can signifi cantly impact revenues. In any case, theory and practice need to be more uniform; the facts need to follow the law and offi cial policy.

In the end, it is the duty of Muslims to live in accordance with the Qur'an and Shari'a, which prohibit money laundering and terrorist fi nancing very clearly. And so the Muslims should then be able to take up the cause of leadership in business ethics and compliance at multiple levels, expanding also to global proportions. This should be possible to accomplish using an integrated ideology of the philosophical ancient with pragmatic modern thought.

As the Noble Qur'an says at Surat Ali-Imran 3:104, "And let there be [arising] from you a nation inviting to [all that is] good, enjoining what is right and forbidding what is wrong, and those will be the successful."

© Business Islamica 2012