COMBATING TERRORIST FINANCING

Terrorist Financing
Definition of Terrorist Financing :-
The Saudi AML Law Article 1.7 defines criminal activity as: any activity sanctioned by Shariah or law including the financing of terrorism, terrorist acts and terrorist organizations. The Bylaw 2.1 of the AML Law Article 2 describes "financing terrorism, terrorists acts and terrorist organizations include property that comes from legitimate sources".
The United Nations 1999 International Convention for the Suppression of the Financing of Terrorism describes terrorist financing in the following way: "Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully or willfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out:
A. An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex.
B. Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by nature or context, is to intimidate a population, or to compel a government or an international organization to do or to abstain from doing any act."
Saudi Arabia is committed to all relevant United Nations Security Council Resolutions directed towards fighting terrorist financing and has criminalized financing of terrorism, terrorist acts and terrorist organizations, under Article 2.d of the Saudi AML Law.
SAMA requires strict compliance with UN and FATF directives. If a bank or money exchanger has any reason to believe that individual, commercial establishment or organization is, by any means, directly or indirectly, providing or collecting funds in the knowledge that such funds will be used for illegal purposes, the bank or money exchanger must refrain from entering into transactions and must report the matter to the competent authorities.
Processes of Terrorist Financing
The techniques used to finance terrorism are essentially the same as those used to conceal the sources and uses of money laundering, however, the main differences between the two are that (a) often small amounts are required to commit individual terrorist acts, making it difficult to track the terrorist funds; and (b) terrorists can be funded from legitimately obtained income, making it difficult to identify the stage at which legitimate funds become terrorist funds. Terrorists may derive their income from a variety of sources, often combining both lawful and unlawful funding. The forms of financing can be categorized into the following types:
1. Financial Support
This funding could be in the form of charitable donations, community solicitation and other fund raising initiatives, which may come from entities or individuals.
2. Criminal Activity
This funding is often derived from criminal activities such as money laundering, fraud and other financial crimes.
3. Legitimate Source
This form of funding may originate from legitimate business activity, established to fully or partially fund these illegal activities.
Typologies
The various techniques or methods used to launder money or finance terrorism are generally referred to as typologies. A typology study is a useful tool to examine in depth a particular issue of concern with a view to providing insight and knowledge on emerging threats and how these might be addressed.
FATF and MENA-FATF regularly issue documents relating to money laundering and terrorist financing typologies, and banks and money exchangers should update themselves with the new typologies applicable to their businesses. The following are examples of typical typologies relating to money laundering and terrorist financing:
• Alternative remittance services (hawala, hundi, etc.): Informal mechanisms based on networks of trust used to remit monies. Often work in parallel with the traditional banking sector but are illegal. Exploited by money launderers and terrorist financiers to move value without detection and to obscure the identity of those controlling funds.
• Structuring (smurfing): A method involving numerous transactions (deposits, withdrawals, transfers), often various people, high volumes of small transactions and sometimes numerous accounts to avoid detection threshold reporting obligations.
• Currency exchanges/ cash conversion: Used to assist with smuggling to another jurisdiction or to exploit low reporting requirements on currency exchange houses to minimize risk of detection, e.g., purchasing of travelers checks to transport value to another jurisdiction.
• Cash couriers/ currency smuggling: Concealed movement of currency across borders to avoid transaction/ cash reporting measures.
• Use of credit cards, checks, etc.: Used as instruments to access funds held in a bank, often in another jurisdiction.
• Purchase of valuable assets (e.g., real estate, vehicles, shares, etc.): Criminal proceeds are invested in high-value negotiable goods to take advantage of reduced reporting requirements to obscure the source of proceeds of crime.
• Use of wire transfers: To electronically transfer funds between banks and often to another jurisdiction to avoid detection and confiscation.
• Trade-based money laundering: Usually involves invoice manipulation and uses trade finance routes and commodities to avoid financial transparency laws and regulations.
• Abuse of non-profit organizations: May be misused to raise funds for terrorist purpose, obscure the source and nature of funds and to distribute terrorist finances.
• Investment in capital markets: To obscure the source of proceeds of crime to purchase negotiable instruments, often exploiting relatively low reporting requirements.
• Mingling (business investment): A key step in money laundering involves combining proceeds of crime with legitimate business monies to obscure the source of funds.
• Use of shell companies/ corporations: A technique to obscure the identity of persons controlling funds and exploit relatively low reporting requirements.
• Use of offshore businesses, including trust company service providers: To obscure the identity of persons controlling funds and to move monies away from interdiction by domestic authorities.
• Use of nominees, trusts, or third parties, etc: To obscure the identity of persons controlling illicit funds.
• Use of foreign bank accounts: To move funds away from interdiction by domestic authorities and obscure the identity of persons controlling illicit funds.
• Identity fraud/ false identification: Used to obscure identification of those involved in many methods of money laundering and terrorist financing.
• Use professional services (lawyers, accountants, brokers, etc.): To obscure identity of beneficiaries and the source of illicit funds. May also include corrupt professionals who offer ‘specialist’ money laundering services to criminals.

Policies & Standards

Risk-Based Approach
Banks and money exchangers should adopt a risk-based approach in designing their Anti-Money Laundering (AML) and Combating Terrorist Financing (CTF) programs to ensure that measures used to mitigate money laundering and terrorist financing are commensurate to the risks identified in their organizations. This will allow resources to be allocated in the most efficient ways. Some of the benefits of utilizing risk-based approach in discharging banks’ or money exchangers AML/CTF responsibilities are:
1. Allowing banks and money exchangers to differentiate between customers risk in a particular business by focusing on higher threats, thus improving the outcome of the overall process;
2. While establishing minimum standards, allowing a bank or money exchanger to apply its own approach to systems and controls, and arrangements in particular circumstances, thus allowing more flexibility to adapt as risks evolve; and
3. Helping to create better management of risks and cost effective system.

A risk-based approach will serve to balance the burden placed on individual banks and money exchangers and on their customers with a realistic assessment of the threat of a business being used in connection with money laundering or terrorist financing by focusing effort on areas where it is needed and has most impact.
Banks and money exchangers may face some challenges that they need to consider while implementing the risk-based approach. These challenges should be regarded as offering opportunities to implement a more effective system in the fight against money laundering and terrorist financing activities. Some of these challenges can be summarized as follows:
1. Risk Assessment Methodology: Identifying appropriate information to conduct a sound risk analysis and overall assessment.
2. Judgmental Decisions: Greater needs for more expert staff capable of making sound judgments regarding risk identification and evaluation.
3. Transitional Cost: Cost relating to transition from prescription method to risk based method.
4. Fear Factor: Regulatory response to potential diversity of practice.
The risk-based approach requires certain actions to be taken in assessing the most cost effective and proportionate ways to manage and mitigate the money laundering and terrorist financing risks faced by a bank. These actions are:
1. Identifying the money laundering and terrorist financing risks that are relevant to the bank or money exchanger in order to ensure that the approach is built on sound foundation, and that the risks are well understood.
2. Assessing the identified risks presented by the bank’s or money exchanger s particular aspect:
a. Customers;
b. Products and services;
c. Delivery channels;
d. Geographical area of operation.
The weight given to the above risk categories in assessing the overall risk of potential money laundering and terrorist financing may vary from one bank or money exchanger to another, depending on their respective circumstances. Consequently, each bank or money exchanger will have to make its own determination as to the risk weights.
3. Establishing and implementing controls to mitigate these assessed risks.
4. Monitoring and improving the effective operation of these controls.
5. Recording appropriately what has been done and explaining the reasons and rationale.
Business Risk Assessment
Banks and money exchangers should conduct and document the above business risk assessment. In particular, banks and money exchangers should update this assessment on annual basis, to identify changes in their business environments (such as organizational structure), its customers, the jurisdictions with which its customers are connected, its products and services, and how it delivers those products and services. Banks and money exchangers must build their AML/CTF programs based on the conclusions and the residual risk identified in the business risk assessment. To achieve an adequate assessment, a bank or money exchanger should establish that it has considered its exposure to money laundering and terrorist financing risk by:

1. Covering all risks posed by money laundering and terrorist financing relating to different businesses within the bank or money exchanger.
2. Considering organizational factors that may increase the level of exposure to the risk of money laundering and terrorist financing, e.g., business volumes and capacity issues.
3. Considering the nature, scale and complexity of its business, the diversity of its operations (including geographical diversity), the volume and size of its transactions, and the degree of risk associated with each area of its operation.
4. Considering the type and nature of its customers and what they do.
5. Considering whether any additional risks are posed by the jurisdictions with which its customers (including intermediaries and introducers) are connected. Factors such as high levels of organized crime, increased vulnerabilities to corruption and inadequate frameworks to prevent and detect money laundering and financing of terrorism will impact the risk posed by relationships connected with such jurisdictions.
6. Considering the characteristics of the products and services that the bank or money exchanger offers and assessing the associated vulnerabilities posed by each product and service, including delivery methods. For example:
a. Products such as current accounts are more vulnerable because they allow payments to be made to and from third parties, including cash transactions.
b. The use of third parties such as group entities, introducers and intermediaries to obtain information about the customer.
c. Pooled relationships with intermediaries are more vulnerable, because of the anonymity provided by the co-mingling of assets or funds belonging to several customers by the intermediary.
d. Conversely, those products that do not permit third party transfers or where redemption is permitted only to an account from which the investment is funded will be less vulnerable.
7. Considering how it establishes and delivers products and services to its customers. For example, risks are likely to be greater whether relationships may be established remotely (non-face-to-face), or may be controlled remotely by the customer (straight-through processing of transactions).
8. Recording, updating and retaining its business risk assessment.

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