Word of the week: BSA

The Bank Secrecy Act (BSA) is the primary law in the U.S. against money laundering.  Cassara and Jorisch* explain the BSA as follows:

Officially known as the “Currency and Foreign Transactions Reporting Act,” it requires financial institutions to help various government agencies detect and prevent money laundering.  Specifically, the BSA requires banks and other financial institutions to file reports of currency transactions exceeding $10,000, to keep records of cash purchases of negotiable instruments, and to report suspicious activity.

The IRS notes that BSA requirements serve to “detect and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion or other unlawful activity.”

*Cassara, John and Jorisch, Avi.  On the Trail of Terror Finance (Washington, D.C.:  Red Cell Intelligence Group, 2010).

Word of the week: third party

The person making financial transactions for illicit purposes isn’t necessarily the person pulling the strings.  If you work for a money services business, you should try to ascertain if your customer is operating under instructions from a third party.  This guidance comes from Canada’s FinTRAC, but it’s useful information for anybody with know-your-customer responsibilities:

Find out if there is a third party

As a money services business (MSB), you have to find out if your client is acting on behalf of a third party when you:

• conduct a large cash transaction and you have to keep a record of it
• have to keep a record about a service agreement

Who is a third party?

A third party is anyone else who gave instructions to your client to request MSB services from you. It is not about who “owns” the money, but rather about who gives the instructions to deal with the money.

How to find out if there is a third party

Ask the individual in front of you if they are acting on someone else’s instructions. If the answer is yes, that someone else is a third party.

Examples of a third party:

1. Tarek wants to send money to his son Roger in Lebanon. He gives his daughter Tara $13,000 in cash and asks her to go to the MSB to send the money. Tara gives the money to the MSB and requests that a money transfer be made to Roger in Lebanon. Tarek is the third party as he is the one who gave the instructions to Tara to request that a money transfer be made.
2. Jacques, a financial officer and employee of Voyages Inc. in Canada, goes to the MSB every month to transfer money to their head office in France. Jacques’ employer, Voyages Inc., is the third party as Jacques is acting on his employer’s instructions.

Records to keep on a third party

You have to keep a record for five years after the day you created it, if you:

• find out that there is a third party
• suspect that there is a third party

You find out that there is a third party

If you find out that there is a third party involved, you have to keep a record with the following information about the third party:

• name, address and job or main business
• if it is an individual, their date of birth
• if it is a corporation, their corporation number and place of incorporation
• the nature of the relationship between the third party and:
  • the individual who gave you the cash if you are doing this because of a large cash transaction or
  • the organization entering into a service agreement.

Examples of how to describe the nature of the relationship include that the third party is your client’s accountant, agent, customer, employee, friend, legal counsel or relative.

You suspect that there is a third party

If you are not able to find out that there is a third party, but you suspect that there are instructions from a third party involved, you have to keep a record to indicate the following:

• why you suspect the individual is acting on a third party’s instructions and in the case of a:
  • large cash transaction, whether or not the individual giving the cash indicated that the transaction was being conducted on behalf of a third party
  • service agreement, whether or not the client indicated that the agreement was being done on behalf of a third party

Word of the week: soft loan

Among the hundreds of requests for zakat or other financial assistance that Money Jihad has received from overseas spammers, a couple have involved requests for a “soft loan.”

In June 2011 through our “Contact us” page, Wisnu Wibowo wrote, “Asalamualaikum… I hope someone can help with soft loan” purportedly to keep him out of jail for a $2,000 debt.  Borrowing from Peter to pay Paul, it would seem.

In January of this year, somebody named Krisna Busana Karya also contacted Money Jihad demanding “grants or soft loan” with a five year term to help with an oyster cultivation business with an eye toward a growing market in Jakarta.  Tempting offer, Krisna, but no thanks.

What is a “soft loan”?

A soft loan is defined as “A loan made on terms lower than or more favourable to the borrower than regular commercial terms”.*

Soft loans are repaid with interest, but it may be at a smaller interest rate or payable over a longer term than conventional loans.  Since interest is involved, soft loans are not sharia-compliant.

Nevertheless, extending a soft loan to a borrower who cannot meet conventional terms suggests that the lender is taking on risk in excess of what the capital markets normally bear.  Therefore, soft loans are somewhat similar to sharia finance in that both deviate from fair market interest rates.  Soft loans, like sharia loans, come with strings attached, such as concessions made by the borrower.

People do not lend for free.  Reduce or eliminate interest rates, and lenders will come up with ways of recouping the costs through fees or other methods.  Is “ethical finance” truly ethical when the actual cost of borrowing is obscured by fees and special conditions, rather than a transparent, market-based interest rate that is known to both parties?

* Food and Agricultural Organization of the United Nations, Glossary of Terms for Agricultural Insurance and Rural Finance (Rome:  FAO, 1992).

Wednesday word: bitcoin

Bitcoin is an online medium of exchange.  Rather than being regulated by monetary authorities, bitcoin digital currency was devised by unelected, anonymous Internet users.  Investopedia defines bitcoin as:

A decentralized digital currency that enables low-cost payments without the need for central authorities and issuers. Bitcoin is a peer-to-peer (P2P) currency system created in open source C++ programming code. Bitcoins can be accessed from anywhere in the world with an internet connection. Once a user has Bitcoins, they are stored in a digital wallet. Bitcoins can then be sent to anyone else who has a Bitcoin address. Bitcoin was developed in 2009 and based on the works of an individual or group of individuals known as Satoshi Nakamoto.

Like earlier forms of digital cash, bitcoin operates outside the conventional currency system.  It may allow for greater individual freedom in transactions, but it is difficult to trace and can be used for criminal activity such as sanctions evasion or buying contraband.

Wednesday word: digital cash

Julian Gaspar defines digital cash as “an electronic payment system that represents currency in an electronic format that moves outside the normal network of money”.*

Because it operates outside the conventional currency system, digital cash may allow for greater freedom in transactions.  Critics point out that transactions in such systems are anonymous, difficult to trace, and can be used for criminal activity.

* Gaspar, Julian, Introduction to Business (Boston:  Houghton Mifflin Company, 2006).

Saudi Arabia funds Lashkar-e-Jhangvi

The Sunni radical Pakistani terrorist group Lashkar-e-Jhangvi (LeJ), which is responsible for attacks against Shia Muslims, is funded by Saudi Arabia.  LeJ’s parent organization, Sipah-e-Sahaba (SSP), feeds at the same trough.

From Reuters last fall:

THE SAUDI CONNECTION

In the Punjab town of Jhang, LeJ’s birthplace, SSP leader Maulana Mohammad Ahmed Ludhianvi describes what he says are Tehran’s grand designs. Iranian consular offices and cultural centers, he alleges, are actually a front for its intelligence agencies.

“If Iranian interference continues it will destroy this country,” said Ludhianvi in an interview in his home. The state provides him with armed guards, fearful any harm done to him could trigger sectarian bloodletting.

The Iranian embassy in Islamabad, asked for a response to that allegation, issued a statement denouncing sectarian violence.

“What is happening today in the name of sectarianism has nothing to do with Muslims and their ideologies,” it said.

Ludhianvi insisted he was just a politician. “I would like to tell you that I am not a murderer, I am not a killer, I am not a terrorist. We are a political party.”

After a meal of chicken, curry and spinach, Ludhianvi and his aides stood up to warmly welcome a visitor: Saudi Arabia-based cleric Malik Abdul Haq al-Meqqi.

A Pakistani cleric knowledgeable about Sunni groups described Meqqi as a middleman between Saudi donors and intelligence agencies and the LeJ, the SSP and other groups.

“Of course, Saudi Arabia supports these groups. They want to keep Iranian influence in check in Pakistan, so they pay,” the Pakistani cleric said. His account squared with that of a Pakistani intelligence agent, who said jailed militants had confessed that LeJ received Saudi funding…

A Stanford University study also said that, “LeJ has received money from several Persian Gulf countries including Saudi Arabia and the United Arab Emirates.  These countries funded LeJ and other Sunni militant groups primarily to counter the rising influence of Iran’s revolutionary Shiism,” (h/t Land Destroyer).

This is especially relevant now that LeJ’s attacks on Shias are becoming more frequent and lethal.  They just killed 81 people in Quetta and another 100 people last month.  LeJ and SSP are also gaining political representation in the Punjab and National Assembly (h/t Hayat Alvi).

Wednesday word: revolutionary tax

The “revolutionary tax” is a fundraising method normally associated with Marxist movements and ideology-based terrorism.  One dictionary defines a revolutionary tax, or impuesto revolucionario, as an “amount of money demanded by a terrorist group demands from a business or wealthy person under threat of death.”*

W. A. Tupman has noted that revolutionary taxes are most often imposed by urban guerrillas to finance terrorist operations.

The inspiration for the revolutionary tax seems to trace back to Karl Marx and Friederich Engels, who once wrote that “In a revolution, taxation, swollen to colossal proportions, can be used as a form of attack against private property,” in a review of the Emile de Girardin’s book Le socialisme et l’impôt (“Socialism and Taxes”).

Money Jihad doesn’t normally link to Wikipedia, but this particular entry describes the phenomenon of revolutionary taxation so succinctly and clearly that it’s a must read:

Revolutionary tax

From Wikipedia, the free encyclopedia

Revolutionary tax is a major form of funding for violent non-state actors such as guerrilla and terrorist organizations. Those outside the organization may consider it to be a euphemism for “protection money.”^[1] Proponents of such groups maintain however that there is no difference between the revolutionary taxes “extorted” by given groups and corporate taxes raised by governments.

Revolutionary taxes are typically extorted from businesses, and they also “play a secondary role as one other means of intimidating the target population.”^[1]

Examples

The Irish Provisional IRA and Corsican FLNC have extorted revolutionary taxes^[2] as well as the following organizations.

ETA

The Basque nationalist organization ETA depended on revolutionary taxes.^[3][4][5] Small to medium-sized businesses were extorted between the amounts of 35,000 to 400,000 euros each, which comprised most of ETA’s 10 million euro budget in 2001.^[6]

The Philippines

In the Philippines most local and foreign companies pay revolutionary taxes to the Maoist New People’s Army. According to the army, the tax is a major obstacle for the country’s development while the New People’s Army justified it as a tax to be paid upon entering territories controlled by the rebels being a belligerent force.^[7][8]

Colombia

The revolutionary taxes of Colombian guerrilla movements have become more common in the 1980s and 1990s.^[9]

Nepal

The maoist guerillas of Nepal have also widely extorted revolutionary taxes.^[10]

Argentina

The national socialist Argentine Movimiento Nacionalista Tacuara (MNT) demanded a “revolutionary tax” from many Jewish shops in Buenos Aires.^{[citation needed]}

Soviet Russia

In the Soviet Russia, the Bolshevik government decreed a revolutionary tax on November 2, 1918.^[11] Although the Bolshevik government already controlled the country, its opponents were still internationally recognized as the lawful rulers.

References

1. ^ ^{a b} Detection of Terrorist Financing, U.S. National Credit Union Administration (NCUA), 2002
2. ^ MONEY LAUNDERING AND TERRORISM FINANCING: AN OVERVIEW, Jean-François Thony, IMF.org, Seminar on Current Developments in Monetary and Financial Law Washington, D.C., May 7–17, 2002. “Money laundering and the financing of terrorism may be seen as distinct activities. … sometimes discreetly called a “revolutionary tax” (ETA, FLNC, IRA)”
3. ^ Terrorism versus democracy: the liberal state response, Paul Wilkinson, Frank Cass Publishers, 2001, p. 70
4. ^ Suspected ETA supporters arrested in cross-border swoop Euronews 20/06/06
5. ^ Terror, Fires, Hail: Holiday Time in Europe, ABC News
6. ^ Counterterrorism: An Example of Co-operation, Juan Miguel Lian Macias, Ministry of Defence of Spain, 2002-2-22: “ETA is funded mainly from one source: the money it collects through extortion of small and medium businessmen, charging them the so-called “revolutionary tax”. At present the amounts required are between 35,000 and 400,000 euros. The annual budget the terrorist organisation needs for the maintenance of its structures is estimated at around 10 million euros. Beyond the Spanish borders, ETA seeks links with similar groups and causes. Hence, it intends to gain the support of ideologically akin groups. It has or has had contacts with the Breton Revolutionary Army, with Corsican and Irish terrorist groups, with revolutionary groups from Latin America, etc.”
7. ^ Rebels’ ‘revolutionary tax’ adds to cost of business in Philippines, N.Y.Times, October 20, 2004
8. ^ Chapter 6 — Terrorist Organizations, Country Reports on Terrorism 2007, U.S. Department of State
9. ^ Negotiating with Terrorists – A Reassessment of Colombia’s Peace Policy, NICOLAS URRUTIA, Stanford Journal of International Relations, vol. 3, issue 2, 2002
10. ^ Trekking in the time of terrorism – The east is red with rhododendron and revolution, DAMBAR KRISHNA SHRESTHA, GUPHA POKHARI #243, 15.4.2005
11. ^ Socialism: Still Impossible After All These Years, Peter J. Boettke & Peter T. Leeson, George Mason University, s. 13; Critical Review, Vol. 17, Autumn 2005

The un-cited imposition of the revolutionary tax against Jews in Buenos Aires mentioned above is documented in The War of All the People by Jon B. Perdue.

Having explained the term, the academic concept of a revolutionary tax really needs to be broadened to include religious-based revolutionary movements, especially Islamist movements.  The Islamic fundamentalist imposition of the twin sharia taxes—zakat on Muslims and jizya on non-Muslims—is an attempt to revive aspects of Caliphate-era tax law and combine them with contemporary terrorist financing tactics.  This has been most clearly illustrated in the 1990s and 2000s in Afghanistan by the Taliban, but also by jihadist groups in Pakistan and Somalia.  And such extortion has not been limited to urban centers; it has been carried out in the countryside too.

Finally, it is important to note that ETA’s longstanding and profitable revolutionary tax mentioned above has reportedly been abandoned.  If the tax on Basque and Navarran businessmen that ETA benefited from for so many years has come to an end, perhaps there is hope that one day, the Islamic terrorists can be forced to abandon their jihad tax.

VOX Media, Diccionario Escolar, 2nd Edition (London:  McGraw Hill Professional, 2011).

Wednesday word: sovereign wealth funds. Your security at risk?

Time for a reprise of Money Jihad’s occasional series, the “Wednesday word.”  Let’s take a look at sovereign wealth funds, which Philip Romero defines as:

Investment funds maintained by the governments of countries that run budget surpluses, usually because the nation exports more than it imports (e.g., oil-exporting countries).  These funds act much like other institutional investors, except that their client is, directly or indirectly, a national government.*

In the 1950s, the big oil producing countries, mostly in the Persian Gulf, wanted some way of investing extra capital.  They said this would help protect them from the volatility of the oil markets.  Since then, they have acquired more and more assets around the world.  Critics have pointed out several concerns about these sovereign wealth funds:

• SWFs can acquire important stakes in sensitive industries and sectors, ie “assets with strategic value,” as illustrated most famously by the Dubai Ports World fiasco in 2006.
• SWFs distort markets by investing capital in pursuit of foreign policy goals rather than financial goals.
• The funds lack transparency and accountability.
• SWFs can carry out corporate espionage and extract technology they previously could not access.
• Due to their massive size, SFWs have the potential to disrupt financial markets.

In addition to those concerns, Bryan Balin of John Hopkins points out:

Revisiting the Golden Chain, 11 years later

It was the 1990s.  Osama bin Laden was broke, busted, and disgusted.  Al Qaeda had spent its last dime, and Osama needed a bailout.  Sulaiman Al-Rajhi and 19 other millionaire and billionaire Muslims came to the rescue.  They constituted a “golden chain” of financial backers that would enable a second life for Al Qaeda in Afghanistan from which to stage the terrorist attacks of 9/11.

The U.S. Senate presented the evidence against the Golden Chain once again this summer in its report about the misdeeds of the British bank HSBC.  HSBC maintained a relationship with Al-Rajhi Bank, of which Sulaiman Al-Rajhi was a founder, until 2005 despite the earlier discovery of the Golden Chain and Al-Rajhi Bank’s record of facilitating terrorist transactions.

Don’t take my word for it.  This comes from the Senate’s Jul. 17, 2012, report:

Al Qaeda List of Financial Benefactors. The al Qaeda list of financial benefactors came to light in March 2002, after a search of the Bosnian offices of the Benevolence International Foundation, a Saudi based nonprofit organization which was also designated a terrorist organization by the Treasury Department, led to seizure of a CD-ROM and computer hard drive with numerous al Qaeda documents.  One computer file contained scanned images of several hundred documents chronicling the formation of al Qaeda. One of the scanned documents contained a handwritten list of 20 individuals identified as key financial contributors to al Qaeda. Osama bin Laden apparently referred to that group of individuals as the “Golden Chain.” In a report prepared for Congress, the Congressional Research Service explained:

According to the Commission’s report, Saudi individuals and other financiers associated with the Golden Chain enabled bin Laden and Al Qaeda to replace lost financial assets and establish a base in Afghanistan following their abrupt departure from Sudan in 1996.

One of the 20 handwritten names in the Golden Chain document identifying al Qaeda’s early key financial benefactors is Sulaiman bin Abdul Aziz Al Rajhi, one of Al Rajhi Bank’s key founders and most senior officials.

The Golden Chain document has been discussed in the 9-11 Commission’s report, in federal court filings, and civil lawsuits. Media reports as early as 2004 noted that the al Qaeda list included the Al Rajhi name. HSBC was clearly on notice about both the al Qaeda list and its inclusion of Sulaiman bin Abdul Aziz Al Rajhi.

What became of the Golden Chain?  As for Al-Rajhi, the most prominent individual listed, he remains at large with an estimated net worth of $6 billion, showing up on Forbes magazine cover stories and feature interviews in the Arab News.  By Al-Rajhi’s own admission, he’s working out a “meticulous scheme” for a mysterious charitable endowment to dispose of his assets.

Wednesday word: Istisna’a

Like salam, istisna’a is an Islamic contract that allows two parties to agree on a price now for a product delivered later (although Islam generally prohibits deferred payment sales or sales of objects that do not yet exist).

Specifically, istisna’a is defined by Islamic finance specialist Brian Kettell as “a sale contract whereby the purchaser asks the seller to manufacture a specifically defined product, using the seller’s raw materials, at a given price.”*

One difference between istisna’a and salam is that is that istisna’a is used for major manufactured products, facilities, or equipment such as an oil rig, while salam is often used for agricultural or other objects.

However, while there is a marginal justification for salam in Islamic law, there is virtually none, if any, for istisna’a.  Kettell writes:

Similarly to Murabaha and Ijara, no direct support for the principle of Istisna’a can be found by studying the major sources of Sharia’a law.  In fact, the majority of religious schools argue that Istisna’a is inconsistent with Sharia’a law.  Only the Hanafi School accepts the Istisa’a contract and then merely because there is a need within society and customary practice (urf) to have an Islamically acceptable form of project finance.  Nothwithstanding the lack of juristic support for Istisna’a, it is still a widely employed method among Islamic banks.

In a 10 page document describing and justifying salam and istisna’a, Mufti Taqi Usmani (one of the two most notorious sharia finance proponents in the world) cites only one Hadith to justify salam, and none to justify istisn’a.  Usmani makes one vague reference to the Ottoman Empire as having utilized istisna’a.  Although Mr. Usmani supports jihad, sharia, and Islamic supremacy, his apparent support for istisna’a contracts may be based upon something other than Islam.

*Kettell, Brian B., Introduction to Islamic Banking and Finance (Chippenham: John Wiley and Sons, 2011).

Wednesday word: maysir

Maysir means “gambling,” and it is prohibited by Islamic law.  Muslims throughout the centuries have regarded maysir as any type of game of chance with money at stake.

In the time of Muhammad, however, it is possible that maysir simply referred to one particular game of dice, as described in Franz Rosenthal’s book Gambling in Islam.  Nonetheless, Rosenthal says that no proof is available either way, and Muslims have been consistent in outlawing virtually any type of gambling.

The Koran, Sura 5, Verse 90 says, “O ye who believe!  Strong drink and games of chance [maysir] and idols and divining arrows are only an infamy of Satan’s handiwork. Leave it aside in order that ye may succeed.”

The advocates of sharia law are so adamant on this point that they’re willing inflict severe injuries on those who gamble.  See this recent news (h/t Atlas Shrugs) out of Aceh, Indonesia, where 11 were caned for gambling.

Would you look forward to living under Islamic law where a private bet over a sporting event or a game of cards subjects you to a public caning?  Do you, like some in Washington, D.C., Paris, and London eagerly anticipate the ascension of “democratically” elected Muslim Brotherhood partisans in the wake of the Arab Spring who will impose penalties such as the ones Acehnese authorities have meted out against low-stakes gamblers?

The prohibition on maysir is based on irrational superstitions, petty whims, and ill-conceived utterances of a violent man 14 centuries ago.