Introduction to Money Laundering

Money laundering is the process of making dirty money look clean. Doug Hopton stated that money laundering has been described as a process by which criminals seek to cover the source and ownership of the proceeds of their criminal practices. The goal is to enable them to keep control over the income and to eventually recover money. This leads people to believe that money laundering can be explained in one of three ways: covering dirty money with clean money, washing drug money, or disguising criminal money. This historical definition is inadequate because the expression “money laundering” is itself a misnomer. It does not take into account the fact that in the modern world committing money laundering does not necessarily include physical money (Hopton, 2009).

Criminals transfer their money across jurisdictions to maintain layers of transactions and avoid an audit trail. These two practices have dangerous microeconomic implications. Criminals, who are planning to launder their dirty money, pick an investment not to maximize their profit but only to avoid detection. The issue is they invest their money in the least productive activities as long as these activities give opportunity to avoid detection. Thus, this affects the productivity and efficiency of both the local and world economies. In addition, criminals tend to move their money rapidly between their accounts, other banks accounts or even across borders. This fast movement of money brings some issues; such as bank instability and liquidity. Also the transferring of big amounts of money in and out of a country can shock small developing economies (Combating money laundering and the financing of terrorism, 2009).

Over the last two decades, the amount of illicit funds laundered globally increased. Money laundering has a grave effect on the economies of developed and developing countries. International regulatory bodies are making efforts to reduce the risk and implications of money laundering. In the same context, the Central Bank of Sudan (CBOS) is making efforts to follow and comply with international standards.

Money laundering activities followed by various implications and risks, such as reputational risk, are one of the issues that impact the Banking System in Sudan. Recently, Sudan has been removed from the list of the countries under the Financial Action Task Force (FATF) monitoring process. The removal was a beginning for Sudanese banks to establish a newly opened correspondent banking relationship. Unfortunately, Sudan is still under the US sanctions which prohibited the Sudanese banks from conducting business in US dollar, importation of American products, exportation of products with Sudanese origin, etc.. Furthermore, accidently US sanctions contribute in having a suitable money laundering environment in Sudan. According to these Sanctions, Sudanese Banks are no longer able to meet their customers’ needs and consequently this increases the black market dominance. As a result of that, the black market becomes a combination of illicit and legitimate business.

Money laundering crime happens in three stages: placement, layering, and integration, and each stage requires special efforts by banks to fight and avoid dealing in dirty money. To combat ML, the Central Bank of Sudan maintains a number of publications, regulations, and policies regarding anti-money laundering, in order to comply with international standards and to reduce the risk of the implications of money laundering in the Sudanese banking system. These publication and regulations are based on the Anti Money Laundering (AML) & the Financing of Terrorism Sudanese Act (Cbos.gov.sd, 2016).

A 2009 study found that money laundering criminal proceeds could add up to 3.6 of global GDP, or US $ 2.1 trillion (Trafficking, R.F.D., 2011). The implications of money laundering extend further to cause: increased crime and corruption, weakened financial institutions, loss of control of the national economic policy, loss of government resources, operational risks, legal and compliance risks, reputational risks, credit risks and liquidity risks. 

The Sudanese Banking System

During the colonial period, Barclays Bank, the first foreign bank in the history of Sudan was established. Sudan was using the Dual Currencies in Transactions policy and according to this policy the activities were divided between the Ministry of Finance and the Branch of National Bank of Egypt in Sudan. In order to achieve a replacement of the old system, a Committee was formed of three experts from the U.S. Federal Reserve to study and examine the possibility of establishing a Central Bank of Sudan (CBOS). In March 1957, the experts submitted a report which was followed by the issuance by government of the Bank of Sudan Act of 1959.  In the following year the Central Bank of Sudan started conducting business (Cbos.gov.sd., 2016).

The Bank began to conduct transactions on February 22, 1960, and it was managed by Mamoun Behairy the first Governor of Central Bank of Sudan. Many domestic Banks started to operate after the Central Bank of Sudan was established, such as the Sudanese Commercial Bank in 1960, The Industrial bank of Sudan in 1961, and the Agricultural Bank of Sudan in 1967.

In May 1970, the government of Sudan decided to nationalize the whole banking sector in Sudan; years later they allowed foreign banks to work together with national banks. Furthermore, in the 1990s the government of Sudan decided to change the banking system from a traditional to an Islamic system (Mohsin, M.I.A., 2005.)

The Banking system in Sudan is divided into two types: Commercial Banks and Specialized Banks. There are three types of commercial Banks which are: government, joint (owned by government and the private sector), and foreign banks. (Cbos.gov.sd., 2016). In addition, the majority of the specialized banks are owned by the government, and they are playing an important function in developing domestic industry, agriculture and social development. There are five specialized banks operating in the country, three of them are owned by the government in order to focus on the main sectors:

• The Savings and Social Development Bank which aims to encourage savings and development,
• The Agriculture Bank of Sudan, which focuses on accomplishing self-sufficiency from food, and exports to other countries in order to gain foreign currencies,
• The Industrial Development Bank, which focuses on developing the industrial sector
• The Family Bank, which is jointly owned, and established to provide micro-finance to small projects which help a number of unemployed people to start their own businesses,
• Financial Investment Bank, which is also a jointly-owned bank meant to invest in the Khartoum stock exchange in order to assist in economic growth (Cbos.gov.sd, 2016).

Moreover, the banking system in Sudan is highly concentrated, with three of the largest banks controlling about 85.0 per cent of the banking sector assets in 2011. According to the IMF, in 2014 the financial system in Sudan was working under Islamic principles and laws (Sharia), and dominated by the banking sector which accounts for 90 percent of the financial system assets. By the end of 2014, there were 37 operating banks, 30 of them are commercial domestic banks (some of them are joint with government and foreign ownership), and the other 7 are fully owned by foreign banks.

The Central Bank of Sudan (CBOS) has taken some serious actions to improve the banking sector performance by fixing the weaknesses in bank supervision, which included the CBOS divesting from some public banks, and also improving inspections and enforcement identified by the IMF’s Financial Sector Assessment Program in 2005. The CBOS also encouraged banks to expand by opening  new branches and setting up a credit registry system, which caused a significant improvement in the financial system where more than 32 new bank branches were opened by the end of 2013, and more than 100 ATM’s installed around the country. More eServices were also added such as mobile banking, E. registrations for students, and points-of-sale in supermarkets and grocery stores (Cbos.gov.sd, 2016).

Combating Money Laundering

Sudan published its first Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Act in 2004. This Act criminalizes and defines the term money laundering clearly, and gives explanations for different terms such as, real beneficiary, ongoing relationship, casual client, and others. This Act was updated in 2010 to follow the change in organized crime, and on December 2010, the Central Bank of Sudan published the first regulation regarding AML/CFT. This regulation was the first specialized guideline for the banking sector and the AML/CFT regulations explained the risks associated with customers, products, and the geographic area. Again, and in accordance with international standards, in 2014 the AML/CFT regulations were updated twice to be more effective and supportive to the Financial Action Task Force (FATF) requirements. International regulatory bodies welcomed Sudan’s efforts and encouraged Sudan by removing the country’s name from the FATF’s monitoring process under its on-going global AML/CFT compliance process (Fatf-gafi.org, 2016). The major key to improve banks performance is to ensure strong supervision and more privatization and this can only be achieved by continuing the implementation of best practices in banks (inspections, enforcement and supervision) (Cbos.gov.sd, 2016).

Sanctions

In the late 1990s, the United State of America through the Treasury Department’s Office of Foreign Assets Control (OFAC) placed Sudan under US Sanctions as a response to the Sudanese government practices and their ongoing support for international terrorism. Moreover, in 2006 the US made amendments by adding the conflict in the Darfur area. After five years and after the independence of South of Sudan, the OFAC made an exception for the new state called The Republic of South of Sudan. These sanctions are covering many areas that can be used to pressure the Sudanese government, such as a ban on the importation of products or the use of services of Sudanese origin, the exportation or re-exportation to Sudan of products, services, or technology from the U.S. or by a U.S. person.

The issue of the US sanctions is not affecting the Sudanese government itself but it is affecting the whole economy of the country. Of course one of the US sanctions aims is to persuade corrupt governments by complicating the economic situation of the country, but in a country like Sudan with a ranking of 165 out of 168 and score of 12% in the Transparency International Ranking, it is impossible (Transparency International – Country Profiles, 2016). Additionally, because of the US sanctions Sudanese banks are facing many barriers while trying to meet their customer’s needs. Thus, customers will seek other channels such as the Second Market (Black Market) and this will tend to increase the amount of money outside the banking system, and may also contribute to building an appropriate environment for money laundering. 

The Study

This study aimed to investigate the implications of money laundering on the performance of the Sudanese banking System, by testing the relationship of the banking performance and the sound implementation of money laundering regulations and publications.

The study was conducted using a mixed research design as it was the most appropriate research methodology. Data was analyzed quantitatively, but a need for qualitative data arose to garner a better understanding of the reasons, opinions and comments surrounding money laundering in Sudan.

This study considered a number of 6 out of a total of 34 banks in Sudan and the Sudanese Financial Information Unit which was established for anti-money laundering purposes. The collection of data was through 31 questionnaires and 6 face to face interviews. The targeted interviewees were the Compliance Officers to avoid issues of inaccurate information.

The study tested the following hypotheses:

First Hypothesis: Stability of the Sudanese banking system is related to an effective implementation of anti – Money Laundering Regulations and Publications.

Second Hypothesis: There is a direct relation between the level of performance of Sudanese banks and sound implementation of anti-money laundering regulations.

Third hypothesis: The anti-money laundering regulations and publications have no impact on the performance of the Sudanese banking system.

Results

 Firstly, the SPSS descriptive statistical results for the first hypothesis shows that 48.4% of respondents strongly agreed and 35.5% agreed that the stability of the Sudanese banking is associated and affected by the effective implementation of the AML regulations (H1), compare to only 3.2% who disagreed and 12.9% who remained neutral. Secondly, the statistical test showed that 35.5% strongly agreed and 12.9% agreed with the point that there is a direct relationship between the performance level of the Sudanese banking system and the sound implementation of the AML regulations and publications (H2) compared to 9.7% who disagreed and remained neutral. Thirdly, the results show that 67.7% strongly disagreed and 16.1% disagreed with the point that the AML regulations have no impact on the Sudanese banking performance (H3), compared to 9.7% who agreed and 6.5% who remained neutral.

As a summary, it has been proven that the relationship between the performance of the Sudanese banking sector and the AML regulations is positively significant. 

Qualitative Data

In this part we review the data collected by interviewing a number of 5 Compliance Officers from both domestic and foreign banks. The results of these interviews have been coded, labeled and categorized. The data has been categorized into three main categories: issues, risks, and problem solving. The issues category includes cash society, black market, and AML software. The risk category involves banking license, reputational risk, and liquidity risk. Lastly, the problem solving category is about improving the AML regulations, and the concern with analysis, gold, non-financial institutions, AML systems, and capabilities. Below, the summary of answers has been categorized by question and category.

Question 1: What are the factors behind anking stability in Sudan? And can we consider AML as an essential factor?

All the interviewee said that AML is an essential factor in banking stability. According to Mr. Taha Saeed the Head of Compliance at the National Bank of Abu Dhabi – Sudan, the stability itself is directly related to the stability of the banking system. Thus, the AML comes in the part through maximizing the banking network through correspondent banks, and linking the removal of Sudan from the FATF list which was advantageous to the Sudanese banking system. Another important opinion from Mr. Ahmed the Head of Compliance and Internal Audit at Qatar National Bank, noted that if the banking system in Sudan became open without strong regulations of AML it will lead to failure of the entire banking system in Sudan.

Question 2: What is the role of AML regulations and publications on the stability of the Sudanese banking system?

Most of the interviewees had the same answer. They confirmed the AML regulations and publications minimize reputational risks, liquidity risks, loss of resources, and expanding the correspondent relationship. Mr. Taha Saeed added an important point; he said Sudan is a cash society and the AML regulations helps in reducing this.

Question 3: Do the US sanctions impact the liquidity of the Sudanese banks?

The answer to this question was the same from all respondents; all the interviewees said the sanctions decrease the liquidity of the banks. The US sanctions assist in increasing the amount of money outside the banking system. According to the interviewees, banks are no longer able to meet the customers’ needs, thus, customers will seek another channel to conduct their business (black market). Mr. Ammar the Head of Legal and Compliance at the Bank of Khartoum, said it had impacted banks in terms of losing external resources, such as foreign currencies.

Question 4: Do the US sanctions facilitate the process of Money Laundering? How?

Most of the interviewee said the sanctions facilitate the process of money laundering. They refer to the same point in question 3; because of the sanctions customers started using other channels outside the formal financial system, resulting in the black market being the main venue where both legal and illegal business are conducted.

Question 5: While Sudan is under US sanctions, how do banks comply with international standards correctly?

The answers to this question were a little bit different, for example Mrs. Manal the Head of Compliance at the National Bank of Egypt, said banks may be (compliant) but not completely. Others like Mr. Ahmed and Mr. Ammar said the sanctions made the process of complying with international standards more difficult. Sanctions makes Sudanese banks incur more costs such as paying large amounts for AML systems.

Question 6: What are the gaps in AML regulations and publications? And how can they be improved?

Most of the interviewees said the AML regulation should focus more on the analysis part and on software. Also, the AML regulation need to cover the cash society; regulations should show ways to bring money inside the banking system and monitor it (Mr.Taha). However, Mr. Ammar thinks the gap is not in the regulations themselves, but in the application of the AML regulations by financial institutions.

Conclusion

Both the quantitative and qualitative analysis results agreed with the goal of this study. As it is clearly mentioned above, the quantitative data analysis showed that the majority of the respondents strongly agreed that money laundering is affecting the performance of Sudanese banks, and also the analysis results showed the significant relationship. Of course, the performance is affected by other factors but at the same time money laundering has an essential effect. Regarding the qualitative results, the interviewees provided answers following the same directions of this study. The three categories are strongly related to each other, issues of cash society, black market, software (category 1) and risks such as losing banking license, reputational risk, liquidity risk (category 2) can all be solved by improving the AML regulations (category 3). In fact, most of the information provided by the interviewees is supported by the literature. Cox, 2014, noted that an institution without reputation is worth nothing and the significant failure of the financial institution to protect itself from conducting business with dishonest individuals or companies can significantly affect its reputation with staggering effects.

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