Keeping Clean: How Islamic Banks Fight Money Laundering?

A rule making body issues authorative shari’a auditing standards for all Islamic banks and other Islamic businesses and it will be the most effective way to eliminate problems within the Islamic economy. The most effort to develop a body of consistent standards for shari’a audits has been undertaken by

The banking system including the shadow banking system has been very instrumental in the driving of the economy, Wen 2012. Banking system consists of the structural network of institutions that offer financial servises within an economy or country,Cihak 2007. Howeve there has been great inovations and developments in this industry which can positively contribute to financial instability of an economy. Schaeck 2010, opined that the the growing increase in competition in the the banking sector between the traditional banks and the shadow banking system greatly increases the systematic risk the banking sysyem faces.The banking system always faces a systematic risk that if one bank happens to experience a problem the same will

We must make sure that organised crime cannot launder its funds through the banking system or the gambling sector… Our banks should never function as laundromats for mafia money, or enable the funding of terrorists”.

Money laundering is the process that criminals use to make “dirty” money seem clean. They may set up a business to funnel money through like a car wash or a strip club. In the increasingly globalized world, some criminals also use shell companies, international wire transfers, multiple bank accounts and offshore accounts to make their illicit earnings appear legitimate. Anti-money laundering task forces are set up to combat this problem. Since money laundering

Over the decades, IMF (International Monetary Fund) has provided governments across the world with practical assistance to tackle money laundering. As a result, many countries around the world have reformulated laws governing central banking, commercial banking, and foreign exchange with the intention to prevent money laundering (Quirk, 1997, p.8). Furthermore, the cooperation between IMF and FATF (Financial Action Task Force) has also played an important role on combating money laundering (Schneider & Windischbauer, 2008).

In another study, 5 Islamic banks of MENA state were used. Their financial statement of 1993-2002 revealed that there is a rise in liquidity risk, reason being the hasty withdrawal by the account holder due to a disparity between the

The gale of economic liberalization currently sweeping across the globe provides another reason for looking into the efficiency of Islamic banks since it poses a further competitive challenge to the Islamic banking institutions. It is expected that by the year 2007, trade liberalization will require Malaysian domestic banks to compete with other global players on an equal playing field. Such a change implies that local Islamic banking institutions will have to be efficient, innovative, competitive and resilient players in the market. This is particularly important since foreign banks that are arguably more efficient may also offer Islamic banking products to take advantage of brisk demand for Islamic banking products.

The communication between private and public sector helped to create some of the laws against money laundering, directed at the financial sector with the combination of national strategies from Switzerland, the United Kingdom, and the United States. One of the key issues to point out between sectors is that it is often assumed that the monitoring roles developed in the private sector might never be successfully accomplished directly by the states alone, and with so much assumption it leaves room for doubts. Banks careless associations with criminals have often undermined the public’s confidence in bank's stability of the entire financial system.

Main competitive pitch of Islamic banking is in Sharia compliant and interest free. But the real business of Islamic banking is producing profit.

The term “shadow banking” is one that is used by banking regulators, the media and academics especially when coming up with explanations for the financial crisis of 2007-2008. It has become a rallying point for international reform efforts aimed at the unregulated nonbank financial activities which have potential to destabilize the global financial system1.However on closer examination it is apparent that not only does shadow banking subsist predominantly within the regulated banking system2, it also in another

The primary model of Islamic managing an account framework came into picture in 1963 in Egypt. Ahmed al Najjar was the boss originator of this bank and the key peculiarities are

In addition, Islamic bonds are still far superior as compared to conventional binds, underpinned by the following factors: • Fairness and transparency. The financier and customer share the risks and rewards based on an agreed profit-sharing ratio. The roles and responsibilities of the parties to a contract are also explicitly disclosed and transparent. Asset-backed transactions. Islamic financial transactions must be backed by an underlying tangible asset or legitimate productive activity. This discourages over-exposure of the financing facility beyond the value of the underlying asset, and hence provides continuous security to the investors Ethical investment. Islamic finance prohibits the charging or paying of interest, and imposes restrictions on unethical and speculative financial activities

Offshore banking is the action of having a bank account outside of the country of residence. Typically it offers many advantages like greater privacy, low or no taxation, easy access to deposits and protection against local, political, or financial instability, but has also been popular for its use of illegal practices like money laundering and tax evasion. Those against offshore banking view its illegal reputation and predict that it will only cause further damage like providing fund for terrorism or holding underground economies. However other experts believe that offshore banking is a safe haven for depositors and has had a substantial impact on the international economy in today’s world.

People in the modern world keep their funds stored in some type of financial institution, whether it’s a small local bank that only operates in a small town or a large multinational bank that has offices in every major city around the world and caters to millions of people. With the responsibility of handling the assets of millions of people banks are sometimes accused for activities that may be illegal, such as money laundering: the method of concealing illegally acquired money or invasion of a client’s account. Unlike small banks, Multinational banks are the most susceptible to these accusations. Multinational banks have to abide to the laws of multiple countries and any action they do could cause controversy, whether it's considered good in the bank’s eyes or if it’s genuinely bad. While fiscal government policies that affect revenue collection and expenditure set the limits for multinational banks, ultimately multinational banks should be held to a higher international set of regulations. Their actions may be legal in some countries while illegal in others, causing various problems that could lead to the closure of offices in one country due to an action in another. Therefore, an international governing body should be created to regulate t multinational banks and keep from getting in trouble with national governments who have unique restrictions.

In order to build an effective system in the fight against money laundering it is essential for banks and financial institutions to take strict measures and procedures represented by controlling them, and for that Simwayi and Wang (2011) found that commercial banks in Zambia have gen-erally complied with the Bank of Zambia AML directives of 2004 and they have taken AML laws and