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Problems of countering the legalization of proceeds from
criminal activity (on the example of the Kingdom of
Bahrain)
Umidakhon SOBITOVA
Tashkent State University of Law
ARTICLE INFO
ABSTRACT
Article history:
Received December 2023
Received in revised form
15 December 2023
Accepted 20 January 2024
Available online
15 February 2024
This article examines the challenges of combating money
laundering and terrorist financing in offshore territories of the
Kingdom of Bahrain. Additionally, it reveals the methods and
mechanisms of money laundering within this jurisdiction. It also
provides examples from notable cases. The article analyzes the
Basel AML Index indicators, part of a study by the Basel
Institute under the United Nations Crime Prevention and
Criminal Justice Program Network. These indicators cover a
broad spectrum of risk factors, each with its own focus and
scope. The rating calculation is based on indicators organized
into five main categories, each weighted differently.
2181-
1415/©
2024 in Science LLC.
https://doi.org/10.47689/2181-1415-vol5-iss1/S-pp320-327
This is an open access article under the Attribution 4.0 International
(CC BY 4.0) license (https://creativecommons.org/licenses/by/4.0/deed.ru)
Keywords:
FATF,
preferential treatment,
Financial Intelligence
Department,
phase,
cyber fraud.
Jinoiy faoliyatdan olingan daromadlarni legallashtirishga
qarshi kurashish muammolari (Bahrayn Qirolligi misolida)
ANNOTATSIYA
Kalit so‘zlar
:
FATF,
imtiyozli rejim,
Moliyaviy razvedka
boshqarmasi,
faza,
kiber firibgarlik.
Ushbu maqolada Bahrayn Qirolligining offshor hududida
jinoiy y
o‘
l bilan olingan daromadlarni legallashtirishga va
terrorizmni moliyalashtirishga qarshi kurashning dolzarb
masalalari k
o‘
rib chiqilgan. Bundan tashqari, shu hududda
“
nopok
”
pulni yuvish jarayonining shakllari va modellari
aniqlangan.
“
Yuqori darajadagi
”
jinoiy ishlardan misollar
keltirilgan. Birlashgan Millatlar Tashkilotining jinoyatchilikning
oldini olish va jinoiy Odil sudlov dasturi (Birlashgan Millatlar
Tashkilotining jinoyatchilikning oldini olish va jinoiy odil sudlov
dasturi tarmo
g‘
i) homiyligida faoliyat yuritadigan Bazel instituti
1
Teacher, Department of Court, Law Enforcement Agencies and Advocacy, Tashkent State University of Law.
E-mail: sobitova.umidakhon@gmail.com
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tomonidan olib borilgan tadqiqotlar doirasida jadvalda Bazel
AML indeksining k
o‘
rsatkichlari tahlil qilingan b
o‘
lib, ular xavf
k
o‘
rsatkichlarining keng doirasini
o‘
z ichiga oladi, ularning har
biri har xil y
o‘
nalish va qamrovga ega. Reytingni hisoblash
uchun ishlatiladigan k
o‘
rsatkichlar har xil
o‘
ziga xos tortishish
kuchiga ega b
o‘
lgan beshta asosiy toifaga b
o‘
linadi.
Проблемы противодействия легализации доходов,
полученных от преступной деятельности
(на примере
Королевства Бахрейн)
АННОТАЦИЯ
Ключевые слова:
ФАТФ,
льготный режим,
Управление финансовой
разведки,
фаза,
кибермошенничество.
В настоящей статье рассмотрены актуальные вопросы
противодействия
легализации
доходов,
полученных
преступным путём, и финансированию терроризма на
оффшорной территории Королевства Бахрейн. Более того,
раскрыты формы и модели процесса отмывания «грязных»
денег на данной территории. Приведены примеры из
«громких» уголовных дел. В рамках исследования,
проведённого
Базельским
институтом
под
эгидой
Программы Организации Объединённых Наций по
предупреждению преступности и уголовному правосудию, в
таблице проанализированы показатели Basel AML Index.
Эти показатели включают в себя широкий спектр
показателей рисков, каждый из которых имеет разную
направленность и охват. Показатели, используемые для
расчёта рейтинга, сгруппированы по пяти основным
категориям, каждая из которых имеет разный удельный вес.
SUMMARY
This scientific article focuses on combating the legalization of proceeds from crime.
During the research, the author analyzed "offshore zones" and assessed the risks
associated with placing and fragmenting crime proceeds and financing terrorism in
Bahrain
’
s offshore territories. Notably, tax advantages are not exclusive to companies in
classic offshore jurisdictions but also extend to those registered in European countries.
Examples include the Netherlands, Luxembourg, Austria, the UK, and Switzerland. These
jurisdictions offer significant tax benefits to companies, despite corporate taxes and strict
financial reporting requirements, under certain conditions. These jurisdictions, known
for their higher level of respectability or "image," differ from financial offshores.
The legality of using offshore companies, like any legal entity, varies; they can be part of
legal tax planning or illegal activities like tax evasion or money laundering. The legality of
an offshore transaction depends on the laws of its registration country, other relevant
countries, and international treaties. While many developed countries impose
restrictions on offshore transactions for their residents, a complete ban is rare.
The author has thoroughly examined the primary models of money laundering, a topic
that has sparked controversy among scholars. The article provides various international
examples of criminal cases in this category.
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As a result, the author concludes that the use of Bahrain
’
s offshore jurisdictions at
the final stage of organized criminal activity in the economic sphere, including tax
evasion, is the most individual, sometimes distinctive feature of laundering proceeds
from crime and financing terrorism. In general, this scientific article covers
comprehensively and systematically the issues related to countering the legalization of
criminal proceeds, therefore, it is of theoretical, scientific, and practical interest to both
students, researchers, and forensic investigators.
... Capital has one single vital aspiration
–
the desire to grow...
Karl Marx [1, p. 244]
As you know, the functioning of international terrorism is closely connected to the
creation of safe and favorable conditions when using offshore jurisdictions. In this
regard, special attention is paid to the fight against the financing of terrorism, and the
developers of comprehensive measures, at the same time, being fighters in this area, are
the Group for the Development of Financial Measures to Combat Money Laundering
(FATF). The comprehensive measures put forward by this Group exist in many countries
of the world and, first of all, it is worth noting that they include verification of documents
and participants of unreliable, in other words, suspicious transactions.
That is exactly how large and unlimited advantages are provided through offshore
jurisdictions to achieve criminal goals, to an almost endless circle of people in any country.
Since such "tax havens" have such favorable conditions, namely: a simplified
registration procedure; the secretive and confidential nature of the use of personal data,
confidential information about persons who have registered such a company; a huge
number of benefits, including tax, as well as those benefits through which criminal
organizations use the "tax haven" as a source of financing of terrorist activities.
In its turn, we will briefly explain that the
"offshore zone"
is the entire territory of
a certain state, it is also possible that its part, where there is a privileged, profitable, or
zero taxation regime for some types of companies [2].
Before considering the issue regarding the risks for the placement and
fragmentation of proceeds from crime and the financing of terrorism in the offshore
territory of the Kingdom of Bahrain, we will describe the situation in this territory.
Thus, the Kingdom of Bahrain is an island in the Persian Gulf in Southwest Asia.
This island state has established trade relations with Pakistan and India, which allows
entrepreneurs to promote their businesses. The kingdom
’
s other strong point is oil
production and refining, which accounts for about 30% of GDP. The main advantage of an
offshore company in Bahrain is zero taxes. The only exception when you need to pay a tax
is oil and natural gas production.
It is worth noting that Bahrain offers three forms of doing business:
–
WLL
–
With Limited Liability.
Such organizations have limited liability, and also
require an authorized capital of 20,000 dinars
–
$ 53,050. The capital is paid immediately to
the tax authority. The company should have 2-50 owners, as well as at least 2 directors.
–
SPC
–
Single Person Company.
Such firms are similar to individual
entrepreneurship. The amount of the authorized capital should be 50,000 dinars
–
$ 132,600. To create an enterprise of the SPC type in an island state, 1 person is needed
who will perform the duties of the owner and shareholder of the company.
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–
BSC
–
Bahrain Stock Company.
To open an offshore company, you need 2 or
more owners. Here, entrepreneurs will have to pay the highest amount of the authorized
capital
–
from 250,000 dinars (from $ 663,000). Businessmen must immediately pay half
of the amount to the tax authority, and within three years
–
the remaining 50% [3].
Particularly important are those points regarding the provision of preferential
terms and a mutually beneficial position when registering a company in the Kingdom of
Bahrain: firstly, having adopted the experience of foreign countries, Bahrain introduced a
norm in its banking legislation regarding the interest rate on loans, when in Islamic
countries this norm contradicts the provisions of Sharia and Muslim law in general.
Consequently, this norm is simply absent in Muslim countries.
Secondly, the commercial banking sector is quite developed in Bahrain, among
them there are popular international banks, as well as offshore banks of Islamic banks.
Thirdly, there are also laws about bankruptcy and liquidation by court, existing in
modern developed countries [4].
Moreover, we will further analyze
the main models of the money laundering process
,
since this process is complex, thus quite lengthy, involving many different operations.
In this regard, it is important to mention the views of scientists on this issue. For
example, several scientists, including Professor
P. Bernasconi
(Switzerland)
, put
forward a view on such a two-stage model as: 1) Money Laundering, that is, money
laundering and 2) Recycling, more precisely, return to circulation, considering these
components as "laundering" of the first and second degree. In turn, Professor
K. Muller
(Switzerland)
presents a four-sector model studied using two pairs of concepts: legality
or illegality, the country of the main crime, or the country of money laundering [5].
In our opinion, considering the forms of money legalization in the offshore zone of
Bahrain, it is worth studying this issue within the framework of the most common "three-
phase model". Meanwhile, adhering to this model, it is important to note that the first
phase is referred to as
Placement
. This phase is characterized by the fact that before the
introduction of "dirty" money into legal circulation, to begin with, it is often necessary to
"launder" them beforehand, in such a way that they can be converted into other types of
currencies, banknotes of other denominations, securities. The forms of the first phase in
banking are aimed at circumventing the provisions on mandatory identification of the
client that operates in most countries.
Key forms of the first phase:
✓
embezzlement or blackmail of persons responsible for the identification of the
client;
✓
fraud using front persons and companies;
✓
the use of enterprises with a large cash turnover, the legal proceeds of which are
mixed with "dirty" money;
✓
creation of own fictitious enterprises declaring "dirty" money as revenue;
✓
structuring
–
payments in small amounts to one bank account;
✓
exchange transactions, more precisely, organized exchange of money for
banknotes of a different denomination or other currency without using bank accounts;
✓
smurfing, that is the organized purchase of easily transferable property values,
mainly financial instruments. Each purchase is carried out for an amount lower than that
with which the identification obligation arises.
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Next, we will explain the structure of the second phase, referred to as
Layering
.
The purpose of the second phase is to separate criminal proceeds from the source of their
origin by conducting a complex of financial transactions. Ultimately, the chain of traces is
broken and the anonymity of property values is ensured. The operations carried out in
the second phase have the specifics of an international nature. To carry out operations, in
the second phase, front persons and fictitious firms are widely used, issuing fictitious
accounts that serve as the basis for transferring money. Bahrain is undoubtedly the
"desired and favorite" place for the implementation of dark and dubious operations in
the African-Arab region
(Fig. 1)
.
Finally, consider the third phase, called
Integration
. The third phase differs from
the previous two in that it is in this phase that money acquires a fundamentally new,
legitimate source of origin and is invested in the legal economy. In this phase, first of all,
deals with undervaluation are in priority. For example, in the same real estate
transaction: a house is purchased at a reduced price, and the difference with the real
price is paid with "black" money and after that, "repairs are made", and the building is
sold at a higher price. As a result, legal income is generated. Secondly, overpriced
transactions. As an example, operations with works of art, at auctions, and in exchange
turnover can be cited. Things whose value can only be determined conditionally, or
estimated, are sold at a fairly high price. As a result, a high real income is generated.
Thirdly, "laundering" through casinos and lotteries. In this case, the money is declared as
a win. Fourth,
Transfer pricing
, which is common in export-import operations. In this
case, two contracts are drawn up: a real one and a fictitious one (with an inflated
transaction amount). Under a fictitious contract, money is transferred to an intermediary
company, usually registered in an offshore territory, and the difference between the real
and fictitious price remains as income on the account of this company.
It is advisable to cite a
recent example
related to the report of law enforcement
officers on suspicion of a fraudulent scheme, where three seized funds from the Ministry
of Defense of Ukraine and purchased military ammunition for $ 580 thousand. According
to the investigation, two citizens of Ukraine are involved in its organization
–
the
founders of an offshore company on the territory of the Kingdom of Bahrain. One of them
is an active lawyer. On behalf of the Defense Department, the scammers found a company
in Turkey that supplied div armor for the Armed Forces and concluded an agreement
between it and the Ministry of Defense for more than 16 million euros.
In addition, the defendants in this incident, to seize funds, convinced the
leadership of the Turkish company to agree with a controlled company for the purchase
of 1,000 military ballistic vests of the IV level of protection for their urgent delivery for
the needs of the Armed Forces. As a result, the offshore company received 580,000 US
dollars, there were no deliveries of military products, and the attackers distributed the
funds obtained fraudulently among themselves. As a result, more than 20 searches were
conducted, during which 17 million UAH, $400 thousand, and 100 thousand were seized
euros, draft records, and other documentation [6].
Moreover, for a complete analysis of the issue related to money laundering in the
offshore jurisdiction of Bahrain, we will also include a "high-profile" case investigated by
the Egmont Group: The Financial Intelligence Directorate (FID), which is the FIU of
Bahrain, identified an international money laundering scheme after receiving a SPO from
a local currency exchange office. This referred to a person making several money
transfers abroad, the amounts of which, roughly speaking, were contrary to his financial
situation, while they did not have a reliable and reasonable legal source.
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The Financial Intelligence Department carried out the following investigative
actions. Consequently, a search was made in the FID database for the presence of
information on criminal records, movements of all recipients and senders known at that
time, as well as the presence of SPO directed against them. In addition, the accounts of
Subject 2 were seized and printouts of telephone conversations between Subject 1 and
Subject 2 were obtained, information was also obtained on all transactions carried out in
the Kingdom of Bahrain, the main recipients of which were the same Subject 1 and
Subject 2.
At the same time, the FID carried out international cooperation using the Egmont
Secure Network and sent requests to five FIUs of the countries in which the senders of
these transfers were located.
Eventually, the FID was able to locate and track down all the suspects in Bahrain
who were involved in the case. These suspects were detained; illegally obtained funds in
the amount of 105,638 Bahraini dinars (US$ 280,952) were seized. As a result, an
investigation conducted jointly with the FIU of other countries helped to identify a
criminal organization in Bahrain run by Subject 1 and his accomplices. Following the
legislation of the Kingdom of Bahrain, articles 64 and 111 of Law No. 4 of 2001,
concerning the prohibition of money laundering and combating it, Subjects 1, 2, and
3 were found guilty of money laundering and cyber fraud, eventually sentenced to five
years in prison and fined 5,000 Bahraini dinars (13,298 US dollars) [7, pp. 86-88].
Thus, summarizing the above, we can conclude that, analyzing the trends and
levels of criminal operations committed by foreign enterprises with the participation of
offshore companies of the Kingdom of Bahrain, we emphasize quite logical and subtle
nuances: the commercial activity of the enterprise for the export of cheap raw materials
and the import of imported goods operates under the guise of declared production; many
foreign participants have such enterprises whose financial contributions are small and
mainly serve to mask shady activities.
Being a winning and suitable zone for offshore companies, the Kingdom of Bahrain
creates endless opportunities for the legalization of criminal proceeds, for reasons that
the banking system of this region is prone to corruption and corrupt, and it is possible to
buy and establish a bank for insignificant, meager amounts, and there is also a high
demand for capital. To sum up, the use of Bahrain
’
s offshore jurisdictions at the final
stage of organized criminal activity in the economic sphere, including tax evasion, is the
most individual, sometimes distinctive feature of laundering proceeds from crime and
terrorist financing.
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*Fig. 1. Ranking of countries in the fight against the legalization of criminal
proceeds. Middle East and North Africa
* As part of the study, the Basel Institute operates under the auspices of the United
Nations Crime Prevention and Criminal Justice Program Network. The Basel AML Index
includes a wide range of risk indicators, each of which has a different focus and coverage.
The indicators used to calculate the rating are grouped into five basic categories with
different specific weights:
• The quality of the anti
-money laundering and terrorist financing system (65%).
• Risks of corruption and bribery (10%).
• Financial transparency and standards (10%).
• Public transparency and accountability (5%).
• Political and legal risks (10%) [8].
REFERENCES:
1.
Description of jurisdictions // [Electronic resource]: URL: https://ru.uniwide
.biz/offshore-jurisprudence/ (accessed: 20.01.2024).
2.
Fraudsters stole 580 thousand dollars from the Ministry of Defense for the
purchase
of
bulletproof
vests
//
[Electronic
resource]:
URL:
https://www.bagnet.org/news/accidents/1336946/moshenniki-ukrali-u-minoborony-
580-tys-dollarov-na-zakupku-bronezhiletov-video (accessed: 23.01.2024).
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3.
Ivanov E.A. Formation of a system in Russia to combat the legalization
(laundering) of proceeds from crime [Electronic book] // Patterns of crime, strategy of
struggle and law.
–
Moscow: Russian Criminological Association, 2001.
–
383 p.
4.
Marx K. Capital. Vol. 1. Chapter 8. // [Electronic textbook].
–
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–
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https://www.esperanto.mv.ru/Marksismo/Kapital1/kapital1-08.html
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20.01.2024).
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Kingdom of Bahrain // [Electronic resource]: URL: http://www.first-
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in
Bahrain
//
[Electronic
resource]:
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investigation of which financial analysis was carried out (2014-2020) // Case 19.
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