The Islamic Financial Services Board (IFSB) has released Joint Islamic Financial Services Board (IFSB)-Arab Monetary Fund (AMF) Working Paper on Money Laundering and Financing of Terrorism (ML/FT) Risks in Islamic Banking (WP-12).
The IFSB and AMF collaboration aimed to examine ML/FT methods, trends and typologies as specifically related to Islamic banking, and attempted to address whether there is any evidence that ML/FT risks in Islamic banking are indeed different from those that arise in conventional banking. From that perspective, this working paper explores the risks of ML/FT activities in the banking system.
Dr Bello Lawal Danbatta, Secretary General of the IFSB stated: “This paper is a timely response of the IFSB to the comments that the Islamic financial services industry (IFSI) may be highly prone to the issues of ML/FT risks which might emanate from the intrinsic characteristics of instruments and arrangements used in Islamic banking, or from the nature of the contractual relationship between Islamic banks and their customers.
“The paper would enhance the understanding and awareness among the stakeholders of the IFSI regarding the ML/TF risks in Islamic banking and would constitute the basis for further research works.”
Overall, the paper did not find any significant difference in the ML/FT risks between conventional and Islamic banking. Moreover, the concerns often raised regarding the potential for Islamic social finance platforms such as zakāh (زكاة, a compulsory annual tax on wealth), waqf (وَقْف, a donation for religious or charitable purposes), ṣadaqah (صدقة, charity performed voluntarily), etc., to be used to mobilise, store and disburse funds for ML/FT is unfounded based on the research findings. In addition, most respondent banking regulatory and supervisory authorities (RSAs) say that there is no merit in introducing specific regulations or preventive measures to address the ML/FT risks in Islamic banking.
Since risk levels are largely similar in both conventional and Islamic banking, Islamic banks should adhere to their own country regulations and the Financial Action Task Force standards to combat ML/FT, the IFSB said.
Details:
Download the working paper from the IFSB website