AML CHALLENGES

Financial fraud and terrorist financing

–International investment, Ponzi schemes & Hawala
The case of the Lebanese Madoff:
‘Salah Ezzedine’

10 acams today | December–February 2010 www.ACAMS.org


I
ssues attached to the ever-growing
threat of organized crime and terror-
ism continues to be a focal point of
discussion amongst the world’s political
leaders and within international organi-
zations. The 2009 G-8 meeting of justice
and home affairs ministers explored
global strategies, noting the increasing
link between terrorism and international
organized crime1. At an INTERPOL con-
ference held in October 2009 the growing
synergy between terrorism, drug traffick-
ing, money laundering and cybercrime
was at the center of the discussions.
These developments and realizations are
interesting, given the recent case, which
emerged in Lebanon in September 2009
following the collapse of a business empire
run by the Lebanese businessman, Salah
Ezzedine. Not only has this incident jeop-
ardized Hezbollah’s reputation amongst
its followers (see italicized text for further
details on Hezbollah), but it has unraveled
a case which shows how terrorist activi-
ties and international organized crime
are inextricably woven together through
sophisticated international financial crime
networks, using investment vehicles and
‘state of the art’ investment techniques to
increase their financial standing.
The Ezzedine case is a further exam-
ple of how the financial crisis, not only
brought down mainstream investment
structures, but how it also broke up intri-
cate Ponzi schemes allegedly used for
the purpose of terrorist financing. Some
of the more prominent cases include the
U.S.-based Madoff and Stanford cases
alongside a number of other multimillion-
dollar Ponzi schemes. For further details
on Ponzi Schemes and red flag indicators
please view the article written by Amy
Wotapka in this issue.
The following article, based on the
analysis of media, and expert reports and
comments, highlights how successful
businessmen have engaged with terrorist
organizations seeking to manage and grow
their investments, not only with the aim
of generating substantial returns on their
personal investments, but also in order to
support the organizations terrorist endeav-
ors. The case outlines how investment
activities of an apparent legal nature were
co-mingled with a series of illegal activi-
ties, ultimately resulting in the develop-
ment of a Ponzi scheme, which collapsed
International organized crime is defined as those self-perpetuating associations of individuals who cooperate internationally for the purpose of obtaining
1
power, influence, monetary and commercial gains, wholly or in part by illegal means, while protecting their activities through a pattern of corruption
and violence. International organized criminals operate in hierarchies, clans, networks and cells. The crimes they commit vary as widely as their
organizational structures. — US Dept. of Justice, Overview of the Law Enforcement Strategy to Combat International Organised Crime — Quoted in The
Millennium Project — 2009 State of the Future. http://www.millennium-project.org/
www.ACAMS.org
in August 2009. Notably, Hawala systems
and underground banking activities
appear to have played an important role in
the scheme, highlighting the difficulties
attached to such unregulated markets.
Salah Ezzedine
A large-scale underground Ponzi
scheme amounting to almost US$ 1.2 bil-
lion emerged following the bankruptcy
declaration of the Shiite entrepreneur
Salah Ezzedine in August 2009. Investors
in Ezzedine’s funds not only included
wealthy clients in Saudi Arabia, Kuwait,
Qatar and the United Arab Emirates, but
also terrorist and militia organizations.
Bankers reportedly described the case as
the biggest fraud of its kind that Lebanon
has ever seen, and media reports referred
to Ezzedine as Lebanon’s Madoff. It should
be noted, however, that comparatively, the
funds allegedly defrauded by Ezzedine are
only a fraction of the figures involved in
Madoff’s scheme. In-depth investigations
by the Lebanese law enforcement authori-
ties are currently ongoing, and therefore
many issues regarding the motivation and
intentions attached to Ezzedine’s activities
remain unclear. Whether the bankruptcy
was purely the result of bad investments
in oil, metals and other raw materials, or
whether it was indeed embezzlement,
are questions, being addressed by the
investigators. Furthermore, whether this
was a scheme set up and managed by one
individual, namely Ezzedine, or whether
other untoward structures were involved
behind the scenes remains an unanswered
question. Some sources suggest that it
might have been a security and financial
‘ambush’ by foreign parties, possibly Israel.
Others, who are surprised that Ezzedine’s
Ponzi scheme unraveled so quickly, have
questioned whether the role of the U.S.
Treasury in combating money laundering
by terrorist parties might have played a
part in bringing down Ezzedine’s scheme.
Alongside his asset management com-
pany, al-Mustathmir, Ezzedine is known in
Lebanon as the owner of the children’s TV
channel Al-Hadi and of the major Beirut-
based publishing house Dar Al-Hadi, one
of Lebanon’s most prominent producers of
Shiite religious books, which also publishes
books written by Hezbollah officials. The
New York Times amongst others reported
that Ezzedine owned factories throughout
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AML CHALLENGES
Eastern Europe and managed significant
real estate investments in Lebanon, as well
as major holdings in the blood diamond
trade in West Africa. An article published
by STRATFOR Global Intelligence, which
claims that Ezzedine was involved in a
number of often shady business enterprises
in Lebanon, Eastern Europe and Africa,
noted that Ezzedine’s 35-40 percent return
on investments were largely generated by
illegal activities such as money laundering,
drug trafficking and auto theft. Ezzedine
also is well known amongst the local
population for his philanthropic activities
in Southern Lebanon. His most prominent
charitable activities include the construc-
tion of a large mosque in the center of his
hometown in Maaroub, and the devel-
opment of a municipal stadium named
“Stadium of the Resistance and Liberation
Martyrs.” Through a travel business owned
by Ezzedine he reportedly organizes pil-
grimages to Mecca and Medina.
Ezzedine’s Ponzi scheme
Ezzedine raised funds for his invest-
ment firm, promising Lebanese and other
investors based in the Middle East up
to a 40 percent return on investment.
Interestingly, as reported in the Lebanese
Daily Star, Ezzedine invested large
amounts of money, estimated at hundreds
of millions of dollars, without going
through the Lebanese banking system.
Many Muslims believe that banks
pursue ‘un-Islamic’ investments, which
is why many Lebanese Shia trusted and
invested in Ezzedine’s business. He alleg-
edly made limited financial transactions
via two Lebanese banks amounting to
less than 2 percent of the funds investors
entrusted with him. Because the financial
losses from his investments appeared to
be less than the amount of cash he had
received from investors questions were
raised regarding the whereabouts of the
difference. The Lebanese Armed Forces
(LAF) were therefore engaged in the inves-
tigation in order to collate intelligence on
money transfers and investments in sev-
eral countries, including Algeria, China,
Brazil and Morocco. A number of articles
noted that Ezzedine also had major busi-
ness interests in oil and iron industries in
Eastern Europe, which following the drop
in oil prices faced significant losses, led to
the toppling of his investment. Ezzedine
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AML CHALLENGES
tried to make up for his losses by taking
money from Lebanese investors. It remains
unclear exactly what Ezzedine did with
the money or where the funds are located.
Fondsprofessionell claimed that Ezzedine
also invested in metals, oil and other
raw materials in Africa and the Middle
East. Lebanese banks allegedly claim not
to have invested in Ezzedine’s fund and
therefore not to have been effected by the
bankruptcy.
Links to Hezbollah
According to YaLibnan, Ezzedine was
a personal friend of some senior leaders of
Hezbollah (see italicized text for further
details on Hezbollah). His radio station
and publishing business was named after
Hadi Nasrallah, the son of Hezbollah’s
general secretary, Hassan Nasrallah, who
Businesses are
often used as
conduits and
as shields
to disguise
criminal activity
was killed during an attack against Israel.
It also is believed, that Ezzedine is indi-
rectly related to a senior official within the
Hezbollah party. Many Hezbollah mem-
bers ranging from farmers and shopkeep-
ers to senior members within the party
placed great faith and large amounts of
their savings in the hands of Ezzedine.
The collapse of Ezzedine’s empire also
has affected the reputation of Hezbollah, an
organization so highly regarded amongst
its followers for its excellent reputation for
financial and political probity. Hezbollah
had the reputation of being incorruptible.
Although Hezbollah has distanced itself
from Ezzedine by denying any official
dealings with him, it was incidentally
Ezzedine’s close links with Hezbollah,
which encouraged Shiite investors in
Southern Lebanon and Beirut to choose to
risk their savings. Many investors put their
trust in Ezzedine, principally because of
12 acams today | December–February 2010
the financier's connections to Hezbollah
and because of his reputation as a pious,
respectable Shiite. Some media sources
claim that Hezbollah did have business
dealings with Ezzedine and that the party
had invested up to US$ 4 million in his
investment fund. According to an article
published in STRATFOR, Hezbollah
immediately withdrew $500 million
worth of investment from Ezzedine’s port-
folio. They subsequently arrested him and
coerced him into transferring his remain-
ing financial assets to the group before
turning him into the Lebanese authorities.
Either way, as pointed out by Dr.
Matthew Levitt, Director of Terrorism
Studies at the Washington Institute
for Near East Policy, it is known that
Hezbollah generates funds through a range
of criminal business activities, ranging
from smuggling to fraud to drug trade and
diamond trade both within the Middle
East and internationally. And, although
it is not clear whether Ezzedine formed
a part of Hezbollah’s fundraising circles,
it would appear that this was an invest-
ment which went wrong, and one might
raise the question whether Hezbollah is
distancing themselves in order to protect
other streams of revenue generated from
within the Ezzedine business empire or
from existing business structures used to
launder funds.
This is therefore a good example of how
important it is to understand the political
affiliations of businesses and their direc-
tors and owners when undertaking cus-
tomer due diligence. Businesses are often
used as conduits and as shields to dis-
guise criminal activity or to provide ille-
gal activity with a façade of legitimacy.
An article published in Time Magazine
reported that although Ezzedine’s con-
nections to Hezbollah remain unclear;
it is known that the organization does
rely on a network of businessmen and
fundraisers like Ezzedine. Furthermore,
Hezbollah’s alleged endeavor to become
independent from its main patron Iran,
has seen the organization expand into
such business networks.
Links to the Islamic Revolutionary Guard
Corps (IRGC)
According to the same article published
by STRATFOR, Ezzedine also managed
the finances of IRGC officials. This also
is of particular relevance given Iran’s
links to Hezbollah and the importance of
Hezbollah for Iran’s strategic operations
against Israel. The same article notes that
the IRGC retains a strong influence over
Hezbollah and notes that according to
some Hezbollah officials, their military
decisions are made by IRGC commanders
stationed in Lebanon.
According to a Backgrounder piece pub-
lished by the Council on Foreign Relations,
analysts say the organization, with its
control of strategic industries, commer-
cial services and black-market enterprises
has evolved into one of the country's most
influential domestic institutions. The arti-
cle concluded by noting that the U.S. State
Department has included Iran on its list of
state sponsors of terrorism since 1984, and
the agency's most recent country assess-
ment designated the IRGC (specifically its
Quds force) a terrorist entity.
Using a combination of Hawala and banking
The FBI’s Terrorist Financing Operations
Section (TFOS) believes that terrorists and
criminals have reverted back to informal
channels due to the increased monitoring
and reporting requirements of the formal
financial system. As a result, such orga-
nizations rely on cash couriers, bulk cash
smuggling and the use of Hawalas. The
same paper claimed that the key vulner-
abilities continue to be wire transfers, cor-
respondent banking and fraud. It should
be noted that fraud is more visible in 2009
than it was in 2001 and that the more
specific vulnerability of Money Services
Businesses (MSB) being engaged by illegal
money remitters and/or Hawalas is greater.
The Ezzedine case is not the only exam-
ple of how Hawala banking and regular
banking have been used jointly to transfer
funds. In August, Financial Crime Online
reported that three U.S.-based Yemeni
immigrants had, as part of a sting opera-
tion, agreed to illegally transport funds
to what they thought were accounts con-
trolled by the Lebanese militant group,
which has been classified as a terror-
ist organization by U.S. officials, were
charged with money laundering, rather
than terrorism-related counts. The opera-
tion was set up following the analysis of
some 300 Currency Transaction Reports
(CTR). Their operation was apparently
part Hawala and part of a regular financial
www.ACAMS.org

transactions network. The accused were
not receiving enough funds to settle all
positions created by the funds being sent
abroad. Therefore, the suspects had to
transfer a lot of money abroad to facilitate
the transfers. They did so by using part of
the regular financial network.
Therefore, although informal banking
systems appear to be the main vehicle
used for many terrorist financing activities
it seems that in many cases formal bank-
ing channels also are necessary. As such,
sharp monitoring systems can be helpful
tools to detect untoward transactions in
this comparatively small space.
Conclusion
Although Hawala seems to have been
the preferred route used by Ezzedine
and others, due in particular to the
increased regulation of financial insti-
tutions, those undertaking criminal
activities are sometimes nonetheless,
forced to use regulated financial chan-
nels not only for their illegal activities,
but more importantly for their legitimate
streams of business. This underlines the
importance of enhanced due diligence
and regular monitoring on high-risk cli-
ents. Furthermore, aspects of political
risk, which should form part of any risk
assessment alongside the client, product
and sector risk analysis are key. In the
case of Ezzedine not least of all as a result
of Iran’s links to Hezbollah and the cur-
rent geopolitical constellation, a political
risk assessment if of the essence.
It is important to note, that it is not suffi-
cient to collect a list of data in a standardized
know your customer (KYC) profiling form,
and to check various sanction and black lists
in order to effectively protect the financial
system from being abused by highly skilled
and sophisticated money laundering opera-
tions. Based on a risk assessment, in-depth
Sharp monitoring
systems can be
helpful tools to
detect untoward
transactions
www.ACAMS.org
research and skilled analysis of publicly
available records and other sources, com-
bined with in-depth business and country
knowledge, should form an integral part of
any enhanced due diligence process and
complement the more standard enhanced
due diligence profiling activities, based on
the risk-based approach.
Hezbollah — Background
According to an entry on Britannica
Online, Hizb Allah (“Party of God”), also
spelled Hezbullah, Hizbullah, Hizballah
or Hezballah, Hezbollah is a militia group
and political party that first emerged as
a faction in Lebanon following the Israeli
invasion in 1982.
Shiite Muslims, traditionally the weak-
est religious group in Lebanon, first found
their voice in the moderate and largely
secular Amal movement. Following the
Islamic Revolution in Shiite Iran in 1979
and the Israeli invasion of Lebanon in
1982, a group of Lebanese Shiite clerics
formed Hezbollah with the goal of driv-
ing Israel from Lebanon and establishing
an Islamic state there. Hezbollah was
based in the predominately Shiite areas
of the Biqaa Valley, southern Lebanon,
and southern Beirut. It coordinated its
efforts closely with Iran, from which it
acquired substantial logistical support,
and drew its manpower largely from dis-
affected younger, more radical members
of Amal. Throughout the 1980s Hezbollah
engaged in increasingly sophisticated
attacks against Israel and fought in
Lebanon’s civil war (1975–90), repeatedly
coming to blows with Amal. During this
time, Hezbollah allegedly engaged in ter-
rorist attacks including kidnappings and
car bombings, directed predominantly
against Westerners (e.g. the 1983 U.S.
Embassy bombing against the United
States Embassy in Beirut), but also estab-
lished a comprehensive social services
network for its supporters.
Hezbollah was one of the few militia
groups not disarmed by the Syrians at the
end of the civil war, and they continued
to fight a sustained guerrilla campaign
against Israel in southern Lebanon until
Israel’s withdrawal in 2000. Hezbollah
emerged as a leading political party in
post-civil war Lebanon.
According to an entry on Wikipedia,
Hezbollah is now also a major provider
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AML CHALLENGES
of social services, which operate schools,
hospitals, and agricultural services for
thousands of Lebanese Shiites, and plays
a significant force in Lebanese politics.
It is regarded as a resistance movement
throughout much of the Arab and Muslim
world. Many governments, including
Arab ones, have condemned actions by
Hezbollah while others have praised the
party. Several western countries regard it in
whole or in part as a terrorist organization.
Iran's Revolutionary Guard Corps
— Background
Iran's Revolutionary Guard Corps (IRGC)
was founded in the aftermath of the 1979
Islamic Revolution to defend the regime
against internal and external threats, but
has since expanded far beyond its original
mandate. Today the guard has evolved into
a socio, military, political and economic
force with influence reaching deep into
Iran's power structure.
The Backgrounder article published by
the Council on Foreign Relations, high-
lights the links between Hezbollah and
the IRGC’s Quds force. Military analysts
allegedly claim that IRGC began deploying
fighters (NPR) abroad during the Iran-Iraq
war of 1980 to 1988, and thereby exporting
the ideals of the revolution throughout the
Middle East. The Quds Force, a paramili-
tary arm of the Revolutionary Guards with
less than a thousand people, emerged
as the de facto external-affairs branch
during the expansion. Its mandate was to
conduct foreign-policy missions and forge
relationships with Shiite and Kurdish
groups. A Quds unit was deployed to
Lebanon in 1982, where it helped in the
genesis of Hezbollah. Another unit was
sent to Bosnia to back Bosnian Muslims in
their civil war in the early- and mid-1990s.
More recently, some experts say, the
Quds Force has shipped weapons to the
Lebanon-based Hezbollah, Gaza-based
Hamas, and Palestinian Islamic Jihad,
and is also supplying munitions to the
Taliban in Afghanistan and Shiite militias
in Iraq.
Jennifer Hanley-Giersch, CAMS, director,
Business Risk Research Limited, Berlin,
Germany, Jennifer.hanley@business-risk-
research.com
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