| I. OVERVIEWIn the wake of the September
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| | "Report on Money Laundering Typologies
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| 11 terrorist attacks on the USA,
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| | 1999-2000," Financial Action Task Force,
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| attention was drawn to the age-old,
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| | FATF-XI, February 3, 2000, at )Hawala
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| secretive, and globe-spanning banking
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| | networks closely feed into Islamic banks
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| system developed in Asia and known as
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| | throughout the world and to commodity
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| "Hawala" (to change, in Arabic). It is
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| | trading in South Asia. There are more
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| based on a short term, discountable,
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| | than 200 Islamic banks in the USA alone
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| negotiable, promissory note (or bill of
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| | and many thousands in Europe, North and
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| exchange) called "Hundi". While not
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| | South Africa, Saudi Arabia, the Gulf
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| limited to Moslems, it has come to be
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| | states (especially in the free zone of
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| identified with "Islamic Banking".Islamic
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| | Dubai and in Bahrain), Pakistan,
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| Law (Sharia'a) regulates commerce and
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| | Malaysia, Indonesia, and other South East
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| finance in the Fiqh Al Mua'malat,
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| | Asian countries. By the end of 1998, the
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| (transactions amongst people). Modern
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| | overt (read: tip of the iceberg)
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| Islamic banks are overseen by the Shari'a
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| | liabilities of these financial
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| Supervisory Board of Islamic Banks and
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| | institutions amounted to 148 billion US
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| Institutions ("The Shari'a
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| | dollars. They dabbled in equipment
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| Committee").The Shi'a "Islamic Laws
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| | leasing, real estate leasing and
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| according to the Fatawa of Ayatullah al
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| | development, corporate equity, and trade
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| Uzama Syed Ali al-Husaini Seestani" has
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| | structured trade and commodities
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| this to say about Hawala banking:"2298.
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| | financing (usually in consortia called
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| If a debtor directs his creditor to
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| | "Mudaraba").While previously confined to
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| collect his debt from the third person,
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| | the Arab peninsula and to south and east
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| and the creditor accepts the arrangement,
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| | Asia, this mode of traditional banking
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| the third person will, on completion of
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| | became truly international in the 1970's,
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| all the conditions to be explained later,
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| | following the unprecedented flow of
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| become the debtor. Thereafter, the
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| | wealth to many Moslem nations due to the
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| creditor cannot demand his debt from the
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| | oil shocks and the emergence of the Asian
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| first debtor."The prophet Muhammad (a
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| | tigers. Islamic banks joined forces with
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| cross border trader of goods and
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| | corporations, multinationals, and banks
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| commodities by profession) encouraged the
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| | in the West to finance oil exploration
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| free movement of goods and the
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| | and drilling, mining, and agribusiness.
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| development of markets. Numerous Moslem
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| | Many leading law firms in the West (such
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| scholars railed against hoarding and
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| | as Norton Rose, Freshfields, Clyde and
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| harmful speculation (market cornering and
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| | Co. and Clifford Chance) have "Islamic
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| manipulation known as "Gharar"). Moslems
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| | Finance" teams which are familiar with
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| were the first to use promissory notes
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| | Islam-compatible commercial contracts.II.
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| and assignment, or transfer of debts via
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| | HAWALA AND TERRORISMRecent anti-terrorist
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| bills of exchange ("Hawala"). Among
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| | legislation in the US and the UK allows
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| modern banking instruments, only floating
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| | government agencies to regularly
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| and, therefore, uncertain, interest
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| | supervise and inspect businesses that are
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| payments ("Riba" and "Jahala"), futures
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| | suspected of being a front for the
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| contracts, and forfeiting are frowned
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| | ''Hawala'' banking system, makes it a
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| upon. But agile Moslem traders easily and
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| | crime to smuggle more than $10,000 in
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| often circumvent these religious
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| | cash across USA borders, and empowers the
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| restrictions by creating "synthetic
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| | Treasury secretary (and its Financial
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| Murabaha (contracts)" identical to
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| | Crimes Enforcement Network - FinCEN) to
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| Western forward and futures contracts.
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| | tighten record-keeping and reporting
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| Actually, the only allowed transfer or
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| | rules for banks and financial
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| trading of debts (as distinct from the
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| | institutions based in the USA. A new
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| underlying commodities or goods) is under
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| | inter-agency Foreign Terrorist Asset
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| the Hawala."Hawala" consists of
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| | Tracking Center (FTAT) was set up. A 1993
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| transferring money (usually across
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| | moribund proposed law requiring US-based
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| borders and in order to avoid taxes or
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| | Halawadar to register and to report
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| the need to bribe officials) without
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| | suspicious transactions may be revived.
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| physical or electronic transfer of funds.
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| | These relatively radical measures reflect
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| Money changers ("Hawaladar") receive cash
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| | the belief that the al-Qaida network of
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| in one country, no questions asked.
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| | Osama bin Laden uses the Hawala system to
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| Correspondent hawaladars in another
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| | raise and move funds across national
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| country dispense an identical amount
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| | borders. A Hawaladar in Pakistan (Dihab
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| (minus minimal fees and commissions) to a
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| | Shill) was identified as the financier in
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| recipient or, less often, to a bank
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| | the attacks on the American embassies in
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| account. E-mail, or letter ("Hundi")
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| | Kenya and Tanzania in 1998.But the USA is
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| carrying couriers are used to convey the
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| | not the only country to face terrorism
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| necessary information (the amount of
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| | financed by Hawala networks.A few months
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| money, the date it has to be paid on)
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| | ago, the Delhi police, the Indian
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| between Hawaladars. The sender provides
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| | government's Enforcement Directorate
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| the recipient with code words (or
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| | (ED), and the Military Intelligence (MI)
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| numbers, for instance the serial numbers
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| | arrested six Jammu Kashmir Islamic Front
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| of currency notes), a digital encrypted
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| | (JKIF) terrorists. The arrests led to the
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| message, or agreed signals (like
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| | exposure of an enormous web of Hawala
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| handshakes), to be used to retrieve the
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| | institutions in Delhi, aided and abetted,
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| money. Big Hawaladars use a chain of
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| | some say, by the ISI (Inter Services
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| middlemen in cities around the globe.But
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| | Intelligence, Pakistan's security
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| most Hawaladars are small businesses.
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| | services). The Hawala network was used to
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| Their Hawala activity is a sideline or
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| | funnel money to terrorist groups in the
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| moonlighting operation. "Chits" (verbal
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| | disputed Kashmir Valley.Luckily, the
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| agreements) substitute for certain
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| | common perception that Hawala financing
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| written records. In bigger operations
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| | is paperless is wrong. The transfer of
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| there are human "memorizers" who serve as
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| | information regarding the funds often
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| arbiters in case of dispute. The Hawala
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| | leaves digital (though heavily encrypted)
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| system requires unbounded trust.
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| | trails. Couriers and "contract
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| Hawaladars are often members of the same
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| | memorizers", gold dealers, commodity
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| family, village, clan, or ethnic group.
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| | merchants, transporters, and moneylenders
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| It is a system older than the West. The
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| | can be apprehended and interrogated.
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| ancient Chinese had their own "Hawala" -
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| | Written, physical, letters are still the
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| "fei qian" (or "flying money"). Arab
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| | favourite mode of communication among
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| traders used it to avoid being robbed on
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| | small and medium Hawaladars, who also
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| the Silk Road. Cheating is punished by
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| | invariably resort to extremely detailed
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| effective ex-communication and "loss of
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| | single entry bookkeeping. And the sudden
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| honour" - the equivalent of an economic
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| | appearance and disappearance of funds in
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| death sentence. Physical violence is
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| | bank accounts still have to be explained.
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| rarer but not unheard of. Violence
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| | Moreover, the sheer scale of the amounts
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| sometimes also erupts between money
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| | involved entails the collaboration of off
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| recipients and robbers who are after the
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| | shore banks and more established
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| huge quantities of physical cash sloshing
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| | financial institutions in the West. Such
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| about the system. But these, too, are
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| | flows of funds affect the local money
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| rare events, as rare as bank robberies.
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| | markets in Asia and are instantaneously
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| One result of this effective social
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| | reflected in interest rates charged to
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| regulation is that commodity traders in
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| | frequent borrowers, such as wholesalers.
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| Asia shift hundreds of millions of US
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| | Spending and consumption patterns change
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| dollars per trade based solely on trust
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| | discernibly after such influxes. Most of
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| and the verbal commitment of their
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| | the money ends up in prime world banks
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| counterparts.Hawala arrangements are used
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| | behind flimsy business facades. Hackers
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| to avoid customs duties, consumption
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| | in Germany claimed (without providing
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| taxes, and other trade-related levies.
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| | proof) to have infiltrated Hawala-related
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| Suppliers provide importers with lower
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| | bank accounts.The problem is that banks
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| prices on their invoices, and get paid
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| | and financial institutions - and not only
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| the difference via Hawala. Legitimate
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| | in dodgy offshore havens ("black holes"
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| transactions and tax evasion constitute
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| | in the lingo) - clam up and refuse to
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| the bulk of Hawala operations. Modern
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| | divulge information about their clients.
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| Hawala networks emerged in the 1960's and
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| | Banking is largely a matter of fragile
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| 1970's to circumvent official bans on
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| | trust between bank and customer and tight
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| gold imports in Southeast Asia and to
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| | secrecy. Bankers are reluctant to
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| facilitate the transfer of hard earned
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| | undermine either. Banks use mainframe
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| wages of expatriates to their families
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| | computers which can rarely be hacked
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| ("home remittances") and their conversion
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| | through cyberspace and can be compromised
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| at rates more favourable (often double)
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| | only physically in close co-operation
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| than the government's. Hawala provides a
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| | with insiders. The shadier the bank - the
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| cheap (it costs c. 1% of the amount
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| | more formidable its digital defenses. The
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| transferred), efficient, and frictionless
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| | use of numbered accounts (outlawed in
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| alternative to morbid and corrupt
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| | Austria, for instance, only recently) and
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| domestic financial institutions. It is
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| | pseudonyms (still possible in
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| Western Union without the hi-tech gear
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| | Lichtenstein) complicates matters. Bin
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| and the exorbitant transfer
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| | Laden's accounts are unlikely to bear his
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| fees.Unfortunately, these networks have
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| | name. He has collaborators.Hawala
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| been hijacked and compromised by drug
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| | networks are often used to launder money,
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| traffickers (mainly in Afganistan and
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| | or to evade taxes. Even when employed for
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| Pakistan), corrupt officials, secret
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| | legitimate purposes, to diversify the
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| services, money launderers, organized
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| | risk involved in the transfer of large
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| crime, and terrorists. Pakistani Hawala
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| | sums, Hawaladars apply techniques
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| networks alone move up to 5 billion US
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| | borrowed from money laundering. Deposits
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| dollars annually according to estimates
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| | are fragmented and wired to hundreds of
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| by Pakistan's Minister of Finance,
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| | banks the world over ("starburst").
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| Shaukut Aziz. In 1999, Institutional
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| | Sometimes, the money ends up in the
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| Investor Magazine identified 1100 money
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| | account of origin ("boomerang").Hence the
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| brokers in Pakistan and transactions that
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| | focus on payment clearing and settlement
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| ran as high as 10 million US dollars
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| | systems. Most countries have only one
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| apiece. As opposed to stereotypes, most
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| | such system, the repository of data
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| Hawala networks are not controlled by
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| | regarding all banking (and most
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| Arabs, but by Indian and Pakistani
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| | non-banking) transactions in the country.
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| expatriates and immigrants in the Gulf.
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| | Yet, even this is a partial solution.
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| The Hawala network in India has been
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| | Most national systems maintain records
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| brutally and ruthlessly demolished by
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| | for 6-12 months, private settlement and
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| Indira Ghandi (during the emergency
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| | clearing systems for even less.Yet, the
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| regime imposed in 1975), but Indian
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| | crux of the problem is not the Hawala or
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| nationals still play a big part in
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| | the Hawaladars. The corrupt and inept
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| international Hawala networks. Similar
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| | governments of Asia are to blame for not
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| networks in Sri Lanka, the Philippines,
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| | regulating their banking systems, for
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| and Bangladesh have also been
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| | over-regulating everything else, for not
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| eradicated.The OECD's Financial Action
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| | fostering competition, for throwing
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| Task Force (FATF) says that:"Hawala
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| | public money at bad debts and at worse
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| remains a significant method for large
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| | borrowers, for over-taxing, for robbing
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| numbers of businesses of all sizes and
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| | people of their life savings through
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| individuals to repatriate funds and
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| | capital controls, for tearing at the
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| purchase gold.... It is favoured because
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| | delicate fabric of trust between customer
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| it usually costs less than moving funds
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| | and bank (Pakistan, for instance, froze
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| through the banking system, it operates
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| | all foreign exchange accounts two years
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| 24 hours per day and every day of the
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| | ago). Perhaps if Asia had reasonably
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| year, it is virtually completely
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| | expedient, reasonably priced, reasonably
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| reliable, and there is minimal paperwork
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| | regulated, user-friendly banks - Osama
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| required."(Organisation for Economic
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| | bin Laden would have found it impossible
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| Co-Operation and Development (OECD),
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| | to finance his mischief so invisibly.
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