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