The United States Department of State's Money Laundering and Financial Crimes report for 2001 states that, "Money laundering has devastating social consequences and is a threat to national security. It provides the fuel for...terrorists…" The Hawala "parallel banking" system for transferring money is one of the techniques used by terrorists to launder funds that are used to support their activities.
This article explores the origin and nature, the use of, and the possible strategies to eliminate or emasculate the Hawala money transfer system - an ancient and informal banking system used in the Middle East and Asia for transferring money from one country to another, without leaving a trace. Hawala is completely outside of all commercial banking channels, unaffected by any form of regulation and is totally out of sight of governmental agencies, and essentially leaves no money trail. The Hawala system can and is being used to fund terrorist operations, such as September 11th attack.
Hawala
In the Middle East, the concept is known as Hawala that means "honor" or "trust", and is derived from Farsi. In India it is sometimes known as Hundi. The same concept is known throughout Asia by the name Fei Chi'en, which is derived from Mandarin, meaning, "flying money". Readers of James Clavell's novel Shogun, know the system of flying money by its common name the "chop system".
Hawala, or the chop system, has its antecedents in the cultures of the Middle and Far East. In mobile cultures, fixed institutions, such as banks or formal money changes, are infrequent. One does not find banks in the deserts or mountain villages. In modern times children from third world nations often take jobs in first or second world nations and send substantial portions of their earnings back home. Often, there are no banks within a day's walk from where the parents live. Yet, if there is a local Hawala dealer, the prodigal son can remit his earnings in a matter of days, often with the funds being hand delivered to the recipient.
As far back as the 8th century AD, Arab merchants developed a system of paying for goods from a distant land. This system evolved for the payment of goods purchased from abroad without the physical movement of money or other accepted media of exchange. The system involves the payment of money to a broker in one place, and the collecting of like amounts of money in an another place. The broker takes a small fee for his services, much less than comparable commercial charges.
In order to avoid robbers and pirates, a traveler would go to a local dealer or "broker", and give him a sum of money. The dealer gives the traveler a secret code and the name of a fellow dealer at the traveler's destination. Upon arrival the traveler would go to the local dealer, give him the code, and would receive a sum of money equivalent to that originally deposited with the first dealer - less, of course, the usual commission. The client's money does not move. This is not only a safe and efficient system; it leaves no paper trail. Eventually the brokers reconcile their accounts with each other.
In Western Europe, the dealers were often money-lending families, who would meet annually usually during a religious holiday, and net the amounts owed to one another. Ultimately this informal system of passing money evolved into the merchant banking system used to finance domestic and international trade. The 3rd Lord Rothschild once remarked that, "Banking consists essentially of facilitating the movement of money from point A, where it is, to point B where it is needed."
A 1996 "Advisory" from the Federal Deposit Insurance Corporation provided:
"In the Middle East and Asia, the system maintained its ancient root, and continues to grow - for the system is simple, and meets the needs of the local cultures.
"In the Hawala system the client is given a secret code or message to give to the dealer at the other end of the transaction. In the chop system, traditionally the client was given a broken coin or token (the "chop"), the dealer would send by courier a portion of the broken coin to the other dealer. The client would show up, and if the two halves matched, they were to give the agreed upon sum. The typical fee for a transaction is between five and ten percent. Periodically, all of the Hawala dealers in the network net their various transactions, and make payments amongst themselves."
The modern Hawala system has been described as:
"With its lack of governmental supervision, the Hawala system allows individuals to make deposits and withdrawals through the Hawala dealers rather than financial institutions."
The OECD's Financial Action Tax Force, Report on Money Laundering Topologies (2000-2001) stated that:
"The money laundering situation...[the] underground banking (known variously as hundi, Hawala, chit or fei-chien system, and accordingly to the area and ethnic groups involved) is a long-standing tradition in this part of the world. Underground banking offers a quick, cheap, efficient, and anonymous means of moving money. One member observed that the rates charged by Asian underground banks tend to be extremely competitive as compared to the prevailing charges for disposing of criminal funds in other regions."
"With the decline in direct state sponsorship of terrorism, terrorists groups have increasingly resorted to criminal activities to raise the funds needed to support their activities... As for the methods used by terrorists groups to launder funds derived from these criminal sources...the same laundering methods are used by both terrorism and organized crime." [Emphasis added.]
The United States Department of State report, Money Laundering and Financial Crimes state:
"The Hawala (or hundi) alternative (or parallel remittance system) continues to be a key factor in money laundering and other financial crimes committed in and associated with South Asia. It is closely related to the black or off the books economies in the region. The sizes of the underground economies in South Asia are estimated to be 50 to 100 percent the size of the white or documented economies.
"Hawala operates on trust and connections (trust is one of several meanings associated with the word Hawala). Customers trust haw alas bankers or operators (known as Hawaladars) who use their connections to facilitate money movement worldwide. Hawala transfers take place with little, if any paper trail; and when records are kept, they are usually kept in code... Today, hawala continues to be used for many legitimate transfers for cultural and financial reasons..."
"Dubai, India and Pakistan form a hawala triangle responsible for significant international money laundering activities that go far beyond South Asia".
Recent Examples
In August 2001, under the code name "Operation Owl", Hong Kong's Independent Commission against Corruption with assistance from Chinese authorities smashed a syndicate that for more than five years had smuggled over $50 billion dollars into Hong Kong. A portion of the funds had been transferred out of Hong Kong via the chop system.
The Surinder K. Jain scandal in India involved a Hawala dealer who paid nearly $18 million in bribes to 115 public officials and members of the top ranks of Indian politics. The Indian Central Bureau of Investigation obtained two ledgers that lead them to other dealers in the hawala network. In India, which has been the most successful nation to combat the Hawala system, it was estimated that 3,000 plus Hawala brokers were operating in the Asian region, which robbed the Indian government of tax on $2 billion in revenue. The dealers often operate from downtown markets. Their clients are mostly laborers whose monthly income is less than $500 - hence they are unable to afford the high costs of banking remittances. For example to send $20, the fee is only $1.50 - no bank can offer comparable rates.
One of the five pillars of Islam is Zakta, the giving to religious charity. Because there is virtually no accountability, some of this money has found its way to support terrorists. Often the monies raised in countries for humanitarian purposes are diverted to support terrorist activities. For example, each year the Saudi Ministry of Religious Works donates over $10 billion to Islamic organizations to appease fundamentalists. Much of the smaller sums, especially those raised for charitable purposes outside of the main cities, are often transmitted via the Hawala system.
Notwithstanding the civil services that are available in Somali, Hawala dealers were virtually the only form of banking organization that was functioning. In 1997 some 13 Hawala dealers in Somali merged into one "company" known as the Amal Group, with the objective "...to improve Hawala services by reducing costs..." In addition to traditional Hawala transfers, this group has now established the Amal Bank.
Money Laundering and Terrorist Funding
Money laundering is the movement of money to disguise its nature and origins. Money laundering is estimated to involve between $300 billion and $1.3 trillion annually. A growing portion of laundered funds is used to finance terrorism. References to Hawala and or other alternate money movement systems have been made in most major reports on money laundering.
Between the 1970s and the 1990s much of the activities of the terrorists were state sponsored and funded, which ultimately gave way to self-funding by the terrorist organizations. In addition to making use of the formal banking system to pay for terrorist activities, extensive use is being made of the informal banking systems such as Hawala and the Colombian Black Market Peso Exchange.
One of the states that has been a financial backer of terrorism is Libya. Even though Gadhafi investments have been frozen in the United States since 1985, his financial advisor Mr. Huwej, has engaged in "financial engineering" using minority stakes, shell companies, and interlocking share-holdings that will not attract the attention of authorities and invests over $8 billion through more than 103 companies. The Hawala has been part of the system used to move some of the funds of Libya.
There is an inextricable link between money, terrorism, and the laundering of funds. The Hawala system has historically been used in the Golden Crescent of the heroin trade, which encompasses Iran, Turkey, Pakistan, and Afghanistan. This also happens to be the heart of the current terrorist activities. Terrorists are using the same techniques as drug cartels to move money from one country to another.
Fortunately, the same techniques that have been used to successfully attack drug money will have direct application to stemming the movement of terrorist funds.
Hawala and Terrorism
Since the mid-1990s, the United Nations, the U.S. Treasury, and the OECD have been reporting an increase in the use of underground systems of transferring money. The Hawala system has been but a footnote in most of these governmental and non-governmental agency reports on money laundering. In light of September's events, it is becoming the focus of close scrutiny. In January 2000, Interpol's Criminal Funds Investigation Group (FOPAC), related a report entitled The Hawala Alternative Remittance System And Its Role In Money Laundering, and will shortly release a report entitled Sub-Systems Of Ethnic Money Laundering In Interpol Member Countries On The Asian Continent. Recently, Chancellor Gordon Brown announced the establishing of a task force to investigate Hawala bankers - "a shadowy underground group that allows criminals in the UK to make illegal transactions in other countries without being detected."
In 1999, 233 people were killed in terrorist attacks, down from 741 deaths in 1998. However, 2001 will be a seminal year in world history - with terrorism taking 6,000+ lives worldwide. Money is the lifeblood of international religious-based terrorism! Without money - most acts of fanatical terrorists would be confined to minor incidents in far off lands. Certainly terrorism would not be a global export without hard currency. Money permits international travel, the ability to purchase weapons and implements of destruction, and allows the terrorists to blend into local society - planning their misdeeds while staying in the shadows. It is virtually impossible for a terrorist to be in a far off land, trying to plan an attack while working at a minimal wage job, 60 hours, or more, a week. That is why President Bush and Prime Minister Blair announced within days of the destruction of the World Trade Center Towers on September 11, that a prime element of the War on Terrorism will be the eradication of their financial support.
On September 24, 2001, the United States issued an Executive Order seizing the property and assets of 27 persons and entities that were believed to be involved in acts of terrorism, or who supported terrorism. On October 12, 2001, 39 names were added to the list. The enforcement of this Order is the responsibility of the Office of Foreign Asset Control. By October, Gordon Brown, the UK Finance minister had announced that $20 million dollars had been frozen and 110 countries had committed to join the effort to combat the financing of terrorism in more than a half dozen countries.
It will be difficult to eradicate the global flow of funds to terrorists because for only nominal sums expended, terrorists may inflict billions of dollars in damage, and permanently change everyday life. It is estimated that the World Trade Center operation involved 20 terrorists in the United States, a web of international support, and was planned over several years - with a total cost of between $250,000 and $500,000. If one were to spread that amount over the 20 terrorists that would amount to no more than $12,500 per annum per terrorist. It has been reported that Mr. Bin Laden spent only $3,685 for a vial of anthrax from Asia.
Small monetary sums are capable of inflicting such devastation and mere legislation, or enforcement of anti-money laundering laws, and or "closing down" money launderers will not be enough. The laws requiring the reporting of suspicious transactions are currently unmanageable.
Money that comes through traditional banking or money exchange channels is even difficult to track. One of the September 11th hijackers received $100,000 from the United Arab Emirates made in four transfers over a twelve-month period. The money was sent via a moneychanger from Sharjah, one of the seven United Arab Emirates. Even with this information, without the assistance of the UAE, it will be impossible to follow the trail.
Often the financial investigative governmental agencies are the most capable of all the investigative organizations. Although Hawala brokers have to date been illusive, when a nation turns its attention to them and the problems they cause - the governments have proven successful in curtailing Hawala activities.
Emasculating the Hawala System
Saudi Arabia has nearly six million foreign laborers, a substantial portion of whom use the Hawala system to send approximately $150 billion abroad. With such vast sums of money moving through the system from just one country, one can imagine the difficulty in detecting which sums are legitimate remittances, and what funds are going to finance terrorism.
In the United States alone, there are virtually a score of top-flight, governmental agencies that have national and international capabilities to ferret out Hawala dealers, and slowly strangle the networks used to transfer funds. These organizations include the Federal Bureau of Investigation, the Secret Service, the Drug Enforcement Agency, the Postal Inspectors, the Internal Revenue Service's Criminal Infestation Division, the U.S. Customs Service, FinCen, various bank examining agencies, and the Foreign Terrorist Tracking Center (which is part of the Treasury's Office of Foreign Asset Control - responsible for the freezing of assets). All of these organizations will focus their attention on terrorist funding, shutting down the funding of these organizations, and curtailing their ability to move money through the international monetary system. Additionally, each of the G-7 nations have pledged to establish Financial Intelligence Units that will focus on money laundering and terrorists activities.
From a big-picture prospective, countries should apply the current money laundering principles to the Hawala system. This includes: (1) enactment of a broad spectrum of laws so that the movement of money is a crime, (2) enhanced use of criminal and civil asset forfeiture laws, (3) aggressively exploit information already gathered, (4) sharpen the reporting analytical tools, and (5) apply money laundering laws to money service businesses.
India, after its scandal involving the corruption of public officials, had successfully combated the Hawala system, using old fashioned investigative and prosecution techniques. Initially, undercover techniques, especially outside of the United States will lead the storm in the Hawala fight. Undercover agents will send funds through a local Hawala dealer to relatives in the United States (or vice versa). This will give law enforcement access to both the receiving and paying dealers. Then by putting the dealers under surveillance it will lead to other members of the network, as well as their customers. Eventually law enforcement will be able to "squeeze" both the customers, as well as the dealers for further leads. Within 12 - 18 months, law enforcement should have a good picture of the core network. This process has to be repeated in scores of cities in a dozen countries.
New and innovative techniques using facsimiles and e-mails may make dealers more vulnerable. The use of modern communications is now a weakness of the Hawala system that will allow governmental agencies to track down and collapse these systems. There are "key logger" devices that hide inside computers and secretly record everything that is typed; capturing passwords and keys for coded files. The Central Intelligence Agency had a computer program called "Fluent" that translates Arabic to English, and "Oasis" that transcribes television and radio broadcasts. This can be employed to track funds and activities of Hawala dealers. "dTective" is a computer program for tracing financial transactions that is being used to catalog the flow used by the September 11th terrorists. And "Encase" is a program that can recover deleted computer files from seized computers.
United States justice, although the paragon of fairness is not as swift and facile as other countries. For example, within two weeks of the first hoax reports of anthrax, France had arrested, tried and convicted the hoaxter under special anti-terrorist legislation that provides for expedited procedures. In circumstances where there is insufficient evidence to hold or convict a terrorist under United States laws, there may be other countries involved with different standards - in that case the United States can facilitate bringing the suspects to justice in one of those other countries.
Concluding Comments
Unfortunately, as the Hawala system is being eradicated, other systems will emerge as the vehicle of choice. For example, sophisticated systems that were originally developed for cyber payment have been developed for anonymous payment, without the movement of cash. Fortunately, as the financing is forced out of the shadows of scraps of papers, chits and oral code words, and into the modern world of computers there are sophisticated law enforcement organizations that will be able to track payments, identify the parties, and lay waste to the terrorist financial networks.
1 It is sometimes spelled "Hawalla".
2 For example "pay 10 meter cloth to P-7" - meaning to pay $10,000 to a person identified a P-7
3 Natarajan, "Combating India's Heroin Trade Through Anti-Money Laundering Legislation", 21 Fordham Int 1 L.J. 2014 (June 1998)
4 In April 1990, the OECD's Financial Action Task Force report containing a set of 40 recommendations (see www.OECD.org/FATF/40Recs_En.htm). In October 1999 the United Nations' Office For Drug Control & Crime Prevention finalized its report entitled: "Financial Havens, Bank Secrecy And Money-Laundering" (www.Imolin.org/Finhaeng.htm). In February 2001 FATF released the "Report On Money Laundering Typologies 2000-2001". (www.OECD.org/FATF/pdf/TY2001-en.pdf).
5 OECD's FATF "Report On Money Laundering Typologies" (2000-2001), Pg.19.
6 The OFAC is a division of the U.S. Treasury. The Executive Order and the workings of the OFAC can be found at: www.ustras.gov/ofac/. The OFAC supervised the freezing of Iranian assets in the 1980s, and has programs involving Iraq, Liberia, the Sudan and the Taliban.
7 The Washington Post, October 24, 2001 article by Niles Latham, that also reported that a vial of anthrax was purchased from a laboratory in the Czech Republic of $7500.
8 The 2001 National Money Laundering Strategy.
9 The FBI used this to crack the encrypted code of Nicodemo "Little Nicky" Scarfo, convicted of $5 million a year book making operation in New Jersey. This technique may be used to track e-mails between Hawala dealers.
10 Bridis, "Anti-Terror Tools Include High-Tech", Associated Press, Sunday October 28, 2001.Prime Minister Lester B. Bird of Antigua and Barbuda recently outlined what many feel.
