Role of Hawala in Terrorism Financing and Money Laundering

Hawala (also known as hundi) is an informal value transfer system based on performance and honor of a huge network of money brokers which are primarily located in the Middle East, Africa and Asia.

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars.

• A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city.
• The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.
• The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system.
• As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment.
• No records are produced of individual transactions;
• Only a running tally of the amount owed one broker by the other is kept.
• Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.

The practice of Hawala has been a way of funding Islamic business for at least 1200 years.

-Wikipedia

Some Halawadars (Halawa Operators) were shut down after 911, like the Al-Barakat company. Opened in Somalia, and operating in 40 countries worldwide. It was formed byAhmad Ali Jimale, from his office in Dubai .

It was estimated in 2001 that in an average year, US $200 million to $500 million was being transferred into Somalia through the Hawalad system.

New Hawala companies filled the gap, after al Barakat shut down, and some Halawadars though most seem to operate legitimately , some are involved in corrupt and illeagel activities.

The Halawa system's lack of individual transaction and record keeping makes a legitimate system vulnerable to terrorist use. The system is so frequently used by terrorists that the US Council on Foreign relations made the following recommendation in this 2002 report:

Encourage Hawaladar Registration: A comprehensive plan to
enforce the registration of hawaladars in the United States should
be adopted and a system of incentives (tax breaks, etc.) should
be developed to encourage registration of hawaladars. Incentives
are likely to diminish the reluctance of standard hawaladars to adhere to the new law and, in the process, those hawaladars who traffic funds for terrorist groups will be more isolated and easier for law enforcement officials to identify.

-Council on Foreign Relations 2002 Report on Terrorism Financing

Since then, registration has happened in various places, though I do not believe this has made any difference.

• The Halawadar simply accepts the funds and transfers the value to another broker-there is no crime or hint of wrongdoing. The Halawadar in the target country simply provides the cash, and commits no crime. He will be none the wiser if the receiver uses the funds to arm or equip terrorits, but they have by passed the banking system.
• Requiring registered Halawadars to correctly ID users and monitor the various terrorist watch lists, would be a start.
• The Bush administration now seems to be moving toward a money laundering approach

Victor Comras wrote recently in an article in the Counterterrorism Blog that the emphaisis seems to be shifting toward Anti-money Laundering (AML) strategies. He suggests that Terrorism finacing stratgies which are in place, need to be maintained as well. He said:

"The new AML strategy places increased emphasis on the international aspects of money laundering. It is now clear that foreign banks are being used regularly to introduce illegally obtained proceeds into US banks and other depository institutions. This includes using “correspondent,” “payable through,” and “nested” accounts to conceal the customer’s true identity.

The Rest

The point is, we must not forget Halawa when we try new AML strategies, or it will continue to be a shell game, with funds slipping out of banks and into Halawa transactions.