Table of Contents
2. Informal Money Transfer Systems (IMTS)
2.1. Various Systems: An Overview
2.2. The Scope of Informal Money Transfers
3. The System of Hawala and Hundi
3.1. An Example of a Hawala Remittance
3.2. Bookkeeping and the Paper-Trail
3.3. The Institutional Framework of Hawala
3.4. Advantages of Hawala
4. Hawala and the Financing of Terrorism
4.1. Money Transfers: Terrorist’s Wish List
4.2. Hawala, Charities and 9/11
4.2.1. The Charities as a Money Generator
4.2.2. Legitimate Businesses as a Source of Money
4.2.3. The Transfer of Funds for the 9/11 Attacks
4.3. Future Terrorist Financing
5. Policy Options in the Fight against Terror Finance
5.1. The Regulations by the Unites States
5.2. The Regulations by the UN Counter Terrorism Committee (CTC)
5.3. The Regulations by the G-7 Financial Action Task Force (FATF)
5.4. The Abu Dhabi Declaration on Hawala
List of Figures
Figure 1: A Hawala Transaction
Figure 2: Relational Contracts in a Hawala Transaction
Figure 3: Terrorism Money Trail
List of Tables
Table 1: Summary of Estimates Private Remittances, 1981-2000
Table 2: Bookkeeping of a Hawaladar
Table 3: Operational Costs of Various Terrorist Attacks
List of Photographs
Picture 1: A Zakat Collection Box
After the horrible attacks on September 11, 2001, an ancient informal money transfer system called hawala came under scrutiny for its possible involvement in the financing. This book explores what other, similar informal transfer systems exist, and what their percentage of total remittances is. After an analysis of its competitors, hawala is further explained through a sample transaction, followed by an insight on its bookkeeping. Later the institutional framework is analyzed and, most important, its considerable incentives to the customer are outlined.
The work then tries to define the ‘ideal’ characteristics of a transfer system in respect to terrorist financing and explores the current and actual use of hawala to finance terrorism. How are the necessary funds generated and moved? A brief outlook into the future of terrorist financing will end this chapter.
Being aware of the incentives to the regular customer as well as to the terrorist organizations to use hawala, the major policies to stop the financing of terrorism will be evaluated as to their efficiency. Are they enough to dry up terrorist funding?
JEL Classifications: E26, F10, F33, F37, F42, G20, N25
Keywords: Hawala/Hundi, Terrorist Financing, Informal Money Transfer Systems (IMTS), Charities
Zakat [almsgiving] is only for the poor, and the needy and those who collect them, and for to attract the hearts of those who have been inclined [towards Islam]; and to free the captives and those in debt, and for the cause of Allah, and for the wayfarers; a duty imposed by Allah.
Quran, Surah Taubah (9), verse 60
With the devastating attacks in the United States of America on September 11, 2001, terrorism struck with unprecedented force. Soon after, the first details of the planning and execution of the terrorist attack were uncovered. Unlike other previously observed acts of terror, its scope required sound and extensive planning, financing, and execution by the terrorists. This new dimension of destruction and terror through a single attack mandated a different approach than the ones that were previously implemented, such as sanctioning a country that is regarded as sponsoring terrorism. One of these measures is a serious attempt to stop the flow of terror money by various agencies, both governmental as well as international.
In the aftermath of 9/11, many media reports as well as the U.S. government raised questions about the use of informal money transfer systems (IMTS) by the terrorists. How were and are they used and is there a way to stop the transfer of funds by terrorists?
To what extent have IMTS been employed by the terrorists and if so, what policies would help to curb the illegal practices known as black hawala ? Does black hawala even exist?
After this introduction, part 2 of this work will provide an overview about various IMTS that are in use around the world as well as their cash turnovers.
In part 3, I focus on a particular system named hawala or hundi, since it is prevalent in the Middle East, North Africa, Central Asia and Pakistan. A brief description of a standard hawala transaction as well as an example of bookkeeping of a hawala intermediary (hawaladar) will be given in order to understand the advantages of the system to its participants.
Chapter 4 lists the demands of a terrorist with respect to terror finance and explores the use of hawala and charities in connection 9/11.
The last chapter details the various policies that have been adopted by the government of the United States and various other agencies such as the Financial Action Task Force (FATF) and examines the effectiveness of the different policies.
2. Informal Money Transfer Systems (IMTS)
Informal Money Transfer Systems are defined by their lack of paper trail and a commonly valid structure. The informal money transfer systems are often referred to as ‘underground banking’. This term, however, leads to a misconception of the characteristics of the system. In fact, the system exists next to a formal banking system and is part of regular businesses. Many operators of such systems own travel agencies, grocery stores, import/export companies and offer the money transfers on the side. Most IMTS operate openly. Further, the term ‘banking system’ is misleading in the sense that there is no money lending to customers or deposits. It is rather a reliant, cheap and fast system of transfers without an actual movement of money, based on trust.
There are many informal money transfer systems that are still in place around the globe, especially in the Middle East, Asia, and Latin America.
2.1. Various Systems: An Overview
These various informal channels have a common foundation: they arise if there is a lack of political stability, security or if people strive to evade taxes and money movement or exchange restrictions. As Buencamino et al. (2002, p. 1) put it, “their beginnings were … the result of people of similar ethnic background seeking a workable, efficient, cheap and secure means of transferring money and settling account with one another.” In fact, the vast majority of the IMTS are based on ethnicity or religion, while only a few rely on a regional context, notably the informal structure that arose with the emergence of the black market for pesos in Colombia.
There are two historical systems, namely the hawala/hundi and the fei ch’ien. Hawala/hundi will be discussed later in this book to a large extent, but to compare and contrast the two, a closer look at the Chinese system fei ch’ien will be helpful.
As most other systems, the fei ch’ien arose as a result of trade. During the Tang Dynasty (618-907 AD), “merchants from the southern part of China sold their tea … at the Capital and transferred their money to … liaison offices or agencies of provincial governments located at the Imperial Capital where these revenues were used to pay taxes due from these provinces to the central government. These ‘courts’ issued certificates indicating the amount paid by the merchants who, upon their return, would present them to their provincial government for payment of an equivalent sum of money” (ibid., 2002, p. 3). This system benefits both the local government and the merchants since neither had to travel with cash. As I will demonstrate later in the case of hawala, with the migration to other regions of China, the system spread as well. Migrants sent part of their salary home to support their families which had stayed behind. With the increasing migration that crossed the borders, the system changed from a domestic to an international dimension.
Beside the two historical and the Colombian black market peso exchange system that also allows for informal transfers, there are smaller, similar operations taking place in various regions. Rather commonplace is the system of chit and chop.
The chop system is still prevalent today and has many parallels to hawala. If somebody decides to ‘wire’ some amount from country A to a beneficiary in country B, for example, he or she will go to a broker and hand him the money. In turn, the broker communicates the necessary details of the transaction, such as the amount, the beneficiary and his location to his counterpart in country B. As a ‘receipt’ the depositor is given half of a chop, which usually consists of a button, a ticket of some kind or a playing card torn into two halves. The broker then sends his part of the chop to the broker in country B, while the client sends his half to the beneficiary. The beneficiary and the receiving broker then identify each other by the matching parts of the chop and the money will be handed out. As with hawala, the broker that initiates the transaction charges a fee for his service . The system of chop is said to have been used in Switzerland during the 1960s and the early 1970s to facilitate the re-export of cash or gold. Clients outside the country who bunkered their wealth in the often-cited numbered bank accounts in Switzerland were seeking a method to repatriate money for ‘daily use’. So bank employees crossed the border with cash and one bill halved at the last visit by the client to the bank, serving as identification. However, with the adaptation of the ‘know your customer’-policy, this practice was abandoned.
 For further information about the Colombian Peso Black Market, refer to FinCEN (1997)
 Fei ch’ien is translated as “flying money”
 The Chinese systems are known by various different names: “hui kuan” means “to remit sums of money”, “chiao hui” means “over-seas remittances“, “phoe kuan” refers to “message houses”, “nging sing kek” means “money letter shop”, others call it “chop shop”. List of translations from Sandhu, 2004, p. 7
 In Vietnam “hui”, in Thailand “poey kuan”, in some Latin American countries “stash house” or “casa de cambio”, in some African countries “gift services”, and in the Philippines, “door- to- door services”, List from Sandhu, 2004, p. 7
- Quote paper
- Sebastian Müller (Author), 2004, Money Wars: Hawala and Its Use to Finance Terrorism, Munich, GRIN Verlag, https://www.grin.com/document/32766