Money Wars: Hawala and Its Use to Finance Terrorism

Table of Contents

Abstract

1. Introduction

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

6. Conclusion

7. Annexes

8. Literature

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

Abstract

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

1. Introduction

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.^[1]

There are two historical systems, namely the hawala/hundi and the fei ch’ien^[2]. 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^[3] 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.^[4] 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.

[...]

^[1] For further information about the Colombian Peso Black Market, refer to FinCEN (1997)

^[2] Fei ch’ien is translated as “flying money”

^[3] 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

^[4] 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