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