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