Hawala, money laundering, and terrorism finance: micro-lending as an end to illicit remittance.

Author:Bowers, Charles B.
 
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  1. INTRODUCTION

    "Hawala", in Arabic, means "to transfer;" (1) it is also known as "Hundi," meaning "to collect"--from Sanskrit root. (2) Though the term might be a new addition to the western lexicon, it is used quite readily the world-over in some form. A traveler's check, for example, is known as "hawala safir" from parts of Africa to Asia and throughout the Middle East. (3) This paper, as interlocutor, seeks to introduce (to re-introduce to some) not only the term hawala, but the unique security challenges this concept--that of an informal, and less than transparent, value transfer system--presents. Beyond examining the role of hawala in money laundering and terrorism finance, the objective of this work is to weigh the effectiveness of current efforts in addressing these issues, both at the street-level and in the legislative realm, post September 11, 2001 (9/11). Lastly, the author offers recommendations based on US, UAE, Turkey, and Netherlands-based research coupled with numerous interviews with various subject-matter experts ranging from international bankers to legislators to diplomats to federal agents.

  2. THE HAWALA TRANSACTION

    Hawala, in its most basic delineation, is "money transfer without money movement," (4) without movement in formal financial institutions that is. Upon customer request, a US-based hawaladar--a hawala operator--will call, fax, or email their hawaladar associate in Pakistan, for example, with the specifics of the transaction (i.e. amount and password only--no names are used). This Pakistan-based hawaladar will then pay the requested amount out of his/her own funds, and in local currency, upon receiving the agreed upon password from the recipient. The only paper trail might be a notation, often encoded or in a little-known dialect (e.g. Gujarati (5) or Memoni (6)), of the debt obligation in internal books. The funds are distributed, often delivered right to the door of the intended recipient, all within a course of minutes, (7) without receipts or paperwork, and all outside of formal financial institutions.

    Theoretically, payments between hawaladars operate both ways. In our example the Pakistani hawaladar could just as easily request that his US colleague pay out X to a US recipient. As is typically the case, however, flows tend to be asymmetrical (i.e., money leaves more developed nations bound for least developed nations in the form of remittances). It is clear, however, that this trade is not simply bilateral. Our US and Pakistani hawaladars would be dealing concurrently with operators in Dhaka, Muscat, Istanbul, London, etc.

    Hundreds or thousands of these transactions are bundled together over the course of weeks or months with consolidation taking place at various levels. Midlevel hawaladars act as clearing houses for small scale operators, larger hawaladars act as clearing houses for those in the middle, and so on. In Dubai, at the megalevel, tranches of value worth 100,000 [pounds sterling] are the minimum units of trade in each hawala swap. (8) Despite this layering, eventually balance sheet positions, even at the lowest levels, have to be settled.

    Some settlement occurs within traditional banking channels, but much of this balancing of the accounts takes place through alternative channels like cash couriers. (9) Despite Reports of International Transactions of Currency or Monetary Instruments (CMIR) reporting requirements, (10) money is effectively smuggled across our borders in this fashion every day. In fact, in the US State Department's 1998 International Narcotics Control Strategy Report, bulk cash smuggling was deemed one of the most utilized money laundering techniques in the United States and around the world. In the same report, a decade later, the same holds true: "The smuggling of bulk currency out of the United States is the largest and most significant ... money laundering threat facing law enforcement. Deterring direct access to US financial institutions by criminals does not prevent money laundering if illicit proceeds can still reach US accounts through indirect means." (11)

    The principal drawback of using couriers is one of logistics. One million dollars in "street cash" (i.e. bills in $5, $10, and $20 denominations) weighs approximately 256 pounds. (12) Therefore, in larger transactions, some hawaladars (or their associates) utilize import/export businesses. Through these companies, "countervaluation"--the settling of accounts through trade rather than transfer--occurs. (13) Countervaluation is done either by the underinvoicing or overinvoicing of product flows between these import/export businesses. (14) For example, if a hawaladar owed $25,000 to a colleague in Bishkek, he might overinvoice a shipment of carpets. The carpets, having a true value of $25,000 would be invoiced at $50,000; $25,000 would cover the legitimate cost of goods and the remaining $25,000 would settle his/her debt. As John Cassara, former CIA officer and US Customs agent, notes, "The cover of the business transaction and the documentation involved wash the money clean.... [A] customs inspector is hard-pressed to spot moderate discrepancies in invoice pricing and product description." (15) Whether carpets or gold, it's simply unrealistic to expect customs agents to wade through mountains of pile verifying knots per square inch or the purported purity of gold; is it solid gold or simply gold-plated; is it 18-carat or 22-carat?

    The products involved in countervaluation present tracking challenges in and of themselves. Though the principle focus of this paper is on the hawala transaction, the use of goods in the countervaluation process makes the mention of trade-based money laundering a necessity. And, gold, in particular, presents one of the most challenging set of security concerns. In fact, some, like Mr. Cassara, argue that for the role gold plays in ethnic-based alternative remittance systems, it should be classified as an alternative remittance system itself (more on this later). (16)

  3. VALUABLE REMITTANCE TOOL OR NATIONAL SECURITY THREAT?

    Remittances--the money that migrant workers send back to their countries of origin (17)--play a large and ever growing role in the global economy. As far back as the 1990's, "[D]eposits from emigrants ... represented almost 20 percent of total deposits in the Portuguese banking system." (18) Skip ahead a few years, and in 2002 remittances from the US to Latin America averaged $200-300 per month per person while monthly sums to Pakistan and India were nearly three times that amount per person. (19) As a result, by 2003, developing countries were receiving $96 billion in remittance inflows. (20) This sum accounted for more than 5 percent of the 2003 GDPs for 25 developing countries, (21) and nearly 7.5 percent of the GDP and 160 percent of the Foreign Direct Investment (FDI) of Vietnam. (22) By 2005, global remittances passing through formal channels exceeded a staggering $233 billion. (23)

    I pause to stress two points here, the first being that the above-mentioned figures are indeed estimates. There are many reasons, but two in particular, that suggest why these numbers should be viewed with a modicum of skepticism. Firstly, there is a lack of uniformity in remittance classification. In many countries, companies which would otherwise be classified as money transmitters are considered commercial entities rather than financial institutions, and are, therefore, exempt from many of the regulatory, oversight, and reporting requirements. (24) In addition, remittances which are paid through post offices are seldom reported to financial authorities (as is the case in the US). (25) As such, those transactions also escape inclusion in remittance data. Secondly, the levels of reporting, and thus the adequacy of the data collected, vary from country to country. For example, even where money transfer companies are required to register as financial institutions, they often fail to report both the number and value of remittance transactions. (26)

    Another point that needs to be emphasized is that these figures represent only those flows passing through formal channels. While "most countries do not measure remittances that occur through informal channels," (27) international bodies do, and their figures are in the tens of billions of dollars. (28) Some commentators, like professor Roger Ballard, place international levels higher still: "[u]nrecorded flows moving through informal channels ... are conservatively estimated to amount to at least 50 percent of recorded flows." (29) If that statement is accurate, informal flows would amount to roughly $115 billion annually. In Pakistan alone, "[o]fficials ... estimate that more than $7 billion flow into the nation through hawala channels each year." (30) To put these numbers into perspective, the sum of formal and informal remittance flows is somewhere around $350 billion per year, (31) while 2007 CIA Factbook figures list China's budget revenues at just $450 billion. (32)

    Cautionary notes aside, no matter how broad the discrepancies between the actual figures and the estimates above, and between reporting methodologies and the actual data, two things are clear. First, give or take hundreds of thousands of dollars, or tens of billions of dollars for that matter, and the numbers involved are still enormous. Second, there is a clear bifurcation of preference among remitters. Some choose to utilize the formal sector while others, often at risk of criminal prosecution, opt for the informal.

    Why is that the case? Why would one prefer to send money through a hawaladar? There are four basic incentives that seem to fuel this choice: (1) the absence of formal sector alternatives, (2) cultural familiarity, (3) affordability, and (4) anonymity.

    "[H]awala continues to be the best option for most immigrants and the only one for those coming from regions devastated by civil conflict and disasters." (33) In...

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