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