Hawala remittance system and money
laundering
Purpose:
We are discussing a MENA UNCAC implementation programme. I need to better understand
how Hawala works in the MENA region. What its risks are and also what its benefits are for
poor people and how these might be balanced.
Content:
• Part 1: Overview of Hawala Remittance Systems
• Part 2: The Role of Hawala Remittance Systems in Money Laundering
• Part 3: Further reading
Summary:
Hawala remittance systems - also referred to by the Financial Action Task Force as alternative
remittance systems – are informal banking arrangements that allow the transfer of funds both
domestically and internationally without using formal financial institutions. As a cheap, fast, and
reliable money transfer system, they are primarily used by migrant workers overseas sending
remittance to support their families in their home countries. Although it is difficult to quantify
accurately the volume of funds transferred every year to the developing world through such channels,
remittances are very important sources of income for many impoverished households and may play
an important role in promoting growth and development. However, in the aftermath of 9/11, there has
been growing concern on their potential role in money laundering. As they are anonymous and
require minimal documentation, they can be easily misused by criminal organisations, including
terrorist groups to conceal the proceeds of criminal activities or corrupt officials to launder the
proceeds of corruption.
Part 1: Overview of Hawala Remittance Systems
In the aftermath of 9/11, there has been renewed interest in Hawala remittance systems and their
potential role in facilitating illegal or terrorist activities. There is still limited knowledge on informal
funds transfer systems and the extent to which they are misused for illegal purposes, including for
both money laundering and terrorist financing.
Transparency International
mchene@transparency.org
Reviewed by:
Robin Hodess, Ph.D.
Transparency International
rhodess@transparency.org
Date:
23 May 2008
U4 Expert Answer
What is Hawala?
Hawala remittance systems are a fast, safe and cost-effective way to transfer funds both domestically
and internationally without using formal financial institutions. As such, it is an informal fund transfer
system that runs in parallel to – and usually independently from – the formal banking system. Such
systems were originally developed to facilitate trade between distant regions at a time or in regions
where conventional banking instruments were either absent, weak or unsafe.
The FATF uses the following definition of alternative remittance systems:
“Alternative remittance systems cover any system used for transferring money from one location to
another and generally operating outside the banking channels. The services encompassed by this
broad definition range from those managed by large multinational companies to small local networks.
They can be of legal or illegal nature and make use of a variety of methods and tools to transfer the
money”. (Please see: http://www.fatf-gafi.org/dataoecd/16/8/35003256.pdf).
Hawala remittance systems are not per se illegal. As a remittance system, Hawala is submitted to the
national regulations governing remittance services. In some countries, Hawala is illegal from a
regulatory perspective, although enforcement is difficult as such services are usually advertised in
ethnic media or via internet in vernacular languages. In addition, Hawala brokers often run legitimate
businesses alongside the remittance services that they offer, which further challenges potential
detection. In South Asian countries such as India or Pakistan, there are laws that prohibit speculation
in the local currency and foreign exchange transactions at another rate than the official exchange
rate, which makes Hawala systems as they currently operate illegal. Some countries also impose
registration/licensing requirements to money remitters or strict regulations over domestic and
international remittance.
How does Hawala Operate?
Hawala remittance systems involve the transfer of the value of currency without physically moving it.
A customer – usually a migrant worker- approaches a Hawala broker and gives him a sum of money
to be transferred to a beneficiary – usually a relative - in another city or country. The Hawala broker
often runs a legitimate business in addition to the financial services he offers and has a business
contact, a friend or a relative in this city/country. The Hawala operator contacts their Hawala partner –
usually a contact from their personal or business network - in the recipient city/country by phone, fax
or e-mail. The operator instructs the partner to deliver the funds to the beneficiary, providing amount,
name, address and telephone number of the recipient and promises to settle the debt at a later stage.
The customer does not necessarily receive a receipt but is given an identification code for the
transaction. The Hawala broker in the recipient city/country contacts the beneficiary and delivers the
funds. The recipient can receive the funds without producing identity documents other than the
previously agreed code.
There is no recorded agreement or written contract for the transaction. The deal is secured by the
trust between the parties with no legal means of reclamation.
Such systems suppose that the Hawala broker is connected to a network of other brokers to arrange
the payments or knows people who can access such networks in the recipient city/country. Hawala
networks are therefore often (but not only) based on kinship or family ties, as the closer the
relationship, the easier the settlement process will be. They usually advertise services for
countries/cities where such connections exist.
Each time the Hawala broker gives payment instructions, an informal debt is created. The Hawala
broker that delivered the funds to the beneficiary needs to recover the money from the first broker. In
some cases, predominantly in the Middle East, a courier brings the money from one party to the
other. The formal banking system can also be used to settle alternative remittance debts, but the
system more typically relies on alternative methods, using a mix of legal and illegal means of
settlement.
Hawala partners may be business partners, typically involved in import/export activities. In such case,
transferring money is one of the activities they are regularly engaged in as part of their normal
dealings with one another. The debt settlement can be done by “manipulating” invoices to conceal
money transfers, for example by under-invoicing or over-invoicing shipment of goods.
The Hawalla broker delivering the money to the end beneficiary may also owe the other money,
repaying his debt by paying the Hawala customers. The first broker may also have entrusted the
second one with money for Hawala activities. In such cases, there is no need for the second broker
to recover any money.
Once the transaction is complete, there is no need for record keeping and neither for reporting nor
regulatory requirements for customer identification. Hawala transactions leave no paper trail,
business documentation or financial records for law enforcement agencies to track the origins of the
transfers.
Extent of Hawala Remittance Systems
Hawala brokers operate more or less openly in all parts of the world and the system has global reach.
The only limits to the transaction are the risk involved for the remitter to carry cash and the capacity
of the receiving broker to cover the transaction. The United Arab Emirates, especially Dubai, are
believed to handle the largest volume of transactions, but the system is widespread in countries such
as Pakistan, Indian and the Persian Gulf states.
The extent of Hawala systems has been little explored in the literature and cannot be quantified
reliably and accurately given the informal nature of the transactions. It is impossible to provide a
precise figure, but it is likely that it ranges to billions of USD. Some countries make estimates based
on their expatriate community and balance of payment data. In Pakistan, officials estimate that more
than USD 5 to 7 billions enters into the country every year through Hawala channels. (Please see:
http://www.treas.gov/offices/enforcement/key-issues/hawala/) In the case of India, Interpol estimates
the size of Hawala at possibly 40% of the country’s gross domestic product. It is estimated that
globally between USD 100 billions and USD 300 billions flow through informal remittance systems
every year. (Please see: http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf).
In spite of its informal nature, alternative remittance systems may have direct and indirect
macroeconomic implications and have a potential impact on monetary accounts of both remitting and
receiving countries. Informal financial transactions are neither reflected in official statistics nor
recorded in the foreign assets of the recipient country or liabilities of the remitting countries. At the
same time, such transactions are believed to increase the circulation of cash in the recipient
countries and affect the composition of broad money. Alternative remittance systems may also have
an indirect effect on monetary policies as they influence the demand and supply for foreign
currencies. Alternative remittance systems also have negative fiscal implications for both remitting
and receiving countries. As the funds circulate outside the official system, they are not subject to tax
and represent a loss of business both for the formal financial system and government income.
The literature points to the need to survey and compile information on the importance of these
alternative remittance systems as well as on the regulations governing them in the various countries.
The Profile of Hawala Users
Advantage for users
All authors consulted agree on the advantages of using Hawala both for legal and illegal purposes.
Hawala is attractive to customers as it provides a fast, safe and convenient way to transfer funds,
usually with a far lower commission than that charged by the banks. In countries where there are
strict regulations governing domestic and international money transfers, Hawala can be driven by
capital flight motivations, by customers concerned with internal security and stability using alternative
remittance systems to place money abroad, or pay for education or medical treatment. There is an
array of advantages for users:
• The system is cost effective. Hawala brokers take a small commission and usually practice
more advantageous exchange rates than the official rates. Hawala operators have low
overheads, and generate profit through small commissions and exchange rate speculations.
• The system is safe. In countries plagued by political insecurity such as Afghanistan, it is one
of the most convenient, safe, reliable and inexpensive ways to move funds within the
country.
• The system is efficient. A Hawala remittance transaction takes place within one or two days.
• The system is reliable. The system is based on trust and there are no reported instances of
customers being cheated in the literature. A breach of trust would keep the customers
away.
• The system is flexible and not bureaucratic. The informal nature of the transactions makes
them very attractive to users with tax, immigration or other legal concerns. For example,
illegal migrants do not have adequate identification and couldn’t use the formal banking
system to send money home.
• The system is anonymous. It facilitates transfer of money without records or documentation.
• The system doesn’t leave a paper trail. As it is rare that Hawala brokers keep records after
the transaction is completed, it is unlikely that the transaction will be identified or detected.
• The system is culture friendly. For migrant workers, ethnic or kinship ties with the Hawala
brokers make this system particularly convenient and easy to use.
Profile of Users
The speed, cost-effectiveness, safety and potential anonymity of Hawala transactions contribute to
widespread use (for both legal and illegal purposes) and make them a rational choice for the poorest
segments of the population.
Hawala is traditionally associated with South Asia and the Middle East. Its primary users are
members of the expatriate populations from the Indian sub continent, East Asia, Africa, Eastern
Europe who migrated to Northern America, Europe and the Persian Gulf region and send remittances
to their family who remained in their country of origin. These funds represent important sources of
income for some countries. In 2005, the World Bank estimated that remittances to developing
countries from overseas workers amounted to USD 126 billions in 2004, representing twice the
amount of Official Development Assistance. A study by the Inter-American Development Bank
concludes that Latin America and the Caribbean are the main recipient areas of remittance in the
world (31%), followed by South Asia (20 %) and the Middle East and North Africa (18%). (Please
see: http://tcdc1.undp.org/Remittances_Oct102005B.pdf).
Remittance from migrant workers- whether transferred through formal or informal channels- are very
important to both the national economy and individual households as a means to escape poverty. In
a 2005 background note, UNDP explores the potential role of remittance in achieving the Millennium
Development Goals, including the goal of reducing the proportion of people living in absolute poverty
and suggests that remittance to developing countries can play an instrumental role in reducing
poverty and promoting growth and development. (Please see:
http://tcdc1.undp.org/Remittances_Oct102005B.pdf). The following data and information are mostly
drawn from this background note.
In countries in post-conflict states or affected by economic hardships, remittance are a very important
part of family maintenance and economic survival for millions of impoverished households. For
example, in Haiti, remittances represented 17 % of the GDP in 2001 and accounted for up to 40 % of
the GDP in Somalia in the late 1990s. A 2003 UNDP survey estimates that more than 25 % of
families in Somalia receive remittance from abroad. According to a survey conducted in Armenia,
remittances make up to 80 % of household incomes on average and appear to go to the most
vulnerable households, keeping families above the poverty line. Similar trends have been observed in
Tajikistan, Eritrea or the Comoros, suggesting high dependence on remittance per capita.
Informal channels are the most commonly used systems of remittance transfer for less developing
countries as well as economies in transition, as there are considerable price differences between the
formal and the informal systems. The average cost of transferring remittances to Central and South
America can be as high as 20 %. There are cases in which low income customers are not charged at
all for the transfer when using alternative remittance systems.
The system is particularly convenient for populations that are out of reach of the formal financial
sector because they live in poor and remote areas, where it is not profitable to open local branches of
formal banking institutions. In a context of political insecurity, this may be the only option to reach
isolated segments of the population. In conflict affected countries such as Afghanistan for example,
the Hawala system constitutes the safest way to circulate money in the provinces and the population
uses it to transfer funds around the country. More recently, they have also been used by the majority
of international and domestic NGOs and development agencies to provide financial services for the
delivery of emergency relief and humanitarian aid.
Remittance can also be used for investment and play a key role in developing small businesses.
More information would be needed on the use of remittance, but it is believed that a substantial
portion is re-invested in land and housing, vehicles purchase and education services. Some
remittances are also spent on machinery and shops to start up an income generating activity. One
can also reasonably assume that, even when spent on consumer goods, remittance can stimulate
growth. A study of Mexico suggests that each dollar of remittance generates three dollars of spending
power.
Part 2: Hawala Remittance System and its Role in Money
Laundering
The many above-mentioned advantages of Hawala remittance systems don’t make them attractive
only for “legitimate” users. In the wake of 9/11, there has been renewed interest for Hawala systems
and growing concern about its potential role in facilitating serious crimes including money laundering
and terrorism financing.
Potential for Abuse
While Hawala system may serve legitimate purposes for migrant workers or poor people, its specific
characteristics make it vulnerable to those wanting to launder the proceeds of criminal activity. As
they are anonymous and require minimal documentation, external oversight of Hawala transactions is
limited and detection risks are minimised. This makes them susceptible to abuse by individuals and
groups transferring proceeds of crimes or funds to finance illegal activities. There is, for example, a
long-standing tradition among Columbian drug traffickers to use informal “underground” banking
systems.
In addition, the formal financial sector has been subject to increased oversight in recent years, which
may provide criminals with additional incentives to launder their profits via less regulated systems
such as the Hawala systems. Money laundering through the formal financial system involves a series
of risks that have increased with recent know-your-customer campaigns and heightened scrutiny over
suspicious transactions. Smuggling large amounts of cash in low regulated areas also carries a high
risk of losses. Alternative remittance systems can minimise transaction risks and allow placing the
money in the banking system while avoiding the reporting requirements of the formal banking system.
As adopted in the general assembly in 1995, Interpol defines money-laundering as “any act or
attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to
have originated from legitimate sources”. More specifically, money laundering methods seek to hide
the source of the income through a series of financial transactions, either through the formal or
informal financial system. Money laundering activities typically involves three major steps, namely the
placement, layering and integration stages. There is a consensus in the literature on the fact that
Halawa remittance systems have the potential to facilitate all stages of the money laundering
process:
• Placement of criminal proceeds. At this stage of the process, illicit proceeds are placed
within the legitimate financial system. The risk for money launderers is to raise suspicions
about the size and source of income, as some regulations require reporting over a certain
amount of cash handled. Large deposits can be split into smaller deposits in different
financial institutions or accounts, or mingled with the deposits of a legitimate business. The
Hawala system provides an effective means of placement, as in most cases, the Hawala
broker can make deposits at the bank that are justified by its other legitimate business
activities. He/she may also use the cash received to meet business related costs, thus
reducing cash deposits at the bank.
• Layering of criminal proceeds. This stage involves a series of financial transactions where
the money is moved by electronic or wire transfers through the financial system to make it
impossible to track its origins. Funds are typically moved through a combination of front
companies or shell corporations operating from financial tax havens and/or redistributed
through a series of accounts in smaller amounts. Multiple remittances can occur in the
layering process. Alternative remittances such as Hawala systems constitute a relatively
safe layering alternative in a money laundering scheme. In the absence of paper trails or
record-keeping of the transactions, Hawala transfers are difficult to trace and tie to the
original source of money. Layering can be done by using Hawala brokers in several
countries and distributing the transfers over time.
• Integration of criminal proceeds. At this stage, funds are finally made available for use
and return to the money launderer in the form of a legitimate income, such as profit from a
shell company or mixed with the profit of a legitimate business. Integration shares common
features with the Hawala debt settlement process and can be accomplished through
investment in a legitimate business, the purchase of bonds or property, or an import/export
invoice.
Evidence or Lack of Evidence
Illegal flows of moneys are difficult to track or separate from legal money flows, as criminals develop
new and more sophisticated methods to avoid detection. Empirical evidence and information on the
extent and use of alternative remittance systems for money laundering activities remain thin,
anecdotal or non-existent.
In 2005, the Financial Action Task Force (FATF) acknowledged the potential misuse of alternative
remittance systems by including a full section on such systems in its money laundering and terrorist
financing typologies. The reports states “Although the alternative remittance sector is largely
composed of legitimate operators, some categories of alternative remittance systems have
nevertheless been involved in the transfer of funds related to illegal activities. (…). Experience over
the last decade has shown that alternative remittance systems can be misused for illegal purposes,
including for both money laundering and terrorist financing”.(Please see: http://www.fatfgafi.
org/dataoecd/16/8/35003256.pdf).
Other authors argue that Hawala networks are neither the only nor the main vehicle of illegal fund
transfer. In an article published in 2003 in Risk Management, Nikos Passas argues that evidence
from the 9-11 attacks shows that most of the funds received by hijackers reached the US through
formal financial institutions. (Please see: http://www.palgravejournals.
com/rm/journal/v5/n2/abs/8240148a.html). However, the 9/11 commission report in 2004 still
maintains that Osama Bin Laden relied generally on established Hawala networks operating in
Pakistan, Dubai and throughout the Middle East.
There have been some established cases where Hawala or Hawala-like techniques were used to
launder proceeds of criminal activities. In a report published in 2000, Interpol provides a brief
description of such cases in its appendix. They involve cases of narcotics trafficking, terrorism, alien
smuggling, welfare fraud, insider trading, custom and tax violations, and gambling. (Please see:
http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp). The link
between corruption and alternative remittance systems has not been specifically documented in the
literature, but most authors implicitly connect Hawala to the laundering of corruption proceeds.
In 1998 Interpol also conducted a study to determine the structure and operations of alternative
remittance systems in the Asia and Pacific region, through a review of existing literature on
alternative remittance system and a survey of 31 Interpol member countries in the region. Response
to the survey provided a working sample of 25 Interpol member countries of which 21 reported some
form of alternative remittance system operating within their borders. 13 of the 21 countries
experiencing alternative remittance systems found that they operate as a money laundering tool,
including Hong Kong, China, India, Indonesia, Japan, Nepal, Pakistan, Sri Lanka, Philippines, Turkey
and Vietnam. Interpol records a variety of criminal proceeds laundered through such systems in the
region, including profits from the drug trade, arms, gold and gem smuggling, terrorism, and
corruption.
Interpol countries in the Gulf and the Middle East observed that alternative remittance systems tend
to launder profits of drug trade, gold smuggling, extortion and terrorism. Information regarding
specific operational aspects of the system is not available for this region. Experts in neighbouring
countries also report that alternative remittance systems are used in the Gulf as a conduit and
financing mechanisms for the gold trade in the Indian subcontinent. (Please see:
http://www.interpol.com/Public/FinancialCrime/MoneyLaundering/EthnicMoney/default.asp).
Recommendations by International Organisations
The FATF released in October 2001 eight special recommendations on terrorist financing, which
combined with the forty recommendations on money laundering outlines a comprehensive framework
to detect, prevent and combat money laundering. Special recommendation VI focuses explicitly on
alternative remittance, outlining three core elements. The objective of these elements is to bring all
money transfer services, whether formal or informal, within minimum legal and regulatory
requirements, in accordance with the relevant FATF recommendations. These recommendations
focus on key areas such as licensing/registration, due diligence, customer identification, record
keeping, suspicious transaction reporting, compliance monitoring, sanctions and awareness raising.
The sixth recommendation targets alternative remittance systems and include three major aspects:
(Please see FATF’s interpretative note to special recommendation VI:
http://www.oecd.org/document/34/0,3343,en_32250379_32236947_34261877_1_1_1_1,00.html#INS
RVI).
U4 Expert Answer
8
• Jurisdictions should require licensing or registration of persons or legal entities providing
value/money transfer services, including through informal systems or networks;
• Jurisdictions should ensure that money/value transfer services, including informal systems
or networks, are subject to the applicable FATF forty recommendations and the eight special
recommendations;
• Jurisdictions should be able to impose sanctions on money/value transfer services, including
informal systems networks that fail to obtain a licence/register and fail to comply with
relevant FATF recommendations.
The IMF highlights differences in regulatory and supervisory responses to alternative remittance
systems between remitting and receiving countries. In recipient countries, the key issues include
foreign exchange regimes, the quality of the formal financial system and the level of political stability.
Regulations tend to be influenced by these concerns. In remitting countries, there are concerns about
the potential abuse of such remittance systems by criminals. Regulatory measures include
registration/licensing, customer reporting and record keeping requirements. (Please see:
http://www.oecd.org/document/34/0,3343,en_32250379_32236947_34261877_1_1_1_1,00.html#INS
RVI).
The IMF encourages a two-pronged approach toward regulation:
• In countries where an informal Hawala system exists alongside a well-functioning formal
sector, it is recommended that Hawala dealers be registered and keep adequate records in
line with the FAFT recommendations. Efforts should focus on improving the level of
transparency in these systems by bringing them closer to the formal financial sector. In
countries torn by conflicts, such registration may not be feasible.
• The regulatory response should simultaneously address weaknesses that may exist in the
formal sector.
Efforts to regulate Hawala remittance systems are challenged by the limited knowledge of those
systems and the extent to which they are exploited by criminal organisations. Too strict regulations
may push such systems underground or deprive poor people from legitimate sources of income and
survival in many countries. Regulatory concerns should therefore strive to balance the prevention of
misuse with the need to ensure that flows of legitimate funds continue to reach the developing world.
Part 3: Further Reading
Money Laundering and Terrorist Financing Typologies 2004-2005 (2005)
This report from the FATF dedicates a full section to alternative remittance systems and describes
how these networks work in practice, with the view to identifying areas of vulnerability and risks of
misuse for illegal purposes. http://www.fatf-gafi.org/dataoecd/16/8/35003256.pdf
Regulatory Frameworks for Hawala and Other Remittance Systems (2005)
This report prepared by the IMF presents the proceedings of the second International Conference on
Hawala. The conference resulted in a statement identifying the challenges of implementing a
regulatory framework for Hawala remittance systems. Participants agreed that there is a need to
gather and analyse more data and knowledge on those systems.
http://www.apgml.org/frameworks/docs/8/Regulatory%20Frameworks%20for%20Hawala%20and%20
Other%20ARS%20-%20IMF%202005.pdf
The Potential Role of Remittances in Achieving the Millennium Development Goals (2005)
In this Background note, UNDP explores the potential role that remittances can play in promoting
growth and development in developing countries. Although the issues involved are complex,
remittances are important for developing countries as they provide access to substantial additional
financial resources and support the sustainability of livelihoods.
http://tcdc1.undp.org/Remittances_Oct102005B.pdf
Informal Funds Transfer Systems (2003)
This joint IMF-World Bank paper provides an analysis of the Informal Hawala System, presenting its
major features, its uses as well as an economic analysis of Hawala transactions. It concludes by
outlining legal and regulatory aspects of Hawala remittance systems.
http://www.imf.org/external/pubs/nft/op/222/
Combating the Abuse of Alternative Remittance Systems: International Best Practices (2003)
This best practice paper prepared by the FATF is intended to provide additional details to the
Interpretative Note on Recommendation VI that addresses risks associated with alternative
remittance systems. It provides guidance on how to detect those systems outside the formal banking
system and focuses on practical issues such as identification of money transfer services, procedures
for registration/licensing and customer due diligence procedures.
http://www.fatf-gafi.org/dataoecd/32/15/34255005.pdf
Hawala and Other Informal Value Transfer Systems: How to Regulate Them? (2003)
This article summarises the findings of an 18 month study of the mechanics and settlement
processes in Hawala networks and concludes with some policy implications. http://www.palgravejournals.
com/rm/journal/v5/n2/abs/8240148a.html (available for purchase).
The Money Exchange Dealers of Kabul (2003)
This study of the Hawala system in Afghanistan was undertaken to determine current practices of
Hawala in Afghanistan, verify assertions regarding convenience, speed, cost-effectiveness, identify
characteristics that make Hawala vulnerable to abuse and consider appropriate regulatory and
supervisory options.
http://www1.worldbank.org/finance/html/amlcft/docs/ARS/The%20Money%20Exchange%20Dealers
%20of%20Kabul.pdf
Informal Money Transfer Systems: Opportunities and Challenges for Development Finance
(2002)
This paper reviews the main types of informal money transfer systems (IMTS). IMTS remain today
the preferred remittance vehicle among migrant communities. Characteristics such as low transaction
costs, speed and little paperwork render them more attractive than banking institutions. The paper
proposes measures to make those systems less prone to potential abuse by criminals and encourage
the development of formal sector alternatives.
http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf
Alternative Remittance Systems Distinguishing Sub-systems of Ethnic Money Laundering in
INTERPOL Member Countries on the Asian Continent (2000)
A study of 31 INTERPOL member countries in Asia/Pacific was conducted in 1998 by questionnaire
and telephone interview to test the hypothesis that two dominant and distinct alternative remittance
systems prevail in the region; the first encompassing the Asian-oriental countries and the second
covering the Indian sub-continent. The data set is comprised of the 21 INTERPOL countries reporting
the presence of ethnic banking inside their borders. Observational trends in operational aspects
within each system lend support to the hypothesized existence of two distinct ethnic banking systems
in the region.
http://www.interpol.com/Public/FinancialCrime/MoneyLaundering/EthnicMoney/default.asp
The Hawala Alternative Remittance System and its Role in Money Laundering (2000)
This paper presents a description of the Hawala remittance system. Hawala is an ancient system
originating in South Asia; today it is used around the world to conduct legitimate remittances. Hawala
can and does play a role in money laundering. In addition to serving as a “tutorial” on Hawala
transaction, this paper will also discuss the way in which Hawala is used to facilitate money
laundering. http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp
Newsletter by World-Check, the recognised authority on reducing risk through intelligence.
www.world-check.com/experttalk
APRIL 2009
Expert Talk
Modes and strategies of terrorist
financing in South Asia
by Sadia Sulaiman and Ankur Kumar, Research Analysts, World-Check Singapore (TIRU)
2
n the wake of the 9/11 terrorist attacks on the US, South
Asia attracted world attention due to the extent and
spread of terrorist networks operating there. Besides the
myriad indigenous groups present, the region is home to Al-
Qaeda, currently located inside Pakistan’s autonomous tribal
areas. The terrorist threats emanating from this region are of
local, regional and global concern.
Several historical and structural factors contribute to an environment conducive for
terrorist activities. The relatively recent statehood of South Asian states (India and
Pakistan were both founded in 1947) has provided only a thin veneer of cohesion
among an extraordinary heterogeneous grouping of old nations and ethnolinguistic
groups. Secessionist tendencies remain strong. In addition, inter-state border and
territorial disputes create geopolitical uncertainty that drains state resources, and
porous and undefined borders along with sharp ideological contests and vast
inequalities of wealth all remain perennial concerns. The convergence of these
factors helps create the right environment for terrorist groups to not only organize
and stage plots, but more importantly to gain access to the funds necessary for
carrying out their local, regional and global terrorist campaigns.
The South Asian terrorist groups can be broadly divided into Islamist groups
like al-Qaida, Lashkar-e-Tayyiba (LeT), Tehrik-i-Taliban Pakistan (TTP), Jammat-ul
Mujahideen Bangladesh (JMB), and separatist and nationalist groups including the
United Liberation Force of Assam (ULFA), Liberation Tigers of Tamil Eelam (LTTE)
and Maoist groups operating in India. The general fundraising techniques of these
groups are more or less similar. While these groups vary in their size, objectives,
tactics and strategies, their financing strategies can broadly be defined under the
following categories.
Donations & Charities
Donations, whether voluntary or coerced, from people with shared ideological or
religious beliefs has emerged as an important source of terrorist financing in South
Asia. Since South Asia contains a considerable Muslim population, it is easy for the
Islamic charities to convince people to pay their Zakat - compulsory proportion
(2.5%) of one’s savings each year to be given to the poor – to them. Such raising
and transferring of funds is no longer limited to the domestic context in countries
directly affected by terrorism. It also has widespread implications for the international
community in its efforts to eliminate terror financing.
In this context, funds raised through diaspora communities have become a crucial
source of terrorist financing in the region. There are several ways in which separatists
and Islamists utilize them to generate sufficient funds to carry on their activities. One
of the most sophisticated and effective ways used has been to operate a network of
international non-profit organizations (NPOs), which enables them to generate and
transfer funds easily from any part of the world to an intended target area where
investment or procurement opportunities exist. These NPOs act as effective fronts
and also enable these terrorist entities to gain legitimacy. This deliberate siphoning
of funds from well developed, more regulated economies to more porous, less
I
3
regulated ones poses a serious terrorist financing threat. Recently a UK-based
charity, Green Crescent, was found supporting and funding militant activities in
Bangladesh. The charity is headed by a UK-based Bangladeshi expatriate, Faisal
Mostafa who is suspected of links with Jammat-ul Mujahideen Bangladesh (JMB),
an Islamist militant group.
One of the terrorist groups most adept at using NPOs is the Liberation Tigers of Tamil
Eelam (LTTE). The LTTE is an ethno-nationalist Tamil separatist movement battling
for the establishment of a separate Tamil state in North and East Sri Lanka. The
Tamil diaspora emerged primarily as an aftermath of civil war and race riots of the
1970s and 1980s in Sri Lanka which led to large-scale emigration. The Tamil diaspora
currently scattered throughout the world numbers around 800,000, and their
biggest concentration is primarily based in United Kingdom, India, Canada, Australia,
Germany and Switzerland. Jane’s Intelligence Review report by John Solomon and
BC Tan of World-Check indicate that the LTTE raises about 80-90 percent of their
total finances from overseas. The report estimates total revenue LTTE raises is around
claim 300 million dollars a year through its legitimate and illegitimate businesses
and fronts. Donations to LTTE’s vast and sophisticated network of NPOs have played
a major role in funneling this money back home to fund the separatist struggle. One
such NPO is the Tamils Rehabilitation Organization (TRO), which has offices in many
countries such as the UK, Canada, Australia, Sri Lanka. In the aftermath of the 2004
Asian Tsunami, certain NPOs, such as the TRO, raised millions of dollars, a majority of
which reportedly went into the funding of the LTTE.
Since 9/11 has inevitably resulted in a closer look at these NPOs and their sources
of funding. Raising funds abroad and channeling them back has become tougher.
However, support from the diaspora and their contributions and support will
continue to play a significant role in financing of terror activities.
Criminal Activities
The criminal activities in South Asia like theft, money laundering, bank robberies,
kidnapping for ransom, are another source of channeling funds to the militants. A
major case in point is the Tehrik-i-Taliban Pakistan (TTP), which is engaged in several
criminal acts, such as looting, taxing locals in FATA and the NWFP in addition to bank
robberies and kidnappings for ransom. In August 2008, Pakistani law enforcement
agencies disrupted a financial racket of TTP which was operating in Karachi with
the help of Lashkar-i-Jhangi and other militant outfits. The outfits were involved in
bank robberies, robbing people who had withdrawn cash from banks and security
firms and kidnapping for ransom. It is also reported that these groups train and
then recruit people in security firms, banks and money changer firms to meet their
financial needs, which poses a direct threat to the banking industry in the country.
The TTP is also forcibly taking over marble and emerald mines in NWFP and FATA and
raise considerable finances from these sources, which poses a threat to legitimate
businessmen involved in this industry.
4
The Indian separatist group in the Northeast, ULFA, has used extortion since its
inception in 1979 from major business groups, oil exploration firms and tea business
firms. Apart from these major entities, there are also reports of ULFA expanding its
extortion base to include petty traders, villagers and salaried people, demanding
regular payments in small increments.
Narco Trade
The cultivation of Narcotics is also an important source of terror financing in South
Asia. While Afghanistan’s flourishing opium cultivation and its large scale funding
of the Taliban and other anti-governmental organizations is widely known, terrorist
entities such as the Maoists in India and the LTTE in Sri Lanka have also benefitted
greatly from this profitable business. It takes shape both in the form of direct
cultivation by the militants as well as charging a tax from people who cultivate it in
return for “protection.”
The Naxalites are regarded as one of the most deadly internal security threats facing
India. Their connection with narcotics cultivation is well documented. According
to the Narcotics Control Bureau in India, the Naxals thrive on money earned
through illicit cultivation. A report they released in 2007 found out that of the total
marijuana seized in the country, a disproportionately high percentage of it came
from the Maoist controlled pockets in the states of Madhya Pradesh, Maharashtra,
Chhattisgarh and Andhra Pradesh. These states are affected deeply by the Naxalite
violence. Prakash Jaiswal, then minister of state for home affairs in India, informed
the government in April 2008 that cannabis cultivation and its trade has become
a source of finance for the Naxals in Andhra Pradesh, Bihar, Jharkhand and Orissa.
He further stated that Maoists get “protection money” from narcotics traders who
engage in trafficking and also safe passage money from narcotics smugglers.
The LTTE’s connection with narcotics is less substantiated. But it is often accused of
heroin trafficking in the Golden Crescent and Golden Triangle regions to countries
including India, Sri Lanka, Canada, Germany, Italy, France, Scandinavian countries,
Myanmar and Thailand. The earlier cited Jane’s Intelligence Review report indicates
that a portion of the drug market in Montreal amounting to US $1 billion is controlled
by Sri Lankan expatriates, having links to the LTTE.
Hawala or Hundi
Till now we have focused on the main sources of raising funds for terror activities.
South Asia, unlike more advanced and regulated western economies, is also famous
for a less regulated informal value transfer system or Hawala transactions. Hawala
transaction or hundi system is one another important channel through which
terrorists and their sympathizers move money across the globe. Pakistan, India, and
the Persian Gulf states are home to the largest concentration of Hawala transactions.
According to 2002 statistics, Pakistani officials estimate that over $5 billion in
5
transactions take place through hawala networks every year. A recent US State
Department report by Assistant US Secretary of State for International Narcotics and
Law Enforcement Affairs, David T Johnson, has revealed that remittances to India
sent through legal, formal channels in 2007-2008 amounted to USD 42.6 billion, of
which 30–40 percent of transactions were carried out through hawala. The report
suspects that some of these transactions are directly linked to terrorist financing in
India.
In October 2008 the Mumbai police Crime Branch found out that the Indian
Mujahideen, a militant group in India, was receiving money from the Gulf countries
through the hawala networks and the Western Union Money Transfer. Similarly
Kashmir-based separatist groups such as Hizbul Mujahideen (HM) and LeT are also
suspected of using hawala transaction as a source to fund their activities.
Conclusion
Terrorist financing in South Asia remains a key dimension of the larger struggle to
counter terrorism in the region. Although there has been a growing awareness
about sources of terrorist funding and efforts have been made to enact regulation
to counter it, there is much more to do. There are regulations and initiatives by states
to keep a strong vigil on various businesses in an attempt to stop terrorist financing
at its source. But without adequate understanding of the terrorist groups, their
funding techniques and where they operate, laws and their enforcement will likely
fail to be effective. The unprecedented 9/11 attacks have dramatically shown the
international community the need for a stronger response to stop the financing of
militant groups. South Asia has become an epicenter of terrorism and insurgency.
Therefore all initiatives and responses should take a hard look at how South Asian
groups raise funds and what more can be done to stop them.
laundering
Purpose:
We are discussing a MENA UNCAC implementation programme. I need to better understand
how Hawala works in the MENA region. What its risks are and also what its benefits are for
poor people and how these might be balanced.
Content:
• Part 1: Overview of Hawala Remittance Systems
• Part 2: The Role of Hawala Remittance Systems in Money Laundering
• Part 3: Further reading
Summary:
Hawala remittance systems - also referred to by the Financial Action Task Force as alternative
remittance systems – are informal banking arrangements that allow the transfer of funds both
domestically and internationally without using formal financial institutions. As a cheap, fast, and
reliable money transfer system, they are primarily used by migrant workers overseas sending
remittance to support their families in their home countries. Although it is difficult to quantify
accurately the volume of funds transferred every year to the developing world through such channels,
remittances are very important sources of income for many impoverished households and may play
an important role in promoting growth and development. However, in the aftermath of 9/11, there has
been growing concern on their potential role in money laundering. As they are anonymous and
require minimal documentation, they can be easily misused by criminal organisations, including
terrorist groups to conceal the proceeds of criminal activities or corrupt officials to launder the
proceeds of corruption.
Part 1: Overview of Hawala Remittance Systems
In the aftermath of 9/11, there has been renewed interest in Hawala remittance systems and their
potential role in facilitating illegal or terrorist activities. There is still limited knowledge on informal
funds transfer systems and the extent to which they are misused for illegal purposes, including for
both money laundering and terrorist financing.
Transparency International
mchene@transparency.org
Reviewed by:
Robin Hodess, Ph.D.
Transparency International
rhodess@transparency.org
Date:
23 May 2008
U4 Expert Answer
What is Hawala?
Hawala remittance systems are a fast, safe and cost-effective way to transfer funds both domestically
and internationally without using formal financial institutions. As such, it is an informal fund transfer
system that runs in parallel to – and usually independently from – the formal banking system. Such
systems were originally developed to facilitate trade between distant regions at a time or in regions
where conventional banking instruments were either absent, weak or unsafe.
The FATF uses the following definition of alternative remittance systems:
“Alternative remittance systems cover any system used for transferring money from one location to
another and generally operating outside the banking channels. The services encompassed by this
broad definition range from those managed by large multinational companies to small local networks.
They can be of legal or illegal nature and make use of a variety of methods and tools to transfer the
money”. (Please see: http://www.fatf-gafi.org/dataoecd/16/8/35003256.pdf).
Hawala remittance systems are not per se illegal. As a remittance system, Hawala is submitted to the
national regulations governing remittance services. In some countries, Hawala is illegal from a
regulatory perspective, although enforcement is difficult as such services are usually advertised in
ethnic media or via internet in vernacular languages. In addition, Hawala brokers often run legitimate
businesses alongside the remittance services that they offer, which further challenges potential
detection. In South Asian countries such as India or Pakistan, there are laws that prohibit speculation
in the local currency and foreign exchange transactions at another rate than the official exchange
rate, which makes Hawala systems as they currently operate illegal. Some countries also impose
registration/licensing requirements to money remitters or strict regulations over domestic and
international remittance.
How does Hawala Operate?
Hawala remittance systems involve the transfer of the value of currency without physically moving it.
A customer – usually a migrant worker- approaches a Hawala broker and gives him a sum of money
to be transferred to a beneficiary – usually a relative - in another city or country. The Hawala broker
often runs a legitimate business in addition to the financial services he offers and has a business
contact, a friend or a relative in this city/country. The Hawala operator contacts their Hawala partner –
usually a contact from their personal or business network - in the recipient city/country by phone, fax
or e-mail. The operator instructs the partner to deliver the funds to the beneficiary, providing amount,
name, address and telephone number of the recipient and promises to settle the debt at a later stage.
The customer does not necessarily receive a receipt but is given an identification code for the
transaction. The Hawala broker in the recipient city/country contacts the beneficiary and delivers the
funds. The recipient can receive the funds without producing identity documents other than the
previously agreed code.
There is no recorded agreement or written contract for the transaction. The deal is secured by the
trust between the parties with no legal means of reclamation.
Such systems suppose that the Hawala broker is connected to a network of other brokers to arrange
the payments or knows people who can access such networks in the recipient city/country. Hawala
networks are therefore often (but not only) based on kinship or family ties, as the closer the
relationship, the easier the settlement process will be. They usually advertise services for
countries/cities where such connections exist.
Each time the Hawala broker gives payment instructions, an informal debt is created. The Hawala
broker that delivered the funds to the beneficiary needs to recover the money from the first broker. In
some cases, predominantly in the Middle East, a courier brings the money from one party to the
other. The formal banking system can also be used to settle alternative remittance debts, but the
system more typically relies on alternative methods, using a mix of legal and illegal means of
settlement.
Hawala partners may be business partners, typically involved in import/export activities. In such case,
transferring money is one of the activities they are regularly engaged in as part of their normal
dealings with one another. The debt settlement can be done by “manipulating” invoices to conceal
money transfers, for example by under-invoicing or over-invoicing shipment of goods.
The Hawalla broker delivering the money to the end beneficiary may also owe the other money,
repaying his debt by paying the Hawala customers. The first broker may also have entrusted the
second one with money for Hawala activities. In such cases, there is no need for the second broker
to recover any money.
Once the transaction is complete, there is no need for record keeping and neither for reporting nor
regulatory requirements for customer identification. Hawala transactions leave no paper trail,
business documentation or financial records for law enforcement agencies to track the origins of the
transfers.
Extent of Hawala Remittance Systems
Hawala brokers operate more or less openly in all parts of the world and the system has global reach.
The only limits to the transaction are the risk involved for the remitter to carry cash and the capacity
of the receiving broker to cover the transaction. The United Arab Emirates, especially Dubai, are
believed to handle the largest volume of transactions, but the system is widespread in countries such
as Pakistan, Indian and the Persian Gulf states.
The extent of Hawala systems has been little explored in the literature and cannot be quantified
reliably and accurately given the informal nature of the transactions. It is impossible to provide a
precise figure, but it is likely that it ranges to billions of USD. Some countries make estimates based
on their expatriate community and balance of payment data. In Pakistan, officials estimate that more
than USD 5 to 7 billions enters into the country every year through Hawala channels. (Please see:
http://www.treas.gov/offices/enforcement/key-issues/hawala/) In the case of India, Interpol estimates
the size of Hawala at possibly 40% of the country’s gross domestic product. It is estimated that
globally between USD 100 billions and USD 300 billions flow through informal remittance systems
every year. (Please see: http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf).
In spite of its informal nature, alternative remittance systems may have direct and indirect
macroeconomic implications and have a potential impact on monetary accounts of both remitting and
receiving countries. Informal financial transactions are neither reflected in official statistics nor
recorded in the foreign assets of the recipient country or liabilities of the remitting countries. At the
same time, such transactions are believed to increase the circulation of cash in the recipient
countries and affect the composition of broad money. Alternative remittance systems may also have
an indirect effect on monetary policies as they influence the demand and supply for foreign
currencies. Alternative remittance systems also have negative fiscal implications for both remitting
and receiving countries. As the funds circulate outside the official system, they are not subject to tax
and represent a loss of business both for the formal financial system and government income.
The literature points to the need to survey and compile information on the importance of these
alternative remittance systems as well as on the regulations governing them in the various countries.
The Profile of Hawala Users
Advantage for users
All authors consulted agree on the advantages of using Hawala both for legal and illegal purposes.
Hawala is attractive to customers as it provides a fast, safe and convenient way to transfer funds,
usually with a far lower commission than that charged by the banks. In countries where there are
strict regulations governing domestic and international money transfers, Hawala can be driven by
capital flight motivations, by customers concerned with internal security and stability using alternative
remittance systems to place money abroad, or pay for education or medical treatment. There is an
array of advantages for users:
• The system is cost effective. Hawala brokers take a small commission and usually practice
more advantageous exchange rates than the official rates. Hawala operators have low
overheads, and generate profit through small commissions and exchange rate speculations.
• The system is safe. In countries plagued by political insecurity such as Afghanistan, it is one
of the most convenient, safe, reliable and inexpensive ways to move funds within the
country.
• The system is efficient. A Hawala remittance transaction takes place within one or two days.
• The system is reliable. The system is based on trust and there are no reported instances of
customers being cheated in the literature. A breach of trust would keep the customers
away.
• The system is flexible and not bureaucratic. The informal nature of the transactions makes
them very attractive to users with tax, immigration or other legal concerns. For example,
illegal migrants do not have adequate identification and couldn’t use the formal banking
system to send money home.
• The system is anonymous. It facilitates transfer of money without records or documentation.
• The system doesn’t leave a paper trail. As it is rare that Hawala brokers keep records after
the transaction is completed, it is unlikely that the transaction will be identified or detected.
• The system is culture friendly. For migrant workers, ethnic or kinship ties with the Hawala
brokers make this system particularly convenient and easy to use.
Profile of Users
The speed, cost-effectiveness, safety and potential anonymity of Hawala transactions contribute to
widespread use (for both legal and illegal purposes) and make them a rational choice for the poorest
segments of the population.
Hawala is traditionally associated with South Asia and the Middle East. Its primary users are
members of the expatriate populations from the Indian sub continent, East Asia, Africa, Eastern
Europe who migrated to Northern America, Europe and the Persian Gulf region and send remittances
to their family who remained in their country of origin. These funds represent important sources of
income for some countries. In 2005, the World Bank estimated that remittances to developing
countries from overseas workers amounted to USD 126 billions in 2004, representing twice the
amount of Official Development Assistance. A study by the Inter-American Development Bank
concludes that Latin America and the Caribbean are the main recipient areas of remittance in the
world (31%), followed by South Asia (20 %) and the Middle East and North Africa (18%). (Please
see: http://tcdc1.undp.org/Remittances_Oct102005B.pdf).
Remittance from migrant workers- whether transferred through formal or informal channels- are very
important to both the national economy and individual households as a means to escape poverty. In
a 2005 background note, UNDP explores the potential role of remittance in achieving the Millennium
Development Goals, including the goal of reducing the proportion of people living in absolute poverty
and suggests that remittance to developing countries can play an instrumental role in reducing
poverty and promoting growth and development. (Please see:
http://tcdc1.undp.org/Remittances_Oct102005B.pdf). The following data and information are mostly
drawn from this background note.
In countries in post-conflict states or affected by economic hardships, remittance are a very important
part of family maintenance and economic survival for millions of impoverished households. For
example, in Haiti, remittances represented 17 % of the GDP in 2001 and accounted for up to 40 % of
the GDP in Somalia in the late 1990s. A 2003 UNDP survey estimates that more than 25 % of
families in Somalia receive remittance from abroad. According to a survey conducted in Armenia,
remittances make up to 80 % of household incomes on average and appear to go to the most
vulnerable households, keeping families above the poverty line. Similar trends have been observed in
Tajikistan, Eritrea or the Comoros, suggesting high dependence on remittance per capita.
Informal channels are the most commonly used systems of remittance transfer for less developing
countries as well as economies in transition, as there are considerable price differences between the
formal and the informal systems. The average cost of transferring remittances to Central and South
America can be as high as 20 %. There are cases in which low income customers are not charged at
all for the transfer when using alternative remittance systems.
The system is particularly convenient for populations that are out of reach of the formal financial
sector because they live in poor and remote areas, where it is not profitable to open local branches of
formal banking institutions. In a context of political insecurity, this may be the only option to reach
isolated segments of the population. In conflict affected countries such as Afghanistan for example,
the Hawala system constitutes the safest way to circulate money in the provinces and the population
uses it to transfer funds around the country. More recently, they have also been used by the majority
of international and domestic NGOs and development agencies to provide financial services for the
delivery of emergency relief and humanitarian aid.
Remittance can also be used for investment and play a key role in developing small businesses.
More information would be needed on the use of remittance, but it is believed that a substantial
portion is re-invested in land and housing, vehicles purchase and education services. Some
remittances are also spent on machinery and shops to start up an income generating activity. One
can also reasonably assume that, even when spent on consumer goods, remittance can stimulate
growth. A study of Mexico suggests that each dollar of remittance generates three dollars of spending
power.
Part 2: Hawala Remittance System and its Role in Money
Laundering
The many above-mentioned advantages of Hawala remittance systems don’t make them attractive
only for “legitimate” users. In the wake of 9/11, there has been renewed interest for Hawala systems
and growing concern about its potential role in facilitating serious crimes including money laundering
and terrorism financing.
Potential for Abuse
While Hawala system may serve legitimate purposes for migrant workers or poor people, its specific
characteristics make it vulnerable to those wanting to launder the proceeds of criminal activity. As
they are anonymous and require minimal documentation, external oversight of Hawala transactions is
limited and detection risks are minimised. This makes them susceptible to abuse by individuals and
groups transferring proceeds of crimes or funds to finance illegal activities. There is, for example, a
long-standing tradition among Columbian drug traffickers to use informal “underground” banking
systems.
In addition, the formal financial sector has been subject to increased oversight in recent years, which
may provide criminals with additional incentives to launder their profits via less regulated systems
such as the Hawala systems. Money laundering through the formal financial system involves a series
of risks that have increased with recent know-your-customer campaigns and heightened scrutiny over
suspicious transactions. Smuggling large amounts of cash in low regulated areas also carries a high
risk of losses. Alternative remittance systems can minimise transaction risks and allow placing the
money in the banking system while avoiding the reporting requirements of the formal banking system.
As adopted in the general assembly in 1995, Interpol defines money-laundering as “any act or
attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to
have originated from legitimate sources”. More specifically, money laundering methods seek to hide
the source of the income through a series of financial transactions, either through the formal or
informal financial system. Money laundering activities typically involves three major steps, namely the
placement, layering and integration stages. There is a consensus in the literature on the fact that
Halawa remittance systems have the potential to facilitate all stages of the money laundering
process:
• Placement of criminal proceeds. At this stage of the process, illicit proceeds are placed
within the legitimate financial system. The risk for money launderers is to raise suspicions
about the size and source of income, as some regulations require reporting over a certain
amount of cash handled. Large deposits can be split into smaller deposits in different
financial institutions or accounts, or mingled with the deposits of a legitimate business. The
Hawala system provides an effective means of placement, as in most cases, the Hawala
broker can make deposits at the bank that are justified by its other legitimate business
activities. He/she may also use the cash received to meet business related costs, thus
reducing cash deposits at the bank.
• Layering of criminal proceeds. This stage involves a series of financial transactions where
the money is moved by electronic or wire transfers through the financial system to make it
impossible to track its origins. Funds are typically moved through a combination of front
companies or shell corporations operating from financial tax havens and/or redistributed
through a series of accounts in smaller amounts. Multiple remittances can occur in the
layering process. Alternative remittances such as Hawala systems constitute a relatively
safe layering alternative in a money laundering scheme. In the absence of paper trails or
record-keeping of the transactions, Hawala transfers are difficult to trace and tie to the
original source of money. Layering can be done by using Hawala brokers in several
countries and distributing the transfers over time.
• Integration of criminal proceeds. At this stage, funds are finally made available for use
and return to the money launderer in the form of a legitimate income, such as profit from a
shell company or mixed with the profit of a legitimate business. Integration shares common
features with the Hawala debt settlement process and can be accomplished through
investment in a legitimate business, the purchase of bonds or property, or an import/export
invoice.
Evidence or Lack of Evidence
Illegal flows of moneys are difficult to track or separate from legal money flows, as criminals develop
new and more sophisticated methods to avoid detection. Empirical evidence and information on the
extent and use of alternative remittance systems for money laundering activities remain thin,
anecdotal or non-existent.
In 2005, the Financial Action Task Force (FATF) acknowledged the potential misuse of alternative
remittance systems by including a full section on such systems in its money laundering and terrorist
financing typologies. The reports states “Although the alternative remittance sector is largely
composed of legitimate operators, some categories of alternative remittance systems have
nevertheless been involved in the transfer of funds related to illegal activities. (…). Experience over
the last decade has shown that alternative remittance systems can be misused for illegal purposes,
including for both money laundering and terrorist financing”.(Please see: http://www.fatfgafi.
org/dataoecd/16/8/35003256.pdf).
Other authors argue that Hawala networks are neither the only nor the main vehicle of illegal fund
transfer. In an article published in 2003 in Risk Management, Nikos Passas argues that evidence
from the 9-11 attacks shows that most of the funds received by hijackers reached the US through
formal financial institutions. (Please see: http://www.palgravejournals.
com/rm/journal/v5/n2/abs/8240148a.html). However, the 9/11 commission report in 2004 still
maintains that Osama Bin Laden relied generally on established Hawala networks operating in
Pakistan, Dubai and throughout the Middle East.
There have been some established cases where Hawala or Hawala-like techniques were used to
launder proceeds of criminal activities. In a report published in 2000, Interpol provides a brief
description of such cases in its appendix. They involve cases of narcotics trafficking, terrorism, alien
smuggling, welfare fraud, insider trading, custom and tax violations, and gambling. (Please see:
http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp). The link
between corruption and alternative remittance systems has not been specifically documented in the
literature, but most authors implicitly connect Hawala to the laundering of corruption proceeds.
In 1998 Interpol also conducted a study to determine the structure and operations of alternative
remittance systems in the Asia and Pacific region, through a review of existing literature on
alternative remittance system and a survey of 31 Interpol member countries in the region. Response
to the survey provided a working sample of 25 Interpol member countries of which 21 reported some
form of alternative remittance system operating within their borders. 13 of the 21 countries
experiencing alternative remittance systems found that they operate as a money laundering tool,
including Hong Kong, China, India, Indonesia, Japan, Nepal, Pakistan, Sri Lanka, Philippines, Turkey
and Vietnam. Interpol records a variety of criminal proceeds laundered through such systems in the
region, including profits from the drug trade, arms, gold and gem smuggling, terrorism, and
corruption.
Interpol countries in the Gulf and the Middle East observed that alternative remittance systems tend
to launder profits of drug trade, gold smuggling, extortion and terrorism. Information regarding
specific operational aspects of the system is not available for this region. Experts in neighbouring
countries also report that alternative remittance systems are used in the Gulf as a conduit and
financing mechanisms for the gold trade in the Indian subcontinent. (Please see:
http://www.interpol.com/Public/FinancialCrime/MoneyLaundering/EthnicMoney/default.asp).
Recommendations by International Organisations
The FATF released in October 2001 eight special recommendations on terrorist financing, which
combined with the forty recommendations on money laundering outlines a comprehensive framework
to detect, prevent and combat money laundering. Special recommendation VI focuses explicitly on
alternative remittance, outlining three core elements. The objective of these elements is to bring all
money transfer services, whether formal or informal, within minimum legal and regulatory
requirements, in accordance with the relevant FATF recommendations. These recommendations
focus on key areas such as licensing/registration, due diligence, customer identification, record
keeping, suspicious transaction reporting, compliance monitoring, sanctions and awareness raising.
The sixth recommendation targets alternative remittance systems and include three major aspects:
(Please see FATF’s interpretative note to special recommendation VI:
http://www.oecd.org/document/34/0,3343,en_32250379_32236947_34261877_1_1_1_1,00.html#INS
RVI).
U4 Expert Answer
8
• Jurisdictions should require licensing or registration of persons or legal entities providing
value/money transfer services, including through informal systems or networks;
• Jurisdictions should ensure that money/value transfer services, including informal systems
or networks, are subject to the applicable FATF forty recommendations and the eight special
recommendations;
• Jurisdictions should be able to impose sanctions on money/value transfer services, including
informal systems networks that fail to obtain a licence/register and fail to comply with
relevant FATF recommendations.
The IMF highlights differences in regulatory and supervisory responses to alternative remittance
systems between remitting and receiving countries. In recipient countries, the key issues include
foreign exchange regimes, the quality of the formal financial system and the level of political stability.
Regulations tend to be influenced by these concerns. In remitting countries, there are concerns about
the potential abuse of such remittance systems by criminals. Regulatory measures include
registration/licensing, customer reporting and record keeping requirements. (Please see:
http://www.oecd.org/document/34/0,3343,en_32250379_32236947_34261877_1_1_1_1,00.html#INS
RVI).
The IMF encourages a two-pronged approach toward regulation:
• In countries where an informal Hawala system exists alongside a well-functioning formal
sector, it is recommended that Hawala dealers be registered and keep adequate records in
line with the FAFT recommendations. Efforts should focus on improving the level of
transparency in these systems by bringing them closer to the formal financial sector. In
countries torn by conflicts, such registration may not be feasible.
• The regulatory response should simultaneously address weaknesses that may exist in the
formal sector.
Efforts to regulate Hawala remittance systems are challenged by the limited knowledge of those
systems and the extent to which they are exploited by criminal organisations. Too strict regulations
may push such systems underground or deprive poor people from legitimate sources of income and
survival in many countries. Regulatory concerns should therefore strive to balance the prevention of
misuse with the need to ensure that flows of legitimate funds continue to reach the developing world.
Part 3: Further Reading
Money Laundering and Terrorist Financing Typologies 2004-2005 (2005)
This report from the FATF dedicates a full section to alternative remittance systems and describes
how these networks work in practice, with the view to identifying areas of vulnerability and risks of
misuse for illegal purposes. http://www.fatf-gafi.org/dataoecd/16/8/35003256.pdf
Regulatory Frameworks for Hawala and Other Remittance Systems (2005)
This report prepared by the IMF presents the proceedings of the second International Conference on
Hawala. The conference resulted in a statement identifying the challenges of implementing a
regulatory framework for Hawala remittance systems. Participants agreed that there is a need to
gather and analyse more data and knowledge on those systems.
http://www.apgml.org/frameworks/docs/8/Regulatory%20Frameworks%20for%20Hawala%20and%20
Other%20ARS%20-%20IMF%202005.pdf
The Potential Role of Remittances in Achieving the Millennium Development Goals (2005)
In this Background note, UNDP explores the potential role that remittances can play in promoting
growth and development in developing countries. Although the issues involved are complex,
remittances are important for developing countries as they provide access to substantial additional
financial resources and support the sustainability of livelihoods.
http://tcdc1.undp.org/Remittances_Oct102005B.pdf
Informal Funds Transfer Systems (2003)
This joint IMF-World Bank paper provides an analysis of the Informal Hawala System, presenting its
major features, its uses as well as an economic analysis of Hawala transactions. It concludes by
outlining legal and regulatory aspects of Hawala remittance systems.
http://www.imf.org/external/pubs/nft/op/222/
Combating the Abuse of Alternative Remittance Systems: International Best Practices (2003)
This best practice paper prepared by the FATF is intended to provide additional details to the
Interpretative Note on Recommendation VI that addresses risks associated with alternative
remittance systems. It provides guidance on how to detect those systems outside the formal banking
system and focuses on practical issues such as identification of money transfer services, procedures
for registration/licensing and customer due diligence procedures.
http://www.fatf-gafi.org/dataoecd/32/15/34255005.pdf
Hawala and Other Informal Value Transfer Systems: How to Regulate Them? (2003)
This article summarises the findings of an 18 month study of the mechanics and settlement
processes in Hawala networks and concludes with some policy implications. http://www.palgravejournals.
com/rm/journal/v5/n2/abs/8240148a.html (available for purchase).
The Money Exchange Dealers of Kabul (2003)
This study of the Hawala system in Afghanistan was undertaken to determine current practices of
Hawala in Afghanistan, verify assertions regarding convenience, speed, cost-effectiveness, identify
characteristics that make Hawala vulnerable to abuse and consider appropriate regulatory and
supervisory options.
http://www1.worldbank.org/finance/html/amlcft/docs/ARS/The%20Money%20Exchange%20Dealers
%20of%20Kabul.pdf
Informal Money Transfer Systems: Opportunities and Challenges for Development Finance
(2002)
This paper reviews the main types of informal money transfer systems (IMTS). IMTS remain today
the preferred remittance vehicle among migrant communities. Characteristics such as low transaction
costs, speed and little paperwork render them more attractive than banking institutions. The paper
proposes measures to make those systems less prone to potential abuse by criminals and encourage
the development of formal sector alternatives.
http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf
Alternative Remittance Systems Distinguishing Sub-systems of Ethnic Money Laundering in
INTERPOL Member Countries on the Asian Continent (2000)
A study of 31 INTERPOL member countries in Asia/Pacific was conducted in 1998 by questionnaire
and telephone interview to test the hypothesis that two dominant and distinct alternative remittance
systems prevail in the region; the first encompassing the Asian-oriental countries and the second
covering the Indian sub-continent. The data set is comprised of the 21 INTERPOL countries reporting
the presence of ethnic banking inside their borders. Observational trends in operational aspects
within each system lend support to the hypothesized existence of two distinct ethnic banking systems
in the region.
http://www.interpol.com/Public/FinancialCrime/MoneyLaundering/EthnicMoney/default.asp
The Hawala Alternative Remittance System and its Role in Money Laundering (2000)
This paper presents a description of the Hawala remittance system. Hawala is an ancient system
originating in South Asia; today it is used around the world to conduct legitimate remittances. Hawala
can and does play a role in money laundering. In addition to serving as a “tutorial” on Hawala
transaction, this paper will also discuss the way in which Hawala is used to facilitate money
laundering. http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp
Newsletter by World-Check, the recognised authority on reducing risk through intelligence.
www.world-check.com/experttalk
APRIL 2009
Expert Talk
Modes and strategies of terrorist
financing in South Asia
by Sadia Sulaiman and Ankur Kumar, Research Analysts, World-Check Singapore (TIRU)
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n the wake of the 9/11 terrorist attacks on the US, South
Asia attracted world attention due to the extent and
spread of terrorist networks operating there. Besides the
myriad indigenous groups present, the region is home to Al-
Qaeda, currently located inside Pakistan’s autonomous tribal
areas. The terrorist threats emanating from this region are of
local, regional and global concern.
Several historical and structural factors contribute to an environment conducive for
terrorist activities. The relatively recent statehood of South Asian states (India and
Pakistan were both founded in 1947) has provided only a thin veneer of cohesion
among an extraordinary heterogeneous grouping of old nations and ethnolinguistic
groups. Secessionist tendencies remain strong. In addition, inter-state border and
territorial disputes create geopolitical uncertainty that drains state resources, and
porous and undefined borders along with sharp ideological contests and vast
inequalities of wealth all remain perennial concerns. The convergence of these
factors helps create the right environment for terrorist groups to not only organize
and stage plots, but more importantly to gain access to the funds necessary for
carrying out their local, regional and global terrorist campaigns.
The South Asian terrorist groups can be broadly divided into Islamist groups
like al-Qaida, Lashkar-e-Tayyiba (LeT), Tehrik-i-Taliban Pakistan (TTP), Jammat-ul
Mujahideen Bangladesh (JMB), and separatist and nationalist groups including the
United Liberation Force of Assam (ULFA), Liberation Tigers of Tamil Eelam (LTTE)
and Maoist groups operating in India. The general fundraising techniques of these
groups are more or less similar. While these groups vary in their size, objectives,
tactics and strategies, their financing strategies can broadly be defined under the
following categories.
Donations & Charities
Donations, whether voluntary or coerced, from people with shared ideological or
religious beliefs has emerged as an important source of terrorist financing in South
Asia. Since South Asia contains a considerable Muslim population, it is easy for the
Islamic charities to convince people to pay their Zakat - compulsory proportion
(2.5%) of one’s savings each year to be given to the poor – to them. Such raising
and transferring of funds is no longer limited to the domestic context in countries
directly affected by terrorism. It also has widespread implications for the international
community in its efforts to eliminate terror financing.
In this context, funds raised through diaspora communities have become a crucial
source of terrorist financing in the region. There are several ways in which separatists
and Islamists utilize them to generate sufficient funds to carry on their activities. One
of the most sophisticated and effective ways used has been to operate a network of
international non-profit organizations (NPOs), which enables them to generate and
transfer funds easily from any part of the world to an intended target area where
investment or procurement opportunities exist. These NPOs act as effective fronts
and also enable these terrorist entities to gain legitimacy. This deliberate siphoning
of funds from well developed, more regulated economies to more porous, less
I
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regulated ones poses a serious terrorist financing threat. Recently a UK-based
charity, Green Crescent, was found supporting and funding militant activities in
Bangladesh. The charity is headed by a UK-based Bangladeshi expatriate, Faisal
Mostafa who is suspected of links with Jammat-ul Mujahideen Bangladesh (JMB),
an Islamist militant group.
One of the terrorist groups most adept at using NPOs is the Liberation Tigers of Tamil
Eelam (LTTE). The LTTE is an ethno-nationalist Tamil separatist movement battling
for the establishment of a separate Tamil state in North and East Sri Lanka. The
Tamil diaspora emerged primarily as an aftermath of civil war and race riots of the
1970s and 1980s in Sri Lanka which led to large-scale emigration. The Tamil diaspora
currently scattered throughout the world numbers around 800,000, and their
biggest concentration is primarily based in United Kingdom, India, Canada, Australia,
Germany and Switzerland. Jane’s Intelligence Review report by John Solomon and
BC Tan of World-Check indicate that the LTTE raises about 80-90 percent of their
total finances from overseas. The report estimates total revenue LTTE raises is around
claim 300 million dollars a year through its legitimate and illegitimate businesses
and fronts. Donations to LTTE’s vast and sophisticated network of NPOs have played
a major role in funneling this money back home to fund the separatist struggle. One
such NPO is the Tamils Rehabilitation Organization (TRO), which has offices in many
countries such as the UK, Canada, Australia, Sri Lanka. In the aftermath of the 2004
Asian Tsunami, certain NPOs, such as the TRO, raised millions of dollars, a majority of
which reportedly went into the funding of the LTTE.
Since 9/11 has inevitably resulted in a closer look at these NPOs and their sources
of funding. Raising funds abroad and channeling them back has become tougher.
However, support from the diaspora and their contributions and support will
continue to play a significant role in financing of terror activities.
Criminal Activities
The criminal activities in South Asia like theft, money laundering, bank robberies,
kidnapping for ransom, are another source of channeling funds to the militants. A
major case in point is the Tehrik-i-Taliban Pakistan (TTP), which is engaged in several
criminal acts, such as looting, taxing locals in FATA and the NWFP in addition to bank
robberies and kidnappings for ransom. In August 2008, Pakistani law enforcement
agencies disrupted a financial racket of TTP which was operating in Karachi with
the help of Lashkar-i-Jhangi and other militant outfits. The outfits were involved in
bank robberies, robbing people who had withdrawn cash from banks and security
firms and kidnapping for ransom. It is also reported that these groups train and
then recruit people in security firms, banks and money changer firms to meet their
financial needs, which poses a direct threat to the banking industry in the country.
The TTP is also forcibly taking over marble and emerald mines in NWFP and FATA and
raise considerable finances from these sources, which poses a threat to legitimate
businessmen involved in this industry.
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The Indian separatist group in the Northeast, ULFA, has used extortion since its
inception in 1979 from major business groups, oil exploration firms and tea business
firms. Apart from these major entities, there are also reports of ULFA expanding its
extortion base to include petty traders, villagers and salaried people, demanding
regular payments in small increments.
Narco Trade
The cultivation of Narcotics is also an important source of terror financing in South
Asia. While Afghanistan’s flourishing opium cultivation and its large scale funding
of the Taliban and other anti-governmental organizations is widely known, terrorist
entities such as the Maoists in India and the LTTE in Sri Lanka have also benefitted
greatly from this profitable business. It takes shape both in the form of direct
cultivation by the militants as well as charging a tax from people who cultivate it in
return for “protection.”
The Naxalites are regarded as one of the most deadly internal security threats facing
India. Their connection with narcotics cultivation is well documented. According
to the Narcotics Control Bureau in India, the Naxals thrive on money earned
through illicit cultivation. A report they released in 2007 found out that of the total
marijuana seized in the country, a disproportionately high percentage of it came
from the Maoist controlled pockets in the states of Madhya Pradesh, Maharashtra,
Chhattisgarh and Andhra Pradesh. These states are affected deeply by the Naxalite
violence. Prakash Jaiswal, then minister of state for home affairs in India, informed
the government in April 2008 that cannabis cultivation and its trade has become
a source of finance for the Naxals in Andhra Pradesh, Bihar, Jharkhand and Orissa.
He further stated that Maoists get “protection money” from narcotics traders who
engage in trafficking and also safe passage money from narcotics smugglers.
The LTTE’s connection with narcotics is less substantiated. But it is often accused of
heroin trafficking in the Golden Crescent and Golden Triangle regions to countries
including India, Sri Lanka, Canada, Germany, Italy, France, Scandinavian countries,
Myanmar and Thailand. The earlier cited Jane’s Intelligence Review report indicates
that a portion of the drug market in Montreal amounting to US $1 billion is controlled
by Sri Lankan expatriates, having links to the LTTE.
Hawala or Hundi
Till now we have focused on the main sources of raising funds for terror activities.
South Asia, unlike more advanced and regulated western economies, is also famous
for a less regulated informal value transfer system or Hawala transactions. Hawala
transaction or hundi system is one another important channel through which
terrorists and their sympathizers move money across the globe. Pakistan, India, and
the Persian Gulf states are home to the largest concentration of Hawala transactions.
According to 2002 statistics, Pakistani officials estimate that over $5 billion in
5
transactions take place through hawala networks every year. A recent US State
Department report by Assistant US Secretary of State for International Narcotics and
Law Enforcement Affairs, David T Johnson, has revealed that remittances to India
sent through legal, formal channels in 2007-2008 amounted to USD 42.6 billion, of
which 30–40 percent of transactions were carried out through hawala. The report
suspects that some of these transactions are directly linked to terrorist financing in
India.
In October 2008 the Mumbai police Crime Branch found out that the Indian
Mujahideen, a militant group in India, was receiving money from the Gulf countries
through the hawala networks and the Western Union Money Transfer. Similarly
Kashmir-based separatist groups such as Hizbul Mujahideen (HM) and LeT are also
suspected of using hawala transaction as a source to fund their activities.
Conclusion
Terrorist financing in South Asia remains a key dimension of the larger struggle to
counter terrorism in the region. Although there has been a growing awareness
about sources of terrorist funding and efforts have been made to enact regulation
to counter it, there is much more to do. There are regulations and initiatives by states
to keep a strong vigil on various businesses in an attempt to stop terrorist financing
at its source. But without adequate understanding of the terrorist groups, their
funding techniques and where they operate, laws and their enforcement will likely
fail to be effective. The unprecedented 9/11 attacks have dramatically shown the
international community the need for a stronger response to stop the financing of
militant groups. South Asia has become an epicenter of terrorism and insurgency.
Therefore all initiatives and responses should take a hard look at how South Asian
groups raise funds and what more can be done to stop them.
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