Hawala, or The Bank That Never Was

I. OVERVIEWIn the wake of the September 112000, at )Hawala networks closely feed into Islamic
terrorist attacks on the USA, attention was drawn tobanks throughout the world and to commodity
the age-old, secretive, and globe-spanning bankingtrading in South Asia. There are more than 200
system developed in Asia and known as "Hawala" (toIslamic banks in the USA alone and many thousands
change, in Arabic). It is based on a short term,in Europe, North and South Africa, Saudi Arabia, the
discountable, negotiable, promissory note (or bill ofGulf states (especially in the free zone of Dubai and
exchange) called "Hundi". While not limited toin Bahrain), Pakistan, Malaysia, Indonesia, and other
Moslems, it has come to be identified with "IslamicSouth East Asian countries. By the end of 1998, the
Banking".Islamic Law (Sharia'a) regulates commerceovert (read: tip of the iceberg) liabilities of these
and finance in the Fiqh Al Mua'malat, (transactionsfinancial institutions amounted to 148 billion US dollars.
amongst people). Modern Islamic banks are overseenThey dabbled in equipment leasing, real estate leasing
by the Shari'a Supervisory Board of Islamic Banks andand development, corporate equity, and trade
Institutions ("The Shari'a Committee").The Shi'astructured trade and commodities financing (usually in
"Islamic Laws according to the Fatawa of Ayatullah alconsortia called "Mudaraba").While previously confined
Uzama Syed Ali al-Husaini Seestani" has this to sayto the Arab peninsula and to south and east Asia,
about Hawala banking:"2298. If a debtor directs histhis mode of traditional banking became truly
creditor to collect his debt from the third person, andinternational in the 1970's, following the
the creditor accepts the arrangement, the thirdunprecedented flow of wealth to many Moslem
person will, on completion of all the conditions to benations due to the oil shocks and the emergence of
explained later, become the debtor. Thereafter, thethe Asian tigers. Islamic banks joined forces with
creditor cannot demand his debt from the firstcorporations, multinationals, and banks in the West to
debtor."The prophet Muhammad (a cross borderfinance oil exploration and drilling, mining, and
trader of goods and commodities by profession)agribusiness. Many leading law firms in the West (such
encouraged the free movement of goods and theas Norton Rose, Freshfields, Clyde and Co. and
development of markets. Numerous Moslem scholarsClifford Chance) have "Islamic Finance" teams which
railed against hoarding and harmful speculationare familiar with Islam-compatible commercial
(market cornering and manipulation known ascontracts.II. HAWALA AND TERRORISMRecent
"Gharar"). Moslems were the first to use promissoryanti-terrorist legislation in the US and the UK allows
notes and assignment, or transfer of debts via bills ofgovernment agencies to regularly supervise and
exchange ("Hawala"). Among modern bankinginspect businesses that are suspected of being a
instruments, only floating and, therefore, uncertain,front for the ''Hawala'' banking system, makes it a
interest payments ("Riba" and "Jahala"), futurescrime to smuggle more than $10,000 in cash across
contracts, and forfeiting are frowned upon. But agileUSA borders, and empowers the Treasury secretary
Moslem traders easily and often circumvent these(and its Financial Crimes Enforcement Network -
religious restrictions by creating "synthetic MurabahaFinCEN) to tighten record-keeping and reporting rules
(contracts)" identical to Western forward and futuresfor banks and financial institutions based in the USA.
contracts. Actually, the only allowed transfer orA new inter-agency Foreign Terrorist Asset Tracking
trading of debts (as distinct from the underlyingCenter (FTAT) was set up. A 1993 moribund
commodities or goods) is under the Hawala."Hawala"proposed law requiring US-based Halawadar to
consists of transferring money (usually acrossregister and to report suspicious transactions may be
borders and in order to avoid taxes or the need torevived. These relatively radical measures reflect the
bribe officials) without physical or electronic transferbelief that the al-Qaida network of Osama bin Laden
of funds. Money changers ("Hawaladar") receive cashuses the Hawala system to raise and move funds
in one country, no questions asked. Correspondentacross national borders. A Hawaladar in Pakistan
hawaladars in another country dispense an identical(Dihab Shill) was identified as the financier in the
amount (minus minimal fees and commissions) to aattacks on the American embassies in Kenya and
recipient or, less often, to a bank account. E-mail, orTanzania in 1998.But the USA is not the only country
letter ("Hundi") carrying couriers are used to conveyto face terrorism financed by Hawala networks.A
the necessary information (the amount of money,few months ago, the Delhi police, the Indian
the date it has to be paid on) between Hawaladars.government's Enforcement Directorate (ED), and the
The sender provides the recipient with code wordsMilitary Intelligence (MI) arrested six Jammu Kashmir
(or numbers, for instance the serial numbers ofIslamic Front (JKIF) terrorists. The arrests led to the
currency notes), a digital encrypted message, orexposure of an enormous web of Hawala institutions
agreed signals (like handshakes), to be used toin Delhi, aided and abetted, some say, by the ISI
retrieve the money. Big Hawaladars use a chain of(Inter Services Intelligence, Pakistan's security
middlemen in cities around the globe.But mostservices). The Hawala network was used to funnel
Hawaladars are small businesses. Their Hawala activitymoney to terrorist groups in the disputed Kashmir
is a sideline or moonlighting operation. "Chits" (verbalValley.Luckily, the common perception that Hawala
agreements) substitute for certain written records. Infinancing is paperless is wrong. The transfer of
bigger operations there are human "memorizers" whoinformation regarding the funds often leaves digital
serve as arbiters in case of dispute. The Hawala(though heavily encrypted) trails. Couriers and
system requires unbounded trust. Hawaladars are"contract memorizers", gold dealers, commodity
often members of the same family, village, clan, ormerchants, transporters, and moneylenders can be
ethnic group. It is a system older than the West. Theapprehended and interrogated. Written, physical,
ancient Chinese had their own "Hawala" - "fei qian" (orletters are still the favourite mode of communication
"flying money"). Arab traders used it to avoid beingamong small and medium Hawaladars, who also
robbed on the Silk Road. Cheating is punished byinvariably resort to extremely detailed single entry
effective ex-communication and "loss of honour" -bookkeeping. And the sudden appearance and
the equivalent of an economic death sentence.disappearance of funds in bank accounts still have to
Physical violence is rarer but not unheard of. Violencebe explained. Moreover, the sheer scale of the
sometimes also erupts between money recipientsamounts involved entails the collaboration of off
and robbers who are after the huge quantities ofshore banks and more established financial institutions
physical cash sloshing about the system. But these,in the West. Such flows of funds affect the local
too, are rare events, as rare as bank robberies. Onemoney markets in Asia and are instantaneously
result of this effective social regulation is thatreflected in interest rates charged to frequent
commodity traders in Asia shift hundreds of millionsborrowers, such as wholesalers. Spending and
of US dollars per trade based solely on trust and theconsumption patterns change discernibly after such
verbal commitment of their counterparts.Hawalainfluxes. Most of the money ends up in prime world
arrangements are used to avoid customs duties,banks behind flimsy business facades. Hackers in
consumption taxes, and other trade-related levies.Germany claimed (without providing proof) to have
Suppliers provide importers with lower prices on theirinfiltrated Hawala-related bank accounts.The problem
invoices, and get paid the difference via Hawala.is that banks and financial institutions - and not only in
Legitimate transactions and tax evasion constitutedodgy offshore havens ("black holes" in the lingo) -
the bulk of Hawala operations. Modern Hawalaclam up and refuse to divulge information about their
networks emerged in the 1960's and 1970's toclients. Banking is largely a matter of fragile trust
circumvent official bans on gold imports in Southeastbetween bank and customer and tight secrecy.
Asia and to facilitate the transfer of hard earnedBankers are reluctant to undermine either. Banks use
wages of expatriates to their families ("homemainframe computers which can rarely be hacked
remittances") and their conversion at rates morethrough cyberspace and can be compromised only
favourable (often double) than the government's.physically in close co-operation with insiders. The
Hawala provides a cheap (it costs c. 1% of theshadier the bank - the more formidable its digital
amount transferred), efficient, and frictionlessdefenses. The use of numbered accounts (outlawed
alternative to morbid and corrupt domestic financialin Austria, for instance, only recently) and
institutions. It is Western Union without the hi-techpseudonyms (still possible in Lichtenstein) complicates
gear and the exorbitant transfer fees.Unfortunately,matters. Bin Laden's accounts are unlikely to bear his
these networks have been hijacked andname. He has collaborators.Hawala networks are
compromised by drug traffickers (mainly inoften used to launder money, or to evade taxes.
Afganistan and Pakistan), corrupt officials, secretEven when employed for legitimate purposes, to
services, money launderers, organized crime, anddiversify the risk involved in the transfer of large
terrorists. Pakistani Hawala networks alone move upsums, Hawaladars apply techniques borrowed from
to 5 billion US dollars annually according to estimatesmoney laundering. Deposits are fragmented and wired
by Pakistan's Minister of Finance, Shaukut Aziz. Into hundreds of banks the world over ("starburst").
1999, Institutional Investor Magazine identified 1100Sometimes, the money ends up in the account of
money brokers in Pakistan and transactions that ranorigin ("boomerang").Hence the focus on payment
as high as 10 million US dollars apiece. As opposed toclearing and settlement systems. Most countries have
stereotypes, most Hawala networks are notonly one such system, the repository of data
controlled by Arabs, but by Indian and Pakistaniregarding all banking (and most non-banking)
expatriates and immigrants in the Gulf. The Hawalatransactions in the country. Yet, even this is a partial
network in India has been brutally and ruthlesslysolution. Most national systems maintain records for
demolished by Indira Ghandi (during the emergency6-12 months, private settlement and clearing systems
regime imposed in 1975), but Indian nationals still playfor even less.Yet, the crux of the problem is not the
a big part in international Hawala networks. SimilarHawala or the Hawaladars. The corrupt and inept
networks in Sri Lanka, the Philippines, and Bangladeshgovernments of Asia are to blame for not regulating
have also been eradicated.The OECD's Financialtheir banking systems, for over-regulating everything
Action Task Force (FATF) says that:"Hawala remainselse, for not fostering competition, for throwing public
a significant method for large numbers of businessesmoney at bad debts and at worse borrowers, for
of all sizes and individuals to repatriate funds andover-taxing, for robbing people of their life savings
purchase gold.... It is favoured because it usually coststhrough capital controls, for tearing at the delicate
less than moving funds through the banking system,fabric of trust between customer and bank
it operates 24 hours per day and every day of the(Pakistan, for instance, froze all foreign exchange
year, it is virtually completely reliable, and there isaccounts two years ago). Perhaps if Asia had
minimal paperwork required."(Organisation forreasonably expedient, reasonably priced, reasonably
Economic Co-Operation and Development (OECD),regulated, user-friendly banks - Osama bin Laden
"Report on Money Laundering Typologies 1999-2000,"would have found it impossible to finance his mischief
Financial Action Task Force, FATF-XI, February 3,so invisibly.