4 -10 April 2002
Issue No.580
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Al-Ahram Weekly Online 4 -10 April 2002 Issue No.580 |
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Antiquated laundering ways prevail
John Sfakianakis* explains how an ancient money transfer system is helping terrorists escape the US net
During the course of one week in March, US President George Bush sent two senior colleagues -- Treasury Secretary Paul O'Neill and Deputy Secretary of Commerce Samuel Bodma -- to Bahrain, Saudi Arabia, Kuwait and the United Arab Emirates (UAE) to drum up support for the US war on terror. Over the past three months, US efforts to dam the flow of terrorist finances have intensified, and the US has targeted an ancient, informal system of money transfers, that officials believe has funnelled millions of dollars to Osama Bin Laden's Al-Qa'eda network using Dubai as a transfer point. It is also believed that, just as the US began bombing Afghanistan, Taliban and Al-Qa'eda operatives sent millions of dollars through this informal money system to Dubai, where the assets were converted into gold.
This system is known as hawala, and has been used for hundreds of years to move money across distance and around legal and financial barriers in South Asia and the Middle East. The word hawala in Arabic is defined as a bill of exchange or a promissory note. In Egyptian Arabic, the closest translation would be maqassa (barter) of money between individuals, which was banned under former president Gamal Abdel- Nasser. Arab traders used the system on the Silk Road to avoid being robbed; millions of Pakistanis, Indians, Bangladeshis, and others working abroad now use it to send money home to their families.
Despite O'Neill's visit to the Gulf, it is highly unlikely that much can be done to better monitor the hawala system: rhetoric is running ahead of reality. This is not because local UAE authorities are unwilling to help, but they are unable to monitor a highly informal system of money transfer in a region with an informal business climate, little accountability and large cash transactions. Hawala is, by necessity, secretive, and leaves no trace of its activities. Hawala is an alternative or parallel remittance system. It exists and operates outside of, or parallel to, "traditional" banking or financial channels. It was developed in India before the introduction of Western banking practice, and is now a major remittance system used around the globe. Billions of dollars flow through the hawala system; it is estimated that more than $200 billion is transferred annually. In the 1980s, the hawala system was used by US intelligence to funnel money to the Afghan Mujahedin. It is also believed that, in the 1990s, various humanitarian aid NGOs in Afghanistan also used the hawala system to transfer money. In May and June 2001 the State Bank of Pakistan was said to have turned to hawala shops in Islamabad to buy dollars in order to support the local currency. Contrary to popular perception, Dubai is not the only hawala centre in the world. The US and Switzerland, according to Interpol, are considered as important hawala transaction points as Dubai. Hawala is but one of several informal money transaction systems; others include the "chop", "chit" or "flying money" system indigenous to China. An estimated 5,000 international hawala brokers operate around the world. Migrants from India dominate the business, mostly operating from countries in the Gulf, South East Asia, the US and Switzerland.
The transaction starts with a visit to a hawala broker, called a hawaladar, in order to bypass the banks. A person wanting to send money gives the hawaladar the sum to be transferred, plus a fee, and the name and location of the person to be delivered to. An expatriate working in Dubai or Kuwait, for example, who wants to send money back home to Pakistan, turns to a moneylender or trader with contacts in both countries. The trader, who is also involved in other commercial businesses, calls a trusted partner in the home country who delivers the amount to the family, minus a commission. For identification of the trade a code is used and later destroyed. The transaction is untraceable: all documents related to a transaction are immediately destroyed upon completion of the money transfer. The two traders settle accounts either through reciprocal remittances, trade invoice manipulations, gold and precious gem smuggling or by the physical movement of currency.
In most cases, the hawaladar operate independently of each other rather than as part of a larger organisation. In this way, even if one office is closed at one end, others at the far end of the transaction route remain unaffected. These hawala operators are, in general, merchants or small business owners who run a hawala operation alongside their other businesses.
The hawala system provides a cost effective, speedy, reliable and trustworthy method to remit money home. The system proves superior to and cheaper (due to extremely low transaction commissions) than Western banking operations. One reason for hawala's cost effectiveness is the low overhead compared to a normal commercial bank. Some hawaladar operate particularly frugally, using a table in a tea shop as an office and having little more than a cellular phone and notebook as overhead expenses. Hawaladar generally engage in foreign exchange speculation or black market currency dealing. In any case, they exploit naturally occurring fluctuations in the demand for different currencies. This enables them to turn a profit from hawala transactions (which, in addition to being remittances, almost always have a foreign exchange component), and they are also able to offer their customers rates that are better than those offered by banks (most banks will only transact at authorised rates of exchange). No identification needs to be presented and the system operates non-stop.
In short, the hawala system has survived because of its demonstrated resilience in a banking market, such as the UAE's, that is competitive and efficient. Even with the new money-laundering law that the UAE passed in late January 2002, the hawala system will remain untouched. Most financial institutions operating in the UAE have yet to integrate an efficient system into their networks that will automatically and efficiently spotlight a possible money-laundering attempt, industry sources said. Moreover, the passage of money-laundering laws in the UAE and throughout the Middle East will only increase the premium for "cleaning" illegal money; they will not eliminate the laundering itself. That at least, with the help of unusual financial institutions like the Hawaladar, is here to stay.
* The writer is a research fellow at Harvard University's Centre for Middle Eastern Studies.
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