Hawalas, Money-Laundering, and Terrorist Financing

April 2016

Hawala, also referred to as  hundi, is an alternative remittance system that dates back to ancient times. It is labeled “alternative” because it exists outside of traditional banking and financial systems. The system works because it is based on trust and relationships rather than documentation. It is facilitated by hawala dealers called hawaladars. As with any financial remittance, hawala can and does get used for money laundering and terrorist financing.

Hawala originated in South Asia, and still exists in that part of the world, as well as in the Middle East and Africa. There are also other, alternative remittance systems in other parts of the world that are essentially the same as hawala, though they may not be named as such.

People make use of hawala for a number of reasons. They are especially useful for people who cannot or choose not to participate in the global banking system. If a currency exchange is needed as part of the remittance, hawaladars generally offer better exchange rates. There are no wire transfer fees or other charges, and the remittance typically reaches the intended recipient within a day or two at the most – significantly faster than traditional financial systems, and delivery is always included.

The best way to understand how it works is to provide an example. Let’s say that Mohammad came to the U.S. on a tourist visa but decided to stay long after its expiration. He managed to get a job of some kind, and over time saved up $5,000 in cash that he wanted to send to his family back in Pakistan. Any bank would want him to open an account in order to do business. A bank draft would have cost him $25, and would offer him the going exchange rate in Pakistani Rupees (Rs) of 100Rs for each U.S. dollar. But how would Mohammad then get his bank draft to Pakistan? An international courier service would cost at least $40 and would probably take at least a week to get to Pakistan, with no guarantee that it would reach its intended recipient. But using a bank was really not an option for Mohammad in the first place – he didn’t have proper ID, he had no Social Security Number, and he had overstayed his visa. Instead, he turns to a hawaladar named Abdul who could offer him Rs110 on the dollar, with a 1-rupee fee for each dollar transferred. The money would reach the intended recipient within 24 hours, with delivery included. You can see why this system would be attractive to someone like Mohammad.

Mohammad gave Abdul his $5,000 and Abdul contacted a hawaladar he dealt with in Pakistan named Sahir, who delivered Rs545,000 to Mohammad’s family the next day. What was the relationship between Abdul and Sahir? More specifically, how would Sahir recover the money he paid out from Abdul? They would have some kind of business relationship that would come into play. Perhaps Abdul sold Pakistani goods in the U.S. that he sourced from Sahir, and Sahir sold U.S. goods in Pakistan sourced from Abdul. Abdul’s next shipment of U.S. goods to Sahir might have been $20,000 worth of merchandise, but Abdul’s invoice to Sahir was only for $15,000. The additional $5,000 of goods was the money Sahir needed to recover from Abdul. It might also be that Sahir owed $5,000 to Abdul in the first place, and that making the payment to Mohammad’s family on behalf of Abdul cleared that debt. The manipulation of invoices in export/import operations is a very common way for hawaladars to settle their accounts with each other.

The key feature here is that there was no paper trail leading to Mohammad. Abdul kept no record whatsoever of the transaction between him and Mohammad. All Abdul kept track of was the details of who owed what between him and Sahir in Pakistan, and there were legitimate import/export business transactions the entire time. It would be very difficult to figure out that an invoice and/or shipment between the two had been manipulated to settle their hawala dealings with each other.
It doesn’t take much imagination to see how hawala can be used for money-laundering and terrorist financing. Let’s say Mohammad turned out to be an Islamic extremist and the $5,000 was really money he’d collected from like-minded individuals in order to support Hezbollah back home. Remember, there was no documentation of any kind of transaction between Mohammad and Abdul. All that existed were the business transactions between Abdul and Sahir. Now that $5,000 has found its way into the hands of somebody in Pakistan connected to Hezbollah, and terrorism has just been financed through hawala in less than 24 hours.

Where do regular financial institutions fit into this picture in terms of stopping money laundering and terrorist financing  through hawalas? Remember that Abdul received $5,000 in cash from Mohammad. Abdul still needed to do something with that money. That might have been depositing it into a bank account to introduce it into the regulated financial markets so he could then legitimize it through business dealings with other hawaladars. Banks need to be savvy about the remittance patterns they look for in order to determine if further action is needed.

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Tactical Rabbit Inc. always protects the names of its contractors, clients, and sources regardless of circumstances. All activities will be planned and carried out in strict adherence to Intelligence Community Directive 304 (ICD 304), International Trafficking Arms Regulations (ITAR), the Foreign Corrupt Practices Act (FCPA), and all applicable U.S. laws and regulations, including but not limited to all SEC rules and regulations. Tactical Rabbit Inc. is a private intelligence company. Tactical Rabbit is not an investment advisor, accounting firm, law firm, or consumer reporting agency, and does not provide any investment, financial, accounting, legal, or credit advice. Tactical Rabbit Inc. intelligence may NOT be used to make decisions about consumer credit, employers, insurance, tenant screening, or any other purposes that would require FCRA compliance. Tactical Rabbit Inc. does not have any formal affiliation with or connection to the Central Intelligence Agency or the Federal Bureau of Investigation although it may at times contract with former employees of federal agencies. In some cases, Tactical Rabbit Inc. will attempt to facilitate a federal investigation through channels similar to those to which any private citizen has access. Tactical Rabbit Inc. uses the utmost diligence to guard and protect confidential information and trade secrets. In the event that a client signs with Tactical Rabbit Inc., client information will be kept confidential and not divulged, communicated, or used except to the extent deemed necessary by Tactical Rabbit Inc. in providing services to the client.

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