Rewrite Attached Paper In Own Words (No Word For Word)
iken305
453Hawala.docx
HAWALA:
ORIGINS AND PRACTICAL APPLICATIONS
Introduction
The Middle East has made grand contributions to the world. The number zero, the Hanging Gardens of Babylon, Hammurabi and the first code of laws, and Islam are just the tiniest fraction of the region’s contributions to history and culture. It is even speculated that humanity as we know it started in the Fertile Crescent of Mesopotamia- the region around the Tigris and Euphrates rivers in modern-day Iraq. A more innocuous contribution comes from commerce: the Hawala system. Hawala has been around for centuries and continues to be used in both licit and illicit activities.
Origins
Hawala was first mentioned in texts around the 8th century A.D. as a part of Islamic law (Sh’aria).[footnoteRef:0] It is likely that this system arose during this ancient period in response to trade growth around the world. Trade was a dangerous thing because the trade routes were often full of bandits and robbers, so it made little sense to carry much hard currency.[footnoteRef:1] Hawala was a widespread system, as many cultures had names for it: Padala in the Philippines, Hundi in Indai, or Phei Kwan in Thailand to name a few.[footnoteRef:2] Hawala has survived since the 8th century because of the attractiveness of informal funds transfer (IFT) systems.[footnoteRef:3] [0: Eva Ladanyi and Istvan Kobolka, "The Hawala System," Interdisciplinary Management Research X, PDF, p. 415. Accessed August 8, 2017, http://www.efos.unios.hr/repec/osi/journl/PDF/InterdisciplinaryManagementResearchX/IMR10a30.] [1: Mohammed El-Qorchi, "The Hawala System," The Hawala System, December 29, 2002, accessed August 08, 2017, http://www.gdrc.org/icm/hawala.html.] [2: Ibid.] [3: Ibid.]
Hawala is defined by the Financial Action Task Force (FATF) as:
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[footnoteRef:4] [4: Marie Chene, Hawala remittance system and money launderingq, PDF, Bergen, Norway: U4 Anti-Corruption Resource Centre, May 23, 2008, p. 2.]
As the definition indicates, it can be used to meet either legitimate or illegitimate purposes. Because of the informality of the system and the lack of documentation, it is a favorite of terrorist and crime organizations to send money all over the globe. Hawala’s role in this is essentially money laundering, which is again made easier to appear legitimate because of the lack of documentation.
IFT systems are attractive because they cut a lot of bureaucracy out of doing business and are far more cost-effective. Because of hawala’s informal nature, business between a hawaladar and a given client is swift. Literally, the entire transaction amounts to a phone call.[footnoteRef:5] Cost effectiveness is achieved because remitters of hawala generally operate business where money transfers are an integral part of their business, so it does not cost the hawaladar anything.[footnoteRef:6] If anything, they make more money this way. [5: Mohammed El-Qorchi, "The Hawala System," The Hawala System, December 29, 2002, accessed August 08, 2017, http://www.gdrc.org/icm/hawala.html.] [6: Ibid.]
Hawaladars make their money on transfers in a number of ways. Obviously, a hawaladar makes money from any upfront remittance fees they may charge. A second, less obvious, way to generate income comes from currency speculation. Since hawala transfers can take place across national borders, there may be a beneficial exchange rate between the remitter and receiver.[footnoteRef:7] This all leads to why the hawala system continues to make its brokers money: it is very reliable. Trust is literally a part of the definition of the word.[footnoteRef:8] This works to everyone’s advantage again in places rife with turmoil. The only parties that do not benefit from IFT are national governments because they are completely removed from the process.[footnoteRef:9] [7: Eva Ladanyi and Istvan Kobolka, "The Hawala System," Interdisciplinary Management Research X, PDF, p. 417. Accessed August 8, 2017, http://www.efos.unios.hr/repec/osi/journl/PDF/InterdisciplinaryManagementResearchX/IMR10a30.] [8: Ibid.] [9: Ibid.]
The Hawala System in Practice
Hawala is very successful because it is very simple. As previously stated, the entire transfer could be a simple phone call. Let us say that Adam wants to send Bill €20,000. Adam is in Germany and Bill is in Croatia. Adam goes to Henry, a hawaladar, to send the money. Henry takes the money, charges a service fee, gives Adam a transfer number, and calls a hawaladar in Croatia, Suzie in this case. Adam calls Henry to give him the transfer number to confirm the pickup on his end in Croatia.
Suzie gets €20,000 prepared for Henry, which converts to 148,009.79 Kuna (kn). Henry gives Suzie the transfer number, picks up his currency, and leaves. Adam now has an account payable, or liability, to Suzie in the amount of €20,000. Suzie could have Henry send her the cash, or they can both hold on to the hard currency and Henry can pay Suzie in goods and services. During this entire transaction, there is little to no paperwork and the transaction is generally not reported to any governing body.
Another example of a hawala transfer involves using goods. D.K., writing for The Economist, describes how Dahabshiil- a Somali company, uses goods to complete their hawala: “Mr. Duale [of Dahabshiil] would take foreign exchange from Somali migrant workers in Yemen and use it to buy goods to import into Somalia; with the proceeds from his sales, he paid out to their relatives [back in Somalia].”[footnoteRef:10] Not only did this allow Somali workers to send money out of Yemen to their families, but it also circumvented Somalia’s foreign exchange controls.[footnoteRef:11] [10: D.K., "How hawala money-transfer schemes are changing," The Economist, October 15, 2015, accessed August 08, 2017, https://www.economist.com/blogs/economist-explains/2015/10/economist-explains-12.] [11: Ibid.]
Cultural and Economic Implications
Hawala is generally very smooth and streamlined because it is embedded into middle eastern and Islamic culture. As in the Dahabshiil example, the Somali’s in Yemen dealt with Somali hawaladars.[footnoteRef:12] This national and cultural kinship facilitated the ease of transfer for all parties because they shared a language and heritage. As previously stated, trust is built into the definition of hawala. Hawala networks tend to be centered around areas where there are strong familial ties to areas, as the Somali-Yemen example illustrates.[footnoteRef:13] This is something that hawaladars can also take advantage of. [12: Ibid.] [13: Marie Chene, Hawala remittance system and money launderingq, PDF, Bergen, Norway: U4 Anti-Corruption Resource Centre, May 23, 2008, p. 2.]
Hawaladars can make money in currency speculation. In the Somali-Yemen example, Somali workers living in Yemen were sending money to their relatives in Yemen. In other nations, where the monetary exchange rate may be favorable, hawaladars may seek to exploit consumer needs to send money. Hawaladars may actually advertise to encourage this sort of activity and offer not to charge a remittance fee because they stand to make even more over the exchange rate.[footnoteRef:14] Culture, however, is likely to be less of a factor than economic situation as to the success of hawala. [14: Mohammed El-Qorchi, "The Hawala System," The Hawala System, December 29, 2002, accessed August 08, 2017, http://www.gdrc.org/icm/hawala.html.]
Hawala tends to thrive in economically underdeveloped, geographically remote, or poor areas. In especially remote areas of the globe, it makes little financial sense for a bank to open a formal branch at a given location. That is to say that one will probably not find a bank at Mount Everest. However, someone at Everest Base Camp may need money. While geography may play a role in the success of a hawaladar over a banker, economic disposition is likely to play an even bigger role. As such, remittances from hawala networks can constitute significant portions of national GDP for nations that use IFT’s.
IFT’s remain attractive for poor or underdeveloped nations because they are significantly cheaper than using a bank. For a formal money transfer, the accompanying fee can be as high as 20% of the transfer amount.[footnoteRef:15] IFT’s can be economically significant as a result of the savings. IFT’s accounted for 17% of Haiti’s GDP in 2001, and upwards of 40% of Somalia’s GDP during the late 90’s.[footnoteRef:16] In addition, the lack of bureaucracy and recordkeeping around hawala makes such transfers significantly faster than traditional money transfer services.[footnoteRef:17] Given the relative security of the networks and low costs associated with them, it really is no mystery why IFT’s continue to exist. [15: Marie Chene, Hawala remittance system and money launderingq, PDF, Bergen, Norway: U4 Anti-Corruption Resource Centre, May 23, 2008, p. 5.] [16: Ibid.] [17: Eva Ladanyi and Istvan Kobolka, "The Hawala System," Interdisciplinary Management Research X, PDF, p. 419. Accessed August 8, 2017, http://www.efos.unios.hr/repec/osi/journl/PDF/InterdisciplinaryManagementResearchX/IMR10a30.]
Hawala and Money Laundering
Not everything about hawala and IFT’s are rainbows and sunshine. There are always those who are looking to get over on the system. As previously stated, few records are generated with a hawala remittance- that is the appeal of this system. Because of the lack of records, money laundering through such a means becomes fairly straightforward. The previous examples discussed were all legal remittances where the funds being transferred were acquired through legal means. A terrorist or drug dealer would use the system in a different way.
There are three phases in money laundering: placement, layering, and integration.[footnoteRef:18] Placement is the introduction of funds, gained from illicit activity, into a system of finance.[footnoteRef:19] Using Adam from the first example, suppose the money Adam wanted to transfer to Bill came from human trafficking. The cash that Adam gives to Henry, his hawaladar, presents a problem because Henry runs a legitimate business and must report his income. Because cash is not always sent in a hawala remittance, Henry may elect to use a portion of the liquid funds to pay business expenses. From here, the remittance would continue as before, with the exception that Henry will deposit the remaining cash as legitimate revenue. [18: Patrick M. Jost and Harjit Sandhu, The hawala alternative remittance system and its role in money laundering, PDF, Lyon: Interpol General Secretariat, January 2000, p. 9.] [19: Ibid, p. 10.]
Layering is when a money launderer attempts to make the illicit funds appear as though they were obtained through legal means.[footnoteRef:20] One means of doing so is to transfer the money through several accounts and shell companies so that they appear to be legitimate business transactions, and have the funds come out of these transfers as revenue. The problem with that is the paper trail left behind. There is no paper trail in hawala, and even if there is documentation, it is likely to be sparse. Layering can occur in hawala networks by remitting the money through several brokers. [20: Ibid.]
The third phase is integration, where the illicit funds finally appear legitimate.[footnoteRef:21] Hawala can make this phase even easier because hawala can transform currency into almost anything. If Adam wants to launder his money at this stage, he could arrange for the money to be transferred to another country and then transferred right back, giving the transfer the appearance of being a business investment.[footnoteRef:22] The funds could be made to appear as almost anything, and there is little way to prove otherwise because there is so little paperwork to accompany the transfer. [21: Ibid.] [22: Ibid, p. 11.]
Because of the threat of money laundering with such an informal system, a lot of countries are passing legislation requiring recordkeeping of IFT’s. Somalia is one such nation, requiring every transaction to be recorded, as well as the details of the sender’s identity to be taken.[footnoteRef:23] Even so, terrorist organizations have taken advantage of hawala, especially in areas where reporting rules are either nonexistent or unenforced. In 2010, Mohammad Younis was indicted by a U.S. court for facilitating the transfer of $7,000 to Faisal Shahzad, the Times Square bomber.[footnoteRef:24] There was no evidence that Younis was aware of Shahzad’s intentions, however, Younis’ activities gave Shahzad access to the funds he needed for his planned attack.[footnoteRef:25] [23: D.K., "How hawala money-transfer schemes are changing," The Economist, October 15, 2015, accessed August 08, 2017, https://www.economist.com/blogs/economist-explains/2015/10/economist-explains-12.] [24: Jack Moore, "Hawala: The Ancient Banking Practice Used to Finance Terror Groups," Newsweek, March 17, 2016, accessed August 09, 2017, http://www.newsweek.com/underground-european-hawala-network-financing-middle-eastern-terror-groups-307984.] [25: Ibid.]
Conclusions
Hawala has been around for a very long time, and it is unlikely to go anywhere anytime soon. While there are certainly advocates for regulating hawala, there are others who feel that is an impossibility due to its informality.[footnoteRef:26] While the majority of hawala remittances are used for simple things, such as workers sending money to their families, its informal nature makes the system susceptible to abuse. As previously indicated, there are few records to accompany hawala remittances. Nations such as Somalia, are trying to reign all of that in and force records to be kept, this has more to do with economics than preventing money laundering or terrorism. [26: Ibid.]
BIBLIOGRAPHY
Chene, Marie. Hawala remittance system and money launderingq. PDF. Bergen, Norway: U4 Anti-Corruption Resource Centre, May 23, 2008. Retrieved from http://www.u4.no/publications/hawala-remittance-system-and-money-laundering/
D.K. "How hawala money-transfer schemes are changing." The Economist. October 15, 2015. Accessed August 08, 2017. https://www.economist.com/blogs/economist-explains/2015/10/economist-explains-12
El-Qorchi, Mohammed. "The Hawala System." The Hawala System. December 29, 2002. Accessed August 08, 2017. http://www.gdrc.org/icm/hawala.html
Jost, Patrick M., and Harjit Sandhu. The hawala alternative remittance system and its role in money laundering. PDF. Lyon: Interpol General Secretariat, January 2000. Retrieved from http://www.nmta.us/assets/docs/hawala.pdf
Ladanyi, Eva, and Istvan Kobolka. "The Hawala System." Interdisciplinary Management Research X. Accessed August 8, 2017. http://www.efos.unios.hr/repec/osi/journl/PDF/InterdisciplinaryManagementResearchX/IMR10a30.
Mayyasi, Alex. "Hawala: The Working Man's Bitcoin." Priceonomics. February 07, 2014. Accessed August 09, 2017. https://priceonomics.com/hawala-the-working-mans-bitcoin/.
Moore, Jack. "Hawala: The Ancient Banking Practice Used to Finance Terror Groups." Newsweek. March 17, 2016. Accessed August 09, 2017. http://www.newsweek.com/underground-european-hawala-network-financing-middle-eastern-terror-groups-307984.
