Briefing Note
The Hawala System & the International Monetary Fund / Financial
Action Task Force
The omnipresence of the Al-Qaeda with its obdurate mantra placed ‘Alternative
Remittance Systems’ (ARS) at the fore of the counter-terrorism campaign.1 The depth and
extent of ARS is hard to fathom because it allows if not encourages a degree of subreption.
ASRs are widespread; they operate in advanced economic systems where the financial system
operates efficiently,2 and in dysfunctional or less-developed financial systems.3 The
International Monetary Fund (IMF) with the support of such organisation as the Financial
Action Task Force (FATF), the United Nations Office of Drug and Crime (ODC) and the
World Bank has endeavoured to come to grips with ASRs, as ASRs undermine the general
financial system and fall prey to nefarious elements.4
The purpose of this paper is to review a specific ASR system, the hawala system. The
paper emphasis is laid on the purpose and some of the advantages that hawala offers its users.
In the second part, the focus shifts to analysing some of the actions taken by the IMF and the
FATF in their campaign to combat the hawala system. The paper concludes by providing
some suggestions as to deal with the hawala system.
On the importance of dealing with the finance of terrorism see for example: Mathew Levitt “Stemming the Flow
of Terrorist Financing: Practical and Conceptual Challenges” The Fletcher Forum of World Affairs Vol. 27, No. 1
(Winter/spring 2003). Available on line at:
http://www.intelligence.org.il/eng/bu/financing/articles/terror%20financing%20-%20Fletcher.pdf
2
“Suppressing the Financing of Terrorism: A Handbook for Legislative Drafting” Legal Department
International Monetary Fund (2003): 31.
3
See for example the role of hawala in Afghanistan, Samuel Munzele Maimbo “The Money Exchange Dealers of
Kabul: A Study of the Hawala System in Afghanistan” Finance and Private Sector Unit South Asia Region,
World Bank (June 2003): 5. Available on line at:
http://www1.worldbank.org/finance/html/amlcft/docs/(06.23.03)%20The%20Hawala%20System%20in%20Afgh
anistan%20(Maimbo).pdf#search='Purpose%20of%20Hawala'
4
Malkin and Elizur have claimed that comparing the Clinton and George W. Bush approach to money laundering
as comparing apples and oranges, as following 9/11, terrorist financing and money laundering became a central
theme in the ‘war on terror’. They write, “The Clinton people treated money laundering as a problem to be solved
by bureaucrats because there was little hope of help from Congress. Officials came at it as a weapon to defend
human rights by taking down corrupt dictators… The current Bush administration treats money laundering
strictly as a law enforcement matter backed by diplomacy and is able to do so precisely because it was handed the
legal authority by Congress.” Lawrence Malkin & Yuval Elizur “Terrorism’s Money Trail” World Policy Journal
Vol. XIX, No.1, (Spring 2002): 60-61.
1
What is Hawala
Hawala is one of the ARS or Informal Funds Transfer (IFT) systems available for the
transfer of money or assets around the globe.5 IFTs operate domestically and internationally,
as in some countries (particularly war/conflict-afflicted) the local population use it to transfer
funds around the country. It also has a global-reach as it facilitates the sending of funds from
one side of the globe to the next. In the context of IFT, ‘hawala’ refers to an informal way to
transfer funds from one location to another via an intermediary (service providers) known as
‘hawalandars.’6
In Arabic, the term hawala means ‘transfer’ or ‘wire.’ The system exists in China (FeiCh'ien), Philippines (Padala), India (Hundi), Hong Kong (Hui Kuan), and Thailand (Phei
Kwan). The distinguishing feature of hawala is its reliance on trust. Consequently, the system
principle users are family members or members of the same region/community who make use
of it to send money around the globe.7
There are two types of hawala systems the ‘white hawala’ and the ‘black hawala.’ The former
deals with money from licit sources while ‘black hawala’ refers to the transfer of money or
assets obtained from illicit sources. This briefing note focuses principally on the former,
though when seeking to deal with the ‘white hawala’ one must also consider the ‘black
hawala’ as criminals and terrorists manipulate the general hawala system.8
Purpose of Hawala
The hawala system emerged to finance trade without having to travel with gold or silver,
which used to be dangerous, as roads used to be beset with pirates and bandits. The system
flourished in China, Asia and the Middle East.9
5
There are various names for the system with the most common being: Informal Funds Transfer System (IFTS);
Informal Value Transfer System (IVTS) or Alternative Remittance System (ASRs).
6
Mohammad El-Qorchi “Hawala” Finance and Development Vol. 39, No. 4, (December 2002); Mohammad ElQorchi “Hawala: Based on Trust, Subject to Abuse” Economic Perspective (September 2004). Available on line
at: http://usinfo.state.gov/journals/ites/0904/ijee/ijee0904.pdf
7
Mohammad El-Qorchi “Hawala” Finance and Development Vol. 39, No. 4, (December 2002); Mohammad ElQorchi “Hawala: Based on Trust, Subject to Abuse” Economic Perspective (September 2004). Available on line
at: http://usinfo.state.gov/journals/ites/0904/ijee/ijee0904.pdf
8
Examples of hawala abuse range from narcotic trafficking, illegal arms trade, subsidy, welfare and customs
fraud, tax and embargo violations, gold smuggling, etc.
9
The Chinese fe ch’ien (“flying money or coin”) emerged in the latter part of the T’ang Dynasty due to increase
internal trade. Southern traders used the system to sell goods such as tea at the capital and transfer their revenues
back home through liaison offices or agencies of provincial governments located at the Imperial Court. The
revenues were used to pay taxes due from the provinces to the central government, without having to transfer
large sums of money overland were robbers could attack the shipments. Leonides Buencamino & Sergei
Gorbunov “Informal Money Transfer System: Opportunities & Challenges for Development Finance” DESA
Discussion Paper No. 26 (United Nations: November 2002) (ST/ESA/2002/DP/26).
The current primary users of IFTs are individuals from the Indian subcontinent, East Asia,
Africa, Eastern Europe, and elsewhere who live and work in Europe, the Persian Gulf region,
and North America. These individuals send remittances to their relatives back home. 10 This
has led R. Barry Johnson to note that although IFTs have increasingly come under scrutiny
because terrorists and criminals use them, “…remittances are very important to migrant
workers who send money home and that IFT systems represent an important source of income
for some countries.”11 In addition, to migrant workers, other users of the system range from
legitimate companies, government agencies, NGOs, individual traders, etc. Hawala also
operates as a settlement process under which the intermediaries settle their accounts and that
may lead to money transfer or the exchange of goods and services.
Why Use Hawala
The hawala system provides an array of advantages for its users. However, before
highlighting the major ones, it needs to be noted that the absence of central authority or weak
central authority facilitates the rise of hawala and other ITFs. Thus, in Somalia for example,
the absence of central government and effective infrastructure encouraged the emergence of
the system while in Afghanistan incessant violence (especially in the last few decades)
undermined the official financial system.12 In the words of one commentator referring to the
Afghanistan situation, “…hawala has provided the most reliable, convenient, safe, and
inexpensive means of transferring funds to far- flung regions.”13 This view could and does
apply globally. It is especially apparent in the less-developed world where the financial system
is more open to abuse and manipulation by officials and criminals. It is noteworthy that in the
less-developed world the allure of embezzlement by bank officials is greater because of the
low pay received by employees. This enables criminal elements to use financial inducements
to persuade officials to bypass banking laws.
10
The World Bank believes that migrant workers remittance stood at around $110 billion in 2004 compared to
$93 billion in 2003. Dawn April 5, 2004. Available on line at: http://www.dawn.com/2005/04/05/ebr10.htm
11
R. Barry Johnston “Work of the IMF in Informal Funds Transfer System” in Regulatory Frameworks for
Hawala and Other Remittance Systems. Monetary & Financial Systems Department, International Monetary
Fund, (Washington: IMF Multimedia Services Division, 2005): 3.
12
The Taliban eschewed the non-Islamic financial system with Mullah Mohammed Omar distributing money
from a tin box. Ahmed Rashid Taliban: The Story of Afghan Warlords (London: Pan Books, 2001)
13
Samuel Munzele Maimbo “The Money Exchange Dealers of Kabul: A Study of the Hawala System in
Afghanistan” Finance and Private Sector Unit South Asia Region, World Bank (June 2003): 5. Available on line
at:
http://www1.worldbank.org/finance/html/amlcft/docs/(06.23.03)%20The%20Hawala%20System%20in%20Afgh
anistan%20(Maimbo).pdf#search='Purpose%20of%20Hawala'
The advantages of IFTs are numerous, and thus within the context of this briefing note,
only a few would be mentioned. First, IFT is anonymous. The person sending the funds from
Country A to a beneficiary in Country B deals only with the hawalandar who provides the
customer with an authentication code which the customer transmit to his beneficiary. The
beneficiary collects the equivalent amount of the money from another hawalandar, which his
benefactor had deposited with the hawalandar in Country A. There is no need for paper
(evidence) as the transaction could take place orally or even through the internet in a chat
room.14 Under the hawala system, the Customer (the person sending the money) does not need
to open a bank account in the country from which he is sending the money nor does the
beneficiary need a bank account. Moreover, there is often a door-to-door service, which helps
those who are sending money back to ailing or infirm family members.
Second, the system is swifter than the formal banking system, which requires scrutiny over
large money deposits to ensure it is not tainted.15 International wire transfer takes considerable
time, normally around a week as for example the source of money needs to be examined due
to domestic and international regulations. There are also different working practices and other
differences that prevent the quick transference of funds from one country to another. Under the
hawala the money (cash) could be in the hands of the beneficiary within 24 hours. Holidays,
weekends, time differences have little if any affect those using hawala. Moreover, there are
instances where conventional banking facilities do not exist, which leas to the emergence of
hawala.16
Third, the system relies on kinship, ethnic ties or personal relationship between the
hawalandars and their customers, which at times meant that funds could be sent before they
are deposited with the initial hawalandar.17 Linked to this is the issue of reliability (trust) with
On the clientele and ‘paper trail’ aspect see for example Lisa C. Carroll “Alternative remittance systems
distinguishing sub-systems of ethnic money laundering in Interpol member countries on the Asian continent”
Interpol (December 5, 2005). Available on line at:
http://www.interpol.com/Public/FinancialCrime/MoneyLaundering/EthnicMoney/
15
On the British money laundering legislation see for example: Robert Rhodes & Serena Palastrand “A Guide to
Money Laundering Legislation” Journal of Money Laundering Control Vol. 8, No. 1 (September 2004): 9-18.
For the American requirements see for example, Courtney J. Linn “How Terrorists Exploit Gaps in US AntiMoney Laundering Laws to Secret Plunder” Journal of Money Laundering Control Vol. 8, No. 3 (March 2005):
200-214.
16
Buencamino and Gorbunov note that IFTs emerged between Australia and Africa because of a lack of formal
banking linkage between Australia and several African countries. Leonides Buencamino & Sergei Gorbunov
“Informal Money Transfer System: Opportunities & Challenges for Development Finance” DESA Discussion
Paper No. 26 (United Nations: November 2002) (ST/ESA/2002/DP/26).
17
Mohammad El-Qorchi “Hawala” Finance and Development Vol. 39, No. 4, (December 2002).
14
the hawalandars rarely failing to make a payment as they know that such a thing would end
their involvement in the sector.18
Fourth, the system is cheaper, as the hawalandars although charging a fee or commission
(0.25% to 1.25% of the amount involved), still demands a lower rate than the formal financial
system, (they incur less overhead expenses coupled with their disregard of regulations).19
Furthermore, because there is often an element of kinship is involved payment may take a
variety of forms such as goods and services (medical help, housing, etc.)20
The Role of the IMF & FATF in countering Hawala
The Financial Action Task Force (FATF) emerged in 1989 following the G-7 Summit in
Paris. Its aim was to combat the increasing threat that money laundering posed the banking
system and financial institution. To this end, the FATF was entrusted with the responsibility of
examining money laundering techniques and trends. This involved the FATF reviewing the
national and international action and setting out what needs to be done to combat money
laundering. Within a year, the FATF issued a report containing a set of Forty
Recommendations, which provide a comprehensive plan of action needed to fight against
money laundering.21 FATF works closely with other international institutions such as the IMF,
the World Bank, the United Nations and FATF-style regional bodies (FSRBs) to IFTs.
The FATF Eighth Special Recommendations deal specifically with the issue of counter
terrorism financing. Earl Anthony Wayne, the Assistant Secretary, Bureau of Economic and
Business Affairs, has stated that the FATF Eight Special Recommendations on Terrorist
Financing “…have become the international operational standard on addressing terrorist
financing.”22
The First Recommendation emphasises the importance of universal ratification of the 1999
United Nations International Convention for the Suppression of the Financing of Terrorism
Samuel Munzele Maimbo “The Money Exchange Dealers of Kabul: A Study of the Hawala System in
Afghanistan” Finance and Private Sector Unit South Asia Region, World Bank (June 2003): 5. Available on line
at:
http://www1.worldbank.org/finance/html/amlcft/docs/(06.23.03)%20The%20Hawala%20System%20in%20Afgh
anistan%20(Maimbo).pdf#search='Purpose%20of%20Hawala'
19
Leonides Buencamino & Sergei Gorbunov “Informal Money Transfer System: Opportunities & Challenges for
Development Finance” DESA Discussion Paper No. 26 (United Nations: November 2002)
(ST/ESA/2002/DP/26).
20
On the reverse hawala see Mohammad El-Qorchi “Hawala” Finance and Development Vol. 39, No. 4
(December 2002).
21
For the history of the FATF see the FATF website:
http://www.fatf-gafi.org/document/63/0,2340,en_32250379_32236836_34432255_1_1_1_1,00.html
22
E. Anthony Wayne “Internationalizing the Fight” Economic Perspective (September 2004). Available on line
at: http://usinfo.state.gov/journals/ites/0904/ijee/ijee0904.pdf
18
and the Security Council Resolution 1373. The Convention, which more than one hundred
countries have ratified states that it is an offence to directly or indirectly provide or collect
funds with the intention or knowledge that they would be use for terrorist activities.23 The
Convention demands that States introduce legislation making it a criminal offence to finance
terrorism. States must also cooperate with other states and provide each other with legal
assistance in the matters covered by the Convention. Finally, States have to impose various
requirements on their financial institution vis-à-vis the detection and reporting evidence of
financing of terrorist acts.24 Security Council Resolution 1373 declared that the 9/11 attacks
amounted to a threat to international peace and security. The legal implication for such a
declaration is that it allows the Council to take, if it deems it necessary, collective measures
under Chapter VII or Chapter VI (sanctions). The measures must be adopted by the Member
States of the United Nations (Article 25,25 4826 of the UN Charter). On the issue of terrorist
financing requires that states “prevent and suppress the financing of terrorist acts” and
criminalise the wilful collection, whether direct or indirect, of funds for terrorist acts. Under
paragraph 1(d) of 1373, UN Member States are required to “Prohibit their nationals or any
persons and entities within their territories from making any funds, financial assets or
economic resources or financial or other related services available, directly or indirectly, for
the benefit of persons who commit or attempt to commit or facilitate or participate in the
commission of terrorist acts, of entities owned or controlled, directly or indirectly, by such
persons and of persons and entities acting on behalf of or at the direction of such persons.”27
The Convention defines ‘terrorist acts’ if they appear in at least those of the nine international treaties listed in
the Annex to the Convention to which the country is a party (“treaty offences”). Secondly, terrorist acts are also
defined in the generic definition set out in Article 2(b) of the Convention (“generic offences”). For the
Convention see:
http://untreaty.un.org/English/Terrorism/Conv12.pdf#search='United%20Nations%20International%20Conventio
n%20for%20the%20Suppression%20of%20the%20Financing%20of%20Terrorism'
See also: “Suppressing the Financing of Terrorism: A Handbook for Legislative Drafting” Legal Department
International Monetary Fund (2003): 46.
24
“Suppressing the Financing of Terrorism: A Handbook for Legislative Drafting” Legal Department
International Monetary Fund (2003): 31.
25
Article 25 states: “The Members of the United Nations agree to accept and carry out the decisions of the
Security Council in accordance with the present Charter.” Available on line at:
http://www.un.org/aboutun/charter/
26
Article 48(1) states: “The action required to carry out the decisions of the Security Council for the maintenance
of international peace and security shall be taken by all the Members of the United Nations or by some of them,
as the Security Council may determine.” Article 48(2) states “Such decisions shall be carried out by the Members
of the United Nations directly and through their action in the appropriate international agencies of which they are
members.” Available on line at: http://www.un.org/aboutun/charter/
27
United Nations Security Council 1373, September 28, 2001. S/Res/1373 (2001). See also “Suppressing the
Financing of Terrorism: A Handbook for Legislative Drafting” Legal Department International Monetary Fund
(2003): 20-21.
23
The Second Recommendation notes the importance of domestic legislation and the need to
make the financing of terrorism a criminal act. There has been significant development
regarding the domestic criminalisation of terrorist finances according to the reports that states
have submitted to the UN Counter-Terrorism Committee (as required under Security Council
Resolution 1373).28
The Third Recommendation building on Resolution 1373 and the 1999 Convention centres on
the freezing of terrorist funds or assets. The importance of domestic legislation in this field is
emphasised by the FATF. The FATF placed in the Third Recommendation two obligations,
the first is the freezing of terrorist funds or assets to prevent terrorist activity. Moreover, it also
sought through the Recommendation to deprive the ‘terrorists’ of the funds to carry out their
nefarious activities.29
The Fourth Recommendation points to the need for countries, businesses and other entities to
notify the competent authorities if they suspect that funds are somehow relates to, or are to be
used for terrorism, terrorist acts or terrorist organisations. The FATF Guidance Notes points to
two key elements: “Jurisdictions should establish a requirement for making a report to
competent authorities when there is a suspicion that funds are linked to terrorist financing;”
and, “Jurisdictions should establish a requirement for making a report to competent authorities
when there are reasonable grounds to suspect that funds are linked to terrorist financing.”30
The Fifth Recommendation builds on the need for international cooperation. It calls on
countries to notify and/or exchange information on matters relating to the financing of
terrorism. It has five elements:31
1.
Countries need to establish legal avenues to exchange regarding terrorist financing;
2.
Countries need to develop ways to exchange information regarding terrorist financing by
means other than legal assistance mechanisms;
3.
Countries must adopt specific measures to prevent individuals involved with terrorist
financing from having “safe haven”;
28
The reports are available on the website of the Security Council Counter-Terrorism Committee website:
http://www.un.org/Docs/sc/committees/1373/
29
‘Interpretative Note to Special Recommendation III: Freezing and Confiscating Terrorist Assets’ in the FATF
Interpretative Notes to the Nine Special Recommendations on Terrorist Financing. Available on line at:
http://www.fatf-gafi.org/document/53/0,2340,en_32250379_32236947_34261877_1_1_1_1,00.html#inSRIII
30
Guidance Notes for the Special Recommendations on Terrorist Financing and Self-Assessment Questionnaire
FATF Secretariat (March 27, 2002): 3. Available on line at:
http://www.fatf-gafi.org/dataoecd/39/20/34033909.pdf
31
Guidance Notes for the Special Recommendations on Terrorist Financing and Self-Assessment Questionnaire
FATF Secretariat (March 27, 2002): 4. Available on line at:
http://www.fatf-gafi.org/dataoecd/39/20/34033909.pdf
4.
Countries need to adopt extradition procedures regarding individuals involved in terrorist
financing;
5.
Countries should establish provisions or procedures to ensure that “claims of political
motivation are not recognised as a ground for refusing requests to extradite persons
alleged to be involved in terrorist financing”.
Under the Sixth Recommendation, the FATF took the unprecedented step of calling on
persons or legal entities that provide a service of money or asset transmission to be licensed or
registered. The FATF realising that the financial system is open to manipulation and abuse
wants to make it more transparent. The key element is the need for licence/registration for
those who provide money/value transfer services whether through informal or formal
channels.32
The Seventh Recommendation was innovative as it called on states to adopt measures under
which financial institutions obtain and hold information on the sender (name, address, account
number etc.). It specifically focused on wire transfer, domestic and international.33
The Eight Recommendation dealt with non-profit organisations as they are vulnerable to
abuse, and therefore countries need to adopt measures to prevent such abuse. The FATF
Guidance Notes refer to the need for establish jurisdiction that would review “the legal regime
of entities” with special emphasis placed on non-profit organisation to ensure that such groups
are not used by terrorist organisations. More specifically the Recommendation focused on
preventing terrorist organisation from using non-profit organisations “…to disguise or
facilitate terrorist financing activities, to escape asset freezing measures or to conceal
diversions of legitimate funds to terrorist organisations.”34
The Ninth Recommendation (adopted on October 22, 2004) noted that danger posed by money
couriers and called on countries to adopt measures to detect the physical cross-border
movement of currency and bearer negotiated instruments.35
‘Interpretative Note to Special Recommendation VI: Alternative Remittance’ in the FATF Interpretative Notes
to the Nine Special Recommendations on Terrorist Financing. Available on line at:
http://www.fatf-gafi.org/document/53/0,2340,en_32250379_32236947_34261877_1_1_1_1,00.html#inSRIII
33
‘Interpretative Note to Special Recommendation VII: Wire Transfer’ in the FATF Interpretative Notes to the
Nine Special Recommendations on Terrorist Financing. Available on line at:
http://www.fatf-gafi.org/document/53/0,2340,en_32250379_32236947_34261877_1_1_1_1,00.html#inSRIII
34
Guidance Notes for the Special Recommendations on Terrorist Financing and Self-Assessment Questionnaire
FATF Secretariat (March 27, 2002): 6-7. Available on line at:
http://www.fatf-gafi.org/dataoecd/39/20/34033909.pdf
35
“FATF Standards: Nine Special Recommendations on Terrorist Financing”. Available on line at:
http://www.oecd.org/document/9/0,2340,en_32250379_32236920_34032073_1_1_1_1,00.html#IXCashcourriers
32
Why is it important to deal Hawala system
The hawala system (the ‘white’ and the ‘black’) has proven itself highly dangerous on a
multitude of levels. Firstly, it undermines the global financial system as it facilitates the
transference of money without records thereby providing an eschewed financial picture. That
is, the transference of unaccounted money into a country has an impact on development and
growth of a country as argued by Mohammad El-Qorchi. On a macroeconomic level hawala
undermines growth because although funds change hands from one country to another, as does
the value, the broad money-supply remains unaltered. El-Qorchi also notes that hawala has a
fiscal consequence, as tax is not paid on the remittance reducing the revenues of the remitting
and receiving countries.36
The ability of those operating outside of the laws of civil society to use their ill-gotten
gains to finance their continued illicit activities damages economies. On a purely moral basis,
a law-based society must ensure that criminals do not operate freely. States must ensure that
criminals are unable to use their ill-gotten funds to sow misery and pain. Moreover, it has been
suggested that whereas hawalandars in North America may offer better-than-official exchange
rates, their counterparts in the Indian subcontinent profit from offering lower rates to those
willing on the rate as their prime concern is laundering their funds.37 Illegal currency
manipulation harms economies on a domestically and internationally.
Concluding Remarks
The approach of the IMF, the FATF and other regional and international organisation in
dealing with the IFTs has been impressive to date. We have come along way in a short time.
The two conferences on hawala (sponsored by the United Arab Emirates) leading to the Abu
Dhabi Declaration on Hawala (2002)38 emphasised the commitment of the international
community (and more specifically some of the Muslim countries) to deal with IFTs. There
have a variety of innovative ideas as to controlling the system: some governments have
introduced migrant foreign currency accounts and bonds not subjected to foreign exchange
regulations; others introduced legislation in which foreign currency accounts pay abovemarket interest rates; in Egypt and Turkey premium exchange rates are offered for the
Mohammad El-Qorchi “Hawala” Finance and Development Vol. 39, No. 4, (December 2002).
Lisa C. Carroll “Alternative remittance systems distinguishing sub-systems of ethnic money laundering in
Interpol member countries on the Asian continent” Interpol (December 5, 2005). Available on line at:
http://www.interpol.com/Public/FinancialCrime/MoneyLaundering/EthnicMoney/
38
Available on line at:
http://www.ustreas.gov/offices/enforcement/programs/Hawalaconf.pdf#search='abu%20dhabi%20declaration%20on%20hawala'
36
37
conversion of foreign currency.39 An important starting point is the realisation that not all
hawala transactions assist in the illegal transfer of funds to terrorist or other nefarious
organisations. The distinction is significant, as although the system is largely illegal in western
economic system they play a major role in the less developed world. The Bangko Sentral ng
Pilipinas has calculated that annual overseas Filipino worker remittance has increased from
$103 million in 1975 to around $8.5 billion in 2004 making the Philippines the third largest
recipient of migrant remittance after India and Mexico.40 At the same time, it has been difficult
to determine the extent to which terrorists for example use IFTs and there is evidence to
suggest that the 9/11 terrorists used the formal financial system to transfer funds.41
The international community must be aware of the danger of cracking down too hard on
the hawala network, which may push its operators and users underground making them far
more vulnerable to criminal manipulation. Policymakers must remember that for many
migrant communities (some of whom may be unfamiliar with the ways and language of their
new homes) the hawala system is the cheapest, most efficient way to provide their families
with a large portion of their earnings without attraction attention. Consequently, the only way
to control the system is to make the hawala unattractive to its users while also recognising the
role that it plays in developing economies.42 Samuel M. Maimbo has argued that the choice
between formal and informal remittance system rests principally on economics. In other
words, sufficient financial incentives encourage remitters to use the banking (formal) system.43
This would at least help to reduce the ‘white hawala’ system.
In trying to combat the ‘white hawala’ system the international community could begin
by reducing the some of the fees charged by western financial institutions especially on
individual transacting with less developed countries. That is, removing or reducing the fees
Leonides Buencamino & Sergei Gorbunov “Informal Money Transfer System: Opportunities & Challenges for
Development Finance” DESA Discussion Paper No. 26 (United Nations: November 2002): 8.
(ST/ESA/2002/DP/26).
40
The Manila Times March 21, 2005.
41
Leonides Buencamino & Sergei Gorbunov “Informal Money Transfer System: Opportunities & Challenges for
Development Finance” DESA Discussion Paper No. 26 (United Nations: November 2002)
(ST/ESA/2002/DP/26).
42
Buencamino and Gorbunov note that many migrant workers in residing in the United States legally obtain
additional bank cards, which allows their relatives to withdraw funds from US-based accounts at any ATM,
connected to a major electronic banking network. Leonides Buencamino & Sergei Gorbunov “Informal Money
Transfer System: Opportunities & Challenges for Development Finance” DESA Discussion Paper No. 26 (United
Nations: November 2002) (ST/ESA/2002/DP/26).
43
Samuel M. Maimbo “The Regulation & Supervision of Informal Remittance Systems: Emerging Oversight
Strategies” Seminar on Current Development in Monetary Financial Law (November 24, 2004).
39
charged on individuals sending money to their families. Such a system would require a worker
having a valid passport (or working visa, or any other accepted document) and the beneficiary.
Banks are already demanding that those drawing cash from account present some level of
authorisation and therefore adding such a system would not cost too much to financial
institutions. The Filipino Senate begun investigating charges imposed by banks on the
remittances of Overseas Filipino Workers (OFWs). Senator Mar Roxas who called for the
Senate investigation noted that a local bank might charge around $6 per transaction, which
means that over a 12-month period, the bank would collect $72, which is equivalent to 16-day
minimum wage here.44 This is a positive development as it emphasises the willingness of
countries where remittance system operate to encourage people to use the established financial
system.
Countries such as Pakistan, which have traditionally benefited from hawala and other
remittance systems have introduced legislation demanding that hawalandars register their
business with the government and provide documents relating to their transactions, to ensure
transparency.45 India has adopted a different approach by banning the system.46 Korean
companies involved in construction projects in the Middle East dealt with informal remittance
by depositing their employees’ salaries in foreign currency accounts in Korean banks. The
Korean model worked because the workers were not independent, but it is an example of how
some countries have dealt with informal remittance.47
At the end of the day, the growing threat posed by terrorism and criminal activities
demands that the international community must continue to cooperate in improving financial
regulations and share information to undermine the incentives offered by the hawalandars.
The West must demand that countries in which hawala is prevalent introduce regulations as
was done in Pakistan, leading US Treasury Secretary John Snow to applaud Pakistan’s attempt
to curtail terror financing. He added, “Evidence of (Pakistan’s commitment) is the strong
action that has been taken on money laundering, and the registration and regulation of Hawala
44
The Manila Times March 21, 2005.
Gulfnews.com September 20, 2003. Available on line at:
http://search.gulfnews.com/articles/03/09/20/98000.html
46
Samuel M. Maimbo “The Regulation & Supervision of Informal Remittance Systems: Emerging Oversight
Strategies” Seminar on Current Development in Monetary Financial Law (November 24, 2004).
Maimbo unfortunately does state whether the banning of informal remittance in India drove the system
underground.
47
Leonides Buencamino & Sergei Gorbunov “Informal Money Transfer System: Opportunities & Challenges for
Development Finance” DESA Discussion Paper No. 26 (United Nations: November 2002)
(ST/ESA/2002/DP/26).
45
networks.”48 This is why such regional organisation as Middle East and North Africa Financial
Action Task Force (MENA FATF) are important as they recognise the role that the Arab
world has play in preventing terrorist finances.49 Finally, there is substantial evidence that
IFTs benefit from conflict situation where central authority is either non-existent or weak
(hawala grew following the partition of India, the Vietnam War, Somalia, Afghanistan etc.)50
Thus, the international community must continue to work to end conflict and political
instability, demand that hawalandars join the formal banking system and use technology to
cut financial costs within the formal financial sector.
48
Dawn September 20, 2003. Available on line at: http://www.dawn.com/2003/09/20/top7.htm
Bahrain Tribune December 21 2005. Available on line at: http://www.bahraintribune.com/ArticleDetail.asp
50
Leonides Buencamino & Sergei Gorbunov “Informal Money Transfer System: Opportunities & Challenges for
Development Finance” DESA Discussion Paper No. 26 (United Nations: November 2002)
(ST/ESA/2002/DP/26).
49
BIBLIOGRAPHY
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