An ancient financial system known as “hawala” is drawing new attention in the modern-day war against terrorism. In mid-2001, Indian authorities arrested six Jammu Kashmir Islamic Front (JKIF) terrorists who led them to a vast network of Delhi hawala institutions that served as a key funding vehicle for JKIF’s terrorist acts. Interpol lists two other instances of Indian terrorism among specific criminal acts funded through hawalas. To understand why hawala and terror financing are a fit requires an understanding both of the history of the practice and of the laws aimed at combating terror financing.
THE FOUNDATIONS OF HAWALA BANKING
The Knights Templar has been widely credited with inventing modern banking. The close knit society of medieval Crusaders returned from the Middle East rich with plunder and established temples throughout Europe. They established a system where knights could leave money or valuables at one temple and receive back the value of what they had deposited from any Templar temple. This system evolved into what we recognize today as a banking system: one entity with far-flung branches takes in money from depositors which can be withdrawn from any of the bank’s branches.
With the rise in technology and communications, the banking industry has come up with a variety of ways to satisfy the need for money to travel from one place and person to another in the global economy, including checks, automated teller machines, and wire transfers—all of which involve electronic movement of funds from one account to another. No actual currency physically moves when money is transferred from one bank account to another using these modern banking tools. Nevertheless, these transactions are heavily “documented” through extensive and detailed electronic and, in some cases, paper records.
In the United States, banks are heavily regulated by the government. There are laws regarding what transactions banks need to disclose to the government. See, e.g., 31 U.S.C. §§ 5313, 5316. There are also rules and regulations regarding what documentation individuals must have in order to do business with banks. These are key tools in the arsenal of law enforcement officials for detecting, proving and preventing criminal conduct. Numerous high profile convictions, including that of legendary gangster Al Capone, were secured using such financial records.
There is, however, an alternative to using banks to transfer money which is fully operational in much of the world, including the United States. These are the informal money transferring networks called “Hawalas.” Hawala banking, as it is known, is a practice which originated in the Middle East and South Asia. It conforms fairly closely to the system the Templars set up upon their return to Europe nearly a millennium ago. Unlike modern banking, hawala does not generate the extensive and detailed records created by banks. In addition, hawaladers are relatively unconcerned with who their clients are and where their clients’ money came from. These differences make hawala a natural fit for those wishing to avoid detection or oversight of their financial transactions. To prevent this, enforcement of provisions designed to force hawalas to comply with the reporting and record keeping requirements for banks should be a top priority.
WHAT IS HAWALA BANKING?
Hawala banking is a system where currency is transferred between individuals in different places—often different countries—without any currency actually crossing borders. While no currency changes places in a wire transfer transaction either, wire transfers and other bank transactions involve the electronic transfer of funds. Hawala is different. One FBI agent testified in court that “hawala operates in a similar fashion to a Western Union business….[A] hawala business is used to send money from one location to another.” (Testimony of Daniel Gill in United States v. Elfgeeh, 515 F.3d 100, 108 (2d Cir. Feb. 14, 2008)) A typical Hawala transaction is as follows:
One person in Chicago wishes to transfer $5,000 to his brother in Delhi. He goes to a hawalader. Hawaladers are typically local businesspersons who operate other businesses (e.g., stores, travel agencies). Hawaladers are members of an informal network of trusted associates in various locations. The customer pays the local hawalader the $5,000 plus the hawalader’s fee. The hawalader calls the member of his network in Delhi and instructs him to deliver the rupee equivalent of $5,000 to the brother. Of course, individuals in Delhi wishing to transfer money to Chicago can go to the Delhi hawalader, who will call his Chicago counterpart to make the delivery. Any imbalances in the two hawaladers’ overall accounts are settled between them periodically.
Compared to the banking system, these hawala networks are informal and based on a far greater degree of trust. The individual sending money places his trust in the first hawalader to see that his money gets delivered to the designated recipient; the first hawalader trusts that the second hawalader will deliver the money; and the second hawalader trusts that the first hawalader will pay him back when accounts are settled.
Significantly, there is little paperwork involved in hawala banking, and often no efforts are made to comply with banking regulations. Indeed, there is little reason to keep track of the identity of the donor under this system. Unless the money need be returned because delivery cannot be made, the first hawalader need never come into contact with the donor again. Nor do large sums of money need ever actually cross national borders, other than perhaps in the account settling process.
Why would an individual wishing to transfer funds overseas choose a hawala over a bank? There are three principal reasons. First, it is often cheaper to do so. Unlike banks, hawaladers have very little overhead. They do not own or lease premises specifically for their hawala business; rather, they work out of the premises used for their other businesses. They also do not need employees, or at least as many employees as banks do. As a result, they are often able to offer better monetary exchange rates and lower transactional fees than do banks. Second, hawaladers do not require the identification documents from their customers that banks require. For non-citizens and those who want to keep their identities secret, this is a very important consideration. Third, the informality and lack of a paper trail appeal to individuals who wish to conceal their financial activities, including those attempting to conceal assets from creditors and those involved in criminal activity. Thus, while there are legitimate reasons for someone to use hawala banking, the practice is particularly appealing to terrorists, who often need to move money across borders without restrictions, reporting or documentation.
HAWALA AND TERRORISM
The terrorist attacks of September 11, 2001, brought international terrorism to the forefront of public and governmental consciousness. One of the principal focuses of efforts to combat international terrorism has been on cutting off its financing. Recognizing the need to tighten restrictions on and documentation of informal money transfers, Congress passed the USA PATRIOT Act in the aftermath of 9/11. The Patriot Act contains a provision aimed squarely at hawaladers. Specifically, the Patriot Act amended 18 U.S.C. § 1960, which makes it a crime to conduct an unlicensed money transmitting business. Prior to 2001, Section 1960 required that an individual have knowledge of licensing laws and regulations and an intent to violate them in order to be convicted of a violation. This requirement made prosecution of hawaladers difficult. The PATRIOT Act removed the intent requirement from Section 1960.
While case law involving hawalas and terrorism is scant, targeting hawala operations in the fight against international terrorism makes sense. Antiterrorism efforts on many fronts have focused on ensuring that records of potential terrorist activities are preserved and can be made available to law enforcement and antiterrorism officials. One of the key attractions of hawala for terrorists is the inherent lack of record keeping of the identities of donors or of the sources or recipients of their funds. Indeed, hawala provides an opportunity to circumvent two of the laws which make illicit transfers of money difficult: 1) 31 U.S.C. §§ 5313, which requires all “financial institutions” to report cash transactions in excess of $10,000 to the government; and 2) 31 U.S.C. § 5316, which requires that a report be filed with the United States government whenever anyone transfers more than $10,000 between the U.S. and another country. These laws offer an important antiterrorism tool in that they alert the government promptly of suspicious transfers of funds and they create a record trail to be followed after the fact. There have been notable convictions for money laundering in terrorism-related cases, including those of Yassin Aref and Mohammed Hossein in a 2006 New York case and Bayan, Ghassan and Basman Elashi in another 2006 case in Texas. Aref and Hossein were convicted of multiple counts stemming from their financial support of the Pakistani terror group Jaish-e-Mohammed. The Elashi brothers were convicted of conspiracy to aid Hamas leader and Specially Designated Terrorist Mousa abu Marzook.
While § 1960’s broad definition of financial institution includes “any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system” (see 31 U.S.C. § 5312), many hawalas do not report such transactions under Section 5313. Similarly, because hawala transactions do not involve any money actually crossing borders, Section 5316 does not apply. As a result, law enforcement and antiterrorism are deprived of an important tool for detecting potential criminal and terrorist funding.
Further, hawala banking’s lack of documentation presents another significant obstacle to law enforcement and antiterrorism efforts. There is a significant value to terrorist financiers to having no records of their funding transactions: it allows them to keep their financial conduits secret and functioning. Among the key evidence in many criminal and terrorism prosecutions, including the Elashi case discussed above, are records of the defendant’s financial transactions. See United States v. Elashi, Case No. 3:02 cr 00052, United States District Court for the Northern District of Texas, July 12, 2006 Order, at pp. 16, 39 40. Banks keep such records, including records of all wire transfers. Hawaladers do not keep such records; as discussed above, the only records they need keep is where they stand with the other hawaladers in their network.
Evidence of hawala usage in funding actual acts of terrorism is scant, however, that does not mean hawalas do not present a significant risk. Rather, the absence of evidence may well be due to the fact that hawala usage is very difficult to prove for the reasons discussed above. Indeed, experts cannot reliably even estimate the number of hawalas operating in the United States. Where the authorities are able to trace the movement of funds, they generally are able to do so only with the records generated by traditional banks and financial institutions.
Hawala is a centuries old practice for transferring funds. It is informal and relies on trust and personal relationships. Its lack of formality and record keeping make hawala an attractive option for funding criminal operations, including terrorism. Enforcement of provisions designed to force hawalas to comply with the reporting and record keeping requirements for banks will go a long way toward preventing such usage.