Hawala Banking in Asia and the Middle East
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Hawala Banking in Asia and the Middle East
By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"
In the wake of the September 11 terrorist attacks on the USA,
attention was drawn to the age-old, secretive, and globe-spanning
banking system developed in Asia and known as "Hawala" (to change,
in Arabic). It is based on a short term, discountable, negotiable,
promissory note (or bill of exchange) called "Hundi". While not
limited to Moslems, it has come to be identified with "Islamic
Islamic Law (Sharia'a) regulates commerce and finance in the Fiqh Al
Mua'malat, (transactions amongst people). Modern Islamic banks are
overseen by the Shari'a Supervisory Board of Islamic Banks and
Institutions ("The Shari'a Committee").
The Shi'a "Islamic Laws according to the Fatawa of Ayatullah al
Uzama Syed Ali al-Husaini Seestani" has this to say about Hawala
"2298. If a debtor directs his creditor to collect his debt from the
third person, and the creditor accepts the arrangement, the third
person will, on completion of all the conditions to be explained
later, become the debtor. Thereafter, the creditor cannot demand his
debt from the first debtor."
The prophet Muhammad (a cross border trader of goods and commodities
by profession) encouraged the free movement of goods and the
development of markets. Numerous Moslem scholars railed against
hoarding and harmful speculation (market cornering and manipulation
known as "Gharar"). Moslems were the first to use promissory notes
and assignment, or transfer of debts via bills of exchange
("Hawala"). Among modern banking instruments, only floating and,
therefore, uncertain, interest payments ("Riba" and "Jahala"),
futures contracts, and forfeiting are frowned upon. But agile Moslem
traders easily and often circumvent these religious restrictions by
creating "synthetic Murabaha (contracts)" identical to Western
forward and futures contracts. Actually, the only allowed transfer
or trading of debts (as distinct from the underlying commodities or
goods) is under the Hawala.
"Hawala" consists of transferring money (usually across borders and
in order to avoid taxes or the need to bribe officials) without
physical or electronic transfer of funds. Money changers
("Hawaladar") receive cash in one country, no questions asked.
Correspondent hawaladars in another country dispense an identical
amount (minus minimal fees and commissions) to a recipient or, less
often, to a bank account. E-mail, or letter ("Hundi") carrying
couriers are used to convey the necessary information (the amount of
money, the date it has to be paid on) between Hawaladars. The sender
provides the recipient with code words (or numbers, for instance the
serial numbers of currency notes), a digital encrypted message, or
agreed signals (like handshakes), to be used to retrieve the money.
Big Hawaladars use a chain of middlemen in cities around the globe.
But most Hawaladars are small businesses. Their Hawala activity is a
sideline or moonlighting operation. "Chits" (verbal agreements)
substitute for certain written records. In bigger operations there
are human "memorizers" who serve as arbiters in case of dispute. The
Hawala system requires unbounded trust. Hawaladars are often members
of the same family, village, clan, or ethnic group. It is a system
older than the West. The ancient Chinese had their own "Hawala" -
"fei qian" (or "flying money"). Arab traders used it to avoid being
robbed on the Silk Road. Cheating is punished by effective ex-
communication and "loss of honour" - the equivalent of an economic
death sentence. Physical violence is rarer but not unheard of.
Violence sometimes also erupts between money recipients and robbers
who are after the huge quantities of physical cash sloshing about
the system. But these, too, are rare events, as rare as bank
robberies. One result of this effective social regulation is that
commodity traders in Asia shift hundreds of millions of US dollars
per trade based solely on trust and the verbal commitment of their
Hawala arrangements are used to avoid customs duties, consumption
taxes, and other trade-related levies. Suppliers provide importers
with lower prices on their invoices, and get paid the difference via
Hawala. Legitimate transactions and tax evasion constitute the bulk
of Hawala operations. Modern Hawala networks emerged in the 1960's
and 1970's to circumvent official bans on gold imports in Southeast
Asia and to facilitate the transfer of hard earned wages of
expatriates to their families ("home remittances") and their
conversion at rates more favourable (often double) than the
government's. Hawala provides a cheap (it costs c. 1% of the amount
transferred), efficient, and frictionless alternative to morbid and
corrupt domestic financial institutions. It is Western Union without
the hi-tech gear and the exorbitant transfer fees.
Unfortunately, these networks have been hijacked and compromised by
drug traffickers (mainly in Afganistan and Pakistan), corrupt
officials, secret services, money launderers, organized crime, and
terrorists. Pakistani Hawala networks alone move up to 5 billion US
dollars annually according to estimates by Pakistan's Minister of
Finance, Shaukut Aziz. In 1999, Institutional Investor Magazine
identified 1100 money brokers in Pakistan and transactions that ran
as high as 10 million US dollars apiece. As opposed to stereotypes,
most Hawala networks are not controlled by Arabs, but by Indian and
Pakistani expatriates and immigrants in the Gulf. The Hawala network
in India has been brutally and ruthlessly demolished by Indira
Ghandi (during the emergency regime imposed in 1975), but Indian
nationals still play a big part in international Hawala networks.
Similar networks in Sri Lanka, the Philippines, and Bangladesh have
also been eradicated.
The OECD's Financial Action Task Force (FATF) says that:
"Hawala remains a significant method for large numbers of businesses
of all sizes and individuals to repatriate funds and purchase
gold.... It is favoured because it usually costs less than moving
funds through the banking system, it operates 24 hours per day and
every day of the year, it is virtually completely reliable, and
there is minimal paperwork required."
(Organisation for Economic Co-Operation and Development
(OECD), "Report on Money Laundering Typologies 1999-2000," Financial
Action Task Force, FATF-XI, February 3, 2000, at
Hawala networks closely feed into Islamic banks throughout the world
and to commodity trading in South Asia. There are more than 200
Islamic banks in the USA alone and many thousands in Europe, North
and South Africa, Saudi Arabia, the Gulf states (especially in the
free zone of Dubai and in Bahrain), Pakistan, Malaysia, Indonesia,
and other South East Asian countries. By the end of 1998, the overt
(read: tip of the iceberg) liabilities of these financial
institutions amounted to 148 billion US dollars. They dabbled in
equipment leasing, real estate leasing and development, corporate
equity, and trade/structured trade and commodities financing
(usually in consortia called "Mudaraba").
While previously confined to the Arab peninsula and to south and
east Asia, this mode of traditional banking became truly
international in the 1970's, following the unprecedented flow of
wealth to many Moslem nations due to the oil shocks and the
emergence of the Asian tigers. Islamic banks joined forces with
corporations, multinationals, and banks in the West to finance oil
exploration and drilling, mining, and agribusiness. Many leading law
firms in the West (such as Norton Rose, Freshfields, Clyde and Co.
and Clifford Chance) have "Islamic Finance" teams which are familiar
with Islam-compatible commercial contracts.
II. HAWALA AND TERRORISM
Recent anti-terrorist legislation in the US and the UK allows
government agencies to regularly supervise and inspect businesses
that are suspected of being a front for the ''Hawala'' banking
system, makes it a crime to smuggle more than $10,000 in cash across
USA borders, and empowers the Treasury secretary (and its Financial
Crimes Enforcement Network - FinCEN) to tighten record-keeping and
reporting rules for banks and financial institutions based in the
USA. A new inter-agency Foreign Terrorist Asset Tracking Center
(FTAT) was set up. A 1993 moribund proposed law requiring US-based
Halawadar to register and to report suspicious transactions may be
revived. These relatively radical measures reflect the belief that
the al-Qaida network of Osama bin Laden uses the Hawala system to
raise and move funds across national borders. A Hawaladar in
Pakistan (Dihab Shill) was identified as the financier in the
attacks on the American embassies in Kenya and Tanzania in 1998.
But the USA is not the only country to face terrorism financed by
In mid-2001, the Delhi police, the Indian government's Enforcement
Directorate (ED), and the Military Intelligence (MI) arrested six
Jammu Kashmir Islamic Front (JKIF) terrorists. The arrests led to
the exposure of an enormous web of Hawala institutions in Delhi,
aided and abetted, some say, by the ISI (Inter Services
Intelligence, Pakistan's security services). The Hawala network was
used to funnel money to terrorist groups in the disputed Kashmir
Luckily, the common perception that Hawala financing is paperless is
wrong. The transfer of information regarding the funds often leaves
digital (though heavily encrypted) trails. Couriers and "contract
memorizers", gold dealers, commodity merchants, transporters, and
moneylenders can be apprehended and interrogated. Written, physical,
letters are still the favourite mode of communication among small
and medium Hawaladars, who also invariably resort to extremely
detailed single entry bookkeeping. And the sudden appearance and
disappearance of funds in bank accounts still have to be explained.
Moreover, the sheer scale of the amounts involved entails the
collaboration of off shore banks and more established financial
institutions in the West. Such flows of funds affect the local money
markets in Asia and are instantaneously reflected in interest rates
charged to frequent borrowers, such as wholesalers. Spending and
consumption patterns change discernibly after such influxes. Most of
the money ends up in prime world banks behind flimsy business
facades. Hackers in Germany claimed (without providing proof) to
have infiltrated Hawala-related bank accounts.
The problem is that banks and financial institutions - and not only
in dodgy offshore havens ("black holes" in the lingo) - clam up and
refuse to divulge information about their clients. Banking is
largely a matter of fragile trust between bank and customer and
tight secrecy. Bankers are reluctant to undermine either. Banks use
mainframe computers which can rarely be hacked through cyberspace
and can be compromised only physically in close co-operation with
insiders. The shadier the bank - the more formidable its digital
defenses. The use of numbered accounts (outlawed in Austria, for
instance, only recently) and pseudonyms (still possible in
Lichtenstein) complicates matters. Bin Laden's accounts are unlikely
to bear his name. He has collaborators.
Hawala networks are often used to launder money, or to evade taxes.
Even when employed for legitimate purposes, to diversify the risk
involved in the transfer of large sums, Hawaladars apply techniques
borrowed from money laundering. Deposits are fragmented and wired to
hundreds of banks the world over ("starburst"). Sometimes, the money
ends up in the account of origin ("boomerang").
Hence the focus on payment clearing and settlement systems. Most
countries have only one such system, the repository of data
regarding all banking (and most non-banking) transactions in the
country. Yet, even this is a partial solution. Most national systems
maintain records for 6-12 months, private settlement and clearing
systems for even less.
Yet, the crux of the problem is not the Hawala or the Hawaladars.
The corrupt and inept governments of Asia are to blame for not
regulating their banking systems, for over-regulating everything
else, for not fostering competition, for throwing public money at
bad debts and at worse borrowers, for over-taxing, for robbing
people of their life savings through capital controls, for tearing
at the delicate fabric of trust between customer and bank (Pakistan,
for instance, froze all foreign exchange accounts two years ago).
Perhaps if Asia had reasonably expedient, reasonably priced,
reasonably regulated, user-friendly banks - Osama bin Laden would
have found it impossible to finance his mischief so invisibly.
AUTHOR BIO (must be included with the article)
Sam Vaknin ( samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International
(UPI) Senior Business Correspondent, and the editor of mental health
and Central East Europe categories in The Open Directory and
Until recently, he served as the Economic Advisor to the Government
Visit Sam's Web site at samvak.tripod.com