The Hawala Myth in the Financial War on Terror

Afghanistan

LT Dan Hancock

Overview

• Since 9/11 U.S. counter-terror efforts to disrupt al-Qaeda’s finances have been imprecise at best; at worst they have had profound negative effects

• Why is hawala such a great threat?• Is there a need for strict regulation or

elimination?• What is its complicity with “terrorist

financing”?

Introduction

• Since 9/11, why hawala poses a strategic threat has been the source of much debate among policy-makers and scholars

• Strategic banter became policy with the publishing of EO13224 which greatly expanded the ability of the USG to freeze, block and disrupt the transfer of terrorist funds

• The debate is driven by the underlying assumption of policy makers in the wake of 9/11 that hawala is a fundamental piece of al Qaeda’s financial repertoire; this assumption is false

Schools of Thought

• Policy Makers’

• Media

• Financial Academia

Background: What is hawala?

• Hawala is an alternative or parallel remittance system. However, this can be a misleading label since it often is the only viable financial mechanism

• In Arabic, hawala literally means “transfer”• In a larger sense, it is often associated with any

informal money exchange system that operates outside of a formal financial sector

• Primary use is to facilitate sending remittances home from abroad

Historical Roots

• Developed along historical trade routes• Has different names in China, India,

Thailand, Phillipines, etc but essentially the same

• Most prevalent in the Middle East and South Asia

• Viewed as very Islamic. Highly favored because of ethnic and religious reasons in the Middle East/South Asia

Mechanics

• Essential idea is to transfer money without physically transporting funds

• Difficult to track for investigators and regulators

• Hawala activity both licit and illicit is generally layered

Mechanics Cont’d

• In its simplest form, hawala has four parties: a customer, an intermediary (hawaladar), a hawaladar in the receiving city/region/state, and the recipient

Attractiveness

• Speed and Efficiency

• Limited Options for Remittances and aid

• Cultural and Ethnic factors

• Criminal Elements

• Anonymity

Mistrust and Reform: An Analysis of Hawala in Afghanistan

• Four primary financial underpinnings to Afghanistan-based terrorism: 1) assistance from sympathetic states (including the US during the anti-Soviet jihad) 2) Arab contributions and abuse of the zakat 3) narcotics and drug trafficking and 4) hawala

Hawala in Afghanistan

• Has always played an important role in Afghanistan, but especially in recent decades

• After 20 plus years of conflict the formal sector is virtually non-existent; particular acute during the Taliban’s reign

• Hawala was the only reliable service in play; trusted by the Afghan people

Mapping Hawala

• Size: Colossal– 80-90% of all economic activity– Al Qaeda used it? Yes! So did everyone else.

No other choice in Afghanistan!– Only a few hundred hawaladars

• Volume:– Billions.– Typical transactions can be from $10,000-

$1Million

Afghan Hawala Traits

• Affordable and quick

• Hawala myth: Paperless/No Records

• International Organizations

• In most cases the only viable option

• Long-stretch

By Comparison the Formal Sector…

• A weak history• As of 2005 only 13 licensed banks• Slowly increasing services and numbers of banks but the

overall effect at the moment for the average citizen is limited; it is even problematic in Kabul (ATM example)

• Formal sector having to be revamped from the ground up

• Measurable but small progress– Central Bank growing– Electronic connectivity– New currency– Outside/international banks opening in Kabul at least– Kabulbank example

Other Reforms

• Microfinancing• New laws (with the help of the U.S.

Treasury Department) especially regarding regulation of hawala and hawaladars

• Bottom Line: Still very limited interaction between hawala and the formal sector simply because of physical location. Banks are nowhere near the bazaars and markets where hawaladars operate.

The Nexus of Drugs and Hawala…and Terror?

• A problem of epic proportions• The Convergence of poppy seeds and bullets

– Opiate cultivation has increased dramatically in the south and east of Afghanistan, the heart of the insurgency

• Opiate production now correlates less with poverty lines (diminished in the North) and more with Taliban/al Qaeda/insurgent areas (South/border)

• Opiate cultivation, production and distribution are a staple ingredient of the insurgency and Taliban efforts, presumably other jihadists

The Nexus

• Considerable risk to hawala as a natural nexus has developed in its system

• Exploitation of Pashtun interdependent economy that stretches across the border with Pakistan

• Thompson identified and interviewed a cadre of “drug hawaladars” in her seminal study. “Terror” hawaladars? Maybe.

Terror and Hawala

• The nexus between drugs and hawala is palpable. Terror is the more difficult connection

• High probability of similar small group of hawaladars willing to deal with terrorists

• Drug and terror networks are more duplicitous than imagined

Amit Sharma, Special Advisor to the Deputy Secretary of Treasury

“The broad answer is, yes folks (hawaladars) agreed that they did ‘know’ their customers, and therefore did indeed know much of the time what the business they were facilitating included… that said, everyone I spoke with did admit that facilitating terror (and other illicit activity for that matter) was not a good thing, and that they did want to find solutions that they could shove out this business but do so in a way that still retained their access to the larger pool of funds and the market…. I do think there is a distinction drawn between facilitating narcotics and terrorism – absolutely – and we need to remember that financially facilitating some of the drug trade is interpreted different ways… especially if some count their livelihood that way.”

“In the wake of the events of September 11, 2001, and the subsequent international efforts to combat money laundering and the financing of terrorism, abstaining from regulation or supervision of the informalfinancial system is no longer a tenable option.”-Samuel Maimbo, World Bank

Regulatory and Reform Models: The Way Forward

• Current Models– Must consider unique characteristics of

Afghan people and financial system– Regulations constructed for Dubai aren’t

going to work or be welcomed by Afghans

• Fear of regulation by hawaladars

• Self-regulation works

• Hybrid model?

Challenges to Reform

• Cultural and religious landscape of Afghanistan• Literacy• Lack of input from hawaladars: government must co-opt

the hawaladars, namely the Kabul Executive Committee• Pre-set suspicion of authority: there is no strong

inclination for hawaladars to emerge from the shadows much less be dragged out by their feet.

• Even if there is some drug/terror money, most hawaladars would not “out” that transaction or person. There is too much at stake. Poor business practice due to the interdependence already discussed.

“Several hawala dealers commented on the fact that while the DAB had several open forums for discussion on the issuance of new regulations, the forums provided only limited opportunity for the engagement of the sector on the establishment of those regulations since DAB had substantially determined the nature of the regulations themselves prior to the forums, and in any case, only a few of the Kabul based dealers attended. As a result, incentives for compliance are not built into the legal framework nor supported by credible enforcement. Therefore, there has been little to no cooperation with regard to the development and implementation of the present regulatory and supervisory framework or compliance.” – Amit Sharma

Conclusion

• U.S. Regulatory Efforts– FATF/Abu Dhabi Hawala conferences,

EO 13224, USA PATRIOT

• What’s the Alternative?

• First and foremost any regulation must engage the hawaladars of Afghanistan

• Must address literacy

• The U.S. Treasury Department has totally failed to see social and cultural realitieson the ground. • Ironically, after the fall of the Taliban, the Bush Administration found out

the hard way that they had to rely on the same hawala network utilized by terrorists inorder to move money in Afghanistan or to get anything done. A little historicalperspective can go a long way. The complete cultural ignorance by the U.S. governmentto the importance of the hawala system in Afghan or Muslim society was completelyavoidable. There are numerous historical examples and colonial narratives that illustratethe deep meaning of hawala to the Afghan way of life. This sort of improper framing ofthe issue has plagued U.S. foreign policy in the region and certainly its approach tohawala, too.

• “During the decades of conflict, trust in the government was progressively erodedand transposed to kinship, ethnic, and other social connections.”• Afghans are ethnically aligned first and foremost, then they are Muslims, and last of all they

consider themselves Afghan citizens. • Once more, the gravitational pull of these ties is monumentally forceful. These social and ethnic

ties bind the Afghan people, not the central government. It is in these contexts that the Afghan people want to conduct their business, not under the perceived interference of Kabul or the U.S. Treasury Department’s regulations.

Final Thought

• There seems to be a belief that universal regulation, blunt tools such as the PATRIOT ACT, EO 13224, or those offered in the FATF special recommendations are going to ubiquitously act as penicillin for the incongruities and faults of hawala networks throughout the world. This is false and a disastrous cognitive pretext for reform.

• It is a mistake to over-regulate hawala, and to the extent that it must be regulated, the greatest cultural deftness must be employed.

• If the U.S. is to curb Islamic “extremism” and jihadism in its “war on terror” than it absolutely cannot afford to continue offering an olive branch to moderate Muslims even as it wields a blunt and deadly financial hammer in the other hand.

Questions?