You might have heard the term “hawala” mentioned over the last few weeks. Maybe you saw it discussed while watching Amazon’s new Jack Ryan series, or maybe you’re more of a C-SPAN fan, and caught it a few times while watching the House Financial Services Committee’s Subcommittee on Terrorism and Illicit Finance hearing on September 7th on terrorist groups and their means of financing.
Hawala is a trust-based informal value transfer system (sometimes called parallel banking) that is widely used for perfectly legitimate purposes across parts of South Asia, West Africa, and the Middle East, and for facilitating transactions between communities there and people in other parts of the world, like Europe and North America. Its attraction to money launderers and terrorist financers is driven in large part by the difficulty of tracing the transactions and the limited means of regulatory enforcement. Notably, hawala is generally unlawful in countries like Pakistan and India, and in some U.S. states.
Hawala is similar in some respects to the Black Market Peso Exchange I mentioned in June. Most notably, neither tool involves the actual movement of funds—whether cash or wire transfer—across borders. Also like the Black Market Peso Exchange, hawala requires the money launderer or terrorist financer to place a great deal of trust in the intermediary—the money trader/peso broker in the case of the peso exchange and the hawaladar in the case of hawala.
As an example of how it works, suppose you want to get $10,000 to someone in a country with limited banking services. You need to get it done quickly but have concerns both about the exchange rate and the timing and reliability of other means of transfer. You might take your funds to a local hawaladar offering a more favorable exchange rate and faster service—typically a day or two. In exchange for a small commission, the local hawaladar would provide you with a password to send along to your intended beneficiary (perhaps by phone or email). The hawaladar will then give the same password to another hawaladar in the destination country. That hawaladar will have the funds ready to provide to the recipient.
The key thing here is the enormous degree of trust required. The two hawaladars may keep ledgers to ensure that the transactions between them ultimately balance out, or may compensate one another through under- or over-invoicing exported goods, or through other means. The person seeking to send the money entrusts it with the first hawaladar, and also has to trust that the second will deliver an equivalent amount to the intended recipient.
The Financial Crimes Enforcement Network (“FinCEN”) has a useful guide to hawala and the ways in which it can be used to launder money. Despite considerable uncertainty regarding the extent to which groups funding terrorism actually take advantage of it, the system offers several pluses for those pursuing that nefarious end: speed, anonymity, and extreme difficulty in tracing the transactions.