The Hawala Myth in the Financial War on Terror

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The Hawala Myth in the Financial War on Terror

• Afghanistan
• LT Dan Hancock

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Overview

• Since 9/11 U.S. counter-terror efforts to disrupt
  al-Qaedas 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?

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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 Qaedas financial
  repertoire this assumption is false

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Schools of Thought

• Policy Makers
• Media
• Financial Academia

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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

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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

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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

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Mechanics Contd

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

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Attractiveness

• Speed and Efficiency
• Limited Options for Remittances and aid
• Cultural and Ethnic factors
• Criminal Elements
• Anonymity

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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

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

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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

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Afghan Hawala Traits

• Affordable and quick
• Hawala myth Paperless/No Records
• International Organizations
• In most cases the only viable option
• Long-stretch

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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

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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.

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The Nexus of Drugs and Hawalaand 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

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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.

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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

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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.

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• 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 informal
• financial system is no longer a tenable
  option.-Samuel Maimbo, World Bank

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Regulatory and Reform Models The Way Forward

• Current Models
• Must consider unique characteristics of Afghan
  people and financial system
• Regulations constructed for Dubai arent going to
  work or be welcomed by Afghans
• Fear of regulation by hawaladars
• Self-regulation works
• Hybrid model?

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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.

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• 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

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Conclusion

• U.S. Regulatory Efforts
• FATF/Abu Dhabi Hawala conferences, EO
  13224, USA PATRIOT
• Whats the Alternative?
• First and foremost any regulation must engage the
  hawaladars of Afghanistan
• Must address literacy

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• The U.S. Treasury Department has totally failed
  to see social and cultural realities
• on 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 in
• order to move money in Afghanistan or to get
  anything done. A little historical
• perspective can go a long way. The complete
  cultural ignorance by the U.S. government
• to the importance of the hawala system in Afghan
  or Muslim society was completely
• avoidable. There are numerous historical
  examples and colonial narratives that illustrate
• the deep meaning of hawala to the Afghan way of
  life. This sort of improper framing of
• the issue has plagued U.S. foreign policy in the
  region and certainly its approach to
• hawala, too.
• During the decades of conflict, trust in the
  government was progressively eroded
• and 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 Departments regulations.

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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.

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Questions?