Alternative Remittance Systems HAWALA

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Alternative Remittance Systems HAWALA
Presented by Muhammad Baasiri
US-MENA PSD Chairman
SIC Secretary
Financial Operations of Money Laundering Organized
by EUROMED
Amman - Jordan July 17-20, 2006
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History of Hawala

• Hawala originated in India.
• It was born before the spread of Western banking
  in the 19th and 20th centuries.
• It has developed based on specific ethnic,
  cultural or historical factors.

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Definition of Hawala

• Involves the transfer of values between
  countries, outside of the legitimate banking
  system, an called underground, parallel or
  shadow banking.
• Refers to mechanisms or networks of people
  facilitating the transfer of funds or value
  outside the regulated financial channels.

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Hawala Terms

• Hawala Urdi word meaning reference , it is
  based on trust.
• The Arabic root h-w-l means transfer.
• Hawaladar refers to hawala operator.

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How Does Hawala Work?

• One-way stream
• Sender provides money in cash.
• Funds remitted to the Hawaladar counterpart
  through the Hawaladars bank account(s).
• Hawaldar in the recipient country receives and
  disburses funds to the beneficiary

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How Does Hawala Work?

• Two-way stream
• The sender visits a local Hawaladar and provides
  the money in cash.
• The local Hawaladar contacts his counterpart in
  the beneficiarys country with instructions to
  handover the amount to the beneficiary.
• The two brokers rely on netting to settle their
  balances (reciprocal payments,physical movement
  of money, invoice manipulation, etc)

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Reasons for Existence

• Lack of access to formal banking system (high
  costs, lack of experience with institutions
  outside cultural traditions).
• Repatriation of immigrant income.
• Circumvent restrictive exchange controls and
  regulations.

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Why Do people Use Hawala?

• Cultural,political,social reasons.
• Quick service lower fees.
• Favorable exchange rate.
• Avoid taxes.
• High degree of anonymity

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Why is Hawala attractive?

• Hawala is attractive for ML/TF because it
• Leaves no paper trail which impedes law
  enforcement investigations.
• Is not subject to external auditing, control, or
  supervision by regulatory authorities.
• Transfers money outside the formal chain

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INTERNATIONAL INITIATIVES
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Reason of Concern

• Hawala has been exploited by drug traffickers,
  smugglers and illicit arm dealers.
• Indications that Hawala have had a role in moving
  terrorist related funds.

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FATF Response (SR VI)

• Requires countries to take measures to ensure
  that persons or legal entities that provide a
  service for the transmission of money through an
  informal value transfer system are licensed and
  subject to all the FATF Recommendations that
  apply to banks and non-bank financial
  institutions.

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FATF GUIDELINES

• Registration Declare business existence to
  competent authorities.
• Licensing Obtain permission from competent
  authorities to legally operate.
• N.B Requirements enabling regulatory and
  competent authorities to be aware of the
  existence of the Hawaladar

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FATF GUIDELINES cont.

• Customer Identification.
• Record Keeping Requirement.
• Suspicious Transaction Reporting.
• Compliance Monitoring
• Register or License
• Maintain list of agents
• Comply with FATF rec.
• Sanctions For Non-Compliance

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REGIONAL INITIATIVES
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MENAFATF Committee on Hawala

• Convened in Jordan on Sep 11, 2005.
• Participants countries were Jordan, UAE,
  Algeria and Egypt.
• Issued a working paper that includes risks
  associated with Hawala and recommended best
  practices for regulating it.
• Paper adopted by MENAFATF member countries during
  the 2nd plenary held in Beirut on Sep 26-27,
  2005.

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Best Practices

• Licensing or registration of businesses providing
  a service of money or value transfer system.
• Conduct educational and compliance oriented
  programs in order to advise these businesses of
  the necessity of licensing, registration and
  reporting requirements.
• Provide the public with a list of
  registered/licensed businesses providing money
  transfer services

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Best Practices

• Inform law enforcement authorities of the risks
  associated with the informal value transfer
  system.
• Target informal transfer service businesses
  through mass media in order to inform them of the
  necessity of licensing and registration.
• Countries are recommended not to impose
  restrictive procedures to encourage
  licensing/registration of money service
  providers.

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Best Practices

• Subject money service providers to effective AML
  requirements
• Customer due diligence.
• Record-keeping.
• Reporting suspicious transactions.
• Compliance monitoring.

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THANK YOU