Hawala: An underground haven for terrorists or social phenomenon?

Crime, Law and Social Change

Volumn 44, Issue 3, 2005, Pages 277-299

  Razavy, Maryam ^a  

^a UNIVERSITY OF ALBERTA   (Canada)

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[No Author keywords available]

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EID: 33745761768     PISSN: 09254994     EISSN: 15730751     Source Type: Journal    
DOI: 10.1007/s10611-006-9019-3     Document Type: Review

References (99)

1. George Bush, quoted in Kathleen Day. (2001). "Hawala Cash Outlets Investigated As Source For Terror Funds," United States in Action, November 7. Available online: http://www.unitedstatesaction.com/islam-money-changing. htm.
2. There are suggestions that aid agencies had warned authorities that cutting-off financial support from oversees families to those in Somalia would "aggravate an already-desperate situation, increasing the prospects of famine" ("US crackdown on hawalas has severe consequences for Somalis," [2001]. Transnational Communities Programme, Issue 16: Oct-Dec. Available online: http://www.transcomm.ox.ac.uk).
3. Hamid Kanaan [pseudonym], personal interview, Edmonton, Alberta, July 15, 2005.
4. For example, in response to the closure of several hawala firms, Somali communities both at home and abroad accused the U.S. of "acting with anti-Islamic bias" ("Somalia: Remittances and US Action," [2001]. Africa Policy E-Joumal, November 13. Available online: http://www.africaaction. org/docs01/som0111.htm).
5. Mohammed El-Qorchi. (2002). "Hawala: How Does this informal funds transfer system work and should it be regulated?" Finance and Development, December, Vol. 39: 4, p. 31-32;
6. Patrick Jost and Harjit Singh Sandhu. (2002). "The Hawala Alternative Remittance System and its Role in Money Laundering" Interpol Documents. October 2;
7. Roger Ballard. (2003). "A background report on the operation of informal value transfer systems (Hawala)." Available online: http://www.art.man.ac.uk/CASAS/pdfpapers/hawala.pdf.
8. Nikos Passas. (2003). "Informal Value Transfer Systems, Terrorism and Money Laundering: A Report to the National Institute of Justice." Northeastern University;
9. Nikos Passas. (2005a). "Informal Value Transfer Systems and Criminal Activities." Boston / The Hague, College of Criminal Justice, Northwestern University, WODC;
10. Samuel Munzele Maimbo. (2003). The Money Exchange Dealers of Kabul. World Bank Working Paper. No. 13; The International Bank for Reconstruction and Development. Washington, U.S.A.;
11. Sharryn Aiken and R. Cheran. (2005). "The Impact of International Informal Banking in Canada: A Case Study of Tamil Transnational Money Transfer Networks (Undiyal), Canada/Sri Lanka." Law Commission of Canada. Available online: http://www.lcc.gc.ca/research_project/cheran-xi-en.asp.
12. A good example of this type of ignorant policy-making was recently highlighted in an article about Iranian-Americans wishing to send money back home to relatives. It appears that law-makers continue to neglect that U.S. sanctions against Iran make it very difficult to send money through U.S. banks, as many of these banks refuse to wire the money in the fear of violating any sanctions laws. Ultimately, many Iranian-Americans revert back to the hawala system to get the much-needed funds to families back home. Edward Hegstrom. (2003). "The World in Houston: Iranian Exiles in Quandry." Houston Chronicle, 5 May, p. 14.
13. Among the works that addresses these essential issues is Nikos Passas, "Informal Value Transfer Systems and Criminal Activities."
14. Another well-known example of an IFT organization is the Chinese 'chop,' 'chit,' 'flying money,' or 'flying coins' system.
15. Shane Harris. (2002). "Disrupt and Dismantle." Government Executive, February, Vol. 34: 2, p. 39-42.
16. M. Zahraa. (2000). "Characteristic Features of Islamic Law: Perceptions and Misconceptions." Arab Law Quarterly, Vol. 15, pp. 168-196.
17. Manuel Castells. (1996). "Informational Economy." The Rise of the Network Society. Oxford: Blackwell. Ch. 2.
18. I employ the terms 'hawala banking" and 'hawala systems' interchangeably throughout. They do not imply any differential meaning.
19. The era of modernization saw a rise of the nation-state, and with it a system of economics that reflected the sanctity of national boarders and laws. In the era of post-modernization there has been a decline in the concept of nation-state, together with a collapse in both time and space, particularly in terms of global financial transactions. What is interesting to note, however, is that while the West has been undergoing all of these changes, nontraditional banking systems in the East appear to have been practicing all along what the West has only now achieved. Common language, religion, and culture in many areas of the East always have allowed for great movement among regions, and always have facilitated a financial integration that superseded national boundaries. Many hawala systems view themselves as regional and communal entities as opposed to belonging to any particular nation, a current feature of the West's post-modernizatiton.
20. Passas, "Informal Value Transfer Systems and Criminal Activities" does note, however, that this commission fee can vary, depending on the clientele, but most of the literature that I have come across typically pegs the commission value at five percent.
21. Passas, however, notes that the duration of time that hawaladars hold on to records for monetary transactions varies depending on the transaction. See Nikos Passas (2004a). "Indicators of Hawala Operations and Criminal Abuse" Journal of Money Laundering Control. Vol 8:2;
22. and Nikos Passas (2004b). "Law Enforcement Challenges in Hawala-related Investigations" Journal of Financial Crime. Vol 12:2.
23. Matthias Schramm and Markus Taube. (2003). "Evolution and Institutional Foundation of the Hawala Financial System." International Review of Financial Analysis, December 12, pp. 405-420.
24. Gold, in particular, is a popular medium of exchange due to its religious and cultural connotations within the Middle East and India as well as its standard worldwide value. Reports indicate that both the Taliban and al-Qaeda often utilize gold over paper currency in conducting hawala transactions. As Douglas Farah (2004:113) points out in his analysis of financial networks of terror, U.S.-led forces occupying Afghanistan found al-Qaeda training manuals that described how the smuggle gold either on boats or on the body. Farah also points out that gold is valued over cash simply because cash is bulkier and thus, harder to transport (the same raw value) than gold. Farah (2004:116) describes gold as "the lifeblood of the [hawala] system." Douglas Farah. (2004). Blood from Stones: The Secret Financial Network of Terror. Broadway Books, New York.
25. For example, Western Union Canada charges approximately $54.00 (Cdn.) for an online transaction of a $500.00 (Cdn.) transfer to Iraq, $43.00 (Cdn.) for a cash transaction taken to a Western Union office. Not only is this rate far more than the amount a typical hawala dealer would charge, but also of equal importance is the fact that Western Union does not offer remittance services to all nations or localities. For instance, Western Union customers often cannot access nations such as Iran, or smaller villages and towns worldwide where remittance services are in high demand. http://www.westernunion.ca/info/osMoneyTransfer.asp. For more information on comparative costs see Nikos Passas (2005b). "Formalizing the Informal? Problems in the National and International Regulation of Hawala." Regulatory Frameworks For Hawala and Other Remittance Systems. International Monetary Fund Publication Services: Washington, D.C.
26. El-Qorchi, "Hawala: How Does this informal funds transfer system work and should it be regulated?"
27. Also see Passas, "Indicators of Hawala Operations and Criminal Abuse."
28. Passas, Indicators of Hawala Operations and Criminal Abuse Ibid, p. 33.
29. Under the 'fei qian' system, government officials in China issued certificates to merchants selling their wares in the capital. Upon returning home, merchants redeemed their certificates for cash. This system proved especially effective in averting highway robberies. Michele Wucker. (2004). "Remittances: The Perpetual Migration Machine" World Policy Journal, Volume XXI, No. 2, Summer, p. 38.
30. El-Qorchi, "Hawala: How Does this informal funds transfer system work and should it be regulated?"
31. United States Department of the Treasury Financial Crimes Enforcement Network. (1997). "Columbian Black Market Peso Exchange." FinCEN Advisory. Issue 9, November. Available online: http://www.fincen.gov/advisu9. pdf.
32. According to Roger Ballard, "A background report on the operation of informal value transfer systems (Hawala)" 3,
33. one of the earliest references to hawala banking is Abraham Udovitch's Partnership and Profit in Medieval Islam (Princeton, 1970). Using Egyptian scholar, Sarakhshi's legal commentary Al-Masbut, Udovitch argues that hawala appears to have been an ideal method of organizing long-distance trade in the eastern Mediterranean, the Red Sea, Mesopotamia, and Iran since the time of Medieval Islam.
34. Schramm and Taube "Evolution and Institutional Foundation of the Hawala Financial System" 406.
35. Schramm and Taube "Evolution and Institutional Foundation of the Hawala Financial System" 406. Ibid.
36. Richard Martin C. (ed.). (2004). Encyclopedia of Islam and the Muslim World: Volume 1 A-L. New York: Macmillan Reference USA, p. 195.
37. For example, various articles refer to hawala as "an informal Islamic banking network," Adam Cohen; Micheal Weisskopf; Adam Zagorin; and Bruce Crumley. (2001). "How Bin Laden Funds his Network." Time, October 1, Vol, 158, Issue 15, p. 63.,
38. "a traditional Muslim method of money exchange," Robert E. Looney. (2002). "Following the Terrorist Informal Money Trail: The Hawala Financial Mechanism" Strategic Insight, November 1, p. 1.,
39. and a "system of informal money transfers used in the Islamic world" Tysons Corner. (2001). "Bush Cites Crackdown on Money Networks That Work for 'Mass Murderers." CNN.com. November 7, p. 2. Available online: http://archives.cnn.com/2001/US/11/07/inv.freezing.assets.
40. H. Inalcik. (1971). "Hawala." The Encyclopaedia of Islam. Eds. B. Lewis, V.L. Menage, Ch. Pellat, and J. Schacht. Volume III H-IRAM. London: Luzac & Co., p. 283-285.
41. It seems fitting, however, to question the motives behind such 'commissions.' Some have pointed out that readily used labels in Islamic banking practices such as 'commission' simply disguise what is equivalent to pure interest (Timur Kuran. [1995]. "Islamic Economies and the Islamic Subeconomy." Journal of Economic Perspectives, Vol. 9 [4], p. 155-173). Still, many hawala dealers contest this idea, arguing that what they charge cannot technically be called interest, because they are charging a fee for a service that they are rendering. In their minds, that they must contact business associates, and incur overhead costs such as phones, faxes, travel, etc., validates the additional charge
42. (Bobby Afshar [pseudonym], personal interview, Edmonton, Alberta, July 15, 2004).
43. Prior to the emergence of Islam, both the Jewish and Christian faiths already denounced the practice of usury. The Hebrew Bible as well as the Gospel of Luke describe this prohibition: "If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest" (Exodus 22:25) and "And if ye lend to them of whom ye hope to receive, what thank have ye? Even sinners lend to sinners, to receive again as much. But love your enemies, and do them good, and lend, never despairing; and your reward shall be great, and ye shall be sons of the Most High; for he is kind toward the unthankful and evil (Luke, 6:34-35). The Oxford Study Bible. Eds. M. Jack Suggs, Katherine Doob Sakenfeld, and James R. Mueller. New York, Oxford University Press, 1992.
44. M.S. Khan. (1986). "Islamic Interest-Free Banking" IMF Staff Papers. 33, pp. 1-27.
45. Koran. English. (1974). The Koran / translated with notes by N. J. Dawood .4th rev. ed. Harmondsworth; New York: Penguin Books, 2:275.
46. Koran. English. The Koran / Translated with Notes by N. J. Dawood .4th Rev. Ed. Ibid. 3:129.
47. Koran. English. The Koran / Translated with Notes by N. J. Dawood .4th Rev. Ed. Ibid. 2:278.
48. Koran. English. The Koran / Translated with Notes by N. J. Dawood .4th Rev. Ed. Ibid. 2:287.
49. Hadith consists of two parts, the actual oral tradition as well as the isnad, or the line of transmitters (authorities) through which the tradition was passed down to posterity. Among the collections considered by Muslims to be the most authoritative and precise (sahih) are those of al-Bukhari, Muslim, al-Tirmidhi, Abu Daud, al-Sijistani, al-Nasai, and al-Qazwini.
50. Charles Hamilton. (1975). The Hedaya or Guide - A Commentary on the Mussulman Laws. Pakistan: Sh. Muhammad Khalil for Premier Book House, p. 332.
51. It should be noted, however, that with the exception of the hadith Sahih Bukhari, other hadiths do not typically mention the specific term 'hawala' in reference to debt transference, and the discussions that do exist on debt transference in these works are brief.
52. The origins of Islamic trade and finance are traced back to verses of the Koran as well as the hadiths and sunnahs (practices of the prophet Muhammad) which in turn form the basis of Islamic law or shari'a.
53. Fiqh (literally an understanding of Islamic shari'a) is composed of the rulings of Islamic scholars and are meant to be used as binding guidelines for Muslim faithful. There are four major schools of Sunni fiqh (the Shafi'i, Hanafi, Maliki, and Hanbali) as well as one school (the Jafari) that is particular to the Shi'a branch. While these schools agree on the majority of broad religious rulings, small differences do exist.
54. Translated into English by the author from Ayatollah Abolghasem Khoie. (1973). Resaleh Tozih-al-Masael. 12th ed. Tehran: Lofti Publishers, p. 431-433.
55. Ibn Rushd. (1994). The Distinguished Jurists Primer - A translation of Bidayat Al-Mujtahid. Volume II, translated by Imran Ahsan Khan Nyazee. Reading. UK: Center for Muslim Contribution to Civilization: Garnet Publishing Ltd., p. 360.
56. (2005). Board of Istifta, Office of Grand Ayatollah Sistani. Letter to author.
57. Hamid Kanaan, personal interview.
58. Quoted in Menna Shiganguly. (2001). "A Banking System Built for Terrorism." Time (World). October 5.
59. Jost and Sandhu, "The Hawala Alternative Remittance System and its Role in Money Laundering" 6.
60. Sam Vaknin. (2003). "Hawala, or the Bank that Never Was." Available online: http://www.samvak.tripod.com/nm104.html p. 2.
61. "The Money That Leaves no Trace." (2005). El Pais - Herald Tribune. November 1 ; p. 1.
62. Freedman, Michael. (2005). "The Invisible Bankers; Terrorists, drug dealers and smugglers are using a global system as old as the Silk Road" Forbes. Vol. 1:5, p. 24A.
63. Secretary Paul O'Neill, quoted in Corner, "Bush Cites Crackdown on Money Networks That Work for 'Mass Murderers."
64. See, for example, Cohen, Weisskopf, Zagorin; and Crumley "How Bin Laden Funds his Network.";
65. Looney, "Following the Terrorist Informal Money Trail: The Hawala Financial Mechanism";
66. Corner "Bush Cites Crackdown on Money Networks That Work for 'Mass Murderers";
67. and Day, "Hawala Cash Outlets Investigated As Source for Terror Funds."
68. Hamid Kanaan, personal interview.
69. Afghanistan and Somalia would be two such examples.
70. "Cheap and Trusted." (2001). Economist. November 24, Vol. 361:8249, p. 71. This continuing existence of hawala banking amidst the formal banking sector also can be attributed, in part, to the growing number of services that hawala dealers offer clients. For example, one hawala dealer whom I interviewed believed that his clientele had grown since he started offering services in the areas of trade finance and deposit taking (in which clients made deposits not for investment purposes, but rather for safekeeping). In addition, many hawaladars now offer their clients such varied services as access to telephones, fax machines, and the Internet.
71. Abdul Muhammad [pseudonym], personal interview, Edmonton, Alberta, Aug 4, 2005.
72. Judy A. Benjamin, "Post-Taliban Afghanistan: Changed Prospects for Women?" UNCO, Afghanistan, February 2002, p. 7.
73. Worth noting, however, is that while the hawala system is susceptible to abuse, it is not alone in its vulnerabilities. In a recent report on hawala commissioned by the Government of Canada, the authors assert that the hawala system should "not be seen solely as services to simply finance terrorists" and that "it can be argued that conventional banking institutions have offered much more efficient mechanisms for the transfer of large sums of money for illegal services." Cheran and Aiken, "The Impact of International Informal Banking on Canada: A Case Study of Tamil Transnational Money Transfer Networks (Unidiyal), Canada / Sri Lanka."
74. A distinction exists between those hawala transactions where the source of funds is legitimate, and those where the sources and intents of the transactions, are illegitimate. Traditionally, the terms "white hawala" and "black hawala" denote, respectively, legitimate and illegitimate (specifically money laundering) transactions, Jost and Sandhu "The Hawala Alternative Remittance System and its Role in Money Laundering."
75. A1999 article in Institutional Investor Magazine identified 1100 Pakistani money brokers, some with single transactions pegged at the 10 million (U.S.) dollar mark. Vaknin, "Hawala or the Bank that Never Was" 2.
76. Spiegel-Online, 2001,
77. cited in Schramm and Taube "Evolution and Institutional Foundation of the Hawala Financial System" 406.
78. Scott Baldauf, (2002). "The War on Terror's Money - India's Six Month Investigation Offers Lessons on Fighting Underground Banking." Christian Science Monitor, July 22:1.
79. Schramm and Taube "Evolution and Institutional Foundation of the Hawala Financial System" 409.
80. William Wechsler, quoted in, Cohen, Weisskopf, Zagorin, and Crumley, "How Bin Laden Funds his Network" 63.
81. El-Qorchi, "Hawala: How Does this informal funds transfer system work and should it be regulated?" 33.
82. See Passas "Indicators of Hawala Operations and Criminal Abuse."
83. For example, not only is hawala banking permitted in Afghanistan, but also finance minister Ashraf Ghani has declared that he will employ the hawala system in order to ensure that funds will reach their expected destinations in a safe and timely manner. Swaminomics, Swamina Than, Anklesaria Aiyar. (2005). 'The Virtues of Hawala." The Times of India. Available online: http://timesofindia.indiatimes.com/articleshow/47389641 cms.
84. "Contributions by the Department of the Treasury to the Financial War on Terrorism - Fact Sheet." (2002). United States Treasury Department, September. Available online: http://www.treas.gov/press/releases/reports/ 2002910184556291211.pdf.
85. Office of the Press Secretary, Government of the United States of America. (2001). "Terrorist Financial Network Fact Sheet-Shutting Down the Terrorist Financial Network." November 7, Press Release. Available online: http://www.whitehouse.gov/news/releases/2001/11/20011107-6.html.
86. John W. Fountain. (2001). "A Midwestern Community: Somalis in Minneapolis Worry About Effect of Money-Transfer Raids." New York Times, Nov. 9, B7.
87. Western Union. Interview by author, phone interview. June, 09, 2004, University of Alberta: Edmonton, Alberta.
88. "Somalia: Remittances and US Action."
89. Somalia: Remittances and US Action Ibid, p. 54.
90. Surprisingly, despite all of the allegations that the terrorist attacks of 9/11 were financed through hawala banking systems, investigators revealed that the alleged terrorists successfully moved $325,000 through 14 U.S. SunTrust Bank accounts. The alleged made the transactions openly and without any identity theft. The hijackers made up social insurance numbers and used their own driver's licences to open the bank accounts, and utilized valid credit cards and bank cards to make ATM withdrawals. National Commission on Terrorist Attacks upon the United States. (2004). "Monograph on Terrorist Financing (Staff Report to the Commission)." Washington: National Commission on Terrorist Attacks upon the United States.
91. "Monograph on Terrorist Financing (Staff Report to the Commission)" 82.
92. Abolhassan Khourie [pseudonym], personal interview, Edmonton, Alberta, August 09, 2005.
93. Alleged terrorists Mohammed Atta, Dawood Ibrahim, Mohammed Ansari, and Zacharias Moussaoui are a few of the individuals implicated in utilizing hawala banking methods. Harris, "Disrupt and Dismantle" 40;
94. N. S. Jamwal. (2002). "Hawala - The Invisible Financing System of Terrorism." The Day After News Magazine of India, Dec. 2:1. Available online: http://www.dayafterindia.com/dec2/hawala.html.
95. Winer quoted in Vincent J. Schodolski. (2001). "Terror Networks Rely on 'Hawala: Ancient System Under Scrutiny." Chicago Tribune, Sep. 26, p.10.
96. Quoted in, Farah "Blood from Stones: The Secret Financial Network of Terror."
97. The Abu Dhabi Declaration on Hawala (May 2002) set forth the following principles: "Countries should adopt the 40 recommendations of the Financial Action Task Force (FATF) on Money Laundering and the 8 Special Recommendations on Terrorist Financing in relation to remitters, including Hawalas and other alternative remittance providers; Countries should designate competent supervisory authorities to monitor and enforce the application of these recommendations to Hawalas and other alternative remittance providers; Regulations should be effective but not overly restrictive; The continued success in strengthening the international financial system and combating money laundering and terrorist financing requires the close support and unwavering commitment of the international community;" and "The international community should work individually and collectively to regulate the Hawala System for legitimate commerce and to prevent its exploitation or misuse by criminals and others. U.A.E. Central Bank. (2002). "Abu Dhabi Declaration on Hawala." Abu Dhabi May 16, 2002. Abu Dhabi.
98. See Passas, "Informal Value Transfer Systems and Criminal Activities" for a discussion of interesting policy conclusions.
99. "Fears Over U.S. Hawala Crackdown" (2004). BBC News. Feb. 06. Available online: http://news.bbc.co.uk/go/pr/fr/-/1/hi/world/middle_east/ 3463683.stm.