Hawala

We are all aware of the recent unsuccessful attempt of Faisal Shahzad to car bomb Times Square in New York City during May of 2010.  Interesting and exciting as was the news story, what attracted my attention was a report, briefly touched on by the media, based on statements from the ensuing FBI and police investigation of the bomber’s alleged financial sources.  The confusing and apparent contra- dictions of the news story led to further research and this essay.

If the reader of the news reports had accepted the funding story without careful reading, he would believe that co-conspiritors had been taken into custudy in Boston, Pakistan and at least one other U.S. location.  All were identified as being part of the organization which financed Shahzad’s failed bombing attempt, but the FBI added one caveat:  While the identified group provided the financing, it was not clear that they were aware of what they were financing.  At first reading it appeared that the agents were more interested in helping the conspiritors with their defense than supporting the prosocuter’s case.  Something wasn’t right.  As it turned out, the agents were correct, but not to defend the terror- ists. 

The answer to the apparent contradictions is in an aged financial system dating to medieval times called hawala, a form of financial agency accepted under Islamic law in the field of contracts and general obligations.  In Wikipedia, hawala is described in today’s world as used mostly by migrant workers, primarily in South Asia, to return remittances to their countries of origin.  Wikipedia goes on to describe how hawala works:

“In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars.  A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city.  The hawala broker calls another hawala broker in the recipient’s city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.

“The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system.  As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment.  Informal records are produced of individual transactions, and a running tally of the amount owed by one broker to another is kept.  Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.

“In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates.  Generally, the funds enter the system in the source country’s currency and leave the system in the recipient country’s currency.  As settlements often take place without foreign exchange transactions, they can be made at other than official exchange rates.

“Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks.  Its advantages are most pronounced when the receiving country applies distortive exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is less complex (e.g. due to differences in legal environ-

ment in places such as Afghanistan, Yemen, and Somalia).  Moreover, in some parts of the world it is the only option for legitimate funds transfers, and has even been used by aid organizations in areas where it is the best functioning institution.

“Furthermore, the transfers are informal and not effectively regulated by governments, which are a major advantage to customers with tax, currency control, immigration, or other concerns.  In some countries, hawalas are actually regulated by local governments and hawaladars are licensed to perform their money brokering services.”

A normal and reasonable hawaladas commission is five percent, but may vary based on local circum- stances, special requirements of the transfer or additional fees due to regulation.  There is no interest.

There have been cases in the United States where particular money transfers under hawala were treated by the government as financial laundering and the brokers were prosecuted.            

In the current case, Shahzad received funds which he used for the failed Times Square bombing attempt.

The lack of a paper trail has complicated the issue and created more than one scenario, thus the FBI statement that the financing group may not have been aware of the planned use of the funds.

If the source of the funds was the Taliban, al Quida or any other terrorist organization and the flow of the funding from the terrorists to Shahzad can be legally established, the financial group now in custody will undoubtedly be brought to trial as co-conspirators.  However, if the lawyers for the financial group can successfully show that the receiving broker had no knowledge of the source or planned use of the funds, then the prosocuter’s case will be jeopardized and probably fail.  The lack of a paper trail makes for a difficult prosecution.

However, it would appear that the exposure from the Shahzad prosecution could lead to Congress passing legislation regulating money transfers under hawala and possibly requiring the licensing of the hawaladars.

May 2010