Hawala is under-the-table financing and unregulatable
Hawala is the most important money-movement mechanism you've never heard of. Through it, hundreds of millions of dollars move worldwide annually on just a verbal say-so or a handshake. It allows expatriate workers to send money back to their families and terrorists to launder money throughout both the civilized and the uncivilized world. The components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships or regional affiliations. Unlike traditional banking or even the 'chop' system, hawala makes minimal (often no) use of any sort of negotiable instrument. Transfers of money take place based on communications between members of a network of hawaladars, or hawala dealers.
Considering the quiet, backroom nature of hawala, how (if at all) do you think that governments can control and regulate the hawala system? How can we deny terrorists the funding they receive through hawala?
In my humble opinion, governments cannot control the hawala system of finance. This is because of its ethereal and extra-national nature. In background, hawala is "an alternative or parallel remittance system. It exists and operates outside of, or parallel to 'traditional' banking or financial channels" (Jost and Sandhu 2000). Hawala predates traditional banking. It is a system based not on record-keeping but rather on trust.
For example, when Abdul wants to send $5,000 back to his brother in Karachi, he simply gives Yasmeen, a hawaladar, the cash. She calls Ghulam and tells him to give over the equivalent amount of rupees. Ghulam then is visited by Abdul's brother, who picks up his $5,000 worth of rupees, minus negligible fees. At a later time, Yasmeen sends Ghulam the original $5,000 along with the rest of the month's transactions. Hawala is an informal money transfer system which "works through connections. These connections allow for the establishment of a network for conducting the hawala transactions" (Ibid.).
Hawala has many advantages over using the traditional money exchange and transfer networks. First, it is slightly cheaper. In the above example, Abdul was able to transfer more money than he would have been able to through traditional means. Lack of overhead and integration with legitimate business activities (i.e. import/export) makes hawala cheaper than bank-based money transfer.
Second, hawala is faster. A bank draft sent from North America to South Asia can take upwards of a week, while a hawala transfer can take two days maximum. Thanks to the trust factor, two hawaladars can affect a transaction in the time it takes to converse on the phone.
Thirdly, reliability is higher under hawala than with traditional banking. According to Interpol,
Complex international transactions, which might involve
the client's local bank, its correspondent bank, the main
office of a foreign bank and a branch office of the recipient's
foreign bank, have the potential to be problematic. In at
least once instance reported to the authors, money for a
large commercial transaction (money being sent from the
United States to South Asia) was lost 'in transit' for several
weeks while trying to conduct such a transaction. When the
bank located the money, it was returned to the customer.
He enlisted the services of a local hawaladar, who was
able to complete the transaction in less than a day.
Fourthly, the lack of a paper trail means the transaction can happen without entanglements. Banks require social security numbers and picture identification before transactions can be completed. Anonymous remittances, without government identification and oversight, are performed without a second thought under hawala. This also allows for tax evasion -- if remitted through official channels, the tax man may visit the remitter, the receiver, and the hawaladar. Keep it off the books, and the IRS (or its equivalent) will be none the wiser.
This system is how al Qaeda prepares itself financially for attacks. The 9/11 Commission cites, "After Bin Ladin relocated to Afghanistan in 1996, al Qaeda made less use of formal banking channels to transfer money, preferring instead to use an informal system of money movers or bulk cash couriers" (4). This informal, off-the-books network of money transfer makes it impossible to regulate and oversee. This dark, unregulated funding allows terrorists to perpetrate carnage like that seen on 9/11:
Hawala is destined to continue: "Informal networks of charitable foundations, madrassas, hawalas, and other mechanisms will continue to proliferate and be exploited by radical elements" (Flynn 2007). Hawala does not leave a paper trail, nor does it use traditional means of moving funds. Due to its elusive nature, there is no effective way to ban or even regulate the hawala system.
Sources:
9/11 Commission. "Monograph on Terrorist Financing."
Flynn, Dan. "Mapping the Global Future: Report of the National Intelligence Council’s 2020 Project." Strategic Insights, Volume VI, Issue 4, June 2007.
Jost, Patrick M. and Sandhu, Harjit Singh. "The hawala alternative remittance system and its role in money laundering." Interpol General Secretariat, January 2000. Internet: Link, accessed 2 Jul 2007.