Following the 11 September attacks in the United States, governments have sought ways to stop the flow of money to terrorist organizations. That effort has thrown a spotlight on "hawala," an informal banking system common throughout Asia and used to transfer billions of dollars every year. RFE/RL correspondent Kathleen Knox takes a look at some of the problems associated with controlling a banking system that doesn't leave a paper trail.
Prague, 16 October 2001 (RFE/RL) -- Since last month's suicide hijackings in the United States, governments have been trying to follow the terrorists' money trail in the hope that it will lead to the terrorists themselves.
In the fight on the financial front, millions of dollars have been frozen and tighter financial regulations are being urged in an effort to choke off the terrorists' source of funding.
That may be possible in countries where banks and other financial institutions keep accurate records of money transfers. But what if some transfers -- even those that cross the globe -- leave no trail?
That is the puzzle posed by hawala, a centuries-old informal money transfer system common throughout Asia and with brokers around the world.
In cities all over South Asia, anyone can visit their local hawala broker -- or hawaladar -- hand over a sum of cash and have it transferred almost immediately to someone on the other side of the world, who is furnished with the right password or slip of paper.
The system -- based on trust -- is popular as a convenient and inexpensive way to send money to places often out of the reach of conventional banking systems. For many people, it may be the only way to send money home to families living in villages.
But since it leaves little or no record, its critics say it is open to abuse by criminals. Pakistani officials say that more than $5 billion enters their country through hawala networks each year.
A U.S. State Department report last year said this system is a key factor in money laundering and other financial crimes committed in and associated with South Asia.
The report said Dubai, India, and Pakistan form a "hawala triangle" responsible for significant international money-laundering activities that go far beyond South Asia.
The current war against terror has put hawala under new scrutiny, as it offers an easy way for terrorists -- and possibly those behind the 11 September assaults -- to cover their financial tracks.
Monica Bond is a London-based forensic and investigative accountant with experience in money-laundering probes.
She says it's difficult to pinpoint to what extent the hawala system is used for legitimate transactions and how often for illegal transactions.
"Certainly, it is used purely as a matter of convenience -- an informal system of moving money between, typically, relatives -- [but] it's very much open to abuse because of, particularly, a lack of any paper trail. So it's a very easy system to be used by money launderers."
Bond says hawala could be used as one of several money-laundering vehicles.
"Typically in my experience in investigating major money-laundering matters it would be one of many [methods]. Typically a money launderer does not use just one scheme or one system, but uses a whole set of techniques and vehicles to move money around and to hide and disguise the trail. So yes, it could well be used but it wouldn't be used exclusively."
Mads Andenas is director of the British Institute of International and Comparative Law. He attended a recent symposium on economic crime at Cambridge University.
He says it's true that the informal systems are open to abuse. But he adds that efforts to choke off terrorist funding should first focus on ordinary banks, as these provide the channels for most terrorist money, and not hawala or even Islamic charities -- two of which in Britain have been suspected of having terrorist links.
"It's a detraction to some extent to hit the weaker ones in the picture, to look at charities or aid organizations or other forms of institutions or associations which deal with people from the third world. One has to focus on, first of all, clearing up our own banking system. And if you're going to deal with these informal systems, one way of doing that is to make sure there are real alternatives, that you can sit in London and transfer money back to your family somewhere in an African or Asian state. That may today be rather difficult."
Andenas says the EU member states should put their own houses in order first.
"Still, within the European Union you have member states strongly resisting any form of transparency or any form of reporting obligations and any form of breaking through extremely well-developed banking secrecy. Luxembourg was a problem for a long time. In most recent years it's been Austria, they're still not giving up [their] opposition to these points. That's where we in Europe have to focus."
He says that candidate countries hoping to join the European Union should come under scrutiny in this respect too.
"There's also a problem with some of the applicant countries where banks see an opportunity to go in and get a market share by offering more banking secrecy than member states can offer after the directives that have been adopted. One has to be tough with one's own banking system and with those of the countries around us. When we've cleared that up we can start looking at these informal systems. But that has to be the order. It's much too complacent to say we'll look at these informal systems and [not] meet the real challenge, which is to clear up our mainstream banking systems."
Andenas says the informal systems such as hawala do deserve to come under scrutiny too, but that their shortcomings can also provide a convenient diversion.
"It's a very happy solution for many involved if you can look at these informal systems and see that they have technical violations of reporting requirements, that they have been involved in transferring money where there's been some smaller tax frauds. All this is there. I'm sure in informal banking systems, and in the next weeks or months, there will come out things which are not as they should be. But I think it's disproportionate to focus on that."
Both Bond and Andenas say that banks can help by getting to know their clients better so as to be able to spot suspicious or out-of-the-ordinary transactions.
Prague, 16 October 2001 (RFE/RL) -- Since last month's suicide hijackings in the United States, governments have been trying to follow the terrorists' money trail in the hope that it will lead to the terrorists themselves.
In the fight on the financial front, millions of dollars have been frozen and tighter financial regulations are being urged in an effort to choke off the terrorists' source of funding.
That may be possible in countries where banks and other financial institutions keep accurate records of money transfers. But what if some transfers -- even those that cross the globe -- leave no trail?
That is the puzzle posed by hawala, a centuries-old informal money transfer system common throughout Asia and with brokers around the world.
In cities all over South Asia, anyone can visit their local hawala broker -- or hawaladar -- hand over a sum of cash and have it transferred almost immediately to someone on the other side of the world, who is furnished with the right password or slip of paper.
The system -- based on trust -- is popular as a convenient and inexpensive way to send money to places often out of the reach of conventional banking systems. For many people, it may be the only way to send money home to families living in villages.
But since it leaves little or no record, its critics say it is open to abuse by criminals. Pakistani officials say that more than $5 billion enters their country through hawala networks each year.
A U.S. State Department report last year said this system is a key factor in money laundering and other financial crimes committed in and associated with South Asia.
The report said Dubai, India, and Pakistan form a "hawala triangle" responsible for significant international money-laundering activities that go far beyond South Asia.
The current war against terror has put hawala under new scrutiny, as it offers an easy way for terrorists -- and possibly those behind the 11 September assaults -- to cover their financial tracks.
Monica Bond is a London-based forensic and investigative accountant with experience in money-laundering probes.
She says it's difficult to pinpoint to what extent the hawala system is used for legitimate transactions and how often for illegal transactions.
"Certainly, it is used purely as a matter of convenience -- an informal system of moving money between, typically, relatives -- [but] it's very much open to abuse because of, particularly, a lack of any paper trail. So it's a very easy system to be used by money launderers."
Bond says hawala could be used as one of several money-laundering vehicles.
"Typically in my experience in investigating major money-laundering matters it would be one of many [methods]. Typically a money launderer does not use just one scheme or one system, but uses a whole set of techniques and vehicles to move money around and to hide and disguise the trail. So yes, it could well be used but it wouldn't be used exclusively."
Mads Andenas is director of the British Institute of International and Comparative Law. He attended a recent symposium on economic crime at Cambridge University.
He says it's true that the informal systems are open to abuse. But he adds that efforts to choke off terrorist funding should first focus on ordinary banks, as these provide the channels for most terrorist money, and not hawala or even Islamic charities -- two of which in Britain have been suspected of having terrorist links.
"It's a detraction to some extent to hit the weaker ones in the picture, to look at charities or aid organizations or other forms of institutions or associations which deal with people from the third world. One has to focus on, first of all, clearing up our own banking system. And if you're going to deal with these informal systems, one way of doing that is to make sure there are real alternatives, that you can sit in London and transfer money back to your family somewhere in an African or Asian state. That may today be rather difficult."
Andenas says the EU member states should put their own houses in order first.
"Still, within the European Union you have member states strongly resisting any form of transparency or any form of reporting obligations and any form of breaking through extremely well-developed banking secrecy. Luxembourg was a problem for a long time. In most recent years it's been Austria, they're still not giving up [their] opposition to these points. That's where we in Europe have to focus."
He says that candidate countries hoping to join the European Union should come under scrutiny in this respect too.
"There's also a problem with some of the applicant countries where banks see an opportunity to go in and get a market share by offering more banking secrecy than member states can offer after the directives that have been adopted. One has to be tough with one's own banking system and with those of the countries around us. When we've cleared that up we can start looking at these informal systems. But that has to be the order. It's much too complacent to say we'll look at these informal systems and [not] meet the real challenge, which is to clear up our mainstream banking systems."
Andenas says the informal systems such as hawala do deserve to come under scrutiny too, but that their shortcomings can also provide a convenient diversion.
"It's a very happy solution for many involved if you can look at these informal systems and see that they have technical violations of reporting requirements, that they have been involved in transferring money where there's been some smaller tax frauds. All this is there. I'm sure in informal banking systems, and in the next weeks or months, there will come out things which are not as they should be. But I think it's disproportionate to focus on that."
Both Bond and Andenas say that banks can help by getting to know their clients better so as to be able to spot suspicious or out-of-the-ordinary transactions.
