The role of hawala in the Islamic culture. A way to avoid crime financing. EXTENDED ABSTRACT
Introduction: Hawala is an informal payment method typical of Islamic finance widely considered system. It is completely based on trusted non-bank networks that may use in the money transfer process the banking system ad as a portion of the transfer process itself. The objective of the research is to analyze Hawala case-study focusing on the reasons behind the choice of this particular payment method to transfer money undercover mostly everywhere and to everyone, analyzing possible solutions to let this unchecked flow of money emerge. However, there is still little literature and not enough sensitivity on the particular topic, which is the reason why the Hawala case-study is supposed to give a new point of view on the research field of payment methods.
Since 9/11, investigations into the al-Qaeda financial network has led to several notable successes in the United and Europe. Much this achievement in the United States has resulted from strengthening the financial investigatory powers of domestic law-enforcement agencies and coordinating through the Treasury Department's new Foreign Terrorist Asset Tracking Center. These efforts are already proving useful in uncovering large-scale drug-trafficking and money laundering operations. They have also helped reveal important information on terrorist groups, particularly operating in the West, it seems that those efforts are actually not properly effective or stronger enough to fight against that problem. Something more must be done
Financial investigators tracking al-Qaeda assets rely heavily on data and paper trails from commercial banks and financial regulators in pursuing and investigating leads. Such data have involved the tracing of wire transfers between suspected hijacker Mohammed Atta and Shaykh Said of Dubai, believed to be one of Osama bin Laden's key financial operatives. Unfortunately, these efforts have achieved little success to date in reaching the core of the network.
The problem is that many of the terroristic organization's funding mechanisms — like its cells — are small and inconspicuous, often using a traditional Muslim method of money exchange called Hawala.
The purpose of this research project is understanding, in its complexity and variety, the Hawala method used both for legal and illegal purposes all around the world. The research will focus on the reasons behind the choice to use Hawala method to transfer money undercover mostly everywhere
and to everyone. Analyzing possible solutions to this unchecked flow of money, will also try to explain its effective impact into real economy and shadow economy.
Framework: The Hawala system is a money transfer method based entirely on trusted non-bank networks that may banking system as a portion of the transfer process. It may consist of entirely legal or illegal transactions. The word “Hawala” means “transfer” in Arabic. In some contexts, the word “Hawala” is used synonymously with “trust”, " usually to express the personal connection between participants and the informal nature of transactions that are not formally documented. In essence, Hawala is a transfer or remittance from one party to another, without use of a formal financial institution such as a bank or money exchange and is, in this sense, an “informal” transaction.
A typical transaction often involves an expatriate remittance. For example, an expatriate Pakistani worker in the UAE wishes to send money back home. To do this he goes to an intermediary, the Hawaladar, to arrange the transfer. He makes payment in dollars or other convertible currency. The Hawaladar in the UAE contacts a counterpart in Pakistan, who makes payment in rupees to the remitter’s family or other beneficiary. Obviously, some network of family or connections among Hawaladars is required to make such a system work on a large-scale and ongoing basis.
It is important to note that, although the remitter in this case wished money to be sent to a distinct location, no money actually crossed the border physically and no money necessarily entered the conventional or official banking system (unless of course the Pakistani recipient had decided to place it there). The transaction rests upon single communication between Hawaladars and is often not recorded or guaranteed by a written or formal contract.
The trust between the two Hawaladars secures the debt and allows the debt to stand with no legal means of reclamation. There is an implicit guarantee on payments, however, because a broken trust would result in community ostracism constituting economic suicide for the Hawaladar.
Typically, poorer individuals use the Hawala system to take advantage of its low cost and fast delivery. For the blue-collar worker who transfers a monthly stipend off $100, the unofficial hawala is a far cheaper way to send money hack home than the official banking system, at a rate of around 1% percent of the amount transferred. Because of its low overhead costs, hawala provides a more favorable market exchange rate than the official one. In short, the economic attraction of hawala to the customer is usually the speed, low cost and reliability of the system compared to the use of established financial institutions: banks, money exchanges, Western Union, Money Gram and Other providers of this service.
The system is ideal for an use in isolated localities, like the tribal areas of Pakistan and Afghanistan, where formal financial institutions are rare. Hawaladars (those that operate “Hawala”) often run parallel businesses other than money transfer, particularly currency exchange, travel agencies or telephone shops.
Although Hawala is mostly used for legitimate funds transfers, anonymity and minimal documentation have also made it vulnerable to abuses by individuals and groups transferring funds to finance illegal activities.
Methods: Hawala, according to Council of European Union, is a category of financial services or remittance under Money or Value Transfer Service (MVTS). In case of non-compliance with the regulatory requirements applicable to MVTS (laid out in the Anti-Money Laundering Directives and the Payment Services Directive), Hawala activity should be considered illegal. It is important that Hawaladars are encouraged to register as such and to clearly understand their obligations. Simultaneously, supervisory authorities should monitor these activities for any signs of informal financial services outside of current regulations. Particular Hawala networks are created to serve exclusively criminal needs, by placing layering criminal money and paying the equivalent value on demand elsewhere in the world.
To study Hawala and its implications in European economy, the chosen method of investigation will include:
the systematic review of the literature and the study and Official documents made by International and European financial and political institutions;
observation of legislative evolutions on control and contrast of suspicious transactions and cash flows;
case study analysis, OSINT and databases;
the use of semi-structured face-to-face interviews with operators belonging to the UIF of Bank of Italy, EUROPOL and INTERPOL experts and also with representatives of Banks and Islamic Community.
The study will use the qualitative methodology and has the objective of knowing the perception of the situation and the possible procedures that could be used in order to achieve the target of reducing Hawala transactions giving alternatives to clients and also to Islamic people, who have the need of such a particular system, in order to let them to make regular remittances to their families living is territories without any banking facilities in kilometers.
For instance, it could be also useful to use the wider payment methods literature to deepen in the topic of Hawala, together with those of Islamic finance payment system.
Results: The review of the literature will allow obtaining a clearer vision on the scientific state of art in the field of alternative remittances systems and hawala role in Islamic culture. As a matter of fact, we need to know what kind of researches had already been done in order to understand, on the one hand, which actual systems could be suitable with Islamic finance rules (Shariaa law) and, on the other hand, what are the cultural motivations behind the choice of this instrument instead of others. The results of this review will be able to make better understand of the operative context and will allow to refine the methodology of analysis. The interviews conducted will show a varied picture of the actual challenges that institutions are facing day after day in monitoring Hawala-related remittances and cash flow and how Islamic community and Italian bank system feel about the problem. Moreover, interviews and data analysis will give us a clearer view on possible future outlines also in order to avoid crimes such as terrorism financing, fictitious bank interposition and other bank-related crimes, money laundering and organized crime-related crimes.
The expected results of the research could be summarized as follows:
analysis of Hawala both from an economic and social point of view, trying to understand the motivation underlying the use of the particular financial tool and imaging new solutions that banking institutions could put in place to attract legal Hawala flows of money isolating those illegal;
follow the transposition into law of the indications given by Austrian Delegation and Europol, on of September 2017, to Standing Committee on Operational Cooperation on Internal Security1, having a clearer vision of the legal operative framework of Europe in this sector; 1
- Implement the recommendations included in the Supernational Risk Assesment to the 4th Anti Money Laundering Directive
Ensuring HOSSPs apply correctly the requirement of the Payment Service Directive;
Limit cash transactions in the EU and the obligation to declare cash entering or leaving the EU;
500 euro banknotes and 200 Euro banknotes: an accelerate withdrawal of the 500 euro banknote from the market would help to disrupt criminal cash business
- Money laundering through HOSSPs to become a serious criminal offence and the individuation criteria should be expanded to anyone and not limited only to the money launderer
- Consider Public Private Partnerships: creation of safer corridors and JMLITS (Joint Money Intelligence Task Forces)
be able to formulate effective intervention proposals to limit the negative aspects of using Hawala.
The research will not be simple. because tracing the money flow of a Hawala network is virtually impossible and transactions happen mostly in noncooperative jurisdictions and moreover legislation are not effective in this specific sector, but, with no doubt, it will he thrilling because it will hopefully give me the chance to chance to explore a new world both from a cultural and financial point of view and because of my operative framework in fighting against terrorism. In fact, it is reasonable to believe that, knowing better the phenomenon and using the right tools, the illegal use of Hawala could be considerably limited preventing that this money transfer method will be used yet as common and unpunished enrichment and livelihood method for terrorists and organized crime.
Key-words: hawala, Islamic finance, shariaa-compliant, remittance system, crime financing, money transfer
Sites and books references The Economist
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How Hawala money-transfer schemes are changing
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http://www.statewatch.org/news/2017/sep/eu-council-austria-europol-hawala-money-transfer-crime-12005-17.pdf
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