Hawala

hawala

Hawala [ha-wah-lah] (Arabic: ‘transfer’) is an informal value transfer system based on the performance and honor of a huge network of money brokers, primarily located in the Middle East, North Africa, the Horn of Africa, and the Indian subcontinent, operating outside of, or parallel to, traditional banking, financial channels, and remittance systems.

The system is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century. Today, hawala is probably used mostly for migrant workers’ remittances to their countries of origin.

Hawala is mentioned in texts of Islamic jurisprudence as early as the 8th century. It later influenced the development of the agency in common law and in civil laws, such as the ‘aval’ in French law and the ‘avallo’ in Italian law (a joint commitment to payment of an obligation in favor of a creditor or beneficiary). The terms were themselves derived from ‘hawala.’ The transfer of debt, which was ‘not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions,’ was due to the large extent of the ‘trade conducted by the Italian cities with the Muslim world in the Middle Ages.’

The concept of agency was ‘an institution unknown to Roman law” as no ‘individual could conclude a binding contract on behalf of another as his agent.’ In Roman law, the ‘contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him.’ On the other hand, Islamic law and the later common law, ‘had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general.’

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or ‘hawaladars.’ It is the transfer of money without actually moving it. In fact, a successful definition of the hawala system that is used is ‘money transfer without money movement.’ In a typical transaction a customer gives money to a hawaladar in exchange for a password. The recipient of funds gives that password to another hawaladar in exchange for the funds (minus a small commission). The first hawaladar is honor bound to remunerate the second.

The unique feature of the system is that no promissory instruments are exchanged between the 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. Trust and extensive use of connections, such as family relations and regional affiliations, are the components that distinguish it from other remittance systems.

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 (such as goods, services, properties, transfers of employees, etc.), 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 any 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 unprofitable 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 environment in places such as Afghanistan, Yemen, 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.

On a similar note, a ‘hundi’ is a financial instrument that evolved on the Indian sub-continent. Hundis were used in trade and credit transactions as well as remittance instruments for the transfer of funds. In the era of bygone kings and the British Raj hundis served as travellers cheques. They were also used as credit instruments for borrowing and as bills of exchange for trade transactions. Technically, a hundi is an unconditional order in writing made by a person directing another to pay a sum of money to a person named in the order. Being a part of an informal system, hundis now have no legal status and were not covered under the Negotiable Instruments Act, 1881. They were mostly used as cheques by indigenous bankers.

While Hawala is legal all US States, officials assert it can be used to facilitate money laundering, avoid taxation, and move wealth anonymously. After the September 11 terrorist attacks, the American government suspected that some hawala brokers may have helped terrorist organizations to transfer money to fund their activities. The ‘9/11 Commission Report’ has since confirmed that the bulk of the funds used to finance the assault were not sent through the hawala system, but rather by an official inter-bank wire transfer to a SunTrust Bank in Florida, where two of the conspirators had opened a personal account. However as a result of intense pressure from the U.S. authorities, widespread efforts are currently being made to introduce systematic anti-money laundering initiatives on a global scale, to better curb the activities of the financiers of terrorism and those engaged in laundering the profits of drug smuggling.

Whether these initiatives will have the desired effect of curbing such activities has yet to be seen; although a number of hawala networks have been closed down and a number of hawaladars have been successfully prosecuted for money laundering, there is little sign that these actions have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers. Experts emphasize that the overwhelming majority of those who use these informal networks are doing so for legitimate purposes, and simply choose to use a transaction medium other than state-supported banking systems.

In 2001, the Bush administration froze the assets of Al-Barakat, a Somali remittance hawala company used primarily by a large amount of Somalian immigrants. Many of its agents in several countries were initially arrested, though later freed after no concrete evidence against them was found. In 2006 the last Al-Barakat representatives were taken off the U.S. terror list, though some assets remain frozen. In 2009, the Swedish branch of Al-Barakat was removed from the United Nations’ list of terrorist organizations; the company had been on the list for the past eight years, and had had its bank account funds frozen. According to the Swedish Public Radio broadcaster SR, the UN did not explain why it had elected to remove Al-Barakat from its terror list. However, it has been suggested that the recent change in the European Union’s position regarding the many organizations ‘that have been too easily included in the UN terror list’ might have influenced the UN’s position. Al-Barakat is now able again to access its bank account funds.

In 2010, the Kabul office of New Ansari Exchange, Afghanistan’s largest hawala money transfer business, was shuttered following a raid by the Sensitive Investigative Unit, the country’s national anti-political corruption vetted and trained by the US Drug Enforcement Administration (DEA), allegedly because this company could be involved in laundering profits from the illicit opium trade and moving the cash earned by Taliban through extortion and drug trafficking. Thousands of records were seized to dig into the movement of billions of dollars in and out of Afghanistan. There were links between the money transfers by this company and political and business figures and NGOs in the country, including relatives of President Hamid Karzai.

Several months later, Karzai took control of the taskforce that staged the raid, and another US-advised anti-corruption group, the Major Crimes Task Force. He ordered a commission to review scores of past and current anti-corruption inquests. Senior US officials viewed Karzai’s US advised move as an effort to protect those close to Karzai and the NGOs, in the process, to further the investigation into New Ansari. However, the hawala system in Afghanistan is also instrumental in providing financial services for the delivery of emergency relief and humanitarian and developmental aid for the majority of international and domestic NGOs, donor organizations, and development aid agencies.

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