Asia Times: Global Economy


	June 14, 2002	atimes.com

Global Economy

War on terror targets ancient cash transfer system
By N Janardhan

DUBAI - It is banking with a difference: funds are transferred without any paper trail, and there are no accounts, checks, signatures or automated teller machines to deal with. But it is faster and cheaper than conventional systems, and finds access to places in the world where even post offices find it hard to operate. Rooted entirely in human trust, the hawala (Arabic for transfer) system funnels huge amounts of money every year from the Persian Gulf region to different parts of the world, from Asia to Africa.

Dubbed the "poor man's bank" or "Eastern Union" (as opposed to Western Union), it caters mostly to low-income laborers and migrant workers who send their remittances home to remote villages that have no established banking systems.

"The advantage of hawala is that money is delivered the next day to my house, which no bank in the world can do," Mohammed Khan, a taxi driver from Pakistan, says in an interview. "A bank draft takes 15 days before it can be purchased, posted, deposited and cleared," Khan explains, adding that another difficulty with banks is their requirement of maintaining a usually high mandatory minimum balance in accounts.

The exchange rate is a factor, too. "For Pakistan, it is now Rs16.28 to the [United Arab Emirates] dirham at the bank. But the hawala operators are offering Rs16.50," explains Khan. Though that difference is negligible, it sometimes varies between 6 and 10 percent.

Since this informal system of money transfers assures the anonymity of the parties involved, it is often also a handy means for deceitful businessmen who misuse it and wish to evade taxes, engage in money-laundering or hide the details of the recipients and the use of funds. It is in this light that the system has received international attention in recent months.

For instance, the US government charged that chief terror suspect Osama bin Laden's al-Qaeda network transferred funds through the hawala - and the UAE was cited as a transit point from where most of the money spent by the people behind the September 11 terror attacks was transferred.

But such is the importance of the hawala in the economies of South Asia, Africa and the Gulf that the UAE refused to bow to Western pressure to do away with the system. Instead, the UAE government has launched a crackdown on suspect money and decided to set up a licensing and supervisory system.

"We are in the process of devising a system for monitoring and licensing hawaladhars (hawala brokers). Within one and a half months, the system will be finalized," central bank governor Sultan Bin Nasser Al Suwaidi said at a news conference on Monday.

A recent conference of financial experts called for hawala to be subject to "effective but not overly restrictive regulation" to prevent its misuse by criminals. More than 300 delegates from regulatory bodies, law-enforcement agencies, international institutions, banks and moneychangers attended the conference, which offered a chance to blow up "some of the myths that have grown up, particularly in the West", about the way the hawala system operates in the region.

Hawala agents today usually function out of moneychanger bureaus or travel agencies that act as their legitimate front offices. But hawala is said to have existed several centuries earlier as a way for Arab merchants to avoid being robbed while traveling. As these routes expanded to South Asia, the practice caught on.

Hawala flourishes particularly during times of political upheaval and economic uncertainty. For instance, during the 1947 partition of India and Pakistan, currency exchange between the neighboring countries was banned, so the hawala system stepped in to fill the gap. In the 1980s, hawala was allegedly used to help fund the mujahideen fighting the Soviets in Afghanistan.

A more recent example, according to the Washington Post, was how, just as the United States and its allies launched their military campaign in Afghanistan last year, the ruling Taliban and al-Qaeda network sent couriers with bars of gold and bundles of dollars across the border into Pakistan. Millions of dollars were then transferred to the Gulf through hawala and subsequently channeled to different parts of the world to reach other members of the network, according to the newspaper.

Mohammed al Muhairi, a banker in the UAE, says hawala is not an illegal conduit for money transfers, but believes it is open to abuse. "What the system does is arbitrage - making profit out of a situation where there is a mismatch in currency rates. The system also thrives because of relatively closed economies in the Indian subcontinent and the Middle East and the taxation policy."

Because it meets the needs of the most diverse users, any attempt to ban the hawala system is extremely unlikely to succeed, Suwaidi points out. Instead, efforts should ensure that "the system can be used by those who have legitimate reasons for doing so and that those who seek to abuse the system for illegal transactions are identified and stopped by authorities", he says.

The UAE's central bank has set up a 12-member financial intelligence unit to monitor and analyze suspicious transactions. Likewise, money-exchange houses have been directed to record details of people transferring more than 2,000 dirhams (US$550).

In the first few months after the September attacks in the United States, the bank froze the assets of 14 people and institutions suspected of having links with terrorist groups and illegal financial activities.

Muhairi argues that actually, most of the money-laundering begins in the United States and Europe and comes back to the drug dealers in Asia. "Why don't we then consider closing down all those banks? You don't put a fence around a 100,000-hectare farm to stop the horse bolting from the paddock; you put a gate at the paddock first," he says.

The truth, however, is that stricter anti-money-laundering laws all over the world since the September attacks are bound to make hawala operations difficult, says Muhairi. But given the popularity of the system and few or no complaints of people disappearing with the money in transit, hawala may remain the poor person's favorite banking mechanism for a long time to come.

(Inter Press Service)