Nigel's Eyes

20240524 - Why are people fascinated by hawala?

Hawalla and similar systems might not be as old as the hills but they are close. Yet there are frequent breathless articles, social media posts and even academic papers by people who have just found out about it and think they are the first to discover it and its use in crime. There has been material on the subject for decades. Why does it not stick in the collective, systemic, memory?

In March 1997, Patrick Jost of FinCEN presented a paper to the Indian Law Institute's International Conference on Global Drugs Law in New Delhi, India.

Jost's paper was researched and demonstrated several things:

1. Hawala is ancient, predating "Western" banking by thousands of years (arguably, even hawala is predated by the Chinese system known as "the Chop"). It is known across the world by many names but they all, basically, revolve around the concept of trust (which is what differentiates it from The Chop which uses a method of verification rather than relying solely on the word of the dealers).

2. There is good and there is bad hawala. Jost refers to the bad as "black hawala" a term that has not been widely adopted as the entire concept of hawala has been denigrated and attempts have been made to make it illegal and/or to regulate it out of existence.

3. Black hawala is associated with black markets, corruption, smuggling, tax evasion and the transfer of both proceeds of criminal conduct and moneys destined for use in the commission of a crime.

In that paper, and a second one two years later written with Harjit Singh Sandu of Interpol in Paris, Jost drew on his extensive knowledge of international transfers in India and the subcontinent, some of which he had researched while based outside the USA investigating The Bank of Credit and Commerce International.

Jost also cited a wide range of work, including (fair disclosure) my 1996 book "How not to be a money launderer."

He summarised some of the mechanisms that are used by those who use - and some of those who conduct - hawala transactions.

So far as India and many other countries were concerned, the main reasons hawala thrived were:

a) the expatriation of proceeds of corruption

b) the facilitation of international trade by avoiding exchange control regulations

c) the transfer of lawfully obtained funds for the support of family members overseas (and vice versa).

Hawala is the transfer of value without the transfer of funds. It is an ancient concept but - and here readers will be surprised - it is exactly the model used by Western Union, Money Gram, all FinTech money transfer agents - and banks.

A sender hands to a transmitter a sum of money with instructions to pay it to a recipient. A message is sent by the transmitter to the receiver saying "please pay [e,g, 100 USD] to [a recipient who can be identified]". Historically, that would be money for collection or, sometimes, delivery. And a fee would be charged at both ends. Of course, the identity of the recipient would be confirmed by the receiver in some way. This is, in effect, a credit risk issue not a money laundering risk issue.

The Chop, hawala etc. rely upon the receiver having funds on hand or on call because the transmitter retains the deposit and the receiver pays the recipient out of his own funds. The actual money does not move. The system relies on counter-trade i.e. that in a future transaction the transmitter and the receiver swap roles and therefore a set-off can be applied or on a periodic settling where balances are calculated and the balance paid.

This, anyone familiar with the mechanics of banking will know, is exactly how banking works - it's the basis of a clearing and settlements system. It was the failure of this system, when moneys used for overnight deposits between banks, dried up that was the proximate cause of the global financial crisis in 2007. The gig was up: there was no money, there was only a belief in the infallibility of currencies.

Hawala is a banking service and historically, confidentiality was the norm in banking.

Hawala is conducted by "hawaladars" - they are not "hawalas" as even the FATF has erroneously described them. In the example above, the transmitter and receiver are hawaladars.

So, once the mystique is stripped away, hawala is easy to understand.

Why is it so disparaged?

It wasn't - until the world became interested in, in particular, international money flows. Governments who controlled their money through exchange control found that hawala was used to circumvent those controls and, therefore, affected the money supply within a country.

The real fascination started in the 1980s when it was discovered that banks based in and around, Africa and the Middle East were actively facilitating informal value transfers, as hawala-type systems are collectively known.

Jost drew attention to the fact that hawala etc. are used for both legal and illegal purposes and he drew attention to some of the methods that are used in settlement i.e. to make the money flowing between hawaladars for settlement purposes appear to be taking place in the ordinary course of trade.

He addressed for example, under-and-over invoicing schemes in which goods are shipped but the invoice value is misstated and asset smuggling, in particular gold. As with all sensible and intelligent people, he didn't feel the need to create a name for the conduct and so the silly "trade-based money laundering" moniker was not on the horizon.

The paper contains a review of the very important Jain case. Jain was a hawaladar to the stars and senior members of government. Jail was unusual - he kept a diary and all this transactions were recorded. The discovery brought about the collapse of the then government and Jail was jailed. But, later, after Jost's papers were published, despite the very, very clear evidence in the trial, Jain's conviction was overturned and he was freed. And the money that had been transferred out of India? It was lost in the international banking system so the senders effectively got to keep it.

Jost drew attention to the following "what is illegal in one jurisdiction may not be illegal in another" and it remains a problem today where there are inconsistent definitions of those crimes to be regarded as predicate crimes and, even, if some conduct is not recognised as illegal at all.

The papers are in my private collection. There is no permission to reproduce.