20041007 In Hot Pursuit of Terrorist Funds

Now, for a final topic, let me turn to alternative remittance systems and alternative fund raising techniques.

First alternative remittance systems.

I cannot recommend strongly enough a book called Lords of the Rim by Stirling Seagrave. In it he does not mention money laundering or organised crime even once. Yet the whole book, which is about the Chinese Diaspora is in fact a history of money laundering and international commercial and financial networks. Similar developments have taken place in most cultures over time but as the Chinese started it some 4,000 years ago I think we can say that they invented gunpowder, paper and money laundering. The Chinese system is called The Chop but in these post 11 September 2001 days, we all call it by its middle eastern name of hawala.

It’s ten years since I first did research into the use of hawala as a money laundering mechanism and what I found then was that it was widely used for international money transfers in a wide range of commercial dealings and also as a means of payment used by foreign workers to remit money to their families quickly, cheaply and easily, often using their own dialect when dealing with a hawaladar.

For like the Chinese described in Seagrave’s book hawala works on cultural lines. Indeed, Seagrave describes how clan-relationships have survived hundreds of years with continuing relationships between the speakers of different dialects, often from a very small district within a region of China continuing until today to colonies right around the world. He also describes how merchants in the north of China developed the Chop to send their wealth to Canton and Shanghai because the northern rulers had a habit of deciding they should simply confiscate the wealth of the merchants who could, of course, just make more.

Hawala -type systems are very simple: a person wants to send money to his family. So he goes to a hawaladar near his home and pays the money plus the fee for both ends of the transaction. The hawaladar sends a message using whatever medium he has available to a hawaladar near to the recipient. The recipient goes to his local hawaladar and is given the money. At some time in the future, the hawaladars settle up. What we know is that hawaladars have long term working relationships with each other, they will find novel ways of settling up so that they do not put money into banks or carry cash around the world.

But they are widely abused by criminal gangs and by terrorists. They are equally widely used by legitimate businesses and even NGOs to get funds between two points where there is no effective or efficient banking system.

From our perspective the issue is that hawala-type systems do not leave a paper trail. Unlike a bank, such systems are more or less invisible. They operate from corner shops, from money changers, even – in one Hong Kong case – a little old woman who ran a chop business from her tiny flat with the aid of a fax machine.

So where such systems are used, because the money does not touch the financial system, there is no hope of identifying it using normal channels. And hawaladars tend to retain their money in cash, even if they run another business. The deposit and withdrawal of lots of cash would raise questions so they don’t do it.

Incidentally, in 1998 I asked the Financial Action Task Force why they took no steps in relation to hawala. In essence their decision was that it did not feature on the radar of their member countries.8