As Arab banks try to stop illicit money transfers, the ancient 'hawala' network keeps the criminal channels open
By Paul Cochrane in Beirut
The Independent on Sunday 11 February 2007
Hi-tech attempts to stop the flow of finance to terrorist organisations in the Middle East have been stymied by a system of money transfer that dates back to the eighth century.
In the wake of the attacks on 11 September 2001, Washington pushed Arab financial institutions to crack down on illicit money transfers and implement regulations stipulated by the OECD's Financial Action Task Force (FATF) - an international body overseeing initiatives to combat money laundering and terrorism.
Arab central banks and financial institutions were quick to adopt FATF recommendations so that they could continue dealing with Western banks and compete on the global market.
The Middle East North Africa-FATF (MENA-FATF), established two years ago, claims illicit activity has declined by 90 per cent.
But with tighter regulations on banks, criminals are returning to the use of the hawala system of moving money from country to country.
Money is transferred through a network of hawala brokers, or hawaladars. A customer approaches a broker in one city and provides a sum of money to be transferred to a recipient in another, usually foreign, city. The broker who has received the money calls his counterpart in the recipient's city, providing instructions on the disposal of the funds and promising to settle the debt at a later date.
The method relies entirely on the honour of the brokers and no records are produced of individual transactions.
"What happens now does not go through financial institutions or banks; it's smuggled or goes via the hawala system," said Masood Safar Abdulla, the compliance manager at the Commercial Bank of Dubai.
The ancient hawala system is popular with the Gulf's massive expatriate Asian labour force as a cheap way of sending money home, estimated to run to billions of dollars a year.
Although much of the money transferred is legitimate, a drug bust by the Italian police late last year connected several Pakistanis with a Dubai-based Indian who received money through his informal bank to channel funds to drug cartels and arms dealers.
The incident is a single example of how dirty money could be laundered via the hawala system, and has put pressure on countries to improve regulation of alternative remittance systems. "The fact that MENA-FATF is organising a conference on hawala shows it is more serious about the issue," said Michel Nassif of World-Check, a British company that runs an intelligence database on financial risk.
But even if central banks can bring the hawala system under control, large sums of ready cash are being transported around the Middle East, eased by the region's lack of transparency.
"The most troubling spot is Dubai," said a source at a regional central bank. "There is a lot of cash coming in and out. If you look at the construction boom, it doesn't make sense: are these new skyscrapers really economically viable? That is a big indicator of money laundering."
Some money invested in UAE real estate is allegedly from Russian and Indian individuals. But how much is being laundered is anyone's guess. "Who can measure it? We know it is going on and we are not doing enough. UAE says it is, but it is a convenient system for everyone," the source said.
Another banking executive in the region said: "MENA-FATF is not very effective and governments are paranoid about financial transparency."
Iraq is considered a particular problem for regulators, with cash flowing in and out of the country to be laundered or to fund insurgents. "A lot of terrorist financing is going on in Iraq; how else are they being funded?" the central bank source said.
Incidents of money laundering connected to Iraq abound, with one source giving the example of an Iraqi-Lebanese businessman "cleaning" Kuwaiti money in Azerbaijan for an Iranian client to fund Muqtada al-Sadr's Mahdi army in Baghdad.
Mr Nassif said the Middle East needed peace and stability before illicit funding could be curbed. "The more turmoil in the region, the more regulations will not be implemented."