In Defence of Hawala: Rethinking Regulation of Customary Banking

Author:Jacob W. Petterchak
1 In Defence of Hawala: Rethinking Regulation of Customary Banking
In Defence of Hawala: Rethinking Regulation of Customary
Banking
Jacob W. Petterchak
This article concerns the regulation of hawala in the United States under the existing financial services
regulatory environment and how the hawala system is not particularly suited to conforming to these
expectations. Originating in the Middle East, hawala is an ancient and highly decentralised system
of transferring money using two independent brokers called hawaladars. In more recent history, it has
gotten much bad publicity for the role hawala transactions play in financing terrorist operations,
facilitating tax evasion and frauds through trade based money laundering. It is very informal and
decentralized, making the hawala industry exceedingly difficult to regulate. Accordingly, few
hawaladars voluntarily comply with existing anti-money laundering, know your customer and
counter terror finance rules - let alone even follow standard principles of accounting. In an era of a
hyper-globalised financial system, a failure to accommodate alternative models of finance and banking
can have high costs on domestic institutions losing access to profitable frontier markets and even
higher social costs on developing economies losing lifelines to remittances they depend on. In spite of
this, there are a number of measures and policies that financial services regulators can implement that
will assist in bringing the hawala industry into greater compliance with the existing financial
regulatory programmes that apply to all money services businesses and financial institutions.
I. INTRODUCTION
Hawala is definitely not a household word for those of us in the West. Few here have ever
heard of it. Nor does it enjoy the sort of dominance it formerly enjoyed in the wider Middle East
and North Africa region where it was once the sole means of moving money across great distances.
It has been reduced in status to that of a sizable niche service. In many respects, hawala is the most
basic banking service available, and like most extremely b asic services, it has fallen victim to
innovations like drafts and electronic transfers. But some corners of the world haven’t been as
lucky in joining the global economy as others. Even with its steep decline in market share, hawala
thrives in the Persian Gulf and in diaspora communities where it serves an important economic
role in channelling remittances back home.
2 In Defence of Hawala: Rethinking Regulation of Customary Banking
This is the background to our current conversation. The real issue at stake with hawala isn’t so
much that an anachronistic financial service still competes with more modern alternatives, but that
it skirts consumer protections, state licensing and basic practices of good banking that are applied
at great c ost to the rest of this heavily-regulated industry. It is precisely for these reasons that
terrorist cells in particular have used the hawala network to fund cells abroad that carry out
attacks.
1
Being largely unregulated and outside the mainstream financial industry, it is very easy
to see how this is a weak spot in countering the finance of terrorism. Tax evasion and frauds are
also frequently tied to the hawala network for want of ordinary due diligence and a black market
culture that is all too willing to turn a blind eye to financial crimes.
The article seeks to address ways that the regulatory state can more easily accommodate
independent hawaladars and hawala businesses so that they move their operations out of the
underground economy and into the mainstream where there is a smaller risk of facilitating the
finance of terrorism and running afoul of the law. There are several key ways regulators at the
state and federal level in the United States can improve the regulatory regime to work b etter for
the hawaladars, their clients and the frontier markets where the global financial system does not
compete for business, leaving nothing but the hawala system.
II. THE HISTORY OF HAWALA
Hawala is an ancient money transfer system that came to play a prominent commercial role in the
Middle East, but likely migrated there from South Asia or Europe where nearly identical or very
similar systems of exchanging obligations through brokers formed the basis of the Medieval
banking system.
2
It is a simple system of transferring money without movement through affiliated
brokers known as ‘hawaladars’ using various means of c ommunication. While newer banking
methods developed in Europe and displaced customary channels in most of the world, the Middle
East and North Africa have resisted this trend for various reasons. Although most people today
consider the word synonymous with ‘trust’, as it is supposed to be the common element
connecting transactions, the Arabic root for the word means ‘to change’ or ‘transform’. This is
somewhat ironic, since (as detailed below at greater length) there is little transformation or even
1
Joseph Wheatley, 'Ancient Banking, Modern Crimes: How Hawala Secretly Transfers The Finances Of Criminals And Thwarts
Existing Laws' [2005] 26 University of Pennsylvania Journal of International Economic Law.
2
Maryam Razavy, ‘Hawala: An underground haven for terrorists or social phenomenon?’ (2005) 44 Crime, Law & Social Change
277, 292.
3 In Defence of Hawala: Rethinking Regulation of Customary Banking
physical movement of anything - it simply connects countervailing debits and credits in d ifferent
locales to efficiently meet demands.
Its precise origins are not well documented, but given its lack of complexity and contemporary
existence of similar banking methods elsewhere in Asia and a developing system of promissory
notes in Europe, it is not likely that hawala developed in a complete vacuum. This type of system
has many counterparts throughout the world, most of which verifiably predate hawala and Islam.
3
Given its lack of complexity, it is not hard to see why. A similarly ancient system called ‘hundi’ is
prevalent in India.
4
Even China has two loc al equivalents: ‘fei ch’ien’ in the north and ‘hui kuan’
in Canton and Hong Kong.
5
Then the Philippines’ local variety is called ‘padala’. The Financial
Crimes Enforcement Network (FinCEN), which is the national financial intelligence unit of the US
Department of the Treasury, refers to all of these as Informal Value Transfer Systems (IVTS).
6
To
some extent, they are all the same system under different names and used by different ethno-
religious-linguistic communities. or the most part, they are all in decline today, thanks to modern
banking institutions even in the Middle East, and face similar problems of being conduits of illicit
proceeds and off the books frauds. In tracing these individual o ccurrences of the same
phenomenon, the historical record indicates a common origin in China approximately 2000 years
ago and arrival to the Middle East via India sometime in the 12th Century.
7
There are various hadiths, Sunnahs and other religious authorities in Islamic jurisprudence that
lend weight to a variety of Islamic banking practices, but none specifically name and explain the
dynamics behind hawala until much later on.
8
There is no actual mention of it by name until 1327.
9
The theological and doctrinal foundations presented are rather vague and general, leading one to
the conclusion that official religious sanction that came after hawala became a common and well-
developed network of financial guarantors.
10
A more likely story, but arguably less popular for political and cultural reasons, is that hawala was
developed by Crusader nobleman in the Levant who needed to transfer wealth from home to pay
3
Wheatley (n 1) 348-349.
4
L. C. Jain, 'Indigenous Banking In India.' [1929] Economica.
5
El Qorchi M, Mambo S and Wilson J, 'Informal Funds Transfer Systems: An Analysis Of The Informal Hawala System' [2003]
Occasional Paper.
6
'Informal Value Transfer Systems' [2003] FinCEN Advisory.
7
Razavy (n 2) 292ff.
8
N.D. Ray, 'The Medieval Islamic System Of Credit And Banking: Legal And Historical Considerations' (1997) 12 Arab Law
Quarterly. Shi'a Islamic Laws on Hawala According to the Fatawa of Ayatullah al Uzama Syed Ali al-Husaini Seestani,
islam.org/laws/transactions3.html# 2298> accessed 11 October 2015.
9
Matthias Schramm and Markus Taube, ‘Evolution and Institutional Foundation of the Hawala Financial System’ [2003] 12
International Review of Financial Analysis 405, 405-407.
10
See S. Kapoor, Bad Money, Bad Politics: The Untold Hawala Story (first published 1998, New Delhi: South Asia Books, 1998).
4 In Defence of Hawala: Rethinking Regulation of Customary Banking
their soldiers. In the time of Julius Caesar, Rome emp loyed praescriptiones in commercial
transactions, which differ little from cheques today that involve syndicates of redeeming agents
much like hawala.
11
The Knights Templar also operated as a banking group that accepted deposits
and issued letters of credit for redemption to Crusaders and pilgrims.
12
In any event, it came into
particular favour with merchants tied to the bandit-laden Silk Road and treacherous Indian Ocean
trade sometime after the 11th Century.
13
Up until perhaps the mid-20th Century, hawala dominated the Middle East financial services scene.
There were few alternatives available and fewer still of any use to the majority of the populace.
Outside of the more westernised regions on the peripheries of the Mediterranean like Egypt,
Lebanon and coastal North Africa, western-style banks provided no checking and correspondent
banking services in the region. But then urbanization happened, and an oil boom in the Persian
Gulf closely followed by a little thing called globalization.
Today, hawala is a big business in the United Arab Emirates and acts as something of a global hub
for hawala transactions. Immigrant c ommunities in Europe, North America and Australia - of
which Somalis are most frequently associated due to the outsize role remittances play in that
country - and Afghanistan, Pakistan and many other countries in the Middle East, North Africa
and Western Asia are frequent destinations of hawala transfers. Today, the hawala model is being
applied to some extent via an online money transmitter called TransferWise based out of London
that performs transactions through a sophisticated automated online system that essentially does
the same thing as a hawaladars.
14
Once again, the pressures of disruptive innovations compete
with existing forms of financial commerce. It is a story as old as time.
Today, the global hawala b usiness potentially exceeds total receipts of US$100 billion per year,
with about 60% of it moving funds from developed countries to underdeveloped ones.
15
Unregulated flow of remittances across borders has implications for macroeconomic policy as
11
Will Durant, Caesar and Christ: A History of Roman Civilization and of Christianity from their Beginnings to A.D. 325: The story of
civilization #3, (first published 1944, New York: Simon & Schuster 749.
12
See Frank Sanello, The Knights Templars: God's Warriors, the Devil's Bankers, (Taylor Trade Publishing, USA, 2003); Alan Butler
and Stephen Dafoe, The Warriors and the Bankers: A History of the Knights Templar from 1307 to the Present (first published 1998,
Belleville: Templar Books); Sean Martin, The Knights Templar: The History & Myths of the Legendary Military Order, (first published
2005, New York: Thunder's Mouth Press) 47; Helen Nicholson The Knights Templar: A New History, (first published 2001, Stroud:
Sutton) 4.
13
Douglas Frantz, ‘Ancient Secret System Moves Money Globally’, New York Times, (New York, 3 October 2001) B5.
14
Rob Price, ‘London's $1 Billion Finance Startup TransferWise Is Just Like An Ancient Islamic Money Transfer System’ (2015)
Business Insiderto-hawala-2015-1?r=UK&IR=T> accessed 21
December 2015.
15
Roger Ballard, ‘Coalitions of Reciprocity and the Maintenance of Financial within Informal Value Transmission Systems: The
operational dynamics of contemporary hawala networks’ (2005) 6(4) Journal of Banking Regulation 319.
5 In Defence of Hawala: Rethinking Regulation of Customary Banking
well, and affects many national statistics.
16
Given the nature of the business though, it is very
difficult to make exact estimates regarding informal economic activities through IVTS.
Although Somalia accounts for a large percentage of this traffic, Afghanistan’s national economy
is effectively dependent upon hawala.
17
Given the rampant corruption affecting the Afghan
banking industry and high-profile b ank failures marred by corruption, even most international
aid organisations operating in the country utilise hawala for their banking out of necessity.
18
III. HAWALA IN THEORY AND PRACTICE
The theory behind hawala is fairly straightforward. As the most basic and among the first proper
‘banking’ services ever offered, its lack of complexity sh ould surprise n o one. But its origins and
structure have substantial differences from the approach taken to most financial services in law
and backend operations. For those with an interest in the law of equity, it is notable that Islamic
law does not recognize equitable interests or constructive trusts like many other legal systems do.
In an ordinary hawala transaction, the money in question always belongs to the receiver even if
they are not in possession or are unaware of it.
19
For the outside observer, it m ay seem peculiar
that the ownership vacuum so abhorred in Anglo-American j urisprudence goes ignored in the
hawala system. Understanding these points are key to grasping the inner workings of a very
unique service.
Furthermore, it is important to separate the formal rules to hawala from those not necessarily
intrinsic to it, namely the illegal methods that likely permeate the majority of the industry
16
Richard P. C. Brown, ‘Migrant Remittances, Capital Flight, and Macroeconomic Imbalance in Sudan' s Hidden Economy’
(1992) 1(1) Journal of African Economics 86.
17
Samuel Munzele Maimbo, ‘The money exchange dealers of Kabul: a study of the Hawala system in Afghanistan’ World Bank
Working Paper Series: No. 13 (Washington DC, 2003)
dered/PDF/269720PAPER0Money0exchange0dealers.pdf> accessed 11 August 2015.
18
Nikos Passas, Demystifying Hawala: A Look into its Social Organization and Mechanics’ (2006) 7 (Supplement1) Journal of
Scandinavian Studies in Criminology and Crime Prevention 46; James Risen, ‘Intrigue in Karzai Family as an Afghan Era Closes’
New York Times (New York, 4 June 2012) A1 to-
protect-its-privilege.html> accessed 23 December 2015; Adam B. Ellick and Dexter Filkins, ‘Political Ties Shielded Bank in
Afghanistan’ New York Times (New York: 8 September 2010) A1
.html > accessed 23 December 2015; ‘Kabul Bank fraud: Ghani
reopens Afghan corruption case’ BBC News (1 October 2014) -asia-29450821> accessed 23
December 2015.
19
Mohammad H. Kamali, Principles of Islamic Jurisprudence (ITS: London, 3rd edn 2002) 157-164.
6 In Defence of Hawala: Rethinking Regulation of Customary Banking
today.
20
Rather than whitewashing or treating these practices as mere aberrations, it is imperative
to see them as part of a flawed system in a flawed world. Given the degree to which the hawala
industry is simply non-compliant with basic regulatory p rocedures and banking laws in the
United States, it should help in assessing the extent of the current problems facing the hawala
industry and why reform and the law must become a greater concern to the hawaladars, the
regulators and the general public.
3.1 The ‘Nuts and Bolts’ of a Hawala Transaction
In theory, hawala is very simple. The hawala system refers to a customary informal channel for
transferring funds from one p erson to another via an independent broker or agent known as a
hawaladar.
21
The result is not all that different from Western Union or an ordinary b ank draft
cheque in that one party sends money to another, except that the hawaladar requires a
corresponding independent hawaladar to complete the transaction at its destination and settle the
account at a later date. No interest is paid on the accounts, since it is normally very short term and
interest (al-riba /   in Arabic) is haram in Islamic law and thus forbidden.
22
As long as there is a sender with some money for a distant receiver, the hawaladar will probably
be able to find another hawaladar in close proximity to the latter and complete the transaction.
Borders are rarely an obstacle. The hawala system relies heavily on trust, and it c an take time to
find someone to vouch for another hawaladar with whom he has no prior relationship. Mobile
phones are the primary tool of these people. It may take him a few minutes or a few weeks, but
they will eventually find a way through networking.
The most important aspect of the hawala network is the extent of personal relationships between
hawaladars, as it provides a mechanism for bundling tran sactions between multiple hawaladars
to balance accounts. Sometimes this bundling process is so efficient that no balance is ever
exchanged amongst the middlemen; the outbound and inbound clientele of a hawaladar provide
all the necessary liquidity and more or less balance out. If a more formal reconciliation is in order,
it is done, but not always on the books. This will be discussed at greater length below. As such,
20
Divya Sharma, ‘Historical Traces of Hundi, Sociocultural Understanding, and Criminal Abuses of Hawala’ (September 2006)
16 (2) International Criminal Justice Review 99-121.
21
Mohammed El-Qorchi, ‘Hawala’ (2002) 39 (4) Finance and Development Magazine Quarterly
http://www.imf.org/external/pubs/ft/fandd/2002/12/elqorchi.htm> accessed 23 December 2015.
22
Kamali (n 19).
7 In Defence of Hawala: Rethinking Regulation of Customary Banking
the most intricate part of the hawala system is on the backend. Failures to make good on a deal are
by most accounts extremely rare, and since they are already ‘off the books’, such instances are
dealt with out of courts with eith er shunning or physical violence outside of places like Dubai
where the industry operates with some level, however minimal, of regulation.
23
Fees are noticeably low and rarely discussed. Haggling is not an option to my knowledge. The
commission on either end is factored into the receiving sum and rarely exceeds 1%.
24
Thrifty clients
appreciate the value found in the hawala service, as most institutional money services business
extract fees several times higher due to overhead such as brick and mortar facilities, commercial
insurance, independent auditors, regulatory compliance costs and taxes (on the transaction or the
income derived from the service) that are normally unknown to or simply ignored by the
hawaladars.
25
There are also limits to the service p rovided by non-hawala remitters in certain markets. For
example, although Western Union charges about 7% to wire money to Somalia, it can only send it
to one office in the far north of the country. In a country where most of the population is too poor
to afford even a camel, it is easy to see the attractiveness of hawala and why more mainstream
services are unsatisfactory to anyone who is poor.
26
One of the more attractive aspects of hawala for consumers of c ertain regional origins is that it is
convenient. Most hawaladars are available 24/7, reliable and almost hassle-free compared to their
conventional rivals that extract higher fees and require multiple forms of photo identification.
27
Since local alternatives are so limited and can hardly be considered reputable by any objective
measure, hawala has very limited competition in this type of environment where a weak and
corrupt state comb ined with neglect by the international financial system has produced a rather
moth-eaten financial sector.
28
23
Meenakshi Ganguly, ‘A Banking System Built for Terrorism’ Time Magazine (5 October 2001)
accessed 21 December 2015.
24
Samuel Munzele Maimbo, The Challenges of Regulating and Supervising the Hawaladars of Kabul, in Regulatory Frameworks for Hawala and
other Remittance Systems (International Monetary Fund: 2005) 47-52
upervising_Hawaladars.htm> accessed 21 December 2015.
25
Anna Fifield, ‘How Iranians Are Avoiding Sanctions’ Financial Times (London, 14 April 2008),
http://www.ft.com/intl/cms/s/0/6ca69788-0a48-11dd-b5b1-0000779fd2ac.html#axzz2EmP2MaKm> accessed 28
December 2015.
26
Nicholas Kulish, ‘Somalis Face a Snag in Lifelines From Abroad’ New York Times (New York, 4 August 2013) A10.
27
Organisation for Economic Co-Operation and Development (OECD), ‘Report on Money Laundering Typologies 1999-2000’
Financial Action Task Force FATF-XI (Paris, 3 February 2000) http://www.oecd.org/fatf/pdf/TY2000_en.pdf> accessed 29
December 2015.
28
Adil Anwar Daudi, ‘The Invisible Bank: Regulating the Hawala System in India, Pakistan and the United Arab Emirates’
(2005) 15 Indiana International & Comparative Law Review 619, 628-29.
8 In Defence of Hawala: Rethinking Regulation of Customary Banking
3.2 Criminal Elements Embedded in the Hawala System
The administrative aspect of the backend is rather problematic at times- particularly for those that
make no effort to operate legally. Licensed hawala enterprises based in the Persian Gulf or in the
United States follow standard accounting practices, while most unlicensed hawaladars follow
tradition and keep extremely shorthand (arguably coded in “thieves’ cant”
29
) ledgers while some
hawaladars simply go by memory, especially if illiterate.
30
These ledgers use unique abbreviations,
rarely identify clients or consider the provenance of the funds in question.
31
Part of this is a
traditional part of the business, but today it serves to obscure the paper trail if anything attracts
the attention of civil authorities in dodgy deals. Given that about 83% of the hawala industry is
not registered or licensed, the overwhelming majority of hawala boo kkeeping is essentially done
Al Capone-style.
32
Whether the style of hawala bookkeeping predates modern organized crime
syndicates is anyone’s guess, but it remains useful to segments of the underground economy
nonetheless.
Alternatively, ordinary financial institutions are used by hawaladars in the settlement and
reconciliation process. Deposits are made into conventional western-style banks or channelled
through regular money transmitters, but fragmented and wired to hundreds of banks around the
world in a pattern known as the ‘starburst’. Sometimes, the money ends up in the account of origin
to throw off audit trails in a technique referred to as the ‘boomerang’. Ardent defenders of hawala
will reluctantly admit that the system is used to launder money and evade taxes because they are
so well designed to work outside of the normal channels states use to track financial crime.
33
Even
when employed for legitimate purposes, to diversify the risk involved in the transfer of large sums,
hawaladars use techniques borrowed from criminal money launderers.
34
Other black market techniques utilised by professional money launderers and criminal syndicates
are employed by hawaladars reconciling their accounts with others. Invoice fraud in international
29
See Julie Coleman, A History of Cant and Slang Dictionaries (vol 1, 1567-1784 OUP 2004).
30
Patrick M. Jost, Harjit Singh Sandhu, Hawala: The Hawala Alternative Remittance System and its Role in Money Laundering
(FinCEN/INTERPOL Joint Publication, 2000) (Monograph), Appendix D 18.
31
Tina Susman, ‘Court cases shed light on money-transferring system’ Los Angeles Times (Los Angeles, 24 May 2010
na-hawala-20100525> accessed 22 December 2015: Stephen Hudak of the
United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which relies on bank alerts of
suspicious activities to help track suspected illegal hawalas, stated concerning hawalas that, “They’re designed to be secretive, and
they’re designed to have very little paper work involved. The record-keeping they do keep could be in another language.”
32
Abdulrahman Al-Khalifa, The use of Hawala as a Remittance SystemGeorge Mason University Terrorism, Transnational Crime and
Corruption Center (TraCCC) accessed 19
December 2015.
33
Ballard (n 15) 321.
34
Kulish (n 26).
9 In Defence of Hawala: Rethinking Regulation of Customary Banking
shipping is a common such tactic. On e hawaladar will ship goods at a nominal value to avoid
taxes and keep the deal under the radar of any preying authorities. EBay and other online sales
systems provide an excellent medium for facilitating sham deals that appear legitimate barring
extensive due diligence and incorporate a low-rate form of money exchange within the platform.
35
Shell companies are created with adequate funds or assets to settle balances and then transferred
at nominal values to avoid scrutiny, taxes, fees and the like. Goods (both contraband and
legitimate) are also sometimes smuggled to satisfy such accounts, chief among them gold and
drugs.
It is important to note that in customary practice, it is normally a ‘no questions asked’ type of
service. This is perha ps how hawala has earned its poor reputation among law enforcement and
counterterrorism professionals. Even Swiss banks have effectively abandoned the ‘I don’t want to
know’ approach to banking.
36
Alth ough there are licensed hawala businesses that comply with
conventional customer due diligence and know-your-client best practices, the overwhelming
majority are either ignorant of such things or wilfully ignorant. Sanctions are also rarely an
obstacle.
As a matter of helping the books balance on both sides and encourage foreign exchange transfers
through their system, hawaladars sometimes exempt expatriates from paying fees. In contrast,
they reportedly charge higher fees to those who use the system to avoid exchange barriers, capital
controls, the authorities or administrative hurdles.
37
Money leaving common destinations of
transfers is also given preferable rates.
38
It is at this point that some commentators and authorities utilise special terminology to describe
two separate patterns of hawala activity. ‘White hawala’ is used to describe ordinary money
transfers, such as remittances and personal gifts, while ‘black hawala’ refers to black market deals
handled by the hawala system involving drugs, frauds or terrorism.
39
There are several large,
35
David Cook and Timothy Smith, ‘The Malarkey of Money Transfers: Overlooking E-Bay whilst the Hawaladars are Hunted’,
Proceedings of the 1st Australian Counter Terrorism Conference (Edith Cowan University, Perth, Western Australia, 30
November 2010) accessed 31 Dec 2015.
36
Foreign Account Tax Compliance Act (FATCA), Public Law 111147, 124 Stat. 71 (2010); United States Department of the
Treasury, ‘Agreement Between the United States of America and Switzerland for Cooperation to Facilitate the Implementation
of FATCA’ (Press Release), (U.S.A.-Switzerland, 13 February 2013) http://www.treasury.gov/resource-center/tax-
/treaties/Documents/FATCA-Agreement-Switzerland-2-14-2013.pdf> accessed 29 December 2015; also, see Jane G. Song,
‘The End of Secret Swiss Accounts?: The Impact of the U.S. Foreign Account Tax Compliance Act (FATCA) on Switzerland's
Status as a Haven for Offshore Accounts’ (2015) 35 Northwestern Journal of International Law & Business 687
accessed 21 December 2015.
37
El-Qorchi (n 21).
38
Ibid.
39
Charles Falciglia, ‘In Search of the Hawaladar’ ACAMS Today (Miami, 29 August 2011)
search-of-hawaladar/> accessed 22 December 2015.
10 In Defence of Hawala: Rethinking Regulation of Customary Banking
corporate hawala dealers operating in the United States and internationally, such as Amal and
Dahabashiil that entirely deal in th e ‘white hawala’ market, but as mentioned previously, very
little of the hawala market operates legally licensed and regulated.
40
As such, even some of the
‘white hawala’ transactions are tainted a bit grey to some degree. They may also sit side by side in
the dodgy ledgers with very ‘black’ transactions. It is also worth questioning whether nations have
an obligation to root out and stop black m arket banking under international law.
41
Given that
terrorists and other unsavoury sorts operate in the space between nations, nations have a duty to
helping maintain global security by providing a safe atmosphere for conducting business,
although this is not well-defined in international law.
This sort of mixing of legitimate and illegitimate business potentially ties law-abiding consumers
to criminals and terrorists unnecessarily. It is practices like these that that should be avoided in
the interests of the customers and the hawaladars themselves. Given that legal operation is
distinctly possible, it should be sought. Such would blunt the criminal elements within the
industry that has led it being a ‘banking system built for terrorism’
42
that works in secrecy and
deals with disputes mafia-style
IV. HAWALA AND THE LAW: LEGAL REQUIREMENTS AND CONSEQUENCES
In order to chart a better path for users and providers of hawala money services, it is imperative
to understand the legal framework affecting it and the ‘Western’ counterparts in the market. Law
and regulation is a challenging issue to all bank and financial services, and is constantly evolving
due to endless scandals and pushback from the industry and its powerful political lobby. Also of
great importance to this is the legal sanction associated with failure to adhere to the law.
Unlike that of some other countries, there is no general prohibition of hawala in the United States,
nor for any other Islamic financial instruments and/or methods. Regulators and th e law regard
hawala as more of a brand than a separate financial system, so it does not play favourites over
form rather than substance. But, as mentioned above, this has not encouraged many hawaladars
40
Ibid.
41
Joel Slawotsky, ‘Partnering with Despots and Failed Regimes: Rogue Banking as a Primary Violation of International Law’
(2014) 16 (1) San Diego International Law Journal 73.
42
Ganguly (n 22).
11 In Defence of Hawala: Rethinking Regulation of Customary Banking
to follow the law anyway except for some of the largest players in the business. Theory and good
public policy might suggest this result is counterintuitive.
43
After all, shouldn’t a fair and open marketplace automatically encourage compliance by it
participants? Moreover, given the harsh fines and penalties notoriously associated with the
American justice system, shouldn’t compliance be a chief concern of every American hawaladar?
Apparently not. Although the theory of financial accommodation suggests opening previously
unrecognised practices and industries to official status should help incorporate previously
marginalised activities to seek regulation, licensing and ensure consumer protections, there are
several reasons results have not materialised. For starters, the law is not well publicized to certain
immigrant communities. It is also difficult to enter the market, legally speaking, as there are
several costly barriers entering the market.
4.1 Effects of Regulation on Non-Conforming Consumers and Remitters
As a type of Money Services Business (MSB) described by the Bank Secrecy Act (BSA), and m ore
specifically as a type of money transmitter, all forms of IVTS m ay legally operate in any state or
territory.
44
Financial regulators emphasize the result rather than the form of the business, unlike
some other jurisdictions (namely India) that take a hard stance against hawala and other forms of
IVTS more generally. There is no barrier to accessing the market for an individual or incorporated
hawaladar so long as they abide by applicable state and federal laws governing the conduct and
operation of business.
More importantly though, banks and money transmitters in the United States are heavily
regulated in terms of their record keeping and which ones must be to disclose to the government.
45
There are also rules and regulations regarding what documentation individuals must have in
order to do business with banks that were heavily revised under the USA PATRIOT Act following
9/11.
46
There are potentially very large civil and criminal penalties for failing to regist er with
43
Jonathan Ercanbrack, The Transformation of Islamic Law in Global Financial Markets (Cambridge University Press, 2015) 149.
44
Bank Secrecy Act, Public Law 91-508 (1970) (codified as amended in various sections of Titles 12, 15, and 31 of the United
States Code).
45
46
USA PATRIOT Act, Public Law 107-56 (2001) (amending the following: Title III, Subtitle C, §§ 328, 330, 352-354, 359-365,
371, 372, 374, 18 U.S.C. §§ 1956, 1960, 1961, 31 U.S.C. §§ 5311 - 5313, 5317 5319, 5321, 5322, 5324, 5330-5332 and 5341.
12 In Defence of Hawala: Rethinking Regulation of Customary Banking
FinCEN and failure to comply with the necessary recordkeeping, financial reporting, anti-money
laundering and counter terror finance requirements.
47
As mentioned above, the overwhelming majority of hawaladars ar e not registered with FinCEN
or in line with these expectations. Granted, most money transfer businesses operate without
licenses according to national authorities.
48
But hawala services are especially non-compliant, with
less than 20% seeking and obtaining requisite licensing and registration. To put it bluntly, they
risk prosecution regardless of whether their hawala services are part-time humanitarian
endeavours or vast criminal conspiracies.
49
Generally speaking, the law does not care. Worse yet,
an aggressive prosecution case can convince a jury of the latter anyway simply thanks to the nature
of hawala bookkeeping- it is intentionally deceptive by design, which is normally considered proof
of criminal wrongdoing regardless of any explanation by the defendant.
50
One thing that FinCEN does as a national financial intelligence unit is report regularly on their
efforts at enforcing laws and regulations. As an arm of the US Treasury Department, it does this
partly out of vainglory and partly out of statutory obligation to keep open records for th e public
regarding its often newsworthy work.
51
Another office within the Treasury, the Office of Foreign
Asset Control (OFAC), has a similar gimmick, b ut involving sanctions.
52
Hawala makes up very
little of this r eporting and accounts for a tiny fraction of FinCEN’s caseload, but incidents of off-
the-books hawala rarely end well nonetheless.
47
48
United States Government Accountability Office, ‘Bank Secrecy Act: FinCEN and IRS Need to Improve and Better
Coordinate Compliance and Data Management Efforts’ (Washington, DC, GAO Report to Congress No. 07-212, 15 December
2006) 11-12 accessed 21 March 2016.
49
United States v Ahmad 213 F.3d 805 (4th Cir. 2000); United States v Ismail 97 F.3d 50 (4th Cir.1996).
50
United States v X-Citement Video Inc. 513 U.S. 64 (1994) 68 (Supreme Court); Liparota v United States 471 U.S. 419 (1985) 426
(Supreme Court); Bailey v United States 516 U.S. 137 (1995) 144-145 (Supreme Court); Christopher R. Chase, ‘To Shred or Not to
Shred: Document Retention Policies and Federal Obstruction of Justice Statutes’ (2003) 8(3) Fordham Journal of Corporate and
Financial Law 721.
51
United States Department of the Treasury: Financial Crimes Enforcement Network (FinCEN), ‘Retail Store Owner Sentenced
for Unlicensed Hawala OperationThe SAR Activity Review Trends, Tips & Issues (Issue 8, April 2005)
http://www.fincen.gov/law_enforcement/ss/html/056.html> accessed on 19 April 2015; United States Department of the
Treasury: Financial Crimes Enforcement Network (FinCEN), ‘Illicit Wire Activity Destined for Sanctioned Country’ The SAR
Activity Review Trends, Tips & Issues, (Issue 18, October 2010)
accessed 26 December 2015; also, as such
reports are numerous and not sorted by subject headers, see more generally The SAR Activity Review Trends, Tips & Issues
Archive compiled by the FinCEN, a section of the United States Department of the Treasury at
.
52
United States Department of the Treasury Press Center, ‘Treasury Department Sanctions a Taliban Funding Conduit and Two
Key Taliban Figures: Action Targets a Pakistan-based Hawala, Hawaladar and one Taliban Commander’ 21 August 2014
https://www.treasury.gov/press-center/press-releases/Pages/jl2612.aspx> accessed 26 December 2015; United States
Department of the Treasury Press Center, ‘Treasury Imposes Sanctions on a Hawala and Two Individuals Linked to the Taliban’
20 November 2012 https://www.treasury.gov/press-center/press-releases/Pages/tg1777.aspx> accessed 26 December 2015;
also, see United States v Banki 660 F.3d 665 (2d Cir. 2011).
13 In Defence of Hawala: Rethinking Regulation of Customary Banking
Even for hawaladars not actively working as terror financiers, noncompliance can mean prison
time and serious financial p enalties. Such was the case of United States v. Elfgeeh, also known as
the Carnival Ice Cream Case, since it involved a small ice cream shop in Brooklyn, New York that
operated a $21 million unlicensed hawala business on the side.
53
Two br others were responsible
for the hawala business. They used many techniques of m oney launderers to obscure their
activities. It never made a profit and claimed to operate out of charity to the local Yemeni
immigrant community with limited remittance options. They were notified by state and federal
regulators of their registration and licensing obligations, but neglected warnings as th ey did not
consider themselves to be a ‘business’ since they made no profit.
54
Some of the funds they handled,
however, were delivered to individuals tied to Al-Qaeda and its front groups; although no proof
was presented that the hawaladars knew of this or had any way to discover it. Both men received
lengthy prison terms, one for 51 months and the other 188.
55
Although it might not seem like it, Elfgeeh was a landmark case as it was the first successful
prosecution of an unlicensed hawala business and only the second involving an unlicensed money
transfer business to go to federal trial in the United States.
56
More importantly, it was one of the
first cases following the oft-maligned USA PATRIOT Act and its numerous changes to the United
States Code.
57
Prior to the USA PATRIOT Act, 18 U.S.C. § 1960(a) required that an individual have
knowledge of licensing laws and regulations and intent to violate them, making prosecution of
hawaladars nearly impossible. The USA PATRIOT Act removed the intent requirement. The case
established an important new test under § 1960(a), deciding that knowledge of an MSB merely
being unlicensed was sufficient for conviction.
58
Subsequently, there have been numerous cases
involving money laundering and hawala, many of which have allegations of terrorist financing at
the heart of them.
59
53
United States v Elfgeeh 515 F.3d 100 (2d Cir. 2008) (Appellate Court Decision) aka ‘the Carnival Ice Cream Shop Case.’
54
In terms of United States company and tax law, non-profit companies are expressly permitted under the Internal Revenue
Code, 26 U.S.C. §§501-530; see Bruce R. Hopkins, The Law of Tax-Exempt Organizations (New York: John Wiley and Sons 10 Ed.,
2011) 879.
55
Elfgeeh (n 53).
56
United States v Velastegui 199 F.3d 590 (2d Cir. 1999); Due to the prevalent custom of plea bargaining and deferred prosecution
agreements in the United States, approximately 95% of cases never actually go to trial.
57
USA PATRIOT Act, Public Law 107-56 (2001) (n 41).
58
Elfgeeh (n 53), 132; United States v Elfgeeh No. CR-03-0133 (E.D.N.Y. 20 September 2005) (Trial Court); 18 U.S.C. § 1960(a).
59
United States v El-Mezain 664 F.3d 467 (5th Cir. 2011); United States v Yassin Muhiddin Aref and Mohammed Mosharref Hossain
Unreported, Criminal Action No. 04-CR-402, (N.D.N.Y.; Sentencing Memorandum: 29 January 2007, Court Transcript: 8 March 2007;
United States v Uddin 365 F. Supp.2d 825 (E.D. Mich. 2005); Holy Land Foundation for Relief and Development v Ashcroft 219 F. Supp.
2d 57 (D.D.C. 2002), aff'd, 333 F.3d 156 (D.C. Cir. 2003), cert. denied, 540 U.S. 1218 (2004); United States v Bayan Elashi, Ghassan
Elashi, Basman Elashi, Infocom Corporation 440 F. Supp. 2d 536 (N.D. Texas 17 December 2006).
14 In Defence of Hawala: Rethinking Regulation of Customary Banking
Outside of the hawaladars, some hawala c ustomers may also b e subject to prosecution for using
unlicensed hawaladars even in otherwise legal transactions. One such case, United States v Banki,
involved an affluent Iranian-American transferring family m oney stateside from Iran b y way of
an unlicensed hawala business in Dubai with access to an American bank account.
60
Given the
extremely complex sanctions p rogramme in place between the United States and Iran, m ost
business deals and transactions between nationals of the two countries are prohibited.
61
Mahmoud
Banki was tried for several sanctions violations and m ost notably for contravening 18 U.S.C. §
1960(a):
Whoever knowingly conducts, controls, manages, supervises, directs, or owns all
or part of an unlicensed money transmitting business, shall be fined in
accordance with this title or imprisoned not more than 5 years, or both.
The case against him rested on the fact that as the customer, he was ‘directing’ an unlicensed MSB
enterprise and a transaction that would have required a special license from OFAC. The jury,
however, was not instructed to consider an explicit exemption for both the licensure and sanctions
regarding transfers of family assets in the Code of Federal Regulations.
62
The exemption in
question is wide enough in scope that it should have led to a summary dismissal of charges at the
trial stage, but the motion was denied. He was convicted and sentenced to a prison term of 30
months.
Banki is presently regarded as something of a prosecutorial error bordering on an Islamophobic
witch hunt. Many notable supporters came to Mahmoud Banki’s defence, including a former
director of OFAC who went to great lengths to explain the errors in the US Attorney’s case and
the judge’s application of the law. Although the initial case was successful, the conviction was
overturned on appeal due to the grievous jury misdirection and all charges were subsequently
dropped. Banki spent 22 months in prison before being released. That being said, the legal
consequence of using such a system as a mere c ustomer or beneficiary to an unlicensed hawala
transaction was not actually addressed by the Circuit Court of Appeals for the Second District in
60
United States v Banki 660 F.3d 665 (2d Cir. 2011).
61
See Kian Arash Meshkat, The Burden of Economic Sanctions on Iranian-Americans (2013) 44 Georgetown Journal of International
Law 915.
62
15 In Defence of Hawala: Rethinking Regulation of Customary Banking
Banki. In essence, this point of law remains open due to a procedural technicality and prosecutorial
discretion.
Of important note in this are civil penalties upon successful conviction, specifically relating to the
civil asset forfeiture. The consequences are exceptionally high, as U.S.C. § 1960 is a “specified
unlawful activity” that the government can forfeit any property, real or personal, which
constitutes or is derived from any traceable proceeds.
63
The United States has peculiar civil asset
forfeiture laws that put the property in question on trial, but deny it counsel or the right to be
represented in proceedings, even by the individual in question. This results in a variety of strange
case names.
64
It is arguably a summary revocation of due process and rights to property. But that
does not detract from the main point, which is that any outlaw hawaladar will likely face complete
financial ruin and disgorgement by federal authorities upon conviction. The price of
noncompliance is exceptionally high.
In summary, consequences for operating, participating in and using unlicensed hawala MSBs are
potentially very high. But as noted, this can easily be avoided by conforming to legal and
regulatory expectations of the industry that are not so onerous as to preclude participation from
most already in the hawala business. Given the potential cost of noncompliance, explaining the
procedures and processes of entering the market lawfully must be communicated better. It is my
hope to some extent that the following will serve as a better introduction regarding the relevant
statutes, regulations, licenses and processes that apply to such people and enterprises.
4.2 Federal Registration and Regulatory Requirements for the Hawala Industry
Navigating the regulatory state is normally cited as being the leading obstacle that small to
medium sized businesses face.
65
Hawaladars are in all likelihood no different, as stiff penalties and
a complicated regulation system de facto keep the overwhelming majority of them in the
63
18 U.S.C. § 981(a)(1)(A-C); United States v Huber 404 F.3d 1047 (8th Cir. 2005) 1056-57; Jon E. Gordon, Prosecutors Who Seize
Too Much and the Theories They Love: Money Laundering, Facilitation, and Forfeiture (1995) 44 Duke Law Journal 744, 770-71; Stefan D.
Cassella, The Forfeiture of Property Involved in Money Laundering Offenses (2004) 7 Buffalo Criminal Law Review 583, 585ff.
64
United States v Approximately $44,888.35 in U.S. Currency 385 F. Supp. 2d 1057 (E.D. Cal. 2005); United States v 47 10-Ounce Gold
Bars, etc. 2005 WL 221259 *1 (D. Or. 2005); United States v $734,578.82 286 F.3d 641 (3d Cir. 2003), 650-53; United States v
$8,221,877.16 in U.S. Currency 330 F.3d 141 (3d Cir. 2003); United States v All Funds on Deposit in the Name of Kahn 955 F. Supp. 23
(E.D.N.Y. 1997); United States v Real Property 874 Gartel Drive 79 F.3d 918 (9th Cir. 1996); United States v $20,193.39 U.S. Currency
16 F.3d 344 (9th Cir. 1994), 346; United States v 1988 Oldsmobile Cutlass Supreme 983 F.2d 670 (5th Cir. 1993).
65
Dennis Jacobe, ‘Gov't Regulations at Top of Small-Business Owners' Problem List’, Gallup Inc. (24 October 2011)
http://www.gallup.com/poll/150287/gov-regulations-top-small-business-owners-problem-list.aspx> accessed 31 December
2015.
16 In Defence of Hawala: Rethinking Regulation of Customary Banking
underground economy. Coming into compliance is not easy. The following will hopefully assist
in some sense in understanding the regulatory expectation hawaladars face conducting their
businesses in the United States, and more specifically in New York.
Due to the doctrine of dual sovereignty in American Federalism, there are overlapping regulatory
responsibilities between states and the federal government. This article will only discuss the law
as it applies in the state New York and at the federal level. The Federal approach to combatting
money laundering in this political arrangement led to placing the licensing onus on respective
states.
66
The legal status in New York is of utmost importance, primarily because that is epicentre of the
American financial system, but also because the author is based there. The legal system of New
York is c onsidered to be the most important since it leads the nation in m any ways, specifically
banking law, and many other states follow its lead by adopting provisions first promulgated here.
Its judiciary is also held in high regard both nationally and abroad.
67
It is important here to highlight the difference between registration and licensing, as each is sought
by different levels of c ivil authorities in the United States. Registration processes require fewer
conditions to be fulfilled at the tim e of entry, thus making it easier to enter the market. Licensing
is much more difficult process though, as these involve p roving and establishing c ertain
conditions for licensure in addition to front-end screening of applicants. As a result, registration
processes are less onerous, while extensive review and ongoing supervision are necessary for
licensing programs. As a rule, the federal government pursues registration while state authorities
license MSBs. Both, however, create a framework for the supervision of who can operate an MSB
and ensure their compliance with anti-money laundering and counter terror finance obligations.
At the federal level, those performing hawala services are subj ect to a number of conditions to
operate legally. First among these requirements is that all hawala businesses register with FinCEN
using Form 107, which all MSBs are required to complete.
68
It must also obtain a state license. This
registration must be renewed every two years. Failing to register or renew with FinCEN can result
66
See, Courtney J. Linn, ‘One-hour Money Laundering Prosecuting Unlicensed Money Transmitting Businesses Under 18 U.S.C.
§ 1960’ (2007) 8 University of California- Davis Business Law Journal 138.
67
For much of the “Roaring Twenties”, Benjamin Cardozo headed the state’s unified judiciary as chief judge of the New York
Court of Appeal and many considered his appointment to the United States Supreme Court in 1932 as something of a demotion.
68
Form 107 is available via the e-file system at http://bsaefiling.fincen.treas.gov/main.html> accessed 4 January 2016; 31
U.S.C. s 5330 and 31 C.F.R. § 103.41; see 31 C.F.R. § 103.11(uu) for the definition of ‘money service business’ which is defined
very broadly.
17 In Defence of Hawala: Rethinking Regulation of Customary Banking
in large civil and criminal penalties like those detailed above.
69
This is probably one of the simplest
things hawala businesses can do to stave off scrutiny from the authorities and avoid consequences,
but almost none ever do this much. Importantly, there is no excuse for failing to register with
FinCEN or obtain a state license.
70
After this, a hawala business is required to familiarize itself with potential risks it faces in terms of
money laundering and c reate a set of policies and procedures to limit the abuse of their services
by criminals and then to produce a written plan of action.
71
This can include asking questions and
investigating about the source and destination of the funds, profiling c lients based on the
backgrounds depending on the circumstances. The program need not be as detailed and involved
as that of major MSBs, but needs to fit the business’ needs.
This is part of a larger goal all financial services providers and banks must operate under in terms
of complying with anti-money laundering and counter-terrorist financing provisions of the Bank
Secrecy Act, the USA PATRIOT Act and other relevant legislation.
72
There is no single answer to
going about this challenge, and there is a wide margin of appreciation for its implementation,
again, depending on the risk exposure of the particular hawala business.
73
Accordingly, a number of special measures exist to comply with minimising criminal risk
exposure. MSBs must file SARs if a transaction over $2000 appears to have no business purpose or
seems is suspicious enough to warrant further investigation.
74
Needless to say, knowingly
providing of material support to a terrorist or to a designated terrorist organisation is a serious
problem, so MSBs are required to go the extra step to make sure their operations are not conduits
for the laundering of money funding terrorism.
75
69
31 C.F.R. s 103.41(e).
70
United States v Barre 324 F. Supp. 2d 1173 (D. Colo. 2004) 1177.
71
31 C.F.R. s 103.125; 31 C.F.R. s 1022.210.
72
United States Department of the Treasury, A Report to the Congress in Accordance with Section 359 of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) (November 2002)
6-15 accessed 21 April 2016; Money Laundering
Suppression Act of 1994 (Title IV of the Riegle Community Development and Regulatory Improvement Act of 1994), Public
Law 103-325 (1994); Bank Secrecy Act, Public Law 91-508 (1970) (codified as amended in various sections of Titles 12, 15, and
31 of the U.S. Code); USA PATRIOT Act, Public Law 107-56 (2001), (Title III, Subtitle C, § 359 amended 31 U.S.C. s
5330(d)(1)(A))
73
For more information, free resources are available from FinCEN’s ‘Requirements for BSA’ site at
https://www.fincen.gov/financial_institutions/msb/msbrequirements.html> accessed 4 January 2016; also, see FATF Guidance
on the Risk-Based Approach for Money Services Businesses, Financial Action Task Force Report (July 2009)
gafi.org/media/fatf/documents/reports/RBA%20Guidance%20for%20Money%20Service%20Businesses.pdf> accessed 23
December 2015.
74
31 C.F.R. s 103.20.
75
18 U.S.C. s 2339A, 2339B; United States v Hammoud No. 3:00CR147-MU (W.D. N.C. 28 March 2001); United States v Abdi 342
F.3d 313 (4th Cir. 2003)
18 In Defence of Hawala: Rethinking Regulation of Customary Banking
Also as a result, all MSBs, including those that could be characterized as IVTS, must obtain and
verify customer iden tity and record beneficiary information for funds transfers of more than
$3,000.
76
There are also separate record keeping requirements applicable to the sal e of MSB
products, such as traveller’s checks and mon ey orders, as well as to currency exchange
transactions.
77
These records must be maintained for five years.
78
Aside from these strict record keeping requirements are in p lace under the Bank Secrecy which
include geographical targeting orders (GTOs). These GTOs require strict reports and records
regarding services rendered to specified geographical areas and certain persons therein for limited
periods of time.
79
Since hawala provides an opportunity to circumvent two legally required reporting requirements
designed to catch money laundering, it is important to put these at the front of the compliance
programme. The first is to report all cash transactions over $10,000.
80
The second is to report any
transfer of more than $10,000 (cash or otherwise) to another country.
81
The filing of these special
‘Suspicious Activity Reports’ (SAR) is done through the same e-filing system mentioned above
and requires a specific style of information gathering that is designed to assist law enforcement
with following up.
82
They should be done within 30 days. Even if the client is deemed to b e
guiltless upon further investigation, an SAR must still be filed, although it can listed as a matter
of low-concern in the profile.
A common misperception is that the Internal Revenue Service, Department of the Treasury and,
more specifically, FinCEN require all MSBs to retain expensive outside auditors for independent
tests of both their bookkeeping and an anti-money laundering programme. This is not correct,
although MSBs do need to keep these records for several years.
83
Although reviews and audits
are important, they are not formally required so long as the books and money laundering
programme remain in order, up to date and subject to periodic review by the relevant
management.
84
This is especially advantageous to independent and smaller MSBs that may not be
76
31 C.F.R. s 103.33(f).
77
31 C.F.R. s 103.29; 31 C.F.R., s 103.37.
78
31 C.F.R. s 103.38.
79
31 C.F.R. s 103.26.
80
31 U.S.C. s 5313; 31 C.F.R., s 1010.311.
81
31 U.S.C. s 5316; 31 C.F.R., s 1010.100.
82
For more information, see Financial Crimes Enforcement Network Suspicious Activity Report (FinCEN SAR) Electronic Filing
Instructions, United States Department of the Treasury: Financial Crimes Enforcement Network (FinCEN) (Washington, D.C.,
October 2012)
%20Stand%20Alone%20doc.pdf> accessed 29 December 2015.
83
84
31 C.F.R. s 103.125; 67 Fed. Reg. 21114 (29 Apr 2002).
19 In Defence of Hawala: Rethinking Regulation of Customary Banking
financially able to hire retain outside auditors. An excellent resource for keeping abreast of a
changing regulatory landscape is provided to members of the National Money Transmitters
Association.
85
Simply remaining commercially aware of potential abuses of the business by black
market actors and new regulatory requirements can avoid unwanted litigation.
Another means of achieving better compliance and a chief recommendation regarding federal
regulatory requirements is not a formal requirement and more of an optional ‘get out of jail free
card’. Section 314(b) of the USA PATRIOT Act allows financial institutions and MSBs to share
information for the purposes of reporting money laundering and terrorist financing upon
providing notice to FinCEN under protection of legal safe harbour.
86
This section in some ways
deputizes those in the program, and limits their liability regarding customer information privacy
and for known cases of money laundering and terrorist finance so long as a good faith effort has
been made to build a working reporting system. Participation may not be mandatory, but failing
to take advantage of 314(b) is, simply put, irresponsible from a business perspective.
4.3 Licensing and Regulatory Requirements for Hawala in New York State
New York state law differs in many significant ways from the approach of the federal government
in how it regulates MSBs. In New York, it is illegal to receive money for transmission, or to transmit
money without a license issued by the Superintendent of Financial Services. The Superintendent
heads the New York State Department of Financial Services, which is charged with implementing
all state banking laws, including those pertaining to MSBs.
87
Money transmitters are covered under Article XIII-B of the New York State Banking Law, and
include a wide array of product lines including traveller’s cheque vendors and cheque cashing
services. Licensed MSBs may employ agents who do not require a license for m ost of their
functions so long as they handle their accounts through licensed transmitter, although they must
be supervised and conform to all applicable laws.
88
Operation of an unlicensed MSB can be either
a felony or misdemeanour, and as such raises the potential for federal criminal penalties under 18
U.S.C. § 1960. There is only one possible exception to this rule, and that is the United States Postal
Service, which does provide some money transfer services and enjoys a unique position in the
85
The National Money Transmitters Association website accessed 2 January 2016.
86
USA PATRIOT Act s 314(b), implemented by 31 C.F.R., s 103.110, available to MSBs through 31 C.F.R., s 103.125.
87
N.Y. Banking Law, ss 11-12(a), s 14, s 641.
88
N.Y. Banking Law, ss 648(a-c), s 651(a); 3 N.Y. Comp. Codes R. & Regs, s 406.5(a)(6).
20 In Defence of Hawala: Rethinking Regulation of Customary Banking
market and law by virtue of being a federal agency established under the United States
Constitution.
Getting a license in New York is not a straightforward process. Detailed instructions for the
application are available.
89
Amazingly, New York State has not yet developed the convenient and
completely digital type of portal that FinCEN, as the application for an MSB license can be found
here and is only available in paper form and must be submitted by mail.
90
The process requires a
detailed background check of all p rincipals and corporate officers to be conducted by a licensed
private detective at company expense and sent with the application. Further information for
investigation by the Superintendent is also required, including histories of legal proceedings,
financial dealings and details of the business structure listing all ultimate beneficial owners. The
license costs US$3,000. License applicants must also complete notarised affidavits regarding their
knowledge and acceptance of numerous orders made regarding freezing terrorist assets and
customer information privacy. Licenses are transferable, but the objects of such transfers are
subject to detailed background checks by the Superintendent, just like for initial applicants.
91
The anti-money laundering provisions under New York state law are comparable to that at the
federal level, inc luding the requirement to have designated staff in charge of developing the
programme and file SARs.
92
These effectively mirror federal law, particularly those found in the
Bank Secrecy Act, in substance and form.
93
This is intentional, and m ost states follow a similar
legal path in harmonising AML/KYC/CDD programme expectations with federal authorities.
Ongoing money laundering training is required for staff, and the appointment of a responsible
compliance officer with a minimum of three years is experience is required.
Meticulous bookkeeping is required b y state law. All records are subject to inspection by the
Superintendent and subordinate agents on demand and must be kept for a minimum period that,
depending on the size of the transaction, can range from six months to five years.
94
All MSBs,
89
Instructions: Transmitter of Money License, New York State Department of Financial Services,
accessed 4 January 2016.
90
Application for a License to Engage in the Business of Issuing Travellers Checks, Money Orders, Prepaid/Stored Value Cards and/or
Transmitting Money, New York State Department of Financial Services, (DFSMT Rev 10.03.2011)
http://www.dfs.ny.gov/banking/ialfmta.pdf> accessed 4 January 2016.
91
N.Y. Banking Law, s 652(a); s 3 N.Y. Comp. Codes R. & Regs., s 406.11.
92
3 N.Y. Comp. Codes R. & Regs., s 417.2.
93
3 N.Y. Comp. Codes R. & Regs., ss 406.2(a), s 406. 9, s 416.1; s 31 C.F.R., s 103.28.
94
N.Y. Banking Law s 39 (6); 3 N.Y. Comp. Codes R. & Regs., s 406.7.
21 In Defence of Hawala: Rethinking Regulation of Customary Banking
including hawala businesses, are subject to detailed quarterly reports on their revenues, changes
in operations and must further voluntarily report any misconduct within 45 days of the event.
95
The continued operation of an MSB in good standing requires that all licensed MSBs acquire
deposit/surety bond to protect customers in case the business goes into liquidation.
96
The precise
costs for coverage vary widely, but are necessary for the protection of consumers who deposit
funds into an account in good faith of performance. Private surety can be acquired on the open
market, or alternatively it can be obtained from the Federal Deposit Insurance Corporation in some
circumstances. Alternative to the surety bond, the principals may put up an independent security
bond in an escrow account, subject to approval b y the Superintendent.
97
Following industry best
practice, the amount required would need to be close to 10% (at least) of the businesses quarterly
receipts. The state also has specific provisions to provide for such surety if no alternative is made
under Title XIII-C of the New York State Banking Law.
98
Given that many such businesses cannot
obtain surety due to low overhead, limited market access, or participant risk, an alternative fund
was created by statute. In these cases where alternative means of surety or insurance bonding is
not achieved, a penalty or fee of 2% is levied on all transfers handled by the MSB, the total amount
being c apped at $125,000 per year.
99
These fines go to the ‘state transmitter money fund’. It is
supposed to act in cases of insolvency, bankruptcy or inability to p ay and will be capitalised
enough to handle all customer claims in such an event.
Licenses can be revoked for any infractions by the Superintendent following a hearing.
100
No
warnings are necessary and the rights of appeal, although subject to judicial review, are highly
unlikely to be successful if evidence for cause is established.
101
The system permits very little
leniency after a decision has been made regarding termination of licenses.
V. REFORMS TO BRING HAWALA REGULATION INTO THE 21ST CENTURY
As is apparent by now, the present status quo of hawala in the eyes of the law and the marketplace
is that it is an outlaw industry. The overwhelming majority of the industry is unlicensed and
95
3 N.Y. Comp. Codes R. & Regs. s 406.10.
96
N.Y. Banking Law, ss 641-643; 3 N.Y. Comp. Codes R. & Regs., s 406.13(a-b).
97
N.Y. Banking Law s 643(3); 3 N.Y. Comp. Codes R. & Regs., s 406.14.
98
N.Y. Banking Law, Title XIII-C, ss 653-659.
99
N.Y. Banking Law s 657; 3 N.Y. Comp. Codes R. & Regs., s 406.15.
100
N.Y. Banking Law, s 642; 3 N.Y. Comp. Codes R. & Regs., s 406.8.
101
N.Y. Banking Law, s 647.
22 In Defence of Hawala: Rethinking Regulation of Customary Banking
operates illegally. Extremely steep fines and prison sentences are doled out. Consumers are not
afforded protections offered elsewhere in the marketplace, creating a second -class customer. It is
a situation in which no one wins and it limps along by c hoice of both the hawaladars and
legislators who have no impetus to ever change it. Many reforms are n eeded, and it is simply not
realistic to expect conformity from a uniquely decentralised financial service such as hawala.
102
Given the sui generis small-market position, cultural affinity and traditional nature of hawala (and
certain other IVTS systems for that matter), some special treatment is warranted.
It is apparent that regulating a customary, low cost and very basic banking service like a mo dern
equivalent is not working. A new regulatory approach is needed. As noted above, while the cost
of complying with federal registration procedures is low, state licensing is prohibitively expensive
for all but the wealthiest of hawaladars. Barriers to entering the market exist that lock out all but
the already well-heeled. It is in this way that the United States and its regulatory state mirror the
corrupt regimes of the ‘Global South’ that over-regulate and tax everything the underprivileged
have into the underground economy. This is how Osama Bin Laden was able to finance his terror
so easily, after all, the blame of the potential hawaladars is incidental in this regard.
As such, a new strategy would behove the regulators in dealing with the hawala industry. Between
the licensing fee, incidental costs like background investigations and h efty surety bond, the
regulatory state effectively acts as a barrier to entry. A lower license fee needs to be available to
hawala businesses and be combined with a separate surety pay-as-you-go surety fund. In effect, a
parallel regulatory and surety scheme is necessary.
A necessary feature of this parallel system would be best practice guidance on anti-money
laundering and customer due diligence programmes. As it is, these are nebulous and difficult to
quantify in many respects for ordinary banking and financial services institutions. The current
anti-money laundering and customer due diligence standards in place are extremely vague to the
point that they create excessive false red flags. In this way, wealthier countries need to tar get the
anti-money laundering regulations with greater precision. The Organisation for Economic Co -
Operation and Development and the Financial Action Task Force need to specify in great detail
specifically what makes transactions high-risk and banks need assurances that they will not be
prosecuted for the actions of clients when they stick to the m ore clearly defined standards and
102
Smriti S. Nakhasi, ‘Western Unionizing the Hawala: The Privatization of Hawalas and Lender Liability’ [2006-2007]
Northwestern Journal of International Law and Business 475.
23 In Defence of Hawala: Rethinking Regulation of Customary Banking
report criminal activity appropriately. Technology (particularly t elecommunications) and global
diasporas have made hawala much more competitive and needed, but our current regulation
paradigm has proven an obstacle.
Finally, a general amnesty for existing hawala businesses must be extended. A promise of
prosecutorial immunity for past unlicensed hawala activity c an reasonably be offered under the
condition of future compliance. Coupled with an outreach effort to the communities most reliant
on their services, this would incentivise those non-compliant hawaladars to leave the grey market
and enter the parallel regulatory system. They would also suddenly be on the tax rolls and on the
radar of the national financial intelligence unit, FinCEN.
VI. CONCLUSION
Just like a river, comm erce will follow the path of a least resistance in a free market. In the era of
hyper-globalisation, this route will tell an incredible story about human geography. Hawala is just
one of many no doubt, but its present channel is beset by many hurdles. The Organisation for
Economic Co-Operation and Development’s Financial Action Task Force has noted that hawala
has remained popular it usually costs less than moving funds through other means, operates 24/7,
is more reliable, and requires minimal paperwork.
103
The present status of h awala regulation in
New York and the whole United States is really untenable in its present form. It fails to recognise
the independent nature of the business, the communities it caters to, and regions which most
frequently rely on it for basic things like remittances. The present policy of denying pluralism is
not working. If it were, fewer hawaladars would be exposing themselves to criminal prosecution.
Hawala occupies a unique place in the history and the commercial culture of the Middle East and
North Africa even to this day. And although the past century has brought more change to the
region than the preceding twenty combined, hawala remains much as it was at its inception: a
simple money transfer system dependent upon non -competitive brokers. Although r epresenting
a tiny slice of the global transfer business, it makes up a large proportion of the business in key
markets and demographics both within the region and worldwide, namely in underdeveloped
103
OECD (n 26).
24 In Defence of Hawala: Rethinking Regulation of Customary Banking
countries and their diaspora communities that use hawala as a lifeline for remittances. It is for this
reason that it is of great importance.
In spite of its unique origins and n iche market, domestic regulators (to their credit in all fairness)
look to substance rather than form in the application of existing laws. If there is one thing this
article should testify to, it is that the measures imposed on larger market participants in the MSB
business are simply not scalable to either the hawaladars or their customers. It is a problem of the
system being designed for economies of scale instead of small businesses, an all too common
within the American system of government these days.
As such, it is important to consider potential remedies capable of fixing key problems affecting the
hawala industry. Some 80% of hawaladars are not in compliance with licensing, taxation, and anti-
money laundering requirements. Some are simply ignorant of the law and others have no m eans
of complying given the hurdles in place for highly profitable players such as Western Union and
large international banks. Rather than relying on the law as a cudgel to compel obedience, better
outreach and an alternative regulatory system as loosely outlined above would better serve the
interests of both the hawala industry and the government in creating a more open, transparent
and ethical money transfer industry that is free from abuse by criminal elements.
25 In Defence of Hawala: Rethinking Regulation of Customary Banking
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34 In Defence of Hawala: Rethinking Regulation of Customary Banking
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3 N.Y. Comp. Codes R. & Regs. s 406.15
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201

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