Problems applying traditional anti‐money laundering procedures to non‐financial transactions, “parallel banking systems” and Islamic financial systems
| DOI | https://doi.org/10.1108/13685200710746866 |
| Date | 15 May 2007 |
| Pages | 157-169 |
| Published date | 15 May 2007 |
| Author | Bruce Zagaris |
| Subject Matter | Accounting & finance |
Problems applying traditional
anti-money laundering procedures
to non-financial transactions,
“parallel banking systems” and
Islamic financial systems
Bruce Zagaris
Berliner, Corcoran & Rowe, Washington, District of Columbia, USA
Abstract
Purpose – The purpose of this research paper is to consider the unique and even positive nature of
hawalas and other informal fund transfer systems (IFTs) in the developing world.
Design/methodology/approach – Reviewing primary and secondary reports from national
regulators, international organizations, and academics, the paper questions the conventional view
that IFTs should be subject to extensive regulation and scrutiny because they have been abused by
some participants. Many positive characteristics of hawalas – speed, transaction cost, cultural
convenience, and versatility – also contribute to their abuse. The paper examines the modern uses of
hawalas, including legitimate – remittances from migrant workers, humanitarian and emergency aid,
personal investments – and illegitimate – money laundering, terrorist financing, tax and customs
evasion, circumventing exchange controls – applications. The paper then discusses legal issues
involving IFTs in developing and developed countries, discussing factors the international community
should consider when designing regulatory systems. The paper reviews developing world IFT
regulation in the UAE, Afghanistan, Somalia, the Eastern and South African Anti-Money Laundering
Group, and Columbia, and developed world regulation in The Netherlands, the UK, and the USA.
Findings – The paper concludes that IFTs are robust in jurisdictions where formal banking systems
are absent or weak, or where structural obstacles distort foreign exchange and other financial markets.
Originality/value – Looking forward, the paper considers, inter alia, licensing or registration
requirements and the rationale for choosing one over the other, and the need for competent authority
due diligence on IFT operators.
Keywords Money laundering,Terrorism, Financing, Developingcountries
Paper type Research paper
1. Introduction
In the last five years the international community – especially the organizations
responsible for anti-money laundering and counter-terrorism financial enforcement –
has turned its attention to the problems of hawala and other alternative remittance
systems. In particular, since September 11, renewed public interest has focused on
informal funds transfer (IFT) systems. Legislative hearings and media coverage have
concentrated on the putative link between IFT systems and terrorist financing,
increasing the level of official concern about IFT systems’ potential susceptibility
to abuse.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
24th Cambridge International Symposium on Economic Crime, September 3– 10, 2006.
Anti-money
laundering
procedures
157
Journal of Money Laundering Control
Vol. 10 No. 2, 2007
pp. 157-169
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200710746866
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