Hawala Networks: The Paperless Trail of Terrorist Transactions

Photo: AP/Ton Koene

An integral component of U.S. counterterrorism strategy has centered on disrupting terrorist finances. Terrorist groups have exploited resources and industries in various countries – poppy cultivation in Afghanistan, charcoal mining in Somalia, and oil extraction in Iraq to name a few – to sell on the black market and subsequently use proceeds to arm and pay militants.

Perhaps one of the most mystifying aspects of terrorist financing is the ability for terrorist organizations to direct capital from one location to another without the use of institutionalized banking systems. To accomplish this objective, terrorist groups turn to hawala networks as a means of moving funds undetected.

Hawala, which means “transfer” in Arabic, is an informal transaction system based largely on mutual trust. The way the system works is as follows: An individual in country A gives money to a hawala broker, known as a hawalader, in country A. That hawalader then contacts a hawalader operating in country B and informs the person to give a certain amount of money to a specific individual in country B. Codes are provided by all parties to ensure that the money is delivered to the proper recipient. The hawaladers themselves do not send physical money; instead, they maintain records of payments and settle debts at a later point, often through the exchange of valuable goods or even through wire transfers. During the transaction, hawaladers charge a fee for their service.

A major reason why hawala networks are so appealing to terrorist groups is because they do not leave paper trails. Record keeping amongst hawaladers is not uniform and can be grueling to interpret. This reality presents difficulties for law enforcement agencies aiming to uncover and crack down on individuals or organizations that facilitate illicit hawala operations.

The role of hawala networks in terrorist financing was brought to light in a July 2004 report issued by The National Commission on Terrorist Attacks Upon the United States (also known as the 9/11 Commission).

According to the commission’s findings, prior to 9/11, al Qaeda moved a significant amount of its money via hawala networks. “[Osama] Bin Ladin turned to an established hawala network operating in Pakistan, in Dubai, and throughout the Middle East to transfer funds efficiently,” the report stated. “Hawalas were attractive to al Qaeda because they, unlike formal financial institutions, were not subject to potential government oversight and did not keep detailed records in standard form.”

Today, terrorist groups, including the Taliban, al Qaeda, and ISIS, use hawala networks to transfer funds to operatives around the globe. A February 2016 Wall Street Journal article detailed how ISIS continues to procure finances through hawala networks despite facing targeted U.S. air strikes and sanctions.

“Terrorist groups and their supporters operating in the Middle East and South Asia, including al Qaeda and its affiliates, the Taliban, and ISIS, have been reported to use the hawala system to move funds,” says Celina Realuyo, Cipher Brief expert and Professor of Practice in the William J. Perry Center for Hemispheric Defense Studies at National Defense University. “More recently, there are reports that ISIS foreign fighters are using various methods including wire transfers and hawalas to fund their travel and expenses,” she explains.

As part of the effort to clamp down on illicit hawala networks, the U.S. Treasury Department has sanctioned several hawala organizations with links to terrorist groups. In 2012, the Treasury Department sanctioned three hawala networks, the Haji Khairullah Haji Sattar Money Exchange (HKHS), the Roshan Money Exchange (RMX), and Rahat Ltd, all of which principally operate in Afghanistan and Pakistan, for sending funds to the Taliban. Two years later, the Treasury Department sanctioned Haji Basir and Zarjmil Co., another hawala group operating in Pakistan, for its connection to the Taliban. Beyond these organizations, several individuals have been added to the U.S. sanctions list for providing material support to the Taliban as well as to al Qaeda and ISIS.

However, much work remains to be done to diminish the impact of hawala networks on terrorist financing. The Treasury Department, quoting Pakistani officials, estimates that more than $7 billion flows into Pakistan through hawala channels each year. Ensuring that portions of this sum evades terrorist hands is a daunting task.

Last October, the House Committee on Homeland Security issued a report on U.S. efforts to combat financial tactics employed by ISIS and other terrorist groups. The report stated that “gaping weaknesses in reporting and oversight standards for hawala transactions hamper efforts to identify ISIS financiers and hold financial institutions accountable.”

To combat this, the report recommended that the Treasury Department work alongside states that are members of the Financial Action Task Force (FATF) – an inter-governmental body charged with developing measures to combat money laundering, terrorist financing, and other related threats to the integrity of the international financial system – “to improve financial regulatory reporting and oversight standards for processing hawala payments.”

While these recommendations are a step in the right direction, the challenges presented by hawala networks remain vast.

“In short, there is no regulatory solution for hawala networks and our adversaries understand this,” remarks John Cassara, Cipher Brief expert and former Special Agent at the U.S. Treasury Department.

“Osama bin Laden once referred to taking advantage of ‘cracks inside the Western financial system.’ The hawala system isn’t a crack, it’s a canyon,” he concludes.

Bennett Seftel is deputy director of editorial at The Cipher Brief. Follow him on Twitter @BennettSeftel.