Expert Commentary

U.S. Efforts to Combat Illicit Financial Networks

Celina Realuyo
Former Director, U.S. State Department Counterterrorism Finance Programs

The Cipher Brief sat down with Celina Realuyo, Professor of Practice in the William J. Perry Center for Hemispheric Defense Studies at National Defense University, to discuss how terrorist groups have used hawala networks to transfer funds undetected to help support their operations.

TCB: What are hawala networks?

Celina Realuyo: Hawala networks are informal value transfer system (IVTS) – meaning they are systems, mechanisms, or networks of people that receive money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form.

“Hawala” is a word that comes originally from the Arabic language and means transfer or remittance; it provides a fast and cost-effective method for worldwide remittance of money or value, particularly for users who might be outside the reach of the traditional banking sector. In some countries, hawala is illegal, in others the activity is considered a part of the “gray” economy. Other alternative remittance or informal value transfer systems include “hundi,” “fei ch ‘ien,” “chit system,” “poey kuan,” and the black market peso exchange.

Trust and the extensive use of connections, such as family relationships or regional affiliations, distinguish hawalas from other remittance systems. Unlike traditional banking, hawalas make minimal (often no) use of any sort of negotiable instrument. Money transfers take place based on communications between members of a network of hawaladars or hawala dealers.   

TCB: How do hawalas work?

CR: In a basic or traditional hawala transaction, four participants are required: a sender of the funds, a recipient of the funds, and hawaladars in the respective countries of the sender and recipient. Here is an example of a basic hawala transfer where an individual (#1) in Country A wants to send money to an individual (#2) in Country B.

Step One: Individual #1 gives currency to a hawaladar in Country A.

Step Two: The hawaladar in Country A provides Individual #1 with a code or other identification mechanism.

Step Three: The hawaladar in Country A notifies his counterpart in Country B by phone, text, fax, or e-mail of the transaction amount to pay Individual #2 and the code.

Step Four: Individual #1 contacts the intended recipient, Individual #2, in Country B and provides the code to that person.

Step Five: Individual #2 goes to the hawaladar in Country B, gives the appropriate code, and picks up the specified funds sent to him.

The hawaladar charges a flat fee, a commission, or may alternatively, or in addition, profit from the exchange rate differential between the official and the black market price of U.S. dollars in Country B. No money is actually transferred. The hawaladar in Country A uses the money received from senders to “stock” his cash supply for use in future payments for incoming requests to him. The situation is reversed in Country B where the hawaladar’s cash is generated from senders in his country.

Account settling may be accomplished through other methods such as: the physical transfer of currency across borders between operators by couriers; the use of the accumulated currency to purchase easily moveable commodities, which are then exported, subsequently sold, and the cash generated from the sale is provided to the second hawaladar; as payment for goods to be traded; by smuggling or trading gold and precious gems (i.e., diamonds or tanzanite); or through invoice manipulation (overcharging or undercharging for goods or services). Hawalas are a very efficient and inexpensive way to move funds to destinations as far afield as Somalia and Afghanistan.

TCB: Why are hawala networks used by terrorist organizations? Are there any terrorist groups that are most notorious for using them?

CR: Hawala networks are known to be anonymous, reliable, efficient, and inexpensive money transfer systems that do not have a paper trail. All these features make hawalas attractive for the transfer of illicit funds by terrorist and criminal groups. 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. According to the U.S. State Department, the 10 members of Lashkar-e-Taiba responsible for the November 26, 2008 Mumbai attacks that left 183 dead and over 300 injured used the hawala system to fund the operation. More recently, there are reports that ISIS foreign fighters are using various methods including wire transfers and hawalas to fund their travel and expenses.

TCB: Are there any locations where hawala networks have proven most effective (essentially hawala network “hotspots”)?

CR: The hawala system, though used elsewhere, is principally and historically associated with South Asia and the Middle East, where expatriate communities who migrated to Europe, the Persian Gulf region, or North America, use hawala to send remittances to relatives back home. Hawalas operate and are regulated here in the United States.

TCB: If they are outside the U.S., how much influence can the U.S. really have on cracking down on these networks?

CR: In the wake of the September 11, 2001 attacks, the U.S. led not only the military campaign against al Qaeda but also the financial front of the war on terror. The U.S. and its allies recognized the risk of terrorist financing via hawalas. Through the Financial Action Task Force (FATF), the U.S. and member nations have identified that risk and taken measures to monitor, regulate, and safeguard value transfer systems, including hawalas, from terrorist financing.

On October 31, 2001, FATF issued the Eight Special Recommendations on Terrorist Financing which, when combined with the FATF Forty Recommendations on money laundering, set out the basic framework to detect, prevent, and suppress the financing of terrorism and terrorist acts. Special Recommendation Six deals with alternative remittance systems including hawalas and contains three major elements:

  1. Jurisdictions should require licensing or registration of persons or legal entities providing money/value transmission services, including through informal systems or networks.
  2. Jurisdictions should ensure that money/value transmission services, including informal systems or networks, are subject to FATF Recommendations 10-12 and 15.
  3. Jurisdictions should be able to impose sanctions on money/value transmission services, including informal systems or networks, that fail to obtain a license/register and that fail to comply with relevant FATF Recommendations.

FATF Recommendation 14 on Money or Value Transfer Services (MVTS) states that countries should take measures to ensure that natural or legal persons that provide money or value transfer services (MVTS) are licensed or registered, and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations. Countries should take action to identify natural or legal persons that carry out MVTS without a license or registration and to apply appropriate sanctions.

Any person or business working as an agent should also be licensed or registered by a competent authority, or the MVTS provider should maintain a current list of its agents accessible by competent authorities in the countries in which the MVTS provider and its agents operate. Countries should take measures to ensure that MVTS providers who use agents include them. As recently as February 2016, FATF issued Guidance For A Risk-Based Approach Money or Value Transfer Services that includes hawalas.

TCB: How has the U.S. worked to clamp down on terrorist hawala networks? How successful have these efforts been?

CR: In the U.S., we have raised awareness of terrorist financing schemes and regulate hawalas. We also have a better understanding of how terror plots have been funded at home and abroad. This was the case in Faisal Shahzad’s failed 2010 Times Square bomb plot. In 2010, a U.S. court indicted hawaladar, Mohammad Younis, for arranging the delivery of $7,000 in funds to Shahzad through the hawala system, although there was no evidence that Younis had any knowledge of the Times Square plot. Shahzad later admitted that the transaction had been arranged by associates of the Pakistani Taliban.

More recently, hawalas are facilitating the payment of jihadists’ salaries in Iraq and Syria via a European network to avoid detection by authorities. The secret network, which runs through Spanish cities such as Almeria, Barcelona, Bilbao, Madrid, Santander, and Valencia among others, focuses on transferring money to Spanish jihadists situated in northern Syria with monthly sums of £518.5 ($800) given to a single fighter and £777 ($1,200) to a married fighter, officials revealed. Following the money trail has become integral part of any terrorist investigation, as was the case in the ISIS-inspired attacks in San Bernardino and Orlando, to identify suspects providing financing and other material support for terrorism.

TCB: What are some of the challenges the U.S. has encountered when seeking to disrupt Hawala networks?

CR: Hawalas are operated on the basis of trust and rely on known family or regional connections that make them difficult to infiltrate from a human intelligence perspective. In certain jurisdictions, they are not regulated. Since the transactions tend to be small in nature, there are not necessarily red flags to indicate a possible case of terrorist financing.  The New York Police Department Counterterrorism Bureau has worked closely with local communities to better understand the hawala networks in New York and protect them from abuse by terrorists.    

TCB: What more can the U.S. and its allies do to effectively disrupt terrorist Hawala networks?

CR: Through bilateral and regional engagements, the U.S. has worked tirelessly with allies to identify how terrorist and criminal groups are raising, moving, storing, and spending money to fund their dangerous agendas. The U.S. must continue to demonstrate leadership in the campaign to counter the financing of terrorism and crime through all methods including hawalas. This means further researching, developing, and disseminating typologies in terrorist financing. While financial technology (FINTECH), like mobile payments and Bitcoin, provide new means of moving money, we must continue monitoring ancient methods, like cash couriers and hawalas, that can just as easily fund possible future terrorist attacks. 

The views expressed in this interview are those of the author and do not necessarily reflect the views of the William J. Perry Center for Hemispheric Defense Studies, National Defense University, or the Department of Defense.

The Author is Celina Realuyo

Celina Realuyo is Professor of Practice at the William J. Perry Center for Hemispheric Defense Studies at the National Defense University. She is a former U.S. diplomat, international banker with Goldman Sachs, foreign policy advisor under the Clinton and Bush Administrations, and State Department Director of Counterterrorism Finance Programs.

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