An Alternative Banking System & It's Connections To Blood Diamonds, Terrorism, & Child Soldiers
General Information Legal Cluster Bio-Geographic Cluster Trade Cluster Environment Cluster Other Clusters
TED Case Studies
Number 119, 2003
by Joshua Kleymeyer
1. The Issue:
Outside the recognized capitalist canons of legitimate trade and banking, an ancient and efficient system of exchange called Hawala has been gaining popularity in the international black market community. Above all, to those who have access, Hawala is considered a trustworthy, paperless, and lucrative manner of moving money. The immediate payoff for using these underground networks is thus an efficient, often more affordable, and most importantly, untraceable transaction.
Hawala originated in the Middle East thousands of years ago to circumvent roaming bandits who would rob traders while at their most vulnerable, as they traveled by camels on long trips through the desert. China is also recorded to have had an ancient version called a “‘chop’, ‘chit’ or ‘flying money’ system.” (Jost, 2000) Presently, with the advent of international communications technology, Hawala is used more often and for far more illegitimate uses than when it was created. The most stringent example is that of Hawala being utilized to launder money. This is exemplified in the systematic and premeditated mass liquefaction of Osama bin Laden’s monetary wealth into primarily diamonds and secondarily gold.
It is a well regarded fact that in the months leading up to September 11, 2000 al-Qaeda moved tremendous amounts of wealth to hidden corners of the world, confounding the ability of the world’s most adept intelligence agencies to substantially freeze al-Qaeda's assets. (Farah, 2001) Though most Hawala transactions happen with fraudulently documented import and export transactions which, as mentioned above make them virtually impossible to trace, in the case of diamonds and even gold, the goods exchanged become also the medium through which money is directed into the hands of third party accomplices. Consider the difficulty in tracking down the recipients of moneys that have been laundered through elemental goods - valuable around the globe - and through markets that are often locally run if not illegitimate (as in black-markets), and by transactions that have been ill-recorded, if documented at all.
Hawala, at its core, is an alternative remittance system that is considered illegal in the USA, Pakistan, and India, as well as by the World Trade Organization which, through membership requirements, also demands this position of all WTO member countries. This study looks into the inner workings of the Hawala system, including: its myriad uses, the international legal response, and the manner in which this alternative system is affecting civil strife on the grass roots level and on the global level, in the form of civil wars and terrorism.
How Does It Work?
Hawala is essentially a method of rapidly and efficiently moving collateral to millions of locals based around the world, solely on the basis of upstanding business ethic. One mistake or abuse, and you loose the honor offered you by your clientele. The way it works is simple. A Hawalador, possessing the established and necessary trust, at point A has a contact in point B, being a business partner, a relative, or a debtor. By advertise openly or more popularly, by word of mouth, the Hawalador attracts clientele. To complete the loop, the same circumstance and credentials are required at point B to solidify a money transfer. The one with the collateral gives it to the person at point A, who by email, instant messaging (IM), fax or phone notifies their partner at point B. The individual expecting to receive the money is then approach by the business contact at point B. Many times this happens between the business partners as a cancellation of debt, but can also piggyback on import/export transactions, easily being covered up in falsified invoices. (Jost, 2000) The business partners keep good records and ultimately make a good profit. This can be done, as mentioned before, by using gold or diamonds instead of cash - which for paid mercenaries and terrorist groups, becomes a way of existing in their challenging environments. Hence, Hawala becomes not only a method of moving money but also a means to an end: wealth, power, and secrecy.
Hawala Transactions and Bookkeeping:
In this example, Abdul wants to send money to Mohammad. Abdul solicits the services of Yasmeen who has a partner, Ghulam, in the same local as Mohammad. With the use of IT portals, the transaction is done effortlessly and at a more competitive commission rate then offered at banks and lending institutions.
(Pictures courtesy of INTERPOL.)
'Hawala bookkeeping' emphasizes business partners or associates keeping track of how much money is owed to whom. The following sample chart is based on hypothetical records kept by functioning Hawaladors and charts a brief history of one Hawalador's transactions with several different partners. It illustrates how particular the record keeping is, not to mention confusing to an outsider who may only be familiar with the Western model of bookkeeping:
|18/6/98||Ganesh Trading||200000||38||5263.15||52 Tolas of Gold|
(Picture and Graph courtesy of INTERPOL)
The first column indicates the date of the transaction. The second column is the name of the hawala broker to whom the debt is owed; it is very common to use partial names (e.g. 'Vinod') or codes (e.g. 'DK' ). The third column is the amount of the debt. This chart reflects a tendency to do business in multiples of 100,000; so it would not be uncommon to see things like '1.5' for 150,000. The third column indicates the dollar/rupee exchange rate in effect for the transaction. The fourth column is the value of the transaction in dollars. The fifth column reflects the way in which the payment was made. Notations such as 'F-1202' usually represent a bank ('F' might be 'First Bank'; 'B' and 'L' would represent other banks) and the check number. The notation for Ganesh Trading is '52 t' in Hindi. This represents 52 tolas (17) of gold, possibly paid to a local goldsmith or jeweler instead of remitting the money via a bank.
Money Moving Freely About the Globe
The manner in which money moves around the world demands tradesmen. They trade in things valuable, and the world revolves. As the saying goes, money makes the world go around. With the advancement in communication technology, legitimate institutions like banks have become proficient at using an orderly, bureaucratic, and papered approach to the trade. They are considered highly legitimate because they concern themselves greatly with their customers: asking for full names, social security numbers, addresses, etc. Then, as financial institutions must do, they follow international laws, abide by international exchange rates, and usually charge high commissions. Most of all they operate within the scope of “significant record keeping and reporting requirements mandated by the Federal Bank Secrecy Act requirements that the legitimate financial industry must adhere to.” (Balayan, 2001)
Twenty First Century Pony Express
Institutions like Western Union become the middle ground, and are used often
to move huge sums of money by way of a myriad of small transfers. This is due
to their less involving but still existent doctrine of bureaucracy in the form
of limits of cash that can be exchanges as well as preprogrammed alarms that
signal the potentially illegitimate use of this exchange venue. An example would
be to add a transaction with Western Union into the mix of money laundering
techniques. Specifically, in the days before the devastating attack on the World
Trade Center on September 11th, 2001, at least three of the known terrorists
that participated in the high-jacking of the four airplanes returned thousands
of dollars of excess moneys through Western Union to “Mustafa Muhammad
Ahmed, a top official in Osama bin Laden's organization.” (Timmons, 2001)
As a result, Western Union has newly instituted security measures in place to track this kind of pattern, so that there is not a repeat, or rather a missed opportunity to detect a risk to US national security. However, consider for a moment how this will affect the popularity of Hawala due to the enforcement of new and more stringent constraints.
(Photo provided by INTERPOL)
3a. Relevant TED Organized Crime Cases:
Human Rights Abuses:
Note: though these related Trade Environment Database (TED) results are all individually intriguing in their own right, none of them a direct relationship to the illicit trafficking of money, diamonds or gold with the intention of avoiding scrutiny and ultimately funding anarchic non-state players who have recently all fallen under the umbrella stigma of terrorist.]
3b. Relevant ICE cases:
Human Rights Abuses:
4. Author and Date:
Joshua Kleymeyer, April 2003
5. Discourse and Status:
Recognized and licensed institutions today are, in fact, far from the most
preferred avenue of exchanging and transferring money, especially for those
individuals who deal in other things valuable (i.e. gold, conflict diamonds,
weapons, women, children, tactical manuals and classified documents). They obviously
have cause to avoid scrutiny, and usually have time constraints, not to mention
prefer to haggle a better deal then be charged exorbitant commissions.
Furthermore, Hawala is an ancient system known also as hundi, which means “trust” in Hindi. As far as issues of culture identity and the need for close nit relationships to ensure survival go, it is no wonder that Hawala has become the preferred method of moving money around the “third” world. (Jost, 2000) Due to the events on September 11, 2001, the system of Hawala has become the concern of the Department of Defense as well as the US Customs Service located in Washington DC. With the assistance of the new intelligence gathering methods presently made legal with the signing of the Patriot Act, these agencies - in their quest to eradicating terrorism from the face of the earth - have commenced efforts to create a dragnet for Hawaladers called Operation Green Quest. (Balayan, 2002)
6. Forum and Scope:
Charity or Relief Organization
Another area of concern is the variety of methods that may be used to collect funds for philanthropic or humanitarian causes, and the organizations that receive the funds. The issues presently are confounding relations between Saudi Arabia and the US for just this reason. Solicitation methods range from obligatory religious donations to direct-mail and Internet appeals. Noted quantities of these funds that are primarily dedicated to third-world charitable causes have been and are susceptible to being diverted to terrorist networks. Often without the donor's knowledge or consent.
Legitimate Enterprises Terrorist groups are increasingly using so-called "front companies" - legitimate businesses that commingle legally and illegally obtained funds in order to avoid suspicion - to generate revenue for their networks and activities. These businesses run the gamut from convenience stores to international investment management services. Terrorist organizations are also exploiting international trade by converting susceptible assets like cash into precious commodities like gold and gemstones. Gems and precious metals are then universally convertible to "Operational" Assets; (i.e., cash).
Profits from a variety of criminal enterprises benefit terrorist organizations. Some of the more common are:
“An official US report shows that tax havens harbor deposits around US $5 trillion and the US government itself loses about US $70 billion by way of lost tax revenues. One could use it to import goods illegally, say, smuggling of gold. It is estimated that India has lost through gold smuggling and its import (1992) an estimated US $150 billion since gaining independence. The estimates for flight of capital are unreliable but it could be anything upwards of US $100 billion by now. Pakistan Finance Minister Shaukat Aziz, a former executive vice-president of Citibank in New York, said US $2 billion to US $5 billion moved through the "Hawala system annually in Pakistan", more than the amount of foreign transfers through the country's banking system. Though, no study seems to have been carried out to find out the exact percentage share of various players, yet, based on the author's discussion with various sources, an estimated share of Hawala transactions can be attributed to: importers-65 per cent, exporters-10 per cent, expatriates-15 per cent, funding militancy-5 per cent, travellers-5 per cent. Money meant for militant activities forms a small part of the whole spectrum. It is hence difficult to segregate. However, the country of origin gives an indication about the possible end-user, like money coming from Dubai is generally believed to be meant for militant activities and this is where Hawala operators can be of use to intelligence agencies. After September 11, 2001, US authorities believe that millions of US dollars were sent through Hawala by Al-Qaeda to Dubai.”(Jamwal, 2003)
7. Decision Breadth:
Around the world there exists a myriad of locations and avenues to move money, be they through recognized financial institutions, hidden in export/import transactions, through religious channels, or less moral ones like extortion and conflict diamonds. Since Hawala is an alternative remittance system working in parallel with the normal banking channels, and manifesting itself domestically and internationally. Specific hotbeds of Hawala activity around the world are, for example: New York, London, Pakistan, Dubai, in India centers are located in Delhi, Mumbai, Chennai, and Kolkata, and in the Indian sub-continent in Kashmir and Jammu.
There have been reports issued from the World Trade Organization (WTO) on the problem of "Rough Diamonds" creating great amounts of strife in Africa. The Kimberley Process was devised to deal with this issue, but has repeatedly needed updates and new waivers.
8. Legal Standing:
Operation Green Quest
The US Customs Office’s Operation Green Quest, in conjunction with the US Attorney Office’s Suspicious Activity Report Committee has a national and international component. Utilizing 26 US Custom’s Attaché offices, the international contacts are used to follow leads abroad. (Balayan, 2002)
Banking Secrecy Act
The Bank Secrecy Act (BSA) established in 1970, requiring greater transparency from certified banks. It was also applied to other financial services to scrutinize currency transactions domestically, but also attempt to thwart tax evasion.
US Patriot Act
The USA Patriot Act is the harbinger of all acts, drawing on multiple agencies and spearheading the US’s efforts to contain the flow of money to terrorists. It was signed into law by President Bush on October 26, 2001, and stands for: United and Strengthening America by Providing Appropriate Tool Required to Intercept and Obstruct Terrorism. The USA Patriot Act affects several businesses in relation to cracking down on key Hawala money exchange players. “A handful of industries are now under the mandate, while several others may come online later this year. Some of the businesses proposed to fall under the regulations may be loan and finance companies, real estate closers, pawn brokers, vehicle sellers and travel agents.” (Borchmann, 2003)
The USA Patriot Act attempt to cover 10 areas, some of which are boarder control, electronic surveillance, information sharing, but has one specific anti-money laundering program called the International Money Laundering Abatement and Anti-Terrorism Financing Act. This act requires several entities, like currency dealers, casinos, the US Postal Service, and of course banks, to establish their own anti-money laundering programs to be viewed by federal regulators.
Following the guidelines laid out in the 2001 National Money Laundering Strategy, Operation Green Quest lead by the Customs Service and several other agencies will principally work with the previously established El Dorado Task Force out of New York to create quantitative and qualitative enforcement of US policies. (US Customs, 2001)
El Dorado Task Force
The El Dorado Task Force was established in 1992, is comprised of 185 individuals, works with a total of 29 local, federal and state agencies, and has since its inception seized $425 million dollars. This total comes from various money laundering techniques, many of which are specifically drug, not terrorist, related.
“The Treasury Department agencies participating in Operation Green Quest are the Customs Service, the Internal Revenue Service, the Financial Crimes Enforcement Network, the Office of Foreign Assets Control, and the Secret Service. The Federal Bureau of Investigation and federal prosecutors from the Justice Department's Criminal Division are representing the Justice Department in Operation Green Quest.” (US Customs, 2001)
Kimberley Process Certification Scheme
Furthermore, to coordinate the enforcement efforts locally and internationally congress has issued the directive to establish a Kimberley Process Implementation Coordinating Committee. Led by Canada, and co-sponsored by 11 other countries, an international trade ban was approved by the WTO on February 27, 2003. “The World Trade Organization agreed Wednesday that countries can sidestep one of its basic principles and join in a ban on trade, refusing to import so-called "blood diamonds" that have financed civil wars in Africa.”(WTO, 2003) The Kimberley Process requires certificates to be issued for all importation and exportation of gems.
Clean Diamond Trade Act
Senator Grassely, along with several other senators, introduced a bill which the US Senate passed, known as the US Clean Diamond Trade Act on April 1, 2003. The US has been trying for some time to bring the issues related to the sale of conflict diamonds like human rights abuses and illegal trade of weapons, to the attention of the international community under Chapter VII of the United Nations charter. The direct evidence motivating this decision in congress is explained succinctly in the first paragraph of the act: “Funds derived from the sale of rough diamonds are being used by rebels and state actors to finance military activities, overthrow legitimate governments, subvert international efforts to promote peace and stability, and commit horrifying atrocities against unarmed civilians. During the past decade, more than 6,500,000 people from Sierra Leone, Angola, and the Democratic Republic of the Congo have been driven from their homes by wars waged in large part for control of diamond mining areas. A million of these are refugees eking out a miserable existence in neighboring countries, and tens of thousands have fled to the United States. Approximately 3,700,000 people have died during these wars.” (Grassely, 2003)
Thus, a greater effort to staunch the flow of goods that contribute to some of the most dangerous crisis in the world have finally been placed into effect on US soil. This will entail the cooperation of US Customs and retail business’s transparency at home. Abroad, the US Clean Diamond Trade Act will draw heavily on an internationally accepted law known as Kimberely Process Certification Scheme, but accepted as the international rules accorded to the import and export of diamonds. “The Interlaken Declaration on the Kimberely Process Certification Scheme for Rough Diamonds of November 5, 2002, states that Participants will ensure that measures taken to implement the Kimberely Process Certification Scheme for Rough Diamonds will be consistent with international trade rules.” (Grassely, 2003) President George W. Bush signed his final consent of the Clean Diamond Trade Act in late July of 2003.
This UNITA soldier, here awaiting demobilization, was recruited at age 11. Vila Nova, Angola, 1998. UNICEF / HQ96-008 / Giacomo Pirozzi
soldiers await demobilization.
Bo, Sierra Leone, 1998. UNICEF / HQ98-0578 / Giacomo Pirozz.i
(Photos courtesy of United Nations study on Blood Diamonds)
9. Geographic Locations
(Saudi Arabia and India maps courtesy of Central Intelligence Agency.)
(Africa Map courtesy of United Nations.)
a. Geographic Domain: Asia
b. Geographic Site: South Asia
c. Geographic Impact: Middle
10. Sub-National Factors: None
11. Type of Habitat: None
12. Type of Measure: None
13. Direct v. Indirect Impacts: None
14. Relation of Trade Measure to Environmental Impact:
a. Directly Related to Product: None
b. Indirectly Related to Product: None
c. Note Related to Product: None
d. Related to Process: None
15. Trade Product Identification: None
16. Economic Data: None
17. Impact of Trade Restriction:
18. Industry Sector: None
19. Exporters and Importers:
Ibrahim Bah is a former rebel from Senegal, trained under Col. Moammar Gaddafi in Libya, fought in the Casamance uprising in Senegal in the 1970’s, fought the Soviets in Afghanistan in the early 1980’s, fought with Iranian-backed Hezbollah against Israel in the late 1980’s, and is now the principle diamond dealer for Senegal’s Revolutionary United Front (RUF). RUF is a feared group with direct contacts to al Qaeda and Hezbollah, and is known for hacking the limbs off its enemies and forcing children to pick up arms and kill for their cause. Since a recent cease fire between the RUF and Sierra Leone, diamond mining in one of the world’s richest alluvial diamond fields has grown exponentially. Moreover, Ibrahim Bah has his hand firmly placed on the flow valve of this infamous diamond pipeline in West Africa. (Saferworld, 2003)
Customs are not a problem, nor are US agents and “friendlies” that are notably few and far between in Africa. These US agents estimated that in 1999, RUF’s “blood diamonds” grossed them approximately $75 million US dollars. It is also wisely believed that al Qaeda, expecting its funds to be frozen after September 11, converted high percentages of its collateral into diamonds: an undetectable and untraceable form of currency. These diamonds are moved by RUF, with the protection of Liberian government - cemented by high commissions - over there border into Monrovia, where they are traded to Belgium diamond dealers for suitcases of cash. Bah lives in Burkina Faso’s capital city Ouagadougou. (Farah, 2001)
20. Environmental Problem Type:
21. Name, Type, and Diversity of Species:
22. Resource Impact and Effect: N/A
23. Urgency and Lifetime: N/A
24. Substitutes: Alternative banking/trade business
Diamonds Essence Retailers, based in New Jersey, USA, make comparable quality diamonds out of glass.
25. Culture: N/A
26. Trans-Boundary Issues: None
The prime legal issues of controlling a system like Hawala and its offshoots are simply daunting. Just as the struggle to protect Intellectual Property Rights around the world is almost an insurmountable task - heavily enforced by the World Trade Organization and the G8 - the onus always falls on the respective country, often for reason of sovereignty, to police the problem and enforce the internationally drafted laws. The reality that third world countries, who are the primary breading ground for such dangerous experiment in international social backlash, possess dilapidated, ill-equipped, untrained, or simply nonexistent forces to do the job. Too often the actual lack of a judicial force to be reckoned with is the beginning and end to a successful fight against controlling the chaos that comes with trade in weapons or people, in conflict diamonds, timber, and gold. Moreover, even in the US where our legal and policing systems are envied globally, the ability to stop, much less, harness the financial backbone of third-world unrest is a tremendous political and military undertaking.
27. Rights: (see Legal Standing)
28. Relevant Literature:
"Federal Agents in Detroit execute multiple warrants on Hawala targets suspected of sending millions to Yemen in violation of Patriot Act." By: Gina Balaya. US Customs, December 18, 2002 .
"Operation Green Quest targets terrorist finances." By Dean Boyd, Public Affairs Specialist, Office of Public Affairs, US Customs.
"Hawala: The invisible bank." US Customs.
"A Banking System Built for Terrorism: 'Hawala' can move millions of dollars around the globe with no paper trail and no questions asked." By Meenakashi Guanguly. Time - World, Friday, Oct. 05, 2001.
hawala alternative remittance system and its role in money laundering."
Interpol General Secretariat, Lyon, January 2000
By: Patrick M. Jost, & Harjit Singh Sandhu.
"Anti-Money Laundering Literature Search." General - World Bank Institute.
"Ensuring Progress in the Prevention of Violent Conflict: Priorities for the Greek & Italian EU Presidencies 2003." By: Saferworld International Alert: Enhancing EU Impact on Conflict Prevention, April 2003.
"Fighting Corruption IN Customs Administration: What Can We Learn From Recent Experiences?" By: Irène Hors, Organization for Economic Co-operation and Development, Technical Papers, No. 175 .
"Hawala." By: Mohammed El-Qorch, Senior Economist, IMF's Monetary and Exchange Affairs Department. IMF Finance & Development, December 2002, Volume 39, Vol. 4.
"Informal Value Transfer Systems and Criminal Organizations; a study into so-called underground banking networks." By: Nikos Passas, LL.B., Ph.D. Professor of Criminal Justice.
"Tracing Bin Laden's Money: Easier said than done." By: Yael Shahar Sept. 21, 2001.
"Conflict Diamonds." List of recent articles relating to blood diamonds.
For more information conduct searches for relevant documents, cited below:
Clean Diamond Trade Act
WTO Kimberely Certification Process Scheme for Rough Diamonds
United Nation's Office for the Coordination of Humanitarian Affairs (OCHA) & Integrated Regional Information Network (IRIN) report on the fragile peace in Sierra Leone.
Balayan, Gina. (Dec. 2002) "Federal Agents in Detroit execute multiple warrants on Hawala targets suspected of sending millions to Yemen in violation of Patriot Act." < http://www.usdoj.gov/usao/mie/pr/hawala.html > (Jan. 28, 2003).
Borchmann, Phil. "Money Trail: The issue of Homeland Security will change the way the U.S. does business." Naples Daily News: Business. <http://www.naplesnews.com/03/02/business/d833353a.htm> (Feb. 10, 2003).
Farah, D. (Nov. 2, 2001) "Al Qaeda Cash Tied to Diamond Trade Sale of Gems From Sierra Leone Rebels Raised Millions, Sources Say." Washington Post Foreign Service, p.A1 < http://www.washingtonpost.com/ac2/wp-dyn/A27281-2001Nov1> (Mar. 4, 2003).
Grassely, Chuck. (April 11, 2003) "Grassley Hails Final Passage of Conflict Diamonds Bill." <http://grassley.senate.gov/ releases/2003/p03r04-11b.htm> (May 7, 2003).
Jost, Patrick and Harjit Singh Sandhu. INTERPOL. (Jan. 2000) "The hawala alternative remittance system and its role in money laundering." <http://www.interpol.int/Public/ FinancialCrime/MoneyLaundering/hawala/default.asp> (Jan. 25, 2003).
Jamwal, N.S.. "Hawala: The Invisible Financing System of Terrorism." <http://www. idsa-india.org/an-apr1.htm> (Feb.12, 2003).
Saferworld International Alert: Enhancing EU Impact on Conflict Prevention. (April 2003) "Ensuring Progress in the Prevention of Violent Conflict: Priorities for the Greek & Italian EU Presidencies 2003." <http://www.international-alert.org/pdf/pubII/EU_Impact.pdf> (April 30, 2003).
Timmons, Heather. (Nov. 15, 2001) "Western Union: Where the money is – in small bills." Business Weekly. <http://www. businessweek.com/bwdaily/dnflash/nov2001/nf20011115_6080.htm> (Jan. 27, 2003).
US Customs Service. (October 25, 2001) "U.S. Customs Service Launches “Operation Green Quest” Multi-Agency Initiative to Target Sources of Funding for Terrorist Organizations." <http://www.customs.ustreas.gov/hot-new/pressrel/2001/1025-03 .htm> (February 12, 2003).
US Customs Service. (Feb. 12, 2003). "Green Quest: Finding the Missing Pieces of the Terrorist Puzzle. <http://www.customs. ustreas.gov/xp/cgov/enforcement/ investigative_priorities/greenquest.xml> (February 12, 2003).
World Trade Organization. (March 27, 2003). "WTO approves KP waiver- Full Text." <http://www.diamonds.net/news/ newsitem.asp?num=7902&type=all&topic=Conflict> (May 7, 2003).
© Joshua Kleymeyer, July 2003.