Invisible Bankers: Anonymous Digital Cash And The Financing Of Terrorism

26th October 2018

In the aftermath of 9/11, President Bush declared that the United States would destroy Al Qa’eda using ‘every means of diplomacy, every tool of intelligence, every instrument of law enforcement, and every financial influence’. The last of these has a critical role to play in determining the success of a terrorist group and continues to present a paramount challenge to US, British and other counter-terrorism organisations. The funding mechanisms that support terrorist activities, including shell companies, private donors and charities, rely on the inconspicuous movement of large amounts of cash. The methods with which terrorist groups transfer funds, notably the ‘Hawala’, provide anonymity and effectiveness, particularly in regions that lack established banks. Current measures, including government agencies such as the Office of Foreign Assets Control (OFAC) in the United States, and the Payment Services and Money Laundering Directives in Europe, theoretically enable a level of state control over Hawala service providers, including the freezing of the assets of terrorist groups. However, challenges posed by Hawala’s perceived legitimacy continue to impede efforts to prosecute jihadi terrorist cells in practice.

A complex and multi-faceted banking system, Hawala serves as a wire transfer equivalent across the Middle East, Asia and North Africa. Unlike traditional banking systems, no money moves physically between locations; rather, it is transferred by means of a telephone call and recipients then receive a code number or token to prove that the money has been sent. This relies on the performance and honour of a huge network of money brokers, known as ‘Hawaladars’, who facilitate payments. Hawaladars receive their profits through small commissions, as well as by bypassing official exchange rates. Typically, the funds enter the system in the source country’s currency and leave the system in the recipient country’s currency. As settlements often take place without any foreign exchange, they can be carried out relatively cheaply and quickly.

Given its ease of use, speed and affordability, Hawala is sometimes viewed as more reliable than formal banking institutions. For example, in developing countries like Somalia, years of violence and political turmoil have resulted in a heavy dependence on the Hawala system. Currently around 80 percent of the Somali population receives approximately 1.2 billion annually from the country’s diaspora.

Unfortunately, just as relief money flows through Hawala networks, so too does dark money closely linked to the funding of terror, money laundering and other criminal activity. Isolated from modern banking institutions, ISIL has relied heavily on the Hawala system to move money domestically and abroad. The Hawala system has also been linked to the funding of other terrorist groups across the Middle East, like Al-Qaeda and Al-Shabaab.

A debate therefore rages on in the international community. One the one hand, Hawala is a major conduit for terrorist groups worldwide. However, Hawala is also the financial backbone for many millions of people. Middle Eastern expatriates working in the West are the largest proportion of Hawala users, relying on the system to send funds to their families. The total annual flow of such remittances total around $100bn. Periodic shutdowns of Hawala organizations, such as that implemented by Kenya in early 2015, run the risk of triggering economic and humanitarian crises. Therefore, law enforcement and other regulatory bodies must weigh the costs, benefits, and implications of potential new rules and actions that would affect Hawalas.

The international community has created a number of bureaucratic offices in which to combat illegal financial networks. However, surveillance and enforcement forces terrorist organisations to use underground networks and consequently, to circumvent British and international intelligence regulations and oversight. Ironically, terrorist financing is therefore more difficult to track and counteract today because of more stringent oversight post 9/11. Apathetic and un-cooperative foreign partners have also further frustrated the international efforts to find and freeze terrorist financial networks. Although Saudi Arabia does not condone the actions of extremist groups, historically the country has been a major hub for Islamic charities, donors and sponsors, both legitimate and illicit, all of which rely on Hawala for their operations.

Ultimately, Hawala is not a source of terrorist financing, it is a conduit. We can regulate or eliminate such methods. However determined sources of financing will find other ways of transferring value unless we stop those donors where they live. If the formal banking sector intends to compete with the informal remittance business, it should focus on improving the quality of its service and reducing the fees charged. In Afghanistan, in the absence of traditional financial institutions, Hawaladars provided the only viable commercial banking services whilst the Taliban held power. Therefore, a long-term and sustained effort should be aimed at modernising and liberalising the formal financial sector, with a view to addressing its inefficiencies and weaknesses.

That is why organisations like Huozhi are so important. Founded by Edwina Thompson, the company is committed to working out a way to provide people in crisis, and those serving them, with a safe way to receive and send money where there are no banks. Pursuing these more nuanced approaches to financial intelligence challenges are likely to be more effective than over-regulation and coercive measures, which will not, in isolation, reduce the attractiveness of the Hawala system.