Vienna, 11 September - Hawala, a money transfer service used across the globe, is vulnerable to misuse by organized crime groups and other criminal actors, according to a new report released by the United Nations Office on Drugs and Crime (UNODC).
“The Hawala System: Its operations and misuse by opiate traffickers and migrant smugglers” examines the hawala service, sometimes referred to as “underground banking” or “alternative remittance system”, among other names. Though widely used for legitimate purposes, some attributes of the hawala system – which in many countries is unbureaucratic, anonymous, and unregulated - make it attractive to organized crime groups looking to transfer illicit funds and values.
“In the hawala system,” one hawaladar from Somalia acknowledged, “we don’t ask questions. We only offer the service.”
What is hawala?
With a rich history dating back centuries, the Hawala system can offer a unique blend of cultural compatibility, convenience, reliability, broad geographic reach, and speed. It provides vital remittances and is used amongst displaced persons and refugees in times of conflict and when formal financial intermediation is unavailable.
While fundamental to financial inclusion, the system is vulnerable to exploitation and misuse by organized crime. These risks, particularly when hawala systems are operating outside of a regulatory system, can put clients, financial sectors, humanitarian actors, vital remittance corridors – and thus sustainable development – at risk.
Hawala and organized crime
Drug traffickers, migrant smugglers, and other criminal actors capitalize on characteristics of the system to transfer illicit funds and store proceeds from illegal activities. The report found that hawaladars (individuals who operate Hawala services) often don't scrutinize the source of funds or the purpose of transactions, making it an attractive option for those engaged in illegal activities. Hawaladars offer cash savings, currency exchange, short-term lending, safekeeping of funds, and trade guarantees.
In Afghanistan, which supplies 80 per cent of the world’s opium, hawaladars may be directly involved in transferring payments to opium poppy farmers or opium users – or they may be help transfer the proceeds of drug trafficking between countries. Organized crime groups also use halawadars as trustees or intermediaries between the seller and buyer of drugs.
“The hawala system is a reliable and easy-to-use system for drug traffickers,” explained one halawadar in Afghanistan. “Drug traffickers cannot be identified and traced by the police.”
According to another halawadar in Afghanistan, “some of the drug smugglers themselves have opened a hawala business for the sake of smuggling money so that they could transfer their money easily and no problems would arise for them.”
Many migrants and refugees often turn to Hawala due to its accessibility and the absence of available alternative financial systems, such as banks or mobile money services. Hawaladars assist these individuals not only with money transfers but also in finding work, accessing temporary accommodation, and connecting them with essential services during their journeys.
Crucially, as with the opiate traffickers, hawaladars act as trustees between the migrant smuggler and migrants and refugees before the journey begins. The hawaladar will hold the migrants’ payments in trust and transfer to the smuggler only after the migrant has confirmed arrival at the agreed destination.
“Smugglers always have connections with hawaladars,” confirmed one hawaladar from the United States, noting that hawaladars benefit from the high commissions earned from transferring the large sums of money involved in migrant smuggling.
Challenges and policy implications
International standards and recommendations from the Financial Action Task Force (FATF) guide countries in regulating and supervising the Hawala system. Most of the 18 countries covered in the study have a supervisory framework for the sector which require providers to be licenced under legal criteria and official guidance. However, challenges remain in unregulated areas and regions with uncertain regulatory status.
The closed nature of the Hawala system, combined with a lack of oversight and regulation, presents difficulties for law enforcement agencies. Investigating illicit financial flows linked to Hawala can be challenging, given its inherent anonymity and the kinship ties among operators.
Given the threat posed by the hawala system and other money and value transfer services, ongoing analysis of the risks and development of best practices to integrate the hawala sector into a regulatory framework is needed.
“The U.S. State Department Bureau of International Narcotics and Law Enforcement (INL) hopes the findings of this report and others under this program help with the provision of timely data for regional and international decision making on countering narcotics and global drug trafficking,” noted Andrew Buhler, Asia Division Chief of INL.