Wednesday, November 29, 2023

When the Businessmen patronize “Hawala System”… Money Laundering and Terrorist Financing flourish


A lot of businessmen transfer money to their business partners outside Ghana without using the financial institutions (Banks) and also without “moving” any pesewa. I ask myself, how is this possible? Every now and then, businessmen complain about the depreciation of the local currency (cedi) against major foreign currencies (Dollar, Pound and Euro) but they forget one factor contributing to this, is the patronage of the Hawala System.


This article turns to throw more light on the activities of the Hawala System and how vulnerable the system is to money laundering and terrorist financing.


Hawala is a method of transferring money without any money actually moving. Interpol’s definition of Hawala is “money transfer without money movement.” This system is sometimes called the “Trust” system or Hundi. Hawala is an alternative remittance channel that exists outside of traditional banking systems. Transactions between hawala brokers are made without promissory notes because the system is heavily based on trust and the balancing of hawala brokers’ books.


Hawala system is mostly practiced or used throughout the world today, particularly in the Islamic community, as an alternative means of conducting funds transfers. Unlike the conventional method of transferring money across borders through bank wire transfers and cross border transfer, money transfer in the Hawala System is arranged through a network of hawaladars, or hawala dealers.


The Hawala system came about to aid migrant workers who wanted to send remittances to their relatives and friends in their country of origin and it became advantageous as it facilitates the flow of money between poor countries where formal banking is too expensive or difficult to access. In addition to the convenience and speed of conducting Hawala system, the commissions and/ or rates charged are usually low compared to the high rates that banks charge.


How does Hawala System work? Let’s say Sughar (a businessman) needs to send $20,000 to his business partner, Kwame, who lives in another country. He will approach a hawaladar, Alhaji Musa, and gives him the amount of money he wants Kwame to receive, including the details of the transaction (ie. name of recipient, city, and password/ code). Alhaji Musa contacts a hawala dealer in the recipient’s city, Tom, and asks him to give Kwame the $20,000, on condition that Kwame correctly states the password/ code. Tom transfers the money to Kwame from his own account, minus commission. This whole transaction takes only one to two days or, in some instances, just few hours and is backed by trust. The reconciliation and settlement of the transactions between the hawala dealers are done in cash, property or services. I believe we can all identify this practice in some parts of Ghana and/ or have patronized the service before in the past?


The very features that make Hawala system an attractive avenue for legitimate patrons also make it attractive for illegitimate uses. Thus, Hawala system is frequently referred to as underground banking. This is because criminals take advantage of this system to transfer funds from one location to another. Hawala system provides anonymity in its transactions, as official records are not kept and the source of money that is transferred cannot be traced. In addition, corrupt politicians and the wealthy who would prefer to evade taxes use hawala system to anonymize their wealth and activities.


Since the activities of the Hawala system are not routed through the banks and, hence, not regulated by governmental and financial bodies, the system has become vulnerable to criminals to wash their dirty money. The criminal gives the dirty money to the hawala dealer to be transferred outside the country of origin with or without the knowledge of the dealer.


Hawala system can also contribute to the depreciation of the local currency as it fuels speculations on the rate of exchange against other major foreign currency. The hawala dealer decides the exchange rate to be used depending on factors best known to him or her.


Also, the Hawala system used by businessmen to facilitate their international trade can lead to tax evasion as the actual cost of importing the goods might not be declared to the port authorities. This enables the businessman to under invoice the goods in order to pay less tax at the port. Hawala transactions are done off the books and are never taxed; the lack of data on the flow of money frustrates public efforts to devise and implement sound macroeconomic policies.


Because the Hawala system lacks any paper trail, it encourages the criminal to layer the dirty money in order to disguise the source of the money and prevent a suspicious transaction from being filed with the authorities. The system leaves a sparse or confusing paper trail, if any.


The Hawala system has contributed significantly to terrorism financing as it is one of the means through which money is transferred. The main sources of funding for most terrorist group such as al-Qa’ida are donations from charities, individual contributions (whether forced or spontaneous), state sponsorship, profit from legitimate business and profits from criminal activities. The Hawala system has bolstered these fundraising efforts by providing a secure channel for transfers between legitimate companies and criminal activities. The report on the 9/11 attacks stated that the hawala system was used to transfer over $110,000 from an exchange house in the United Arab Emirates (UAE) to a Citibank account in Florida, which was owned jointly by two of the hijackers (involved in the attacks). Just before the attacks, $15,000 was sent to Bin Laden’s lieutenant in the UAE, who collected the money and fled.


In order to fight money laundering and terrorist financing through the Hawala system, countries need to take a stand on the activities of the system. Many countries have been led to re-examine their regulatory policies with regard to the Hawala system. Some countries have made the Hawala system illegal due to the absence of bureaucracy in the system by enacting and implementing laws. For example, in India, the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) are the two major legislative systems that deter the use of Hawala system in the country. In Ghana, the Foreign Exchange Act, 2006 (Act 723) doesn’t encourage the Hawala system. But for Ghana to win the fight against money laundering and terrorist financing through the Hawala system, Act 723 need to be enforced and implemented to the later and monitoring mechanisms insisted.


Another way to fight criminals from washing their dirty money through the Hawala system is by continuous awareness creation on the means through which it can be done. Training and education of businessmen and women on international trade matters will go a long way to desist from the patronage of the Hawala system.


For business owners not patronize the services of the Hawala system, confidence in the formal financial system should be boasted and made more reliable. The Hawala system thrives on trust and network.


Some FinTech companies are implementing the hawala system in providing financial services to the unbanked and under banked populations of the world. Mobile banking and payment platforms, such as Paga (in Nigeria), AirtelTigo Money, Vodafone cash, MTN money (in Ghana) and M-Pesa (in Kenya), are revolutionizing the financial system by promoting financial inclusion through the Hawala system of providing financial services.


Would you mind doing me a favor? Share this article with someone so that the awareness of money laundering and terrorist financing could be spread to avoid being use as a conduit by criminals.


If you require further information on this article, please contact Richieson


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