Fight against funding for terrorists founders on eighth-century system

As Arab banks try to stop illicit money transfers, the ancient 'hawala' network keeps the criminal channels open

Hi-tech attempts to stop the flow of finance to terrorist organisations in the Middle East have been stymied by a system of money transfer that dates back to the eighth century.

In the wake of the attacks on 11 September 2001, Washington pushed Arab financial institutions to crack down on illicit money transfers and implement regulations stipulated by the OECD's Financial Action Task Force (FATF) - an international body overseeing initiatives to combat money laundering and terrorism.

Arab central banks and financial institutions were quick to adopt FATF recommendations so that they could continue dealing with Western banks and compete on the global market.

The Middle East North Africa-FATF (MENA-FATF), established two years ago, claims illicit activity has declined by 90 per cent.

But with tighter regulations on banks, criminals are returning to the use of the hawala system of moving money from country to country.

Money is transferred through a network of hawala brokers, or hawaladars. A customer approaches a broker in one city and provides a sum of money to be transferred to a recipient in another, usually foreign, city. The broker who has received the money calls his counterpart in the recipient's city, providing instructions on the disposal of the funds and promising to settle the debt at a later date.

The method relies entirely on the honour of the brokers and no records are produced of individual transactions.

"What happens now does not go through financial institutions or banks; it's smuggled or goes via the hawala system," said Masood Safar Abdulla, the compliance manager at the Commercial Bank of Dubai.

The ancient hawala system is popular with the Gulf's massive expatriate Asian labour force as a cheap way of sending money home, estimated to run to billions of dollars a year.

Although much of the money transferred is legitimate, a drug bust by the Italian police late last year connected several Pakistanis with a Dubai-based Indian who received money through his informal bank to channel funds to drug cartels and arms dealers.

The incident is a single example of how dirty money could be laundered via the hawala system, and has put pressure on countries to improve regulation of alternative remittance systems. "The fact that MENA-FATF is organising a conference on hawala shows it is more serious about the issue," said Michel Nassif of World-Check, a British company that runs an intelligence database on financial risk.

But even if central banks can bring the hawala system under control, large sums of ready cash are being transported around the Middle East, eased by the region's lack of transparency.

"The most troubling spot is Dubai," said a source at a regional central bank. "There is a lot of cash coming in and out. If you look at the construction boom, it doesn't make sense: are these new skyscrapers really economically viable? That is a big indicator of money laundering."

Some money invested in UAE real estate is allegedly from Russian and Indian individuals. But how much is being laundered is anyone's guess. "Who can measure it? We know it is going on and we are not doing enough. UAE says it is, but it is a convenient system for everyone," the source said.

Another banking executive in the region said: "MENA-FATF is not very effective and governments are paranoid about financial transparency."

Iraq is considered a particular problem for regulators, with cash flowing in and out of the country to be laundered or to fund insurgents. "A lot of terrorist financing is going on in Iraq; how else are they being funded?" the central bank source said.

Incidents of money laundering connected to Iraq abound, with one source giving the example of an Iraqi-Lebanese businessman "cleaning" Kuwaiti money in Azerbaijan for an Iranian client to fund Muqtada al-Sadr's Mahdi army in Baghdad.

Mr Nassif said the Middle East needed peace and stability before illicit funding could be curbed. "The more turmoil in the region, the more regulations will not be implemented."

PROMOTED VIDEO
News
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: C++ Developer – Hedge Fund – New York

$80000 - $110000 per annum, Benefits: Bonus and Employee Investment Scheme: Se...

Selby Jennings: Java Developer Enterprise Specialist –Paris,France

€30000 - €50000 per annum, Benefits: Competitive Bonus: Selby Jennings: Java D...

Selby Jennings: QA Engineer Lead – Hedge Fund – Chicago

$60000 - $90000 per annum, Benefits: Competitive Bonus and Employee Investment ...

Selby Jennings: Buy Side Sales / Account Manager – Fixed Income Market Data – Frankfurt Germany

circa 65,000 EUR + Bonus + Benefits: Selby Jennings: Recruiting a Sales Associ...

Day In a Page

In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible