Chapter 2

It held its
first conference in September 2001 in Croatia. More than
1200 delegates participated in the 10th International Anti-
Corruption Conference in Prague last year. The
conference was attended by the Czech prime minister, the
Mexican president, and the head of the Interpol.

The most potent remedy against corruption is sunshine -
free, accessible, and available information disseminated
and probed by an active opposition, uncompromised
press, and assertive civic organizations and NGO's. In the
absence of these, the fight against official avarice and
criminality is doomed to failure. With them, it stands a
chance.

Corruption can never be entirely eliminated - but it can be
restrained and its effects confined. The cooperation of
good people with trustworthy institutions is indispensable.

Corruption can be defeated only from the inside, though
with plenty of outside help. It is a process of self-
redemption and self-transformation. It is the real
transition.

III. Asset Confiscation and Asset Forfeiture
The abuse of asset confiscation and forfeiture statutes by
governments, law enforcement agencies, and political
appointees and cronies throughout the world is well-
documented. In many developing countries and countries
in transition, assets confiscated from real and alleged
criminals and tax evaders are sold in fake auctions to
party hacks, cronies, police officers, tax inspectors, and
relatives of prominent politicians at bargain basement
prices.

That the assets of suspects in grave crimes and corruption
should be frozen or "disrupted" until they are convicted or
exonerated by the courts - having exhausted their appeals
- is understandable and in accordance with the Vienna
Convention. But there is no justification for the seizure
and sale of property otherwise.

In Switzerland, financial institutions are obliged to
automatically freeze suspect transactions for a period of
five days, subject to the review of an investigative judge.

In France, the Financial Intelligence Unit can freeze funds
involved in a reported suspicious transaction by
administrative fiat. In both jurisdictions, the fast track
freezing of assets has proven to be a more than adequate
measure to cope with organized crime and venality.

The presumption of innocence must fully apply and due
process upheld to prevent self-enrichment and corrupt
dealings with confiscated property, including the unethical
and unseemly use of the proceeds from the sale of
forfeited assets to close gaping holes in strained state and
municipal budgets.

In the United States, according to The Civil Asset
Forfeiture Reform Act of 2000 (HR 1658), the assets of
suspects under investigation and of criminals convicted of
a variety of more than 400 minor and major offenses
(from soliciting a prostitute to gambling and from
narcotics charges to corruption and tax evasion) are often
confiscated and forfeited ("in personam, or value-based
confiscation").

Technically and theoretically, assets can be impounded or
forfeited and disposed of even in hitherto minor Federal
civil offenses (mistakes in fulfilling Medicare or tax
return forms)
The UK's Assets Recovery Agency (ARA) that is in
charge of enforcing the Proceeds of Crime Act 2002, had
this chilling statement to make on May 24, 2007:
"We are pursuing the assets of those involved in a wide
range of crime including drug dealing, people
trafficking, fraud, extortion, smuggling, control of
prostitution, counterfeiting, benefit fraud, tax evasion
and environmental crimes such as illegal dumping of
waste and illegal fishing." (!)
Drug dealing and illegal fishing in the same sentence.

The British firm Bentley-Jennison, who provide Forensic
Accounting Services, add:
"In some cases the defendants will even have their assets
seized at the start of an investigation, before any charges
have been considered. In many cases the authorities will
assume that all of the assets held by the defendant are
illegally obtained as he has a "criminal lifestyle". It is
then down to the defendant to prove otherwise. If the
defendant is judged to have a criminal lifestyle then it
will be assumed that physical assets, such as properties
and motor vehicles, have been acquired through the use
of criminal funds and it will be necessary to present
evidence to contradict this.

The defendant's bank accounts will also be scanned for
evidence of spending and any expenditure on
unidentified assets (and in some cases identified assets)
is also likely to be included as alleged criminal benefit.

This often leads to the inclusion of sums from legitimate
sources and double counting both of which need to be
eliminated".

Under the influence of the post-September 11 United
States and the FATF (Financial Action Task Force on
Money Laundering), Canada, Australia, the United
Kingdom, Greece, South Korea, and Russia have similar
asset recovery and money laundering laws in place.

International treaties (for instance, the 1959 European
Convention on Mutual Legal Assistance in Criminal
Matters, the 1990 Convention of the Council of Europe on
Laundering, Search, Seizure and Confiscation of the
Proceeds from Crime (ETS 141), and The U.N.

Convention against Corruption 2003- UNCAC) and
European Union Directives (e.g., 2001/97/EC) allow the
seizure and confiscation of the assets and "unexplained
wealth" of criminals and suspects globally, even if their
alleged or proven crime does not constitute an offense
where they own property or have bank accounts.

This abrogation of the principle of dual criminality
sometimes leads to serious violations of human and civil
rights. Hitler could have used it to ask the United
Kingdom's Assets Recovery Agency (ARA) to confiscate
the property of refugee Jews who committed "crimes" by
infringing on the infamous Nuremberg race laws.

Only offshore tax havens, such as Andorra, Antigua,
Aruba, the British Virgin Islands, Guernsey, Monaco, the
Netherlands Antilles, Samoa, St. Vincent, the US Virgin
Islands, and Vanuatu still resist the pressure to join in the
efforts to trace and seize suspects' assets and bank
accounts in the absence of a conviction or even charges.

Even worse, unlike in other criminal proceedings, the
burden of proof is on the defendant who has to
demonstrate that the source of the funds used to purchase
the confiscated or forfeited assets is legal. When the
defendant fails to furnish such evidence conclusively and
convincingly, or if he has left the United States or had
died, the assets are sold at an auction and the proceeds
usually revert to various law enforcement agencies, to the
government's budget, or to good social causes and
programs. This is the case in many countries, including
United Kingdom, United States, Germany, France, Hong
Kong, Italy, Denmark, Belgium, Austria, Greece, Ireland,
New Zealand, Singapore and Switzerland.

According to a brief written by Jack Smith, Mark Pieth,
and Guillermo Jorge at the Basel Institute on Governance,
International Centre for Asset Recovery:
"Article 54(1)(c) of the UNCAC recommends that states
parties establish non-criminal systems of confiscation,
which have several advantages for recovery actions: the
standard of evidence is lower ("preponderance of the
evidence" rather than "beyond a reasonable doubt");
they are not subject to some of the more restrictive
traditional safeguards of international cooperation such
as the offense for which the defendant is accused has to
be a crime in the receiving state (dual criminality); and
it opens more formal avenues for negotiation and
settlements. This is already the practice in some
jurisdictions such as the US, Ireland, the UK, Italy,
Colombia, Slovenia, and South Africa, as well as some
Australian and Canadian States".

In most countries, including the United Kingdom, the
United States, Austria, Germany, Indonesia, Macedonia,
and Ireland, assets can be impounded, confiscated, frozen,
forfeited, and even sold prior to and without any criminal
conviction.

In Australia, Austria, Ireland, Hong-Kong, New Zealand,
Singapore, United Kingdom, South Africa, United States
and the Netherlands alleged and suspected criminals, their
family members, friends, employees, and partners can be
stripped of their assets even for crimes they have
committed in other countries and even if they have merely
made use of revenues obtained from illicit activities (this
is called "in rem, or property-based confiscation"). This
often gives rise to cases of double jeopardy.

Typically, the defendant is notified of the impending
forfeiture or confiscation of his or her assets and has
recourse to a hearing within the relevant law enforcement
agency and also to the courts. If he or she can prove
"substantial harm" to life and business, the property may
be released to be used, though ownership is rarely
restored.

When the process of asset confiscation or asset forfeiture
is initiated, banking secrecy is automatically lifted and the
government indemnifies the banks for any damage they
may suffer for disclosing confidential information about
their clients' accounts.

In many countries from South Korea to Greece, lawyer-
client privilege is largely waived. The same requirements
of monitoring of clients' activities and reporting to the
authorities apply to credit and financial institutions,
venture capital firms, tax advisers, accountants, and
notaries.

Elsewhere, there are some other worrying developments:
In Bulgaria, the assets of tax evaders have recently begun
to be confiscated and turned over to the National Revenue
Agency and the State Receivables Collection Agency.

Property is confiscated even when the tax assessment is
disputed in the courts. The Agency cannot, however,
confiscate single-dwelling houses, bank accounts up to
250 leva of one member of the family, salary or pension
up to 250 leva a month, social care, and alimony, support
money or allowances.

Venezuela has recently reformed its Organic Tax Code to
allow for:
" (P)re-judgment enforcement measures (to) include
closure of premises for up to ten days and confiscation
of merchandise. These measures will be applied in
addition to the attachment or sequestration of personal
property and the prohibition against alienation or
encumbrance of realty. During closure of premises, the
employer must continue to pay workers, thereby
avoiding an appeal for constitutional protection".

Finally, in many states in the United States, "community
responsibility" statutes require of owners of legal
businesses to "abate crime" by openly fighting it
themselves. If they fail to tackle the criminals in their
neighborhood, the police can seize and sell their property,
including their apartments and cars. The proceeds from
such sales accrue to the local municipality.

In New-York City, the police confiscated a restaurant
because one of its regular patrons was an alleged drug
dealer. In Alabama, police seized the home of a senior
citizen because her yard was used, without her consent,
for drug dealing. In Maryland, the police confiscated a
family's home and converted it into a retreat for its
officers, having mailed one of the occupants a package of
marijuana.

III.Money Laundering in A Changed World

If you shop with a major bank, chances are that all the
transactions in your account are scrutinized by AML (Anti
Money Laundering) software. Billions of dollars are being
invested in these applications. They are supposed to track
suspicious transfers, deposits, and withdrawals based on
overall statistical patterns. Bank directors, exposed, under
the Patriot Act, to personal liability for money laundering
in their establishments, swear by it as a legal shield and
the holy grail of the on-going war against financial crime
and the finances of terrorism.

Quoted in Wired.com, Neil Katkov of Celent
Communications, pegs future investments in compliance-
related activities and products by American banks alone at
close to $15 billion in the next 3 years (2005-2008). The
United State's Treasury Department's Financial Crimes
Enforcement Network (finCEN) received c. 15 million
reports in each of the years 2003 and 2004.

But this is a drop in the seething ocean of illicit financial
transactions, sometimes egged on and abetted even by the
very Western governments ostensibly dead set against
them.

Israel has always turned a blind eye to the origin of funds
deposited by Jews from South Africa to Russia. In Britain
it is perfectly legal to hide the true ownership of a
company. Underpaid Asian bank clerks on immigrant
work permits in the Gulf states rarely require identity
documents from the mysterious and well-connected
owners of multi-million dollar deposits.

Hawaladars continue plying their paperless and trust-
based trade - the transfer of billions of US dollars around
the world. American and Swiss banks collaborate with
dubious correspondent banks in off shore centres.

Multinationals shift money through tax free territories in
what is euphemistically known as "tax planning". Internet
gambling outfits and casinos serve as fronts for narco-
dollars. British Bureaux de Change launder up to 2.6
billion British pounds annually.

The 500 Euro note makes it much easier to smuggle cash
out of Europe. A French parliamentary committee accused
the City of London of being a money laundering haven in
a 400 page report. Intelligence services cover the tracks of
covert operations by opening accounts in obscure tax
havens, from Cyprus to Nauru. Money laundering, its
venues and techniques, are an integral part of the
economic fabric of the world. Business as usual?
Not really. In retrospect, as far as money laundering goes,
September 11 may be perceived as a watershed as
important as the precipitous collapse of communism in
1989. Both events have forever altered the patterns of the
global flows of illicit capital.

What is Money Laundering?
Strictly speaking, money laundering is the age-old process
of disguising the illegal origin and criminal nature of
funds (obtained in sanctions-busting arms sales,
smuggling, trafficking in humans, organized crime, drug
trafficking, prostitution rings, embezzlement, insider
trading, bribery, and computer fraud) by moving them
untraceably and investing them in legitimate businesses,
securities, or bank deposits. But this narrow definition
masks the fact that the bulk of money laundered is the
result of tax evasion, tax avoidance, and outright tax
fraud, such as the "VAT carousel scheme" in the EU
(moving goods among businesses in various jurisdictions
to capitalize on differences in VAT rates). Tax-related
laundering nets between 10-20 billion US dollars annually
from France and Russia alone. The confluence of criminal
and tax averse funds in money laundering networks serves
to obscure the sources of both.

The Scale of the Problem
According to a 1996 IMF estimate, money laundered
annually amounts to 2-5% of world GDP (between 800
billion and 2 trillion US dollars in today's terms). The
lower figure is considerably larger than an average
European economy, such as Spain's.

The System
It is important to realize that money laundering takes
place within the banking system. Big amounts of cash are
spread among numerous accounts (sometimes in free
economic zones, financial off shore centers, and tax
havens), converted to bearer financial instruments (money
orders, bonds), or placed with trusts and charities. The
money is then transferred to other locations, sometimes as
bogus payments for "goods and services" against fake or
inflated invoices issued by holding companies owned by
lawyers or accountants on behalf of unnamed
beneficiaries. The transferred funds are re-assembled in
their destination and often "shipped" back to the point of
origin under a new identity. The laundered funds are then
invested in the legitimate economy. It is a simple
procedure - yet an effective one. It results in either no
paper trail - or too much of it. The accounts are invariably
liquidated and all traces erased.

Why is It a Problem?
Criminal and tax evading funds are idle and non-
productive. Their injection, however surreptitiously, into
the economy transforms them into a productive (and
cheap) source of capital. Why is this negative?
Because it corrupts government officials, banks and their
officers, contaminates legal sectors of the economy,
crowds out legitimate and foreign capital, makes money
supply unpredictable and uncontrollable, and increases
cross-border capital movements, thereby enhancing the
volatility of exchange rates.

A multilateral, co-ordinated, effort (exchange of
information, uniform laws, extra-territorial legal powers)
is required to counter the international dimensions of
money laundering. Many countries opt in because money
laundering has also become a domestic political and
economic concern. The United Nations, the Bank for
International Settlements, the OECD's FATF (Financial
Action Task Force), the EU, the Council of Europe, the
Organisation of American States, all published anti-
money laundering standards. Regional groupings were
formed (or are being established) in the Caribbean, Asia,
Europe, southern Africa, western Africa, and Latin
America.

Money Laundering in the Wake of the September 11
Attacks
Regulation
The least important trend is the tightening of financial
regulations and the establishment or enhancement of
compulsory (as opposed to industry or voluntary)
regulatory and enforcement agencies.

New legislation in the US which amounts to extending the
powers of the CIA domestically and of the DOJ extra-
territorially, was rather xenophobically described by a
DOJ official, Michael Chertoff, as intended to "make sure
the American banking system does not become a haven
for foreign corrupt leaders or other kinds of foreign
organized criminals".

Privacy and bank secrecy laws have been watered down.

Collaboration with off shore "shell" banks has been
banned. Business with clients of correspondent banks was
curtailed. Banks were effectively transformed into law
enforcement agencies, responsible to verify both the
identities of their (foreign) clients and the source and
origin of their funds. Cash transactions were partly
criminalized. And the securities and currency trading
industry, insurance companies, and money transfer
services are subjected to growing scrutiny as a conduit for
"dirty cash".

Still, such legislation is highly ineffective. The American
Bankers' Association puts the cost of compliance with the
laxer anti-money-laundering laws in force in 1998 at 10
billion US dollars - or more than 10 million US dollars per
obtained conviction. Even when the system does work,
critical alerts drown in the torrent of reports mandated by
the regulations. One bank actually reported a suspicious
transaction in the account of one of the September 11
hijackers - only to be ignored.

The Treasury Department established Operation Green
Quest, an investigative team charged with monitoring
charities, NGO's, credit card fraud, cash smuggling,
counterfeiting, and the Hawala networks. This is not
without precedent. Previous teams tackled drug money,
the biggest money laundering venue ever, BCCI (Bank of
Credit and Commerce International), and ... Al Capone.

The more veteran, New-York based, El-Dorado anti
money laundering Task Force (established in 1992) will
lend a hand and share information.

More than 150 countries promised to co-operate with the
US in its fight against the financing of terrorism - 81 of
which (including the Bahamas, Argentina, Kuwait,
Indonesia, Pakistan, Switzerland, and the EU) actually
froze assets of suspicious individuals, suspected charities,
and dubious firms, or passed new anti money laundering
laws and stricter regulations (the Philippines, the UK,
Germany).

A EU directive now forces lawyers to disclose
incriminating information about their clients' money
laundering activities. Pakistan initiated a "loyalty
scheme", awarding expatriates who prefer official bank
channels to the much maligned (but cheaper and more
efficient) Hawala, with extra baggage allowance and
special treatment in airports.

The magnitude of this international collaboration is
unprecedented. But this burst of solidarity may yet fade.

China, for instance, refuses to chime in. As a result, the
statement issued by APEC in November 2001 on
measures to stem the finances of terrorism was lukewarm
at best. And, protestations of close collaboration to the
contrary, Saudi Arabia has done nothing to combat money
laundering "Islamic charities" (of which it is proud) on its
territory.

Still, a universal code is emerging, based on the work of
the OECD's FATF (Financial Action Task Force) since
1989 (its famous "40 recommendations") and on the
relevant UN conventions. All countries are expected by
the West, on pain of possible sanctions, to adopt a
uniform legal platform (including reporting on suspicious
transactions and freezing assets) and to apply it to all
types of financial intermediaries, not only to banks. This
is likely to result in...

The Decline of off Shore Financial Centres and Tax
Havens
By far the most important outcome of this new-fangled
juridical homogeneity is the acceleration of the decline of
off shore financial and banking centres and tax havens.

The distinction between off-shore and on-shore will
vanish. Of the FATF's "name and shame" blacklist of 19
"black holes" (poorly regulated territories, including
Israel, Indonesia, and Russia) - 11 have substantially
revamped their banking laws and financial regulators.

Coupled with the tightening of US, UK, and EU laws and
the wider interpretation of money laundering to include
political corruption, bribery, and embezzlement - this
would make life a lot more difficult for venal politicians
and major tax evaders. The likes of Sani Abacha (late
President of Nigeria), Ferdinand Marcos (late President of
the Philippines), Vladimiro Montesinos (former, now
standing trial, chief of the intelligence services of Peru),
or Raul Salinas (the brother of Mexico's President) -
would have found it impossible to loot their countries to
the same disgraceful extent in today's financial
environment. And Osama bin Laden would not have been
able to wire funds to US accounts from the Sudanese Al
Shamal Bank, the "correspondent" of 33 American banks.

Quo Vadis, Money Laundering?
Crime is resilient and fast adapting to new realities.

Organized crime is in the process of establishing an
alternative banking system, only tangentially connected to
the West's, in the fringes, and by proxy. This is done by
purchasing defunct banks or banking licences in territories
with lax regulation, cash economies, corrupt politicians,
no tax collection, but reasonable infrastructure.

The countries of Eastern Europe - Yugoslavia
(Montenegro and Serbia), Macedonia, Ukraine, Moldova,
Belarus, Albania, to mention a few - are natural targets. In
some cases, organized crime is so all-pervasive and local
politicians so corrupt that the distinction between criminal
and politician is spurious.

Gradually, money laundering rings move their operations
to these new, accommodating territories. The laundered
funds are used to purchase assets in intentionally botched
privatizations, real estate, existing businesses, and to
finance trading operations. The wasteland that is Eastern
Europe craves private capital and no questions are asked
by investor and recipient alike.

The next frontier is cyberspace. Internet banking, Internet
gambling, day trading, foreign exchange cyber
transactions, e-cash, e-commerce, fictitious invoicing of
the launderer's genuine credit cards - hold the promise of
the future. Impossible to track and monitor, ex-territorial,
totally digital, amenable to identity theft and fake
identities - this is the ideal vehicle for money launderers.

This nascent platform is way too small to accommodate
the enormous amounts of cash laundered daily - but in ten
years time, it may. The problem is likely to be
exacerbated by the introduction of smart cards, electronic
purses, and payment-enabled mobile phones.

In its "Report on Money Laundering Typologies"
(February 2001) the FATF was able to document concrete
and suspected abuses of online banking, Internet casinos,
and web-based financial services. It is difficult to identify
a customer and to get to know it in cyberspace, was the
alarming conclusion. It is equally complicated to establish
jurisdiction.

Many capable professionals - stockbrokers, lawyers,
accountants, traders, insurance brokers, real estate agents,
sellers of high value items such as gold, diamonds, and art
- are employed or co-opted by money laundering
operations. Money launderers are likely to make increased
use of global, around the clock, trading in foreign
currencies and derivatives. These provide instantaneous
transfer of funds and no audit trail.

The underlying securities involved are susceptible to
market manipulation and fraud. Complex insurance
policies (with the "wrong" beneficiaries), and the
securitization of receivables, leasing contracts, mortgages,
and low grade bonds are already used in money
laundering schemes. In general, money laundering goes
well with risk arbitraging financial instruments.

Trust-based, globe-spanning, money transfer systems
based on authentication codes and generations of
commercial relationships cemented in honour and blood -
are another wave of the future. The Hawala and Chinese
networks in Asia, the Black Market Peso Exchange
(BMPE) in Latin America, other evolving courier systems
in Eastern Europe (mainly in Russia, Ukraine, and
Albania) and in Western Europe (mainly in France and
Spain).

In conjunction with encrypted e-mail and web
anonymizers, these networks are virtually impenetrable.

As emigration increases, diasporas established, and
transport and telecommunications become ubiquitous,
"ethnic banking" along the tradition of the Lombards and
the Jews in medieval Europe may become the the
preferred venue of money laundering. September 11 may
have retarded world civilization in more than one way.

IV. Hawala, or The Bank that Never Was

I. OVERVIEW
In the wake of the September 11 terrorist attacks on the
USA, attention was drawn to the age-old, secretive, and
globe-spanning banking system developed in Asia and
known as "Hawala" (to change, in Arabic). It is based on a
short term, discountable, negotiable, promissory note (or
bill of exchange) called "Hundi". While not limited to
Moslems, it has come to be identified with "Islamic
Banking".

Islamic Law (Sharia'a) regulates commerce and finance in
the Fiqh Al Mua'malat, (transactions amongst people).

Modern Islamic banks are overseen by the Shari'a
Supervisory Board of Islamic Banks and Institutions
("The Shari'a Committee").

The Shi'a "Islamic Laws according to the Fatawa of
Ayatullah al Uzama Syed Ali al-Husaini Seestani" has this
to say about Hawala banking:
"2298. If a debtor directs his creditor to collect his debt
from the third person, and the creditor accepts the
arrangement, the third person will, on completion of all
the conditions to be explained later, become the debtor.

Thereafter, the creditor cannot demand his debt from the
first debtor".

The prophet Muhammad (a cross border trader of goods
and commodities by profession) encouraged the free
movement of goods and the development of markets.

Numerous Moslem scholars railed against hoarding and
harmful speculation (market cornering and manipulation
known as "Gharar"). Moslems were the first to use
promissory notes and assignment, or transfer of debts via
bills of exchange ("Hawala"). Among modern banking
instruments, only floating and, therefore, uncertain,
interest payments ("Riba" and "Jahala"), futures contracts,
and forfeiting are frowned upon. But agile Moslem traders
easily and often circumvent these religious restrictions by
creating "synthetic Murabaha (contracts)" identical to
Western forward and futures contracts. Actually, the only
allowed transfer or trading of debts (as distinct from the
underlying commodities or goods) is under the Hawala.
"Hawala" consists of transferring money (usually across
borders and in order to avoid taxes or the need to bribe
officials) without physical or electronic transfer of funds.

Money changers ("Hawaladar") receive cash in one
country, no questions asked. Correspondent hawaladars in
another country dispense an identical amount (minus
minimal fees and commissions) to a recipient or, less
often, to a bank account. E-mail, or letter ("Hundi")
carrying couriers are used to convey the necessary
information (the amount of money, the date it has to be
paid on) between Hawaladars. The sender provides the
recipient with code words (or numbers, for instance the
serial numbers of currency notes), a digital encrypted
message, or agreed signals (like handshakes), to be used
to retrieve the money. Big Hawaladars use a chain of
middlemen in cities around the globe.

But most Hawaladars are small businesses. Their Hawala
activity is a sideline or moonlighting operation. "Chits"
(verbal agreements) substitute for certain written records.

In bigger operations there are human "memorizers" who
serve as arbiters in case of dispute. The Hawala system
requires unbounded trust. Hawaladars are often members
of the same family, village, clan, or ethnic group. It is a
system older than the West. The ancient Chinese had their
own "Hawala" - "fei qian" (or "flying money"). Arab
traders used it to avoid being robbed on the Silk Road.

Cheating is punished by effective ex-communication and
"loss of honour" - the equivalent of an economic death
sentence. Physical violence is rarer but not unheard of.

Violence sometimes also erupts between money recipients
and robbers who are after the huge quantities of physical
cash sloshing about the system. But these, too, are rare
events, as rare as bank robberies. One result of this
effective social regulation is that commodity traders in
Asia shift hundreds of millions of US dollars per trade
based solely on trust and the verbal commitment of their
counterparts.

Hawala arrangements are used to avoid customs duties,
consumption taxes, and other trade-related levies.

Suppliers provide importers with lower prices on their
invoices, and get paid the difference via Hawala.

Legitimate transactions and tax evasion constitute the bulk
of Hawala operations. Modern Hawala networks emerged
in the 1960's and 1970's to circumvent official bans on
gold imports in Southeast Asia and to facilitate the
transfer of hard earned wages of expatriates to their
families ("home remittances") and their conversion at
rates more favourable (often double) than the
government's. Hawala provides a cheap (it costs c. 1% of
the amount transferred), efficient, and frictionless
alternative to morbid and corrupt domestic financial
institutions. It is Western Union without the hi-tech gear
and the exorbitant transfer fees.

Unfortunately, these networks have been hijacked and
compromised by drug traffickers (mainly in Afganistan
and Pakistan), corrupt officials, secret services, money
launderers, organized crime, and terrorists. Pakistani
Hawala networks alone move up to 5 billion US dollars
annually according to estimates by Pakistan's Minister of
Finance, Shaukut Aziz. In 1999, Institutional Investor
Magazine identified 1100 money brokers in Pakistan and
transactions that ran as high as 10 million US dollars
apiece. As opposed to stereotypes, most Hawala networks
are not controlled by Arabs, but by Indian and Pakistani
expatriates and immigrants in the Gulf. The Hawala
network in India has been brutally and ruthlessly
demolished by Indira Ghandi (during the emergency
regime imposed in 1975), but Indian nationals still play a
big part in international Hawala networks. Similar
networks in Sri Lanka, the Philippines, and Bangladesh
have also been eradicated.

The OECD's Financial Action Task Force (FATF) says
that:
"Hawala remains a significant method for large
numbers of businesses of all sizes and individuals to
repatriate funds and purchase gold.... It is favoured
because it usually costs less than moving funds through
the banking system, it operates 24 hours per day and
every day of the year, it is virtually completely reliable,
and there is minimal paperwork required."
(Organisation for Economic Co-Operation and
Development (OECD), "Report on Money Laundering
Typologies 1999-2000," Financial Action Task Force,
FATF-XI, February 3, 2000, at
http://www.oecd.org/fatf/pdf/TY2000_en.pdf )
Hawala networks closely feed into Islamic banks
throughout the world and to commodity trading in South
Asia. There are more than 200 Islamic banks in the USA
alone and many thousands in Europe, North and South
Africa, Saudi Arabia, the Gulf states (especially in the free
zone of Dubai and in Bahrain), Pakistan, Malaysia,
Indonesia, and other South East Asian countries. By the
end of 1998, the overt (read: tip of the iceberg) liabilities
of these financial institutions amounted to 148 billion US
dollars. They dabbled in equipment leasing, real estate
leasing and development, corporate equity, and
trade/structured trade and commodities financing (usually
in consortia called "Mudaraba").