The following article was part of The Gateway of India Dialogue 2016 compendium ‘Where Geopolitics meets Business‘. This piece has been published separately.
Across the world today, even as terrorist groups search for new technologies, new methodologies of operation, and newer source of funding, their reliance on one traditional system remains unchanged—they still use hawala to move and distribute funds to their cadres and sympathisers across the globe.
For instance, in the July 2006 Mumbai train bombings carried out by the Indian Mujahideen (IM), the Pakistan-based handlers of the group used the hawala route to transfer money to IM cadres to execute the attack. [1] Similarly, in the 2010 Times Square car bombing attempt in New York, the perpetrator, Faisal Shahzad, had received money through hawala to plot the attack. [2]
Inevitably therefore, the efforts by India, the U.S., and European countries to seal the sources of terrorism financing include containing the hawala or hundi system. [3] But this remains a tough task, because the very nature of hawala ensures that of all terrorism-related domains, it is the most difficult to gather precise information about.
It is not as if the entire hawala system is undesirable, or only used for illegal purposes. The system originated in the 11th century in West Asia and the Indian subcontinent. [4] It was used to move funds for long-distance trade, at a time when modern banking facilities had not yet developed. The ease of transferring funds and the anonymity of the transactions carried out by the service providers—known in the Indian subcontinent as hawaldars—eventually took hawala beyond trade and made it the preferred system for criminals looking to move funds across countries without alerting the authorities.
This is why, despite the emergence of a formal system of banks and remittance services, hawala continues to thrive. Terrorist groups and organised crime syndicates have used it to launder the money from the sale of narcotics and other criminal activities, across jurisdictions. Al-Qaeda and drug traffickers, for example, regularly use the hawala network in Pakistan and Afghanistan. [5]
But the dynamics of hawala changed after the 11 September 2001 attacks in the U.S. American security agencies suspected that one of the attackers may have received money through hawala. [6] Although the National Commission on Terrorist Attacks Upon the United States (also known as the 9/11 Commission), found no definitive evidence, it concluded that Al-Qaeda had been using hawala to finance its activities. [7] That inference was enough for many countries in Europe and Asia to attempt regulating hawala and hawaldars—through measures that included asking them to register their business and introducing hawala-specific laws.
India’s attempts to counter hawala
However, India had been grappling with the use of hawala for terrorist financing well before September 2001. The 1993 Mumbai serial blasts, carried out by the Dawood Ibrahim crime syndicate, were financed through hawala. [8] Since then, the hawala angle has cropped up in multiple investigations related to terrorist financing, including in the 2006 Mumbai train blasts. [9]
At present, the National Investigation Agency (NIA) is investigating 11 cases of hawala-routed terrorism funding in India. [10] The most prominent among these is related to the Jammu & Kashmir Affectees Relief Trust (JKART), a front organisation set up in Rawalpindi, Pakistan, by the anti-India terrorist group, Hizbul Mujahideen (HM). The NIA believes that the HM, under cover of the JKART, transferred Rs. 80 crores through hawala over a span of many years to fund terrorist activities in Jammu and Kashmir.[11]
Cases such as these are just the tip of the iceberg within Kashmir Valley—security agencies allege that Kashmiri separatists receive regular hawala payments from Pakistan for anti-India activities. In one prominent case, the police twice arrested Ghulam Mohammad Bhat, an aide of Syed Ali Shah Geelani (who heads the hardliner faction of the Hurriyat Conference) in 2008 and 2011, for allegedly receiving money from Pakistan via hawala for separatist activities. [12]
Recent media reports indicate a surge in hawala funding from charity organisations in the Persian Gulf to the seminaries in the Kashmir Valley; these funds are used to indoctrinate the local youth. [13]
But looking for hawala transactions in terrorist financing remains a search for a needle in a haystack. Hawala transactions are highly anonymous—hawaldars, for business reasons, are reluctant to ask questions about the source of the money and the purpose of a transfer. The lack of a proper paper trail is further complicated by the usually small amounts—less than Rs. 1 lakh—of individual hawala transactions. The deep links between hawala and ‘black money’— many politicians and businessmen allegedly use hawala to launder money and evade tax—add another layer of complexity to the investigations.
There is another aspect of hawala which is not related to terrorist financing: Iran, which was locked out of the international financial system under western and international sanctions until recently, has used hawala—locally known as havaleh—for decades. A bulk of these transactions were routed through Dubai, a known hawala hub. [14] Some financial exchanges between Iran and Pakistan were reportedly routed through hawala instead of the Asian Clearing Union. [15]
Hawala is also used by a growing number of the Indian diaspora in West Asia, Europe, and North America to send money home. This is because it is cheaper than the formal remittance services, and many migrants (some of them illegal) do not have access to banks. These remittances bring much-needed liquidity to the system by providing the hawaldars with readily available cash, which they then use for their other transactions.
It is difficult to quantify the number, but there are estimates: a 2009 study by the U.S. State Department noted that funds transferred through hawala were equal to 30-40% of the formal remittances market in India. [16] Recent World Bank data notes that during 2006-2015, the Indian diaspora formally remitted approximately $558 billion to India. [17]
Considering the adverse security implications of hawala, India has taken a number of steps to combat the system:
- The Foreign Exchange Management Act (1999) treats hawala transactions as illegal. [18]
- Under the Prevention of Money Laundering Act (2002), hawala is illegal if the proceeds from such transactions are used for money laundering. [19]
- As a member of the Financial Action Task Force (a 37-member inter-governmental body that combats money laundering), India set up the Financial Intelligence Unit (FIU) in November 2004, and became a part of the Egmont Group (an informal network of national FIUs). [20]
- India is also part of other international initiatives like the Eurasian Group on Combating Money Laundering, and the Asia/Pacific Group on Money Laundering.[21]
But beyond these necessary regulatory and institutional steps, India lacks a robust community intelligence network among the hawaldars, which can report on suspicious transactions involving proceeds from narcotics smuggling, money laundering, and terrorist financing. In the past, a high-handed approach towards hawaldars—security agencies would close their operations and seize their assets—has been counter-productive and has only forced them to go further underground.
Another important initiative in containing hawala is financial inclusion. To address the reasons why the diaspora uses hawala, the formal financial system—banks and remittance services—will have to improve their services by reducing the commission charges for remittances and offering better services. This will bring more people into the formal banking sector.
The United Nations Sustainable Development Goals, adopted in September 2015, have, for the first time, put this issue on its agenda by agreeing to reduce to less than 3% the transaction costs of migrant remittances, and to eliminate remittance corridors with costs higher than 5%. [22]
But reducing or eliminating hawala remains a difficult endeavour, one which requires greater political will in India. A system which has proved to be resilient for centuries will not disappear easily and immediately, and especially not when it is also allegedly used by some politicians. But steps can be taken to weaken it.
The Gateway of India Geoeconomic Dialogue will be held on 13-14 of February 2017.
The Gateway of India Dialogue was co-hosted by Gateway House and the Ministry of External Affairs on the 13-14 of June 2016.
Sameer Patil is Fellow, National Security, Ethnic Conflict and Terrorism, at Gateway House.
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References
[1] Press Trust of India, ‘2006 Mumbai Train Blasts: Police Chargesheet Details Role of Accused’, NDTV, 14 September 2015, <http://www.ndtv.com/india-news/2006-mumbai-train-blasts-police-chargesheet-details-role-of-accused-1216756>
[2] Federal Bureau of Investigation, Department of Justice, United States Government, Manhattan U.S. Attorney Charges Long Island Man with Engaging in Hawala Activity That Funded Attempted Times Square Bombing, 15 September 2010, <https://www.fbi.gov/newyork/press-releases/2010/nyfo091510a.htm>
[3] Hawala is an Arabic-origin word and refers to a bill of exchange or promissory note. In Hindi or Urdu, it additionally means ‘trust’ or ‘reference’, signifying the operating principle of this system. Hundi, a Sanskrit word, also means a bill of exchange or promissory note. See: Jost, Patrick M. and Harjit Singh Sandhu, The Hawala Alternative Remittance System and its Role in Money Laundering, Financial Crimes Enforcement Network and INTERPOL/FOPAC, <https://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/FinCEN-Hawala-rpt.pdf>
[4] Mabrey, Daniel, ‘Demystifying Hawala: Understanding Terrorist Financial Networks’, Crime and Justice International, Volume 19, No. 69, January 2003, <http://www.cjimagazine.com/archives/cji3773.html?id=27>
[5] Peters, Gretchen, Seeds of Terror: The Taliban, the ISI and the New Opium Wars (Gurgaon: Hachette India, 2009), p. 111 and 164.
[6] South Asia Terrorism Portal, ‘Asif Reza Commando Force’, <http://www.satp.org/satporgtp/countries/india/terroristoutfits/ARCF.htm>
[7] National Commission on Terrorist Attacks upon the United States, United States Government, The 9/11 Commission Report, 22 July 2004, <http://govinfo.library.unt.edu/911/report/911Report.pdf>, p. 171
[8] Press Trust of India, ‘1993 blasts were planned in April but Tiger advanced them’, The Economic Times, 21 March 2013, <http://articles.economictimes.indiatimes.com/2013-03-21/news/37903453_1_tiger-memon-bomb-blasts-serial-blasts>
[9] Press Trust of India, ‘2006 Mumbai Train Blasts: Police Chargesheet Details Role of Accused’, NDTV, 14 September 2015, <http://www.ndtv.com/india-news/2006-mumbai-train-blasts-police-chargesheet-details-role-of-accused-1216756>
[10] Lok Sabha, Government of India, ‘Funding through Hawala’, Unstarred Question no. 3288, 12 December 2014, <http://164.100.47.192/Loksabha/Questions/QResult15.aspx?qref=10904&lsno=16>
[11] National Investigation Agency, Ministry of Home Affairs, Government of India, ‘Final Report (U/S 173 Cr PC), State (NIA) V/s Syed Salahuddin and Others’, 30 November 2013, <http://www.nia.gov.in/writereaddata/Portal/CasesPdfDoc/RC-11-2011-DLI-CS-3.pdf>
[12] ITGD Bureau, ‘Geelani aide arrested in Hawala case, Rs 21 lakh seized’, India Today, 23 January 2011, <http://indiatoday.intoday.in/story/geelani-aide-arrested-in-hawala-case-rs-21-lakh-seized/1/127499.html>
[13] Press Trust of India, ‘Gulf funds being used to radicalise Kashmir youth’, Daily Excelsior, 24 April 2016, <http://www.dailyexcelsior.com/gulf-funds-used-radicalise-kashmir-youth/>
[14] Fifield, Anna, ‘How Iranians are avoiding sanctions’, Financial Times, 14 April 2008, <http://www.ft.com/intl/cms/s/0/6ca69788-0a48-11dd-b5b1-0000779fd2ac.html>
[15] Reschikov, Oleg, ‘Iran: Opposition to Western Sanctions in the Banking Sector’, New Eastern Outlook, 30 January 2015, <http://journal-neo.org/2015/01/30/rus-iran-protivodejstvie-zapadny-m-sanktsiyam-v-bankovskoj-sfere/>
[16] Bureau of International Narcotics and Law Enforcement Affairs, U.S. Department of State, 2010 INCSR: Countries/Jurisdictions of Primary Concern: Guatemala through Mexico, 1 March 2010, <http://www.state.gov/j/inl/rls/nrcrpt/2010/vol2/137212.htm>
[17] World Bank, ‘Migration and Remittances Factbook 2016- Country Tables’, December 2015, <http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1199807908806/4549025-1450455807487/Factbook2016_Countries_A-L.pdf>, p. 88
[18] Ministry of Finance, Government of India, ‘The Foreign Exchange Management Act, 1999’, 29 December 1999, <http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/FEMA_act_1999.pdf>
[19] Ministry of Finance, Government of India, ‘Prevention of Money Laundering Act, 2002’, <http://finmin.nic.in/law/moneylaunderingact.pdf>
[20] The Egmont Group of Financial Intelligence Units, ‘About’, <http://www.egmontgroup.org/about>
[21] Patil, Sameer, Combating terror financing through SAARC, 25 November 2014, Gateway House: Indian Council on Global Relations, <https://www.gatewayhouse.in/combating-terror-financing-through-saarc/>
[22] United Nations, ‘Sustainable Development Goals-Goal 10: Reduce inequality within and among countries’, <http://www.un.org/sustainabledevelopment/inequality/>