Regulating Hawala: Informal Remittances Post 9/11

Abstract

In 2010, the officials of the Financial Action Task Force (FATF) were reviewing the problems of formalising informal financial systems in developing countries, and specifically addressing the hawala system in Africa. Hawala was a highly popular form of remittance transfer, especially where there were no banks or the banking system failed to offer clients ease of access and competitive costs. However, hawala was open to misuse as a means for both money laundering and the funding of terrorism. They wondered if and how the FATF could address these problems and whether its existing recommendations and interventions were sufficient.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

Resources

Exhibit 1a Summary of the FATF Recommendations

Source: FATF website, ‘An Introduction to FATF and its Work’, available at: www.fatf-gafi.org (accessed 26 October 2010).

The 40 Recommendations provide a complete set of countermeasures against money laundering (ML) covering the criminal justice system and law enforcement, the financial system and its regulation, and international cooperation.

They set out the principles for action and allow countries a measure of flexibility in implementing these principles according to their particular circumstances and constitutional frameworks. Though not a binding international convention, many countries in the world have made a political commitment to combat money laundering by implementing the 40 Recommendations.

The 40 Recommendations include to:

  • successfully investigate and prosecute money laundering and terrorist financing;
  • deprive criminals of their criminal proceeds and the resources needed to finance their illicit activities;
  • require financial institutions and other businesses and professions to implement effective measures to detect and prevent money laundering and terrorist activities through:
    • customer due diligence,
    • record-keeping,
    • suspicious transactions reporting;
  • ensure that financial institutions and other business institutions comply with AML/CFT requirements;
  • enhance the transparency of legal persons and arrangements;
  • implement mechanisms to facilitate cooperation and coordination of AML/CFT efforts at the international and domestic level;
  • secure a more transparent and stable financial system that is more attractive to foreign investors;
  • ensure that financial institutions are not vulnerable to infiltration or abuse by organised crime groups;
  • build the capacity to fight terrorism and trace terrorist money;
  • meet binding international obligations and avoid risk of sanctions or other actions by the international community; and
  • avoid becoming a haven for criminals.

Exhibit 1b Summary of the FATF IX Recommendations on Terrorist Financing

Source: FATF website, ‘FATF IX Special Recommendations, October 2001’, available at: www.fatf-gafi.org (accessed 29 October 2010).

I. Ratification and implementation of UN instruments – the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism and the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts, particularly United Nations Security Council Resolution 1373.

II. Criminalising the financing of terrorism and associated money laundering – criminalisation of the financing of terrorism, terrorist acts and terrorist organisations.

III. Freezing and confiscating terrorist assets – implementation of measures, including legislative ones, which would enable the competent authorities to freeze assets and seize and confiscate property that were the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organisations.

IV. Reporting suspicious transactions related to terrorism – by financial institutions, or other businesses or entities subject to anti-money laundering obligations.

V. International cooperation – legal assistance or information exchange in connection with criminal, civil enforcement, and administrative investigations, inquiries and proceedings relating to the financing of terrorism, terrorist acts and terrorist organisations. Countries should also take all possible measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organisations, and should have procedures in place to extradite, where possible, such individuals.

VI. Alternative remittance – ensuring that all agents providing for money transfer, both formal and informal, should be licensed or registered and subject to FATF recommendations that apply to banks and non-bank financial institutions.

VII. Wire transfers – introduction of measures for the accurate recording of such transfers (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Monitoring and scrutiny of transactions that contain incomplete information should be conducted.

VIII. Non-profit organisations – review of laws and regulations pertaining to NPOs that were vulnerable to misuse, such as:

  • by terrorist organisations posing as legitimate entities;
  • to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and
  • to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

IX. Cash couriers – measures for the adequate detection of cross-border currency transportation.

Exhibit 2 Remittance Flows to Developing Countries, from Recorded/Formal Sources

Remittance 2006 and 2007 with estimated outlook for 2009 to 2011

(US$ billion)

2006

2007

2008

2009 est

2010 est

2011 est

Developing countries

235

289

338

317

322

334

East Asia and Pacific

58

71

86

85

85

89

Europe and Central Asia

37

51

58

49

51

53

Latin America and Caribbean

59

63

65

58

59

61

Middle East and North Africa

26

31

35

32

33

34

South Asia

43

54

73

72

73

76

Sub-Saharan Africa

13

19

21

21

21

22

Low-income countries

20

25

32

32

33

34

Middle-income countries

215

265

306

285

289

300

World

317

385

444

420

425

441

Source: Dilip Ratha, Sanket Mohapatra and Ani Silwal, A Better-than-expected Outcome so far, but Significant Risks Ahead, Migration and Remittance Trends 2009, 2010. Authors' calculations based on data from IMF Balance of Payments Statistics Yearbook 2008 and data releases from central banks, national statistical agencies, and World Bank country desks. Migration and Development Brief11.pdf available at: www.worldbank.org/prospects/migrationandremittances (accessed 25 October 2010).

Exhibit 3 Schematic Representation of a Typical Hawala Transaction

Source: Adapted from Frederick Ahwireng-Obeng and David T Mutombo, Features and functioning of the hawala remittance system in sub–Saharan Africa, In Mark Napier (Ed.). Real Money, New Frontiers: Case studies of financial innovation in Africa, Juta and Company Ltd: Claremont, 2010: pp. 167–176.

Figure

Exhibit 4 Relationship between the Positive and Negative Characteristics of Hawala

Negative and positive characteristics

Negative effect on BoP accounts

Misuse for financing terrorism

Misuse for money laundering

Foreign exchange diversion

Tax evasion

Minimum record-keeping

Speed

Convenience

Low transaction charges

Flexibility (not registered)

Miscellaneous factors and positive characteristics

Lower transfer charges and better exchange rates

Expanded services to remote areas

New technology

Minimum record-keeping

Speed

Convenience

Low transaction charges

Flexibility

✓ = positive correlation.

Source: Adapted from Frederick Ahwireng-Obeng and David T Mutombo, Features and functioning of the hawala remittance system in sub–Saharan Africa, In Mark Napier (Ed.). Real Money, New Frontiers: Case studies of financial innovation in Africa, Juta and Company Ltd: Claremont, 2010: pp. 167–176.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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