A Guidance to Understand Hawala and to Establish the Nexus with Terrorist Financing

Genesis Martis

The global financial system is vulnerable to money laundering and terrorist financing risks. After the unfortunate events of 9/11, jurisdictions are constantly developing new rules and regulations to mitigate these risks, especially the risks of terrorism. Without the necessary funding, terrorists cannot commit their crimes, making the delivery stage of terrorist financing the most crucial stage. Seeing the growing stringent regulatory framework, bad actors constantly seek new ways to move the funds for terrorism funding purposes, which is either obtained legitimately or illegitimately. Informal Value Transfer Systems (IVTS) have become a preferred way to move around funds, for not only money launderers, terrorism financers but also for immigrants who must support their families back home.

IVTS referrers to “any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form. The transfers generally take place outside of the conventional banking system through non-bank financial institutions or other business entities whose primary business activity may not be the transmission of money.” There are several types of informal value transfers systems. In addition, IVTS has been classified as underground banking and alternative remittance systems. This paper will discuss Hawala, a widely form of IVTS.

Due to its lack of bureaucracy, lack of paper trail and no Know Your Customer (KYC) documentation, bad actors have come to favor this type of remittance system. However, the biggest risk is the unlicensed remittance service providers. The challenges faced by jurisdictions, law enforcement and financial institutions in detecting unlicensed hawala service providers as well as lack of information of the concept make it difficult to assess the amount of funds that are moved through this type of remittance system.

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