Post 9/11 Focus On Hawala Networks

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: Post 9/11, there has been heightened US interest in informal fund transfer systems (IFTs) as conduits for terrorist financing. In an Indian context, such systems are nothing new and have existed for ages known as hundi or hawala. In Arabic, hawala means transfer and is popularly used by large migrant communities to remit funds to their families in far-flung villages and towns in India, Pakistan, Bangladesh among other countries.

The benefits of this system include speed, low cost, cultural convenience and anonymity. According to a recent IMF paper*, this system is also highly adaptable to wars, civil unrest, economic crisis and weak or non-existent banking systems. This is why it has lasted all these years and despite financial sector reform in many developing countries during the 1990s, IFTS are in no danger of becoming irrelevant. That includes countries like India.

The flip-side is that the anonymity associated with such financing lends itself naturally to criminal activities like money laundering and terrorist financing. In a recent article written for this newspaper by PC Sharma, director general of India’s Central Bureau of Investigation, the author pegs the scale of global money laundering at $500 billion or 2-3 % of global GNP. IFTS obviously are the main conduits for such criminal activities.

The IMF paper attempts to put some numbers through a simulation model on the hawala system from a sample of 15 countries which have appreciable numbers of nonresident nationals and have a history of parallel exchange rates: Algeria, Bangladesh, Ecuador, El Salvador, Guatemala, India, Indonesia, Iran, Pakistan, Philippines, Sri Lanka, Sudan, Tanzania, Turkey and Zimbabwe during the period 1981-2000.

According to this model, the black market premium — compiled by the World Bank — is the key factor in determining the economic incentive for remitters to use hawala channels to send funds. This variable is quite divergent across countries and in most of them (including India) it tends to decline noticeably from the early 1980s to the late 1990s. Pakistan, however, is an exception as premiums of 25 to 30 per cent in the early 1980s remained the same during late 1990s.