In late January, French authorities, at the behest of the United States Drug Enforcement Administration (DEA), busted a European drug trafficking and money laundering cell. The DEA alleged that this cell was responsible for overseeing a Hezbollah narcotics trafficking and money laundering network. “These drug trafficking and money laundering schemes utilized by [Hezbollah] provide a revenue and weapons stream for an international terrorist organization responsible for devastating terror attacks around the world,” acting Deputy Administrator of the DEA, Jack Riley, said in a statement.
The DEA alleges that the drug trafficking carried “large” amounts of cocaine between the United States, South American suppliers and Europe, the proceeds of which partly transited through Lebanon and then back to South America to be delivered to the drug cartels. This illegal transaction followed the same principle as Hawala, which in many cases is not used for criminal purposes. Hawala is defined as “money transfer without money movement.”
Cash transfers via Hawala networks are legal but scrutiny into their use to remit cash has grown in recent years as countries, including Lebanon, tighten their cash transfer regulations. Hawala can enable illicit money transfers because the system is informal, and, without recording transactions, the potential for crime is heightened. In 2013, Banque du Liban, Lebanon’s central bank, amended its cash transfer rules to require approved exchange institutions performing Hawala cash transfers to keep records for a minimum of five years. Transfer amounts were limited to $20,000.
Hawala cash transfer networks do serve as a legitimate alternative to electronic fund transfers, utilized legally by economic migrants to transfer money to family members back home. Hawala can be a preferred method to transfer paychecks and sums of cash as remittances because of its ease of use, particularly for individuals who are sending money to relatives located in rural areas where banks or money exchangers may not be present. In some cases there is an element of exclusion from the traditional banking system because of inaccessibility in terms of proximity but also due to cost and convenience. Hawala often is a more convenient service to remit money because transfer fees can be cheaper than wire transfers and cash delivery.
Here’s a rough example of how a legal Hawala network might work: an economic migrant working in country A wants to send a portion of their paycheck to family members that live in a rural area with no access to a bank or money exchanger in country B. The economic migrant speaks to a Hawala provider in country A who coordinates with a business partner in country B to facilitate remittance delivery to the family members. Rather than sending cash, the Hawala provider and their business partner might collect remittances to finance the purchase of goods (for example foodstuffs, consumer products, electronics) in country A for export to the country of remittance. A portion of the proceeds from the sale of those goods in country B would then be delivered as cash to the economic migrant’s family. At face value this example transaction appears completely legitimate and involves individuals that only wish to remit cash to support their family.
But it is not impossible for illicit transactions to slip through and there are multiple entry points for them to do so. Hawala providers may unwittingly – because of front companies – or knowingly accept cash from shady sources. This exposes those who legitimately participate in Hawala cash transfer networks to law enforcement agencies. Agencies like the DEA might suspect illicit activity because of a lack of documentation of the transfer. As cash moves from the pocket of the remitter through the network, it becomes unclear whether the paycheck was sent to family or used to finance terrorism, and the mere hint of illicit activity by any individual or entity involved in the Hawala network, or at any point in the cash transfer, can expose the whole network to investigation.
To learn more about how Hawala-type networks function and how governments build cases against those suspected of using cash transfers in an illicit manner, Executive spoke with Mark Jenner, a United Kingdom based forensic accountant. Jenner specializes in tracking cash transfers through Hawala networks and works with governments to investigate illicit money flows. He also helps with client defense, explaining in court how these systems work and tracing cash.
E How might governments become suspicious of Hawala-type cash transfer networks?
Traditional Hawala is still the trusted local representative who sends your money to a link abroad. But a lot of ethnic transfers are now done by simple money remittance companies and we still refer to them as Hawala businesses. The problem stems from the fact that Hawala has grown into a buzzword used by authorities for more widespread and large-scale transfers.
The issue is that when you’re building a case very often the word Hawala or money remittance is used as an excuse and the person may be accused of money laundering, but no, it’s just a simple Hawala transaction. Whichever side I was working for I would say ‘well fine, but I need to trace where that money actually came from and that is the first and most important step – can you say where the money came from? In a lot of cases where people have received bags of cash they can’t say where it came from but if they are an innocent party they would be able to demonstrate that they’d perhaps sold a house in another country and were expecting the money to come in. Unfortunately, in this business, crooks will highjack the system or they will set up similar systems and use innocent parties to receive money unbeknownst to them.
E When there is illicit use of a Hawala cash transfer network and there is limited documentation, how do governments or law enforcement agencies build their case?
In the UK, the Proceeds in Crime Act allows the government to assume that money is from an illegitimate source, so you have to prove that it came from somewhere legitimate and they don’t [investigate] very deeply into the foreign transaction. So [the government] will say ‘well look you’ve been caught with money here, it is illegitimate unless you can prove otherwise.’ So I find myself in the position to say to the defendant: ‘Well look, they’ve made an assumption because they’re allowed to. Now we have to prove that it comes from a legitimate source.’
Very often, in the circumstances I’m involved in, [the government] will have some sort of intelligence which allows them to pounce on my client and catch them receiving money. That money has come from criminal sources whereas my client has no idea about [it], or says he has no idea, because he’s expecting the money from the sale of a property in his home country.
E Are the rules in the UK, for example, sufficient to regulate this kind of money transfer system, curbing its illicit use?
In my view the rules are very weak and haven’t addressed the problem fully yet. The reason I say that is because it is relatively easy to set up a remittance business in the UK and I know that some of the banks are refusing to work with some of these remittance companies. However, the remittance company is monitored and governed by our Financial Conduct Authority and HM Revenue & Customs (HMRC) and the [regulators] visiting the company that is meant to be a legitimate remittance company will not look at anything other than accounting control systems and they miss the fact that the money often comes from a legitimate source.
E The impression is that a lot of economic migrants who are using this type of money transfer system are doing so basically because they’re effectively excluded from traditional banking because of costs, rural locations or just because they have never used anything but cash.
Sometimes I have to explain to a court why someone would use the Hawala system. There is a very strong motive for a legitimate person to use these systems and I do find people having to go through them because of the quite stringent exchange controls and monetary controls in the destination or receiving country. In India, which has become more relaxed in recent years, is still quite hard to send lots of money abroad. At one stage you couldn’t do it at all so [Hawala] systems grew and became familiar to people who still use it. The other problem is that a lot of these cultures will be very comfortable using cash, even [purchasing] a property [with cash] may be acceptable. In the UK of course it wouldn’t be and so it becomes a very suspicious transaction at this end whereas maybe the person taking part in the transaction, a migrant in this country, will see no harm in it and individuals can be excused or should perhaps be given more leniency for dealing that way.
Companies shouldn’t. And I think if businesses are still receiving cash deposited into their bank accounts, they should not be surprised when the authorities start questioning their motives.
I had one case in Afghanistan. A lot of money was being sent there and the way they balanced the books was by transferring the money not to Afghanistan but to factories in China that were supplying Afghanistan with commodities, and that was [because] China couldn’t be paid by Afghanistan for the purchases. So you have a triangular movement of money there for a very good reason – money had to get from the people in the UK to their family. The money was actually going to China to pay the companies that were dealing with Afghanistan so you have the books all balanced – everyone is getting what they should be getting. But in amongst that the money launderers are moving cash and it all gets lost in the system. So you have a legitimate reason for things happening but then you’ve got the illegitimate transactions mixed up in it, which is why you’ve got to trace the money – where it’s coming from, where it’s going to, and the reasons for each individual transaction, and where you can’t do that in large sums you start to see why the suspicious authorities hone in. If you can’t explain the sources and trace the money, then that’s where money laundering lives.
E So in some cases, at some level, these two worlds of legitimate cash transfers and money laundering collide?
They do and I think it’s down to the difficulties that the authorities have with policing the remittance system. They recognize that there must be a remittance system but it becomes a relatively soft target for the criminals. I deal with a lot of money that is laundered through the conventional banking system so all systems are used, but it appears that Hawala and similar ethnic transfer systems have become a particularly big target for the money launderers.
E Is there any measure of the amount of cash transferred through Hawala-type networks?
I don’t think anybody knows the figures because of the gray line between underground transfers and any sort of conventional transfers. There is no real knowledge of the amount and people variably try to estimate them but I would say, as in any fraud, that nobody really knows what’s going on because it’s hidden and that’s the whole point isn’t it? It’s a hidden activity and it’s the amount that we don’t know about that we need to know, and if we knew about it, it wouldn’t be a problem.