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« Thesis Chapter 1 On Hawala Remittance System And It's Crucial Role In Money Laundering | Main | Thesis Chapter 3 On Hawala Remittance System And It's Crucial Role In Money Laundering »


Thesis Chapter 2 On Hawala Remittance System And It's Crucial Role In Money Laundering

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Chapter 2. Literature Review


2.1 Hawala Remittance System

            Hawala Remittance system also regarded as the alternative remittance system by Financial Action Task Force are known to be an informal banking arrangements and transactions which allow transfer of funds for international and domestic remittances without considering formal financial companies like banks. It is well recognized for having the cheapest and also the fastest and most reliable transfer approach which has been used by overseas workers sending remittances for their families. Though it is very hard to accurately quantify the volume of funds transferred yearly to the developing world through such avenues, remittances are very essential sources of income for different impoverished households and may also play an essential role in promoting development and growth. Nonetheless, in the aftermath of September 11, there has been growing issues on the potential role of Hawala in money laundering. This thought was due to the fact that remittances through hawala system are anonymous and only require minimal documents, that it can be easily misused by criminal organisations or the terrorists groups to cover the proceeds of criminal operations or corrupt government officials to launder the proceeds of their corruptions (El-Qorchi, 2009).

According to some studies, hawala is considered to be a safe, fast and cost-effective transfer funds approach.  It runs independently from the formal banking approach and was originally developed to assist trade between distant regions at a period of time or in regions where traditional banking medium were not available, weak or considered as unsafe.  Alternative remittance systems such as hawala are being defined by the FATF as a system used to cover any system utilised for transferring funds from one region to another and universally operates independently from the banking channels. Alternative remittance systems services range from those administered by large multinational firms to small local networks. They can be of illegal or legal nature and make use of different methods and tools to transfer the money.

            In some countries, Hawala remittance systems is not considered as illegal, however because of some irregularities of the system and its limited documentation, authorities are considering this as an illegal form although they are having difficulties to oppose it because it has been promoted and advertised through internet and ethnic media.  Furthermore, brokers of Hawala usually run legal business in line with the remittance services that they offer, which further post some challenges to detect its irregularities.

2.2 Hawala Remittance Process

            The hawala remittance process is very simple: the customer has a quantity of funds which he wants to provide from his nation of abode to his family in his original country. He gives such money to a hawala banker and the banker calls his contact, which is another hawala banker, in the second nation and asks this to realise such cash to the family of the client.  On the other hand, the hawala banker gives the client with a remittance code which he will give to the member of the family. His family member visits their contact who will give the money on the presentation of the correct remittance code. Such entire process can take less than 24 hours.  The hawala banker as well as his counterpart in the client’s country of origin keep a tally of how much each owes the other party and settle their accounts on several times of a year.  Hawala bankers mostly have import/export firms and may utilise goods to settle accounts such as they can export a specific amount of good to the other at a decreased rate to cover the amount that he owes from Hawala exchanges (see Figure 1).


Figure 1. The Hawala Procedure

Source: El-Qorchi, 2009


2.3 Recent Studies

In accordance to the previous discussion, there are numerous studies and reports that are engaged in considering the role of Hawala in money laundering.  Actually, the paper Monetary and Financial Systems Department (2005) reported that FATF dedicates a full section to alternative remittance systems.  The said paper also describes how these networks work in practice, with the view to identifying areas of vulnerability and risks of misuse for illegal purposes.  On the other hand, the report Monetary and Financial Systems Department (2005) which was prepared by the IMF illustrates the proceedings of the second International Conference on Hawala. Actually, the conference resulted in a statement identifying the challenges of implementing a regulatory framework for Hawala remittance systems. From the said report, the participants agreed that there is a need to gather and analyse more data and knowledge on those systems. 

In the paper entitled “The Potential Role of Remittances in Achieving the Millennium Development Goals (2005)”, UNDP explores the potential role that remittances can play in promoting growth and development in developing countries. Although the issues involved are complex, remittances are important for developing countries as they provide access to substantial additional financial resources and support the sustainability of livelihoods (United Nations Development Programme, 2005).

Apparently, the paper Informal Funds Transfer Systems (2003) which is a joint IMF-World Bank paper provides an analysis of the Informal Hawala System (Monetary and Financial Systems Department, 2005). They present the major features of Hawala, its uses as well as an economic analysis of Hawala transactions. As seen in this paper, they concluded it by outlining legal and regulatory aspects of Hawala remittance systems. The paper entitled “Combating the Abuse of Alternative Remittance Systems: International Best Practices (2003)” also provided additional details to the Interpretative Note on Recommendation VI that addresses risks associated with alternative remittance systems (Financial Action Task Force on Money Laundering 2003). It provides guidance on how to detect those systems outside the formal banking system and focuses on practical issues such as identification of money transfer services, procedures for registration/licensing and customer due diligence procedures.

 2.4 Money Laundering: The Procedure

Money laundering is considered as the process by which criminals attempt to hide the origins and ownership of the proceeds of their criminal activities. The aim is to enable them to retain control over the proceeds, at the same time, provide a cover for their income and wealth (Hopton 2006) (see Figure 2).


Figure 2. Describing Money Laundering

Source: Hopton 2006

Money laundering works on three steps – placement, layering and integration. In the first step, the launderer subjects the dirty money into a legitimate financial institution often as cash bank deposits. Laws and authorities require banks to report high-value transactions contributing to the risks taken by the launderer making the cash conspicuous. The next step would be to distribute the money by means of various financial transactions to change its forms therefore making difficult to follow. Such step is complex because the launderer would do just about anything to make the original dirty money as hard to trace as possible. Launderers engage with several bank-to-bank transfers and wire transfers between different accounts in different names in different countries. Aside, launderers make deposit and withdrawals in continuously varying amount, currency and also purchasing high-value items in order to change the form of money at a continuum. The final step will involve the re-entering of the dirty money within the mainstream economy in lawful-looking form that includes a final bank transfer into an account of a local business as a form of investment or the selling of a purchased item (see Figure 3).

Figure 3. How Money Laundering Works

Thus, it is less well recognized the impact of secrecy jurisdiction or tax havens in encouraging and supporting different corrupt practices (Christensen 2009). As part of the issues of money laundering, a tax haven is considered as a geographical area such as nation, city, state or zone that levies a lower rate of taxation than average compared to other nations and jurisdictions (EscapeArtist Inc. 2008). It is a foreign jurisdiction that qualifies an offshore secrecy jurisdiction that maintains corporate, bank and tax secrecy laws and industry practices that make it difficult for other countries to determine whether their citizens are using the jurisdiction to cheat o their taxes (Tanenbaum 2009).


2.5 Money Laundering in Action

There are factors which cause or motivate the process of money laundering. Primarily, external factors that is common to a specific industry which includes the demands and strikes which produce pressures to a given organization to use illegal activities in order to get a more favorable in their respective market. Enterprises within a given industry face common constraints and given sources of uncertainty. Due to that condition, corporate executives or high level management tend to develop common attitudes towards and mutual concerns with accordance to the constraints of their industry. Therefore, environmental factors could facilitate and increase the likelihood of illegal acts, specifically the structure of the organizations and their connection with their legal and market environments (Dion 2008). One of the best examples to consider is the presence of bank secrecy haven. Thus, there are different banks in the world which implement policies that will ensure secrecy or confidentiality of their customers’ transaction records. Therefore, the said policy can serve as protection and motivation for the money launderers (Cuellar 2003). There are number of overseas banks which allow anonymous banking which allow anonymous banking which involve hundreds of bank transfers. One of the great examples here is the case of Piervinanzi. In March 1988, Anthony Marchese told DelGiudice that he and Piervinanzi were planning to rob an armoured car and suggested a less violent alternative which is the unauthorized wire transfer of funds from Irving Trust into an overseas account and positioned it in order to obtain information that will be vital to transfer it. DelGuidice focus on obtaining an overseas bank account because of the fact that the United States banking regulation is already on its development. The two criminals focus on providing access to accounts in the Cayman Islands because of the strong bank secrecy laws that will prevent them from tracing. Thus, the money they will steal could be repatriated in monthly amount of $200,000. Thus, this case shows that the role of bank secrecy havens plays in making it more difficult to recapture the funds and detects the perpetrators even if the underlying scheme is discovered (Cuellar 2006).

It is also vital to focus on the different groups or organizations that can be involved in cleaning dirty money. These include shell companies or companies that are exist for no other reason but to launder money by taking dirty money as a payment for a supposedly products or services but provide no such things, but just create an appearance of legitimate transactions by using fake invoices and balance sheets (Layton 2009). Due to that, it can be said that different individuals, government agencies and policies are not that powerful to focus on monitoring and controlling companies that registers in a given place. 

On the other hand, there are also some countries in Asia that have well-established, legal alternative banking system which allow undocumented deposits, withdrawals and transfers and other transactions from their customers or clients. Thus, these are considered as trust-based systems that are considered as an ancient tool that leave no paper trail and operate outside the control of the government. The two popular systems are Pakistan and India’s Hawala system and China’s Fie Chen. Therefore, it can be seen that governments in the said countries, together with other countries in Asia are having difficulty to locate and come up with the different actions to be implemented in order to stop the operations of this kind of banking.

Aside from that, it is also important to include the fact that there are different powerful individuals or groups that are involved in the process of money laundering. For instance, within the black markets, business people are used as a peso brokers with importation of products as the front for the purpose of avoiding government taxes on money exchange and tariffs on good importation. Therefore, peso brokers serve as catalysts through charging of lower fees in order to conduct transactions that are beyond the scrutiny of the government. In 1996, Franklin Jurado, a Harvard-educated economist went to prison due because he had clear $36 million for Colombian drug lord Jose Santacruz-Londono. Thus, it can be observe that most of people with a whole lot of dirty money commonly hire financial experts in order to handle the laundering process. Thus, it can be seen that it is vital to focus also on the different financial experts that are handling different cases, because they are the one who are properly informed and familiar with what the different processes that are involved in cleaning dirty money.

In addition, it is also important to focus on the organizational factors which motivates or push money laundering. It is important to focus on the structure of the organization or company. According to the survey of Cochran and Nigh of 434 firms, a firm that has a low-annual profit will be more likely to commit an illegal act. Furthermore, the greater the growth rates of a company, the greater the probability of violating any law. Consequently, the greater the product diversification, the greater the probability of violating the law, this is because different authors and researchers believe that the size of the organization is considered as a condition that could influence the way organizations react to their legal environment. This is because of the fact that they have all the methods, approach, equipment and connections which they can use and applied.

Aside from the issues of money laundering with respect to the Hawala system, tax haven abuse was also part of this practice. Actually, similar to money laundering, tax haven abuse is also considered as a worldwide problem. There are different organizations and governmental agencies that focus on preventing these activities. However, due to the different changes in the business world, the face of tax haven abuse is also changing. These factors include globalization, international travel and modern technology which made international dealings more commonplace, which causes challenges for the government to detect and deter the illegal or even improper use of tax havens (Australian Government 2009).  IT enables rich citizens and corporations to escape the national tax system which enables them to save millions, while the public services and infrastructure in their home countries and the small island havens to remain drastically underfunded (Global Policy Forum 2009). The report of the Global Policy Forum in 2009 showed that there are different multinational and big companies in the world are being benefited for tax haven. Thus, because of the laws and policies in tax havens which focus on confidentiality, they are commonly used in order to commit crimes which violate tax and other laws. The most serious fraudulent use of this kind is by narcotics traffickers to accumulate or launder large sums. Often phony shelter schemes violate securities and tax laws. Shell banks established in St. Vincent have been used in order to defraud United States banks and other important businesses (Gordon 2002). In that case, it is important for government to focus on the different agencies that will investigates all of the financial and non-financial information that could help to inform the government about the performance and different transactions of these companies in different parts of the globe.

2.6 Literature Synthesis

As stated in the previous discussions, there are different factors which affect and influence money laundering in accordance to Hawala System. First, it is important for different governments and nations to be connected and unite in battling this kind of crime. Furthermore, it is also important to have a standard procedures or policies that will handle cases about money laundering.

It is also important for government agencies and units specializing in monitoring and analyzing operations of different companies to focus on their job in knowing if a given or specific company is operating or performing based on what they have declared. It is also important for governments to come up with strong laws and policies that will cooperate with different banks. Therefore, it is important to focus on different policies and laws that can be done or implemented in order to handle one of the major motivation or causes of money laundering and abuse of tax haven, the secrecy or confidentiality of transactions from the clients or customers. It is important to communicate with the bank regarding these transactions that could help in order to gain evidence about a given case.

On the other hand, it is also to focus on the aspect of graft and corruptions inside and out of government office. This is because of the fact that irregularities and corruptions inside government agencies can cause this money launderer and tax haven abusers to have a back-up for their crime, therefore saving them from any accountability to the laws.

Furthermore, because of the fact that banks and other financial institutions are directly connected with the money launderers and abuser of tax haven, it is important to focus on a system that will allow and enable the public, particularly the employees of these banks to report suspicious transactions to the authorities. This can be done by offering incentives and tokens that will motivate the people to be more vigilant. This will start via the process of informing the public regarding the different negative impact of the said two financial crimes to the overall economy, and discuss the different methods and approach that can be used to do it.

Above all, it is important to focus on the different technological development that are commonly used and applied by money launderers and tax haven abusers. It will include the different policies and laws that will focus on limiting the use and application of this technology, in order to ensure that it will not be used for the benefits of the said financial criminals.


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