Narita Bahra QC successfully defended in £11M Money Laundering Trial
Narita Bahra QC and John Carl Townsend successfully defended in an International £11 million money laundering trial, where the defence advanced was Hawala Banking. It was asserted that the client had no knowledge or suspicion that money laundering was taking place and that the transactions had the appearance of genuine hawala transfers.
Hawala Money Transfer Systems: Debunking the Presumption of Illegitimacy
Narita Bahra QC & Dr Jonathan Ercanbrack
Modern financial markets are not usually associated with non-existent audit trails, minimised documentation and transactions undertaken on the basis of trust alone. In fact, just the opposite is the case as extensive contractual documentation, money laundering regulations and auditing characterises the highly regulated nature of modern financial practices. It may come as a big surprise then that hawala, an ancient transaction used to finance trade worldwide reflects these informal or unregulated characteristics. It is the unregulated nature of hawala (depending on the jurisdiction), however, which has led to an unfortunate presumption that the practice is primarily used to transfer or camouflage illegitimate funds. While hawala in some jurisdictions has been susceptible to money laundering and terrorist financing, the financial practice is also a vital means of poverty alleviation and financial inclusion in those countries in which remittances are the lifeblood of the economy. Furthermore, there is no evidence that hawala is used more often for illegitimate purposes. Incidences of money laundering and criminal financing regularly surface in multinational financial institutions, despite the vast array of regulatory requirements and disclosures to which they are subject.
Hawala is an age-old financial practice that most likely originated in the Near and Middle East over a thousand year ago, but which has also flourished throughout East Asia (there the practice is known as fei-ch’ien or ‘flying money’), South Asia (where it is known as hundi) and Afghanistan (where it is known hundi or havaladar) and Africa (hawala). Hawala’s varied nomenclature belies some common characteristics that typify why hawala remains attractive to migrant workers and other unbanked populations, who, increasingly, wish to send home remittances, and/or prefer to deal with trusted persons from their own ethnic or tribal community when engaging in trade and finance. First and foremost, hawala is cheap. It outperforms formal money transfer businesses by around 25-50%, where the average global cost of sending $200 is 7%. It’s also remarkably quick – money can be remitted within hours across the globe – unlike banks which sometimes require up to a week for the money to arrive. Third, hawala involves hawala transfer agents (hawaladars), who often originate from the remitter’s ethnic or tribal community. Familial, ethnic and social affiliation underlies the relationships of trust upon which the efficacy of the system relies. Familiar persons can be trusted to remit the funds to family overseas in the absence of contractual undertakings. One reason for this is that breach of trust is tantamount to an economic death sentence or social exclusion from the community for the breaching hawaladar. Further, formal money transfer businesses require identification documents and other regulatory compliance which can seem threatening to persons who may have immigration problems (they may reside in the country illegally) or other concerns related to their sometimes, traumatic experience with public authorities in their home countries. There is a tendency in some ethnic minority communities to shy away from formal institutions, irrespective of their particular function or nature. Finally, formal financial institutions in remittance-receiving countries may not exist or are difficult to access, making hawala a necessity in such countries.
It is often assumed that hawala is prima facie unlawful, but, arguably, this perspective reflects a somewhat narrow, western-derived legal orientation that views transactions as suspicious when these are undertaken in the absence of regulatory or contractual control. Even in advanced economies, the use of legal planning, particularly in relation to dispute resolution, are settled without reference to potential or actual sanctions. Further, ‘many if not most business exchanges reflect no planning or only a minimal amount of it, especially concerning legal sanctions and the effect of defective performances.’ Perhaps then hawala represents a culturally and socially determined mode of financing trade and commerce that in some respects is not wholly different from conventional business practices.
The Financial Action Taskforce, an independent inter-governmental body, has produced an influential report on hawala in which it categorises hawala into three separate categories: namely, legitimate, hybrid and criminal. These categorisations are based on whether hawala is used for lawful or unlawful purposes but fail to distinguish the fact that the mechanisms of hawala, irrespective of the lawfulness of the parties’ intentions to these transactions, are similar if not the same. Categorisation of hawala is merely a heuristic, meant to separate the legitimate from the illegitimate, but it is rarely a useful one when it is a fact that most transactions resemble one another. Indeed, most transactions are of a low value (in the hundreds) and are thus not usually reportable according to the jurisdiction’s money laundering regulations (MLRs). Contrary to the rationale of this type of reporting requirement, prosecutors often claim that low value transactions are a means to evade MLRs without considering the possible origins of the money or the fact that persons remitting funds informally generally have lower incomes and thus less money to remit. On the other hand, large value transactions, are seen as particularly suspicious (and reportable), even though these transactions are more commonly transmitted via formally regulated money service businesses. So-called consolidating hawaladars, who act as wholesale dealers for a number of hawala money transfer agents, send sums as large as $100,000 overseas on a daily basis. This is a much less costly mode of transfer than dealing with numerous small amounts, both incoming and outgoing, directed toward recipients in multiple continents. More often than not, regulated financial institutions are involved in the transfer of these sums, if not wholly, than at some stage of the series of offsetting transactions.
Despite the many benefits of hawala, the vulnerability of the financing mechanism to money laundering and terrorist financing requires regulation, albeit in a manner which promotes financial inclusion and a formalisation of the remittance market with its attendant benefits. On an international basis, this involves regulating hawala providers in the same way as other money service businesses. This involves regulated firms carrying out customer due diligence, identity verification, suspicious transaction reporting, recordkeeping, training, compliance officers, and internal control requirements. More research is needed to determine whether the same regulatory burden is conducive to formalising the informal remittance market and what could be done differently so as to achieve this objective. Arguably, however, international cooperation is necessary for the formalisation of the remittance market. This is because hawala thrives in regions where formal financial institutions function poorly, where macroeconomic conditions are poor or where significant distortions exist in payment systems or foreign exchange markets. This latter factor involves large margins between official exchange rates and the unofficial rate as offered in the black market. Hawala thrives in these situations by including people financially, who would otherwise be excluded from the financial system or who would bear excessive costs to access the financial system. In some cases, hawala is the only alternative.
Hawala is here to stay until these underlying incentives are removed. Regulation of hawala is important and necessary. However, hawala should not be stereotyped as a criminal financing mechanism. On the contrary, efforts should be made to develop a light touch regulatory framework for low value remittances, which help to alleviate poverty and empower vulnerable people financially.
 For example, in Sri Lanka, where workers’ remittances are the highest in South Asia, overseas remittances account for 20.7 per cent of total income of recipient households. Remittances have exceeded foreign direct investment inflows by two to three times and are double the net receipt of foreign assistance. See Ayako Kageyama, ‘Extent of Poverty Alleviation by Migrant Remittances in Sri Lanka’ 28(1) (2008) South Asia Research 89, 97. A large portion of these totals are thought to be comprised of informal remittances.
 Consider what some are calling the largest money laundering scandal in history involving Danske Bank. See Juliette Garside, ‘Is Money-Laundering Scandal at Danske Bank the Largest Scandal at Danske Bank the Largest in History?’ (The Guardian, 21 September 2018) accessed 3 November 2019.
 Cross-border remittances totalled $344 billion in 2018 and are now expected to exceed Foreign Direct Investment inflows. See The World Bank, ‘Record High Remittances Sent Globally in 2018’ (The World Bank, 8 April 2019) accessed 16 July 2019.
 Afghanistan is a good example. A 2005 World Bank study estimated that 80 to 90 per cent of Afghanistan’s economic activity at that time was facilitated by hawala.
 Stewart Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’ 28(1) (1963) American Sociological Review 55, 60.
 Financial Action Taskforce, ‘The Role of Hawala and Other Similar Service Providers in Money Laundering and Terrorist Financing’ (FATF, October 2013).
 Anneke Kosse and Robert Vermeulen, “Migrants’ Choice of Remittance Channel: Do General Payment Habits Play a Role?” (European Central Bank, Working Paper Series No. 1683, June 2014) 3.
 Financial Action Taskforce (n 7) 49.
 In countries such as Afghanistan where functioning formal financial institutions rarely exist, international NGOs use this method to ensure that large money transfers arrive safely at their offices in Kabul. It is estimated that NGOs operating in Afghanistan since the fall of the Taliban have channelled hundreds of millions of dollars in emergency, relief, and development funding through the hawala system. In countries in war or emerging from war such as Afghanistan and Somalia hawala is not only well suited but also the only alternative for transferring funds.