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Quartermasters of Terror

1.

On November 7, 2001, agents from Customs, Immigration, the IRS, and the FBI burst into the Dorchester, Massachusetts, offices of al-Barakaat, a Somali conglomerate with branches in forty countries, and arrested Mo- hamed M. Hussein, treasurer of Barakaat North America, on charges of operating an unlicensed money transfer business, or, as it was known, a hawala. Al-Barakaat stood accused of raising, investing, laundering, and distributing money on behalf of al-Qaeda. Then–Treasury Secretary Paul O’Neill announced that its various companies were “the money movers, the quartermasters of terror.” Meanwhile, federal authorities were also conducting raids on suspected businesses in eight other American cities. It all had the appearance of a clean, efficient police sting.

The raids were the work of Operation Green Quest, a task force established after September 11, 2001, and designed to coordinate the efforts of various federal offices and agencies with experience in tracking suspicious financial transactions.1 While the FBI’s Financial Review Group was to concentrate on the funding of the September 11 hijackings, Green Quest had the more ambitious commission to “disrupt and dismantle” financial networks used by terrorists. Just as Treasury investigators brought down Al Capone for tax evasion, the thinking went, authorities might be able to follow a trail of dirty money from the ruins of the Trade Center all the way to Osama bin Laden’s caves in Afghanistan.

Three years later that initial optimism looks naive: the Bush administration’s efforts to comprehend, much less combat, terrorist financing have been an abysmal failure. Certainly, we know now a great deal about the economics of terrorism that we did not know then, but none of what we have learned is reassuring. We know that acts of terrorism are extremely cost-effective. According to the 9/11 Commission’s final report, the attacks of September 11 cost less than half a million dollars; the 2000 bombing of the USS Cole is estimated to have cost between $5,000 and $10,000. At the same time, the 9/11 Commission learned that prior to September 11, al-Qaeda had an annual budget of $30 million. The organization’s budget is now estimated to break down to roughly 90 percent for infrastructure—maintaining training camps and communications—and only 10 percent for financing actual terrorist attacks. This is alarming news for those seeking to prevent further attacks, because small amounts of money in transit are much harder to trace than large ones.

More alarming is what we have—and haven’t—learned about the sources of terrorist funding. In the summer of 1996, the State Department concluded that Osama bin Laden had a personal fortune of $300 million, and for many months after September 11, the image of a mad millionaire financing his own personal war against the West endured. But the findings of the 9/11 Commission point to a graver reality: al-Qaeda’s annual budget is maintained not out of bin Laden’s deep pockets, but by piecemeal fund-raising, often through charities in the Gulf countries, and particularly in Saudi Arabia, from supporters of violent jihad.2

Yet that is where the trail runs cold. The 9/11 Commission was able to trace money used by the hijackers, because the terrorists were brazen enough to open American bank accounts and receive wire transfers from abroad. But the commission could reconstruct the transactions that culminated in September 11 only as far back as the point at which the funds entered the orthodox financial sector. As for the origins of the money before it entered the legitimate banking system: “To date, the US government has not been able to determine the origin of the money used for the 9/11 attacks.” The commissioners went on to suggest that the origins are “of little practical significance,” because “al-Qaeda had many avenues of funding.” But the practical significance is enormous. Now that various measures have been taken to crack down on legitimate transfers of money for terrorist purposes, the murky networks of terrorist financing, and the hawala remittance system in particular, present a formidable challenge to American authorities.

The United States, which has traditionally been cast as the chief beneficiary of the free flows of capital, goods, people, and ideas that characterized the globalization and Internet revolutions of the 1990s, has now fallen victim to precisely those developments. Osama bin Laden once told the Pakistani newspaper Karachi Ummat that his men were as “aware of the cracks inside the Western financial system as they are aware of the lines in their hands.”3 It seems certain that his followers are more adept at understanding and manipulating the quick migration of assets and finances in this new world than the Western agencies pursuing them. In his recent book, Blood from Stones, Douglas Farah conveys the complexity of terrorist financing and the failure of government agencies to grasp that complexity. He describes a shadowy and widespread world of quick and mutable currency flows—a world which, even as we catch a glimpse of it, seems to vanish before our eyes.

The hawala system provides a window into the mystery of illicit capital flows. Hawala is a way of moving money without actually moving it. It is based on informal but tightly knit networks of hawaladars, or brokers, in various regions around the world. When a Pakistani taxi driver in Washington, D.C., wants to send money home to his family in Peshawar, he approaches a local hawaladar, and hands him cash or a check. The hawaladar contacts another hawaladar in Peshawar—whether by phone or e-mail—who forwards the sum, minus a small commission, to the taxi driver’s family. When the money has been transferred, the American hawaladar owes his Pakistani counterpart the original amount, but because of the number of transactions that are made, the debt tends to pass back and forth numerous times between hawaladars. Outstanding accounts are balanced weekly or monthly, and not always with money: debts are often settled with goods, from Persian carpets to used cars.

In Arabic, the word hawala means “change” or “transform.” But when the Hindi language adopted the word, it acquired an additional meaning: “trust.”4 Trust between hawaladars is the linchpin of the network: one dealer would not credit another unless he was certain the debt would be honored. If a dealer fails to honor a contract he is blacklisted, and this serves as a strong constraint. Trust allows for the signature characteristic of hawala: it is virtually paperless. Hawaladars do not require documentation from those who want to send money or receive it—the system is anonymous. Often the sender of money only needs to inform the receiver of a code word or number which he is to give to the dispensing hawaladar. The dealers do not keep extensive records of their transactions, and are loath to show the authorities the few books they do keep. Most hawala dealers do not announce their business by putting a sign on the door. Hawalas tend to be side ventures, conducted in the back rooms of small businesses in Asian and African communities throughout the world.5

Because of the intimate nature of hawala transactions, the origins of the system remain obscure, and present scholars with a challenge similar to that of researching an oral tradition. Hawala is said to predate the Western banking system. It is believed to have emerged over a thousand years ago in South Asia and the Middle East, and become popular with Arab traders who did not want to carry large sums of money along the Silk Road. Most experts believe that modern hawala networks took shape in the 1960s and 1970s as a way of circumventing bans on gold imports in Southeast Asia and allowing diaspora communities to send money to their families in Africa, the subcontinent, and the Middle East. During the Vietnam War American GIs learned about hawala from Indian merchants in Saigon and used the system to send money home.6

Hawala is an attractive system for a variety of reasons. It is much cheaper and quicker than bank transfers or commercial companies like Western Union. Commissions are minimal, exchange rates are favorable, and most transactions are completed within a business day. Most importantly, perhaps, the system is available to those who live in remote areas without accessible commercial banking systems.

Today hawala is a vast global institution, serving millions of people worldwide. Despite the fact that the system is illegal in India, Interpol estimated that in 1998, the amount of money circulating in India’s hawala system totaled $680 billion, or roughly 40 percent of the country’s GDP.7 In Pakistan, where the system is also technically illegal, hawala transfers far outnumber money transfers through commercial banks. Worldwide, remittances from rich countries to poorer ones amounted to more than $100 billion in 2003, and hawala is one of the chief means of transporting that money. Moreover, it is not only ethnic Africans and Asians who use the system. Since the usual facilities for transferring payments hardly exist in Afghanistan, most international aid organizations operating in the country use hawala, and an estimated $200 million in relief and development funds passed into the country through hawala networks between 2001 and 2003.8

Most hawala transactions are, if not entirely legal, then at least legitimate: the money being transferred is usually “clean,” in the sense that the parties to the transaction are not engaged in criminal activity. But the anonymity of the system has also made it attractive to criminals. A 2000 Interpol report on hawala provides a list of activities associated with the practice, from terrorism and drug smuggling to tax evasion, gambling, and the transport of illegal aliens. Observers differentiate between legitimate “white hawala” and criminal “black hawala,” but the one is often impossible to disentangle from the other. According to the Interpol report, the illicit economy in South Asia is 30 to 50 percent the size of the orthodox economy.9 Because the hawala system is paperless, it would be difficult to separate the dirty transactions. In the words of one Karachi hawaladar:

Maybe one out of every one thousand or two thousand transactions is [terrorist-related]. Trying to find terrorist funds here is not like trying to find a needle in a haystack. It is trying to find a needle in a needle stack.

Indeed, even apparently clean transactions can have an unsavory component. A 2003 World Bank report on hawala dealers in Kabul asks how it is that, in a system where money does not actually move, impoverished Afghan hawaladars can handle their end of the transactions:

How are the regional counterparts [of the hawaladars] able to finance payments on behalf of the international aid institutions? What is the source of the afghani equivalent paid out in the regions? In the last twelve months, for example, international aid institutions have individually transferred amounts in excess of US $10 million. Where is the afghani equivalent coming from?

The report goes on to speculate that transactions for international aid institutions may be completed with “funds from illegal activities such as the smuggling of gold or weapons, drug trafficking, or trafficking in girls and women,” that the aid organizations may be tangentially playing a part in international terrorist financing, and as such, acting as de facto money launderers themselves.10

  1. 1

    Green Quest was technically a Treasury task force, but included staff from the IRS, the Financial Crimes Enforcement Network (FinCEN), the Secret Service, Customs, and the Office of Foreign Assets Control, and had frequent consultation with the Department of Justice.

  2. 2

    In fact, according to the final report, bin Laden received only $1 million a year from his family, and in 1994 the Saudi government forced the bin Ladens to sell Osama’s portion of the family business, then froze the proceeds of the sale, thereby effectively divesting him of his fortune.

  3. 3

    The interview was conducted at an undisclosed location by an unnamed correspondent of the paper, and published on September 28, 2001.

  4. 4

    While hawala is the term commonly used in the Middle East to describe this system, similar systems with different names are present in other regions: hui kuan in Hong Kong, padala in the Philippines, phei kwan in Thailand, and so forth. In India, the system is often known as hundi. See Mohammed El Qorchi, Samuel Munzele Maimbo, and John F. Wilson, “Informal Funds Transfer Systems: An Analysis of the Informal Hawala System,” International Monetary Fund Occasional Paper, No. 222 (2003).

  5. 5

    Press accounts of hawala have been stymied by the refusal of hawaladars to go on record. See for example Michelle Cottle, “Eastern Union,” The New Republic, October 15, 2001. One revealing glimpse of the system was provided when a Virginia hawaladar, Rahim Bariek, testified about his work before the Senate Subcommittee on International Trade and Finance on November 14, 2001.

  6. 6

    There is remarkably little academic literature available on the origins of hawala. Remittance systems of this sort date back to Tang Dynasty China (618–907), and the ancient Chinese system known as fei qian, or “flying money.” Some hold that that system was exported to other countries in the eighteenth and nineteenth centuries by Chinese living abroad, spurred in part by the growth of the tea trade, and that a broad remittance network was established, which covered most of China and extended to major cities in Japan, Russia, and Southeast Asia. As for the system’s presence in the Middle East, suggestions that hawala dates back a millennium, though common, remain unsubstantiated. There seems to be scholarly agreement that it was present in some form during the Ottoman Empire, when letters of credit facilitated long-distance trade. Hawala was favored for transactions involving the state, such as payment of tax revenues within the Empire, from the provinces to the capital city. See Sevket Pamuk, A Monetary History of the Ottoman Empire (Cambridge University Press, 2000), pp. 84, 169.

  7. 7

    See Scott Baldauf, “The War on Terror’s Money,” The Christian Science Monitor, July 22, 2002.

  8. 8

    See Samuel Munzele Maimbo, “The Money Exchange Dealers of Kabul: A Study of the Hawala System in Afghanistan,” World Bank Working Paper No. 13 (2003).

  9. 9

    Patrick M. Jost and Harjit Singh Sandhu, “The Hawala Alternative Remittance System and Its Role in Money Laundering,” Interpol General Secretariat, January 2000.

  10. 10

    Maimbo, “The Money Exchange Dealers of Kabul.”

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