Mr. Chairman and Distinguished Members of this Committee:
My name is Patrick Jost. I am currently with SRA International, developers of Assentor®, which is a system for the analysis of email messages, instant messages and faxes in brokerages and other financial institutions. Assentor looks for indicators of activities such as money laundering and price fixing, and quarantines messages containing these indicators for review. We are currently enhancing the product to analyze other types of documents for possible indicators of hawala and terrorist financing.
Prior to joining SRA, I was with FinCEN, the United States Department of the Treasury’s Financial Crimes Enforcement Network. At FinCEN, I was responsible for South Asia—India, Pakistan and neighboring countries. While at FinCEN, I assisted many domestic and international law enforcement agencies with the analysis of cases involving hawala. I have seen hawala, or what I might refer to as "hawala techniques" used as a component of money laundering schemes for predicate offenses including narcotics trafficking, alien smuggling, insider-trading and political corruption.
In conjunction with Harjit Sandhu of India’s Central Bureau of Investigation, then detailed to Interpol, I undertook a detailed study of hawala that resulted in the publication of three reports—one on hawala, one on the money laundering situation in India and one on the money laundering situation in Pakistan. Among his significant contributions to these reports, Mr. Sandhu provided valuable information on the use of hawala as a component of terrorist financing.
In the course of the preparation of these reports and my other work at FinCEN, I spent a great deal of time in South Asia. Given my longstanding interest in that part of the world, I improved my knowledge of Hindi and Urdu, and learned some Gujarati to assist me in my study of hawala and to provide effective support to investigations and analysis.
I would now like to provide an overview of the mechanics of a hawala transaction. Before doing so, I would like to point out that there are two essential characteristics of hawala—the first is a network of hawala brokers or dealers, called hawaladars in Hindi and Urdu and often referred to as "hawala operators" in the English language South Asian press, and the second is the trust that exists not only between hawaladars but between hawaladars and their clients.
With this context, let me proceed with an example of a typical hawala transaction. Suppose an individual in a large US city wishes to remit the sum of $5,000 to a relative living in South Asia. This individual contacts a hawaladar, and they negotiate terms. These terms often include the rate of exchange and the manner of delivery of the money. The hawaladar will take the money, and make contact with an associate in or near the place where the money is to be delivered. This second hawaladar will make the necessary delivery arrangements. This can be done by sending a courier to the person with the money, or by providing a phone number to be called to arrange delivery.
It is useful to think of the above example as a hawala "theme"; and what actually happens, is, as in improvised music the "variations" on the theme. The hawala system is very flexible, so many variations occur.
This can be seen in the ways hawaladars settle their debts.
Sometimes, the flow between two hawaladars is balanced, so, in a reasonable amount of time, debts are settled automatically.
Another possibility is that the hawaladar has money in a country and cannot remove it due to measures designed to counter capital flight. These measures can be circumvented via hawala. The hawaladar accepts money in his current country of residence, and has an associate "drain" the supply of money in the other country until it is gone.
Some hawaladars utilize invoice manipulation schemes to settle their debts. These schemes are often necessary because of remittance controls.
For example, a hawaladar operating in the United States could send an associate $100,000 by purchasing $200,000 worth of goods that his associate wants. He ships the merchandise with an invoice for $100,000. The associate receives the merchandise and pays the first hawaladar $100,000. This payment appears to be legitimate because of the shipment and the invoice. The associate has $200,000 worth of merchandise for which only $100,000 was paid. This technique, known as "under invoicing" is one way of circumventing remittance controls as well as settling debts between hawaladars.
The inverse of this, "over invoicing" also exists. It would, for example, be used to transfer money to the United States. A hawaladar operating in the United States would purchase $100,000 worth of goods that his associate wants. He would ship the goods with an invoice for $300,000. Payment of this amount would allow the associate to move $200,000 to the United States. Like "under invoicing" this technique can be used to circumvent remittance controls and settle debts between hawaladars.
What might be termed "debt assignment" also takes place. If hawaladar A owes money to hawaladar B, and hawaladar B owes money to hawaladars C and D, hawaladar B might ask A to settle the debts with C and D, settling his debt with B.
As with other aspects of hawala transactions, there is a great deal of flexibility. Hawaladars will use these settlement methods—or variations on them—as needed and dictated by circumstances.
The majority of hawala transfers out of the United States are remittances by South Asians living and working here to friends or relatives still in South Asia. There are several reasons for this. The first is a cultural preference for hawala. Hawala was developed as a remittance mechanism in South Asia before the appearance of "western" style banking, and continues to be used. The second is cost effectiveness. Since hawaladars do not necessarily respect official exchange rates, they can often deliver more rupees per dollar than an institution that respects official exchange rates. This is an important part of hawala; hawaladars make a certain amount of their profit off of exchange rate speculation, and much "colorful language" is often used while bargaining over very small differences in exchange rates! A third is speed—many hawaladars offer service "in two hours" even though 24 hours is more realistic, given time differences, but is, in any case, almost always faster than bank transfers. The final consideration is reliability, closely related to the trust component of hawala—transfers are not "lost in the mail" or "held up at the bank"; when someone places an order with a hawaladar, there is little if any doubt that the money will be delivered.
In some respects, the hawala system is self-regulating. Hawaladars form an extended community, and it is rare for them to defraud one another or their clients. In the rare cases where this has happened, other hawaladars have been known to make good on the debts of their colleague. While it is possible that some sort of "disciplinary action" will be taken, a hawaladar who commits fraud is one who cannot be trusted. Without the trust of other hawaladars, he can no longer function effectively.
To summarize, hawala is a system that is cost effective, quick, reliable and secure.
These characteristics of hawala account, in large part, for its use instead of other remittance systems. There are also places, like Afghanistan, where hawala is the only viable remittance system.
These factors also account for the use of hawala by certain terrorist organizations. Usama bin Ladin is a Saudi with connections to Afghanistan and Somalia. All of these are countries where hawala is the preferred means of remitting money.
Terrorists, drug traffickers and other criminals also exploit another characteristic of hawala. This is its frequent lack of a complete paper trail documenting all parties to a transaction. It is not uncommon for hawaladars to maintain only logs of debts with other hawaladars. Records of remittance clients and beneficiaries are kept only long enough to facilitate the transaction, and the debt logs are often kept until the debts have been settled.
The lack of a paper trail is but one of several difficulties in investigating the criminal use of hawala. Even when records are available, they are rarely in English, necessitating translation. Even though the records may contain names of other hawaladars, the names are rarely, if ever complete enough to facilitate proper identification—references to "Ali Hussein" or "Shahbhai" are typical.
The most significant investigative barrier is probably the fact that "hawala behavior" lies well outside the cultural experience of most US investigators. Hawala is a system where large amounts of money are handed over without receipts, confirmation numbers, or identification. Hawala transactions take place in the context of a large network unlike a "traditional" corporate structure. The business of hawala is conducted informally, with little in the way of overhead and almost nothing in the way of a regulatory infrastructure, making it, in this respect, nearly the antithesis of banking.
I would like to devote the remainder of my remarks to possible solutions to the problems posed by hawala.
Recent legislative changes calling for the registration and supervision of hawaladars, as well as for identifying hawala transactions as potentially suspicious are commendable first steps, but I do believe that much remains to be done.
There are two areas that I believe need to be addressed.
First, I believe that it is essential for banks and other financial institutions already required to file Suspicious Activity Reports (SARs) to develop an understanding of "what hawala looks like" and act accordingly.
This will help in the identification of hawaladars. If a bank has a client who is conducting hawala transactions, and this client is identified as doing so, and a SAR is filed, this can be used by the authorities to determine whether or not the hawaladar is licensed appropriately.
Even though some hawaladars advertise, not all of them do, so efforts to locate them based solely on advertisements will be of limited effectiveness. Many hawaladars conduct hawala transactions as part of other business operations; this behavior can, with the proper training, be identified by the banks holding the business accounts.
The relationship between hawala and financial institutions in the United States is important. In South Asia and the Middle East, it is possible to do all business by hawala and avoid regulated financial institutions altogether. This is possible, but difficult to do, in the United States. It is possible to conduct private party automobile sales and various personal transactions using cash, but real estate and various business transactions are almost impossible to execute without a banking relationship.
Even though it is certainly possible for terrorists and other criminals to move vast amounts of money into the United States via hawala with little or no trace, some of this money is useless unless it can be converted into an acceptable form. This necessitates a relationship between banks and hawala. This relationship is a potential vulnerability in a hawala money laundering or terrorist financing scheme, and this vulnerability should be exploited.
One important aspect of this relationship is the interaction between hawaladars and financial institutions. Many hawaladars maintain bank accounts, and transactions involving these accounts may exhibit behavior(s) indicative of hawala, allowing, at a minimum, for the potential identification of hawaladars and, if appropriate, other actions.
Another important aspect of this relationship is the interaction between the clients of hawaladars (including the beneficiaries of hawala transactions) and financial institutions. Even though cash is very often the preferred medium of a hawala payment, it is possible that a person receiving cash may need to convert it into another form, and this conversion may have to take place at a regulated financial institution. As with transactions involving hawaladars, these transactions with hawala clients provide some visibility into the participants in hawala operations.
There is a very interesting phenomenon that goes back to a point I made earlier about variations in hawala and is an excellent example of the relationship between hawaladars and financial institutions as well as the relationship between financial institutions and the clients of hawaladars. Recently, I have become aware of cases where the "delivery" of hawala funds is not cash, but a brokerage account already established in the name of the designated recipient of the funds. It is clear that the hawaladars involved in these transactions have more than a casual relationship with the brokerage; they are establishing not just their own accounts, but accounts on the behalf of others. It is also clear that the owners of these accounts requested them so that they can develop a long term relationship with the brokerage.
Banks and other financial institutions have experience in analyzing transactions and making the necessary reports. I believe that this experience, and the infrastructure associated with it should be combined with knowledge of hawala to expand the scope of suspicious activity reporting.
If this can be done, I believe it will contribute towards solving the problem posed by the criminal use of hawala.
The second area deals with the difference between money laundering and terrorist financing.
In brief, money laundering is the process of taking money from "dirty" sources and making it "clean" so that it can be used for what are often legitimate purposes.
This is not always the case with terrorist financing. In many cases, terrorist money has a "clean" origin and a "dirty" purpose.
Some terrorists, such as Usama bin Ladin are wealthy, and use their own funds—often derived from legitimate sources—to finance acts of terror.
Other terrorists make use of funds received from charities; some of these organizations appear to have been established solely for the purpose of raising money for terrorists, others are possible unwitting participants in terrorism.
In both of these cases, the money comes from legitimate sources—business dealings or charitable contributions—so what happens with it is not money laundering.
What happens in many instances of terrorist financing can almost be seen as the inverse of money laundering. "Clean money" becomes "dirty money"—money used to finance acts of terror.
So, from one perspective, and with a certain amount of simplification, money laundering and terrorist financing are opposites. In money laundering, dirty money becomes clean; in terrorist financing, clean money becomes dirty.
From another perspective, however, the processes have much in common. If financial institutions are used, the three steps in money laundering—placement, layering and integration—are common to both money laundering and terrorist financing.
Many anti-money laundering countermeasures, such as account opening procedures and Currency Transaction Reports (CTRs) concentrate on placement. I believe that the scope of "placement-oriented" countermeasures should be enacted to include hawala transactions. Initially, I would recommend that this take place by educating financial institutions about hawala. As more is learned, it is likely that more sophisticated countermeasures could be devised and implemented.
With respect to layering, I believe that more data needs to be gathered in order to identify patterns of layering indicative of possible terrorist finance activities.
I also believe that there should be more emphasis on integration, as this is where the "dirty work" of terrorist financing takes place. Initially, I believe that the awareness of the fact that funds from legitimate sources can, indeed have been, used to finance acts of terror is an important first step. As more is learned through investigation and research, it will be possible to specify guidelines enabling financial institutions to identify the possible integration of terrorist funds.
I would like to conclude by summarizing these last two points and by offering a general observation.
First, I believe that it is essential that financial institutions currently subject to SAR reporting requirements develop an understanding of hawala. This will, I believe, make it more difficult for terrorists and other criminals to use hawala to finance their activities.
Second, I believe that it is essential that what is known about terrorist financing be made available to financial institutions to assist them not only in complying with reporting requirements but to aid them in developing new information about methods. Even though a certain amount of what has been learned about money laundering can be used, terrorist financing is not always the same, so new indicators will have to be developed.
Finally, I would like to commend the members of Congress for having identified the potential threat posed by hawala for the movement of funds by terrorists and other criminals. I would also like to commend the US Department of the Treasury's Office of Foreign Assets of Control (OFAC) for its systematic approach in addressing this problem.
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