Treasury's War Read online

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  FINANCIAL CHOKEPOINTS

  Money finds a way to move efficiently—even in the most remote parts of the world. The US Treasury Department had to find a way to deal with the movement of money outside of the formal financial system and the neatly regulated hallways of banks. We had to find a way to address the movement of illicit funds through traditional hawaladars and cash couriers. And we needed to find ways to target and incapacitate the financial chokepoints that allowed transnational terrorist and criminal groups to operate globally.

  Hawala is a traditional way of exchanging and moving money in Central and South Asia, the Middle East, and Africa. Like Western Union’s wire services, hawala is a system built to move money across borders and around the world. Instead of wire transfers, however, it relies on trusted relationships and networks of brokers connected by phone calls, faxes, and cash to exchange and deliver money in places where there are no ATM machines or bank branches. For a percentage fee, a customer can send money to someone across the world with an expectation that it will be delivered, often to their door, within hours—simply based on the trust between networked brokers. At a certain point—often monthly or quarterly—the brokers reconcile their accounts and exchange-rate differences, usually using bank accounts, exchange of commodities, or credit.

  The system is widespread and embedded in the commercial cultures of places such as Afghanistan, Pakistan, and Somalia, where formal banking or wire companies are often remote, expensive, and inaccessible. Like all financial systems, at its core the hawala system relies on trust—in this case between the brokers (or hawaladars) and with their customers. For farmers, merchants, and anyone who relies on relatives who work abroad, hawala is a principal financial system that undergirds economic life. In many cases, trusted hawaladars are considered more reliable and accountable than antiseptic bankers sitting behind teller windows.

  As the term hawala began to hit the headlines in the West, hawalas quickly acquired a shady reputation. They were viewed as secretive and inherently suspicious, having no official recordkeeping, no connection to the formal financial system, and no oversight by modern regulatory bodies. Furthermore, there was no doubt that hawalas had been leveraged by Al Qaeda and the Taliban to move money in and out of Afghanistan and Pakistan. The hawala system’s reach into hinterlands untouched by banks provided financial access where Al Qaeda had established safe havens and a physical presence. This made hawalas the preferred vehicles for moving money quietly and in smaller batches in and out of the places where terrorists were operating.

  But the developing attitudes about hawalas in the West were plagued by ignorance. Though there was some academic attention paid to the importance of hawalas in the remittances of foreign workers and the economies of certain regions and communities before 9/11,1 there were only a handful of people in the US government who actually understood how the hawala system worked and what it meant to those who practiced it.2

  Though they may have seemed alien to Americans, hawalas were actually well-functioning, necessary financial networks providing access to cross-border transfers of money to those who would otherwise have had none. The system tended to be cheap, accessible, and reliable, as the brokers knew their customers better than most bank tellers do in New York or London. Contrary to Western misperceptions, the hawaladars also kept meticulous records—in detailed ledgers and computers—because their business depended on it. Since their money transfers were also tied to ongoing trade and exchange rates, and mercantile deals, this put a premium on tracking the transfer of money and goods.

  In the months after 9/11, the Treasury Department targeted and shut down suspected hawaladar networks that were being used to siphon money for Al Qaeda, but we understood that the hawala system as a whole was not going to be eradicated. We knew, in fact, that it could serve important purposes, but early on we determined that it needed to be regulated and brought into a framework wherein its transactions could be monitored. Financial Action Task Force (FATF) Special Recommendation VI, adopted in October 2001, provided for the regulation of alternative remittance and informal value transfer systems, including hawala.3

  At the first global hawala conference in Abu Dhabi in 2002, various presenters attempted to build awareness of how hawala worked and how different countries were addressing the challenges of informal money flows. The real work of the conference, however, happened on the margins of the meeting. I led the US delegation in discussions with the central bank governor of the United Arab Emirates, Sultan al-Suweidi, as we began to hammer out the language for an international understanding of how to treat hawala in the post-9/11 world. The result would be a roadmap that the UAE and other countries would use to frame their next steps to regulate the hawala market.

  Having to deal with hawala was a burden for developing countries that wanted to be seen as modern financial centers. The Indian government did not want to see any treatment of the issue in an international forum. Frustrated, its representatives flatly argued that hawala should be made illegal categorically and that the Indian government could not acknowledge its existence. Even so, simply ignoring hawala was not a realistic approach to the problem. Instead, we pushed forward with a declaration that allowed countries to regulate hawala as they deemed appropriate but highlighting the need for greater transparency, regulation, and accountability in the sector.

  This was one of the sea changes in the financial world after 9/11. Hawala was recognized. Now, it had to be regulated. However, it was important for such a declaration to come from the Middle East itself. The UAE had much to gain—or lose—by ensuring that its financial centers were seen as being open, transparent, and cooperative. This was why the UAE government had taken the initiative to host the conference.

  Governor Suweidi and I hammered out the final wording of the statement, along with experts such as Dr. Nikos Passos, and the conference delegates agreed to the publication of what became known as the Abu Dhabi Declaration on Hawala. The declaration acknowledged the important role hawala plays in legitimate business practices around the world, but stated that “the participants also raised concerns about hawala and other informal remittance systems, noting that a lack of transparency and accountability, as well as the absence of governmental supervisions, presents the potential for abuse by criminal elements.”4

  We continued to push for the regulation of hawala and the development of alternative, cheap banking services for large swaths of the developing world that did not have access to formal banks. This was not just about enforcing US security interests. It was also a development issue: improved access to banking and capital would provide more economic opportunity even as it offered more visibility to regulators and security officials.

  In November 2002, at Secretary O’Neill’s last G20 Finance Ministry meeting in New Delhi, he led a discussion on hawala with the finance ministers of the twenty leading economies in the world. In a huge conference room at the Sheraton Hotel, he spoke with expert fluency, laying out the framework for regulation and the creation of alternatives. Over time, perhaps hawalas could be rendered obsolete. Eventually, access to wire services like Western Union and to cheap banking and wire alternatives would be through separate, dedicated bank “windows.” Perhaps even mobile banking technologies and smartphone applications would one day supplant hawalas—or even banks—but that was not going to happen in 2002.

  As O’Neill made his presentation in New Delhi, the Indian finance minister who was hosting the meeting kept a serious and skeptical eye on the proceedings. Other ministers, who were seated behind their countries’ flags around an enormous square conference table, weighed in with comments. Many explained what their countries were doing to regulate hawalas; others asked questions intended to probe whether regulation of the informal financial sector was even possible. O’Neill responded to the points, arguing that there needed to be a realistic attempt to network the regulation of hawalas among nations with an eye toward extending formal banking services and conveniences
to the unbanked. He finished the session with great command of the issues. As he did, he looked around the room with some satisfaction, then turned to look at me, asking, “How’d I do?” “That was great, Mr. Secretary,” I said as I leaned forward—proud that the US treasury secretary had recognized the importance of these complex issues to the international financial community.

  Two years later, after O’Neill’s departure, we were still seeking ways of converting that global focus into fresh strategies for dealing with hawalas. One of the keys would be finding someone with the right mix of unbridled energy and a quest for impact and innovation to take on the task.

  The walk from the Afghan Finance Ministry to the central hawala market in Kabul took only about fifteen minutes. Making that trek in November 2004 was Amit Sharma, a friendly, confident twenty-seven-year-old Indian American with thick black curly hair. Originally recruited to join the CIA, Sharma was barred from doing so by a restriction that prevented Peace Corps volunteers from joining the CIA within five years of their service. When the CIA sent Sharma my way, I couldn’t hire him fast enough. He was among my first hires into the Treasury’s Executive Office of Terrorist Financing and Financial Crimes in the fall of 2003. A year later, he was my emissary to the world of Afghan finance, helping us get a better handle on the evolution of hawala—the backbone of Afghanistan’s informal financial system.

  When he arrived in Kabul, he was determined to see the hawala market firsthand. Brimming with youthful confidence born from his time on the Mongolian plains and Argentine polo pitch, Sharma didn’t think much about defying US embassy lockdown orders after the Taliban’s abduction of UN aid workers. He just took a walk.

  Dressed in a beige suit, Sharma walked through downtown Kabul, across a dry riverbed and over a bridge, with the detritus of plastic bags and bottles strewn about the streets. The streets were crowded with Afghans, and the buildings were almost all one-story structures. The hawala market was one of the largest buildings in the neighborhood, at four stories. Its entrance was lined by a string of small roadside stalls selling sundry goods, food, rugs, and animals. The market building itself had a narrow double door guarded by a uniformed man with a rifle nestled against his shoulder. The guard was fast asleep when Sharma and a Finance Ministry official walked through the doorway.

  A Western Union office, with brightly lighted signage, occupied the first office in the building on the ground floor. There were other offices on this floor, some with business names painted on wooden boards or written with marker on paper taped to the inside of glass doors. The building opened into a center courtyard, with balconies ringing above the inner courtyard. There were about 240 money-service businesses and another 40 or so money-exchange dealers here, and each had a small office.

  In the central courtyard, hawaladars and money-exchange dealers sat on rugs with stacks of cash in different currencies—the afghani, US dollars, Pakistani rupees, euros, Japanese yen, British pounds, Chinese yuan—organized neatly on tables and on the floor. Almost all the hawaladars were bearded and wore sandals and traditional white or gray kurtas with beige and black vests. They moved about the courtyard trading with each other, communicating with a sense of purpose, and sometimes carrying handfuls of cash from one pile to another. The exchange dealers in the courtyard were constantly moving and yelling various currency and exchange rates up to the balcony as customers walked in and out from the street.

  The customers—often businessmen and those with relatives abroad—wanted to exchange currency—afghanis for dollars, euros for rupees—or send money to places like the United Arab Emirates or Pakistan. The brokers and customers handled money easily and in batches and bundles. In the courtyard, cash was the commodity, and the market was open for business.

  As Sharma watched, the hawaladars nodded at him—curious as to who he was and what he wanted. Sharma and his Afghan companion moved out of the courtyard into the offices.

  Several brokers sat on rugs in each of the offices, smoking and drinking tea while talking quietly among themselves. It was rare to see a woman. The brokers were polite to Sharma, shaking hands or nodding. Sharma spoke Hindi intentionally, but was candid with them. His friend had also been open—explaining that Sharma was from the United States and working in the government. It would have been hard to fool the brokers, who knew how to read their customers and could sniff out alien behavior. They could read Sharma and knew he was Indian born but raised in the United States. After introductions and much talk about families and home life, they sat comfortably with Sharma and the Afghan official and answered questions about their businesses.

  Most of the offices had computers, and almost all of the hawaladars also kept ledgers—long, thin notebooks with hand-drawn lines where they listed their customers’ names, debit and credit balances, and exchanges with other dealers. The entries were all numbered, and there were different ledgers for different dealers, for different geographic areas, and for particular regular customers. Like methodical accountants, these men did not do anything haphazardly. Keeping track of their money and their transactions was their business.

  Sharma spent most of his time during this visit with the union boss for the Kandahar Exchange. He was treated to a full tutorial on the workings of the hawala system both inside and outside of Afghanistan, learning about the well-established, trusted network of brokers who formed part of the union; the connection between the money-service businesses, the money exchanges, and retail customers and businesses; and the codes of conduct used to self-police the system and expel rogue brokers. Almost all of the brokers were not only dealing with money but facilitating trade within Afghanistan and across borders. The union boss explained that there were numerous money-trading centers throughout the city, with multiple mobile units representing four or five dealers each. The mobile units used cars and vans carrying cash in multiple currencies, allowing the brokers to meet demand and delivery needs. They were like traveling ATMs.

  After his day at the market, Sharma walked back to the Afghan Finance Ministry and then to the US embassy compound. After just one lesson, he had a deeper appreciation for how the hawaladars worked and for the importance of the hawala system to the Afghan economy. In an out-briefing with US Ambassador Zal Khalizaid, US Agency for International Development (AID) representatives, and others from the embassy, Sharma suggested that the US government find a way of using the hawaladar network more directly and aggressively—not only to leverage its reach, but also to gain greater insights into how the system worked and to build trust with the brokers and the hawaladar union. The AID officials were instantly dismissive of the idea, citing US policy to build up and rely on the formal financial system in Afghanistan. Though they were correct that it was important to build up the formal banking system and to institutionalize practices such as direct deposit of salaries, which would curb corruption, it was equally crucial to take the realities of financial relations in Afghanistan into account. This was something that nongovernmental organizations (NGOs) and security companies doing work in Afghanistan already realized—they were utilizing hawalas every day.

  After Sharma returned to Washington and we discussed his impressions, we decided that we needed to leverage the hawaladar unions more directly to self-regulate the system and isolate rogue actors. Official regulation and enforcement pressure could help shape the environment, but it would be the hawaladars themselves who would know their customers, sniff out suspicious transactions, and become the gatekeepers to the hawala system. Meanwhile, we would also benefit from putting more eyes and ears on the hawala system.

  The solution did not lie in attempting to destroy the hawala system, but in using the system itself to monitor and isolate rogue behavior. Overt regulation would not solve the front-end problem of the use of the hawala system by terrorists and drug traffickers to evade scrutiny. There was just too much profit and tainted money in the system to stop these money flows cold. We needed to find ways of co-opting the hawaladars so that they would do the work thems
elves of policing their own system. This would become our strategic approach.

  We had to refine our approach in more ways than one. The campaign against terrorist financing had continued throughout 2003, with the strategy and processes we had put in place in the early days after 9/11 continuing to yield results. But we had learned some important lessons in the first two years. It was time to refine and sharpen the use of Treasury’s tools.

  In the first instance, we were beginning to recognize that some of our initiatives were having unintended consequences. We knew that our efforts to secure the formal financial system in fact not only made hawalas more vulnerable for abuse but underscored terrorist groups’ use of cash couriers to move money across borders. Terrorists, not surprisingly, turned out to be much like drug traffickers and organized crime figures, at least in one respect: in response to greater scrutiny from banks and formal financial institutions, they resorted to the most basic forms of money movement, including men and women carrying satchels and briefcases full of cash as they traveled. We had seen evidence that Al Qaeda was relying more and more on trusted couriers to move money, understanding that the organization was now more exposed by using banks and charities to get money from the Arabian Gulf and Europe to South Asia. We also knew that customs officials at borders and ports of entry and exit were susceptible to bribes, which made it even more difficult for us to detect and stop this type of money flow. While Sharma continued traveling to Afghanistan in an attempt to make inroads with the hawaladars, we needed to find a new strategy to head off the system of couriers.