Islamic Hawala between legal ratio and illegal use for terrorist purposes

by Davide Lauretta

1. Origin of the term and nature of the system

Already legally introduced by Islam in the 8th century [1], at least formally the instrument of hawala respects the cardinal principles of the Shari’a, the Islamic law. The Arabic term means ‘transfer’ [2] or ‘payment order’ and indicates a traditional and fiduciary way of money transfer, not very different from the obsolete ‘letters of exchange’[3].

The etymology of the term suggests that it evolved over several centuries before reaching its present meaning. Hawala comes from the root H-w-l which means ‘transform’ or ‘change’. Later, the word gained the additional meaning of ‘trust’ and ‘benchmark’, until it became synonymous with ‘guarantee’ once it was passed into French (-Aval)[4].

The most relevant element is the informal character of hawala: the lack of a contract - i.e. a written and regulated agreement between parties - explains why this financial instrument has been included in the casuistry of alternative remittance systems or so-called ‘underground and parallel systems’, thus distinct from conventional methods, typical of banking circuits[5]. According to the Greek scholar Nikos Passas[6], the most suitable expression for this system and others related to it is ‘Informal Funds Transfer Systems’ (IFTS)[7], whose generic character seems to have been shared by the circle of professionals.

To better clarify the matter, unlike conventional banking circuits - where only the two parties to the agreement are involved as sender and receiver of the agreed sum of money for the transaction - and the banking institution as a legal entity, in hawala there are four physical entities involved: the so-called originator, i.e. the one who intends to transfer the money, the first hawaladar (intermediary) who has the task of contacting the second hawaladar, i.e. the one who subsequently liquidates the money to the recipient, the fourth and last actor in the process, who is the beneficiary of the sum[8].

2. Operational method

The practice is the following one: the originator resident or domiciled in country A contacts the trusted hawaladar to transfer the money to him, including a small fee for the service, plus some personal information about the recipient and a security identification code; the latter contacts the second hawaladar resident in country B asking him to deliver to the recipient the equivalent of the amount agreed between the parties concerned. The second hawaladar reaches the recipient of the sum on the basis of the personal information received from the other intermediary and, after certifying the identity of the latter and subjecting him to some questions aimed at assessing his knowledge of the identification code, hands over the money[9]. Because of this modus operandi, the system in question not only falls into the category of informal money transfer models, as mentioned above, but is also labelled money transfer without money movement [10]: precisely to underline the non-existence of a direct transaction from the sender to recipient. Moreover, due to the lack of control by the authority, this system also falls into the category of informal ‘peer-to-peer (P2P) channels[11].

3. The element of trust as a conditio sine qua non for starting a transaction

Considering the abovementioned issues, the transfer does not take place directly from the sender to the recipient. Logistical and security reasons are said to be at the basis of this: about the former, it may be that the recipient of the money has a certain urgency to receive it and the advance of the second hawaladar may satisfy this need, unlike the real sender who is often resident in a distant place. As far as security aspects are concerned, the long distances to be travelled with large sums of money represent a serious risk due to theft and robbery and it makes sense to separate the transfer of money into different stages and at different times.

Hence the importance of trust, which is possible firstly if the actors involved belong to communities supported by the same commonly shared rules [12]. It is no coincidence that most intermediaries are from the same ethnic group, or even from the same family or clan [13]. The certainty or awareness that others respect the same principles, values and cultural models thus seems in itself to constitute a strong guarantee of trustworthiness, prompting all subjects to give what the political scientist Francis Fukuyama has called “prior moral consent”[14].

4. The anonymity of transactions: a good ally for terrorist organisations