- Hawala is an underground payment system that allows users to make undocumented transactions.
- It has been linked to the financing of terrorism, but it is also used for legitimate purposes.
- Experts say oligarchs using Hawala would have to make hundreds of small transactions.
Russian oligarchs may be using informal trust-based payment systems known as Hawala to avoid Western financial sanctions in a move that is not illegal but reflects their desperation, experts say.
Hawala allows funds to be transferred from one entity to another without actually moving any money. There are no records as no documentation is required.
While it is often used for legitimate purposes, such as migrant workers sending money to their family members, for example, Hawala transactions are also linked to the financing of terrorism.
After the 9/11 attacks, the US government sought to find out how Al Qaeda financed its attacks. Senator Paul Sarbanes said at a Senate hearing on November 14, 2001, “As little is known about Hawalas, this informal system presents difficulties for law enforcement officials seeking to track funds used for these various purposes.”
Insider spoke with two experts about the similarities between oligarchs who may be using Hawala and terrorist financing, and how the lack of regulation of underground payment systems attracts sanctioned individuals.
David Claridge, chief executive of security intelligence firm Dragonfly, told Insider that if oligarchs are using Hawalas or any informal payment system to move money, they must have been left with no other options.
Doing so would involve hundreds of thousands of smaller transactions rather than one big one, he added.
Shane Riedel, a financial crime expert and chief executive of Elucidate, which analyzes money movement patterns, said punished individuals trying to withdraw funds from their accounts could be considered a desperate measure.
Hawala used for terrorist financing
Hawala and other similar providers have similarities to conventional payment systems but are not officially documented, which makes them more difficult to track and is another reason why there is so little information about Hawala’s activities.
In 2020, the US Treasury Department attacked Isis financial enablers and money transfer companies that used Hawala – steps taken to eliminate the extremist group’s sources of revenue.
Riedel said one of the differences between how oligarchs can use Hawala and how it has been used for terrorist financing is that Hawala transactions can be legitimate, especially in the Middle East, “because it’s so much cheaper to make remittances.” “.
According to research conducted by the Financial Action Task Force in 2013, informal payment systems pose a terrorist financing risk due to lack of regulation and their existence outside the conventional banking system.
Claridge said it is easier to find Hawalas in countries where migrant workers can be found, such as Germany, the UK or Dubai.
Riedel said, “If you constantly work in Saudi Arabia, you can go to Western Union and pay [for example] $8 for a transfer, or you can go to a Hawala hammock, which your father used and his father used, and you probably pay three cents.”
It would be much more difficult to determine the names of entities or individuals transacting in Hawala, Riedel added. Just because you see a Hawaladar – a Hawala dealer – “there would not necessarily be an indication that there is anything illicit associated with it.”
He argued that oligarchs can start using Hawalas if their banks remain sanctioned and cannot transact. “However, they have family members living in the US who want to send the money, they have children who are studying somewhere and they need to send the money – for whatever reason.”