Hawala arrangements are used to avoid customs duties, consumption taxes, and other trade-related levies. Suppliers provide importers with lower prices on their invoices, and get paid difference via Hawala. Legitimate transactions and tax evasion constitute bulk of Hawala operations. Modern Hawala networks emerged in 1960's and 1970's to circumvent official bans on gold imports in Southeast Asia and to facilitate transfer of hard earned wages of expatriates to their families ("home remittances") and their conversion at rates more favourable (often double) than government's. Hawala provides a cheap (it costs c. 1% of amount transferred), efficient, and frictionless alternative to morbid and corrupt domestic financial institutions. It is Western Union without hi-tech gear and exorbitant transfer fees.

Unfortunately, these networks have been hijacked and compromised by drug traffickers (mainly in Afganistan and Pakistan), corrupt officials, secret services, money launderers, organized crime, and terrorists. Pakistani Hawala networks alone move up to 5 billion US dollars annually according to estimates by Pakistan's Minister of Finance, Shaukut Aziz. In 1999, Institutional Investor Magazine identified 1100 money brokers in Pakistan and transactions that ran as high as 10 million US dollars apiece. As opposed to stereotypes, most Hawala networks are not controlled by Arabs, but by Indian and Pakistani expatriates and immigrants in Gulf. The Hawala network in India has been brutally and ruthlessly demolished by Indira Ghandi (during emergency regime imposed in 1975), but Indian nationals still play a big part in international Hawala networks. Similar networks in Sri Lanka, Philippines, and Bangladesh have also been eradicated.

The OECD's Financial Action Task Force (FATF) says that:

"Hawala remains a significant method for large numbers of businesses of all sizes and individuals to repatriate funds and purchase gold.... It is favoured because it usually costs less than moving funds through banking system, it operates 24 hours per day and every day of year, it is virtually completely reliable, and there is minimal paperwork required."

(Organisation for Economic Co-Operation and Development (OECD), "Report on Money Laundering Typologies 1999-2000," Financial Action Task Force, FATF-XI, February 3, 2000, at http://www.oecd.org/fatf/pdf/TY2000_en.pdf )

Hawala networks closely feed into Islamic banks throughout world and to commodity trading in South Asia. There are more than 200 Islamic banks in USA alone and many thousands in Europe, North and South Africa, Saudi Arabia, Gulf states (especially in free zone of Dubai and in Bahrain), Pakistan, Malaysia, Indonesia, and other South East Asian countries. By end of 1998, overt (read: tip of iceberg) liabilities of these financial institutions amounted to 148 billion US dollars. They dabbled in equipment leasing, real estate leasing and development, corporate equity, and trade/structured trade and commodities financing (usually in consortia called "Mudaraba").

While previously confined to Arab peninsula and to south and east Asia, this mode of traditional banking became truly international in 1970's, following unprecedented flow of wealth to many Moslem nations due to oil shocks and emergence of Asian tigers. Islamic banks joined forces with corporations, multinationals, and banks in West to finance oil exploration and drilling, mining, and agribusiness. Many leading law firms in West (such as Norton Rose, Freshfields, Clyde and Co. and Clifford Chance) have "Islamic Finance" teams which are familiar with Islam-compatible commercial contracts.

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Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, United Press International (UPI) and eBookWeb and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

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