Cryptocurrency Meets Hawala
Implications for all sorts of illicit financing
Welcome to a regular edition of Insight Intelligence. Finally, after a two-week interruption brought to us by the Ottawa occupation, we are back to our regularly-scheduled programming. Today we’re looking at the intersection of hawalas and cryptocurrency, so prepare to get very nerdy. As always, a warm welcome to our new subscribers (we are approaching 1000!), and a special thank you to the new paid subscribers! If you find this interesting, please subscribe and share it with a friend.
The Crypto-Hawala Mashup
Back in January, Business Insider reported that Afghan women are receiving emergency aid in cryptocurrency. According to the article, there are a number of local money exchanges in Herat (hawalas) that accept cryptocurrency that then cash out the cryptocurrency in afghanis or dollars. The article is worth a read in its entirety, particularly as it deals with some of the volatility of Bitcoin. For us, the most interesting thing is the marriage between hawalas and cryptocurrency.
What’s a hawala?
This is probably my least favourite question to answer because it is both incredibly simple and yet complex and nuanced. A hawala is a system used to move money around the world, and is particularly popular in non-Western countries. A lot of descriptions of hawala rely on tropes like “untraceability” and “ancient”. To a certain extent, both of these things are true, but sensationalize some of the routine aspects of hawala. Hawala transactions involve the movement of money between two locations without the physical transfer of funds, and they operate domestically and internationally. Hawala are often described as trust-based systems, but in practice, these are businesses, such that the consequences of defrauding a business partner in the network would be career-ending. Hawalas are used to move money around the world because they are fast and inexpensive, provided that the sending and receiving parties can get to the physical location of the hawaladar.
While some analysts have said that hawaladars (hawala operators) do not keep records, this has been proven largely untrue, although the bookkeeping methods vary and can be almost entirely incomprehensible to an outside observer.Instead of using banks and financial institutions, individuals find hawaladars, provide them funds, and request that the funds be transferred to another individual. Instead of moving the money physically, the hawaladar will contact a business associate and ask for the funds to be released to the intended beneficiary. Later, entirely independently of the original transaction (and only if or when an imbalance occurs), the two hawaladars will settle their accounts through a funds transfer (potentially through an MSB or bank) or perhaps through goods or services.
As with any similar service, there is lots of variation between types of hawala (it’s called different things in different parts of the world), but the main principles remain the same. And while many have vilified hawala for its role in terrorist financing (something I think has been overblown, as I discuss in my book, Illicit Money), many of the things that are vilified about hawalas (speed, trust, paperlessness, global reach, and fluidity) are exactly the types of things that the formal banking sector in the west tries to emulate.
In Afghanistan (and many other parts of the world), hawala is the main mechanism used to transfer funds in and out of the country. There has been a push to regulate register hawalas with Dab, but this process is incomplete, and the majority of hawalas remain unregistered in Afghanistan.
How does a crypto-hawala marriage work?
The development in Afghanistan of hawaladars effectively cashing out cryptocurrency transactions is very interesting. Until this article, I’d seen very little published work on the interaction between hawalas and the cryptocurrency sector. However, in some of my investigative work in Syria, I did find that a similar process occurred there – an individual would receive a transaction in cryptocurrency to their wallet, then would find a hawala that accepts cryptocurrency. The beneficiary of the funds would transfer their cryptocurrency (or a portion of it) to the hawala to be cashed out, and would receive the currency of their choice in the transaction. Alternatively, the cryptocurrency could be sent directly to the hawaladar “in trust” for the intended beneficiary. The hawaladar would then presumably hold the cryptocurrency, or transfer it to someone else. The process in Afghanistan appears to be the same.
This development has important implications for illicit financing. While cryptocurrency might be a valuable method of aid delivery, this mechanism is also potentially exploitable by individuals and entities seeking to evade sanctions, finance terrorism, or engage in other illicit activities. There remain a number of under or poorly regulated cryptocurrency exchanges worldwide, some that are reluctant to implement appropriate anti-money laundering and counter-terrorist financing controls, and there remain vulnerabilities in the sector in terms of un-hosted wallets and related transactions.
To date, there has been little indication that the Taliban has experimented with cryptocurrency for sanctions evasion, and the Taliban has yet to announce its cryptocurrency policy. However, other groups, particularly ISIL-KP, almost certainly have the technical capability to transact in cryptocurrency, and ISIL itself has a proven track record of doing so. The question for me is whether there is a use case for cryptocurrency for the Taliban and other terrorist groups in Afghanistan. At the moment, I suspect that they are well-served by exploiting other, more traditional aspects of the Afghan financial system, but this could change, particularly if the Taliban or others seek to establish greater international connections outside of the immediate region.
I’m sure we’ll be talking about this again before too long.
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Freeman and Ruehsen, “Terrorism Financing Methods,” 11
Reminder: this is basically the same thing that happens with banks.
Marieke De Goede, Speculative Security: The Politics of Pursuing Terrorist Monies (Minneapolis: Univ Of Minnesota Press, 2012). 52
Haroun Rahimi, “How to Create Better Hawala Regulations: A Case Study of Hawala Regulations in Afghanistan,” Crime, Law and Social Change 76, no. 2 (September 1, 2021): 137, https://doi.org/10.1007/s10611-021-09959-w.