Counter-Terrorism: Old School Cash Flow

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May 10, 2019: As ISIL (Islamic State in Iraq and the Levant) lost its territory in Iraq and Syria between 2016-17, leaders of the terror group concentrated on moving as much of their assets, especially cash stolen from banks and businesses to safer places. Much of that money was lost (stolen or physically destroyed by airstrikes and other forms of combat) but several hundred million dollars’ worth survived and is now used to finance ISIL operations worldwide. Much of the cash was hidden by using it to buy all or part of legitimate businesses in countries where that sort of thing was less likely to be discovered and seized by counter-terrorism operations. Nations with a large Moslem population and a culture of corruption (like Turkey, Iraq and Iran) are popular for this. Cash can be moved around using hawala (a traditional and informal banking network) when you don’t have a legitimate business reason.

The main problem with all this informal banking is that it is expensive. The higher the risk of losses (to law enforcement, gangsters or corrupt government officials), the higher the commissions charged to move or park ISIL cash. Think of the ISIL cash hoard as a large iceberg that moved into warmer waters after ISIL lost its territory and ability to raise more cash. While investments in legitimate businesses generate some profit the ISIL assets are, overall, shrinking because of constant counter-terror operations.

The hawala system is not considered a vulnerability and has been around for a long time. Hawala is the Arab version of the South Asian hundi system that was developed thousands of years ago to facilitate long-range trade between South Asia and the Middle East (via the Indian Ocean) and overland via the silk road (with China and Central Asia). Hawala works because there are trusted (by each other) Hawala brokers at each end of the transaction. Commissions vary from under one percent (today, using modern communications) to ten percent or more for large amounts of dangerous (as it Islamic terrorist) cash. Hawalas currently moves several hundred billion dollars’ worth of cash each year for legitimate reasons such as business transactions and expatriate workers sending money back home. Someone sending money to another country must find a hawala broker with partners in the other country. The sender gives the local hawala broker an amount of cash, minus a commission, which usually covers delivering the money in another currency at the other end. The sender receives a secret code that is then sent to the person to receive the money, who then goes to the local hawala broker and, in return for the secret code, receives the money. Hawala dealers settle (balance) their accounts by either transporting cash or, more frequently, by using the surplus at one end to buy local goods for export to the hawala broker the money is owed to. Thus hawala brokers are often partners with import/export businesses.

Because hawala networks keep minimal records their services are often used by gangsters (and Islamic terrorists). This type of business is riskier and, to account for potential losses, higher fees are charged. For remittances, (of expatriate workers to family back home) hawala is often cheaper and faster than legitimate bank transfer systems. That is because these remittances are generally small amounts sent on a regular basis. But criminal organizations (like drugs gangs and ISIL) want to move large quantities of cash, often in a hurry. Many hawala networks can’t handle it but the more enterprising and fearless hawala brokers will gear up to do it and get rich or get killed or imprisoned in the process.

Whenever criminals or Islamic terrorists gain control over a lot of territory (the religious dictatorship in Iran or the drug gangs in Afghanistan, Southeast Asia and South America) hawala brokers are welcome and protected. Because of the suitability of hawala being used for illegal transactions hawala has been outlawed in many parts of the world (especially India and Pakistan). Hawala still operates in those areas, but the fees are higher. In the West, hawala has had a hard time dealing with modern police methods which now include a lot of pattern analysis (of legitimate financial transactions and overall economic activity) that has proved successful at detecting the large-scale hawala networks catering to criminal organizations.

The Western police investigation methods have also made it more difficult for Islamic charities being used as part of international cash transfer networks. These charities have a legitimate reason for transferring cash to distant areas and sometimes hawala is used because it is the safest and most certain method for getting cash to remote areas. A number of large (and now defunct) Islamic charities existed mainly to support Islamic terrorist groups and other criminal activities. While the hawala brokers are resourceful most of them see their work as a long-term career, not a high-risk get rich scheme. Financial investigators have learned to count their success by the growing broker fees hawala networks charge high-risk clients (like ISIL). Investigators have noted fees often going north of ten percent for ISIL-related hawala transactions. ISIL pays because they have no choice if they want to move money around, and they do because currently ISIL exists largely as a financier for promising ISIL franchises worldwide.

 


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