- Hawala is an underground payment system that allows users to make undocumented transactions.
- It has been linked to the financing of terrorism, but is also used for legitimate purposes.
- Experts say that 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 evade 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 moving money. There are no records as no documentation is required.
While often used for legitimate purposes, such as for migrant workers to send money to family members, Hawala transactions have also been linked to terrorist financing.
After the 9/11 attacks, the US government tried to find out how Al Qaeda had financed their attacks. Senator Paul Sarbanes said at a Senate hearing on November 14, 2001: “Since little is known about Hawalas, this informal system poses difficulties for law enforcement officials seeking to trace the 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 clandestine payment systems attracts sanctioned individuals.
David Claridge, CEO of security intelligence firm Dragonfly, told Insider that if the oligarchs are using Hawalas or any informal payment system to move money, they must have run out of 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 executive director of Elucidate, which analyzes patterns in the movement of money, said sanctioned people trying to withdraw funds from their accounts could be considered a desperate move.
Hawala used for terrorist financing
Hawala and similar providers have similarities to major payment systems, but are not officially documented, which makes them more difficult to trace and is another reason why there is so little information about Hawala’s activities.
In 2020, the US Department of the Treasury targeted Isis financial facilitators and money transfer companies using Hawala, measures taken to eliminate the extremist group’s sources of income.
Riedel said one of the differences between the way Hawala can be used by oligarchs and how it has been used to finance terrorism is that Hawala transactions can be legitimate, especially in the Middle East, “because it’s much cheaper to send 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 Hawalas are easier to come across in countries where migrant workers can be found, such as Germany, the United Kingdom or Dubai.
Riedel said: “If you work constantly in Saudi Arabia, you can go to Western Union and pay [for example] $8 for a transfer, or you can go to a Hawala network, which your father and father used, and you’ll probably pay three cents.”
It would be much more difficult to determine the name of the entities or persons conducting the Hawala transactions, Riedel added. The fact that he sees a Hawaladar, a Hawala trafficker, “would not necessarily indicate that there is anything illicit associated with it.”
He argued that oligarchs may start using Hawalas if their banks continue to be sanctioned and unable to transact. “However, they have a family that lives in the US that wants to send the money, they have children that are studying somewhere and they need to send them cash, for whatever reason.”