- Hawala is an underground payment system that lets users make undocumented transactions.
- It has been linked to terrorist financing but is also used for legitimate purposes.
- Experts say oligarchs using Hawala would have to make hundreds of small transactions.
- For more stories, go to www.BusinessInsider.co.za.
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 lets funds 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 home to family members, for example, Hawala transactions have also been linked to terrorist financing.
Following the 9/11 attacks, the US government sought to find how Al Qaeda had fund its attacks. Senator Paul Sarbanes said in a Senate hearing on November 14, 2001: "Since little is known about Hawalas, this informal system poses difficulties for law enforcement officials seeking to track the funds utilized for these various purposes."
Insider spoke to two experts on the similarities between oligarchs who may be using Hawala and terrorist financing, and how the underground payment systems' lack of regulation appeals to 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 around, they must have run out of other options.
Doing so would involve hundreds of thousands of smaller transactions rather than one large one, he added.
Shane Riedel, a financial crime expert and chief executive of Elucidate, which analyses patterns in money movement, said that sanctioned individuals trying to move funds out of their accounts could be considered a desperate move.
Hawala used for terrorist financing
Hawala and other such providers have similarities with mainstream payment systems but are not officially documented, which makes them harder to track and is another reason why there is so little information on Hawala activities.
In 2020, the US Department of Treasury targeted Isis financial facilitators and money transfer companies that used Hawala – measures taken to eliminate the extremist group's revenue sources.
Riedel said that one of the differences between the way oligarchs may 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 a lot cheaper to do remittances."
According to research conducted by the Financial Action Task Force in 2013, informal payment systems pose a terrorist financing risk because of the lack of regulation and their existence outside the conventional banking system.
Claridge said that it is easier to stumble upon Hawalas in countries where migrant workers can be found, such as Germany, the UK or Dubai.
Riedel said: "If you're constantly working in Saudi, 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 used and his father used, and probably pay three cents."
It would be much harder to determine the name of the entities or individuals making Hawala transactions, Riedel added. Just because you see one Hawaladar – a Hawala dealer – "there would not necessarily be an indication that there's anything illicit associated with that."
He argued that oligarchs may start using Hawalas if their banks remain sanctioned and they cannot make transactions. "Yet they've got family living in the US who wants to send the money, they have kids who are studying somewhere, and they need to send them cash – for whatever reason."