How anti-money laundering compliance with regard to hawala based in Dubai with customers in all continents in the world should be conducted.
Hawala is a system of transferring money from one country to another using a trust-based network and alternative modes of exchanging value for value (Levy, 2016). Immigrants working in a foreign country who want to send money to their families in their home country usually use this system (Pathak, 2003). A sender gives a hawala broker or hawaladar the money for remittance. The broker provides the sender with some kind of code for the recipient to get the money. The broker contacts a partner in the home country to send the money to the recipient. The recipient gets the money after providing the code. Settlement of payment between the broker and partner can be through a range of arrangements, such as payment for a previous debt incurred by the partner or addition or deduction to the cost of goods exchanged between the broker and partner. Hawala transactions are informal because of the lack of documentation to identify the sender, partners, country of destination, and recipients (Sullivan, 2015). While hawala addresses a need especially in countries with poor formal banking systems and financial infrastructures, it is also susceptible to money laundering (Zagaris, 2007). Hawala provides the anonymity required by people who want to launder money (Sullivan, 2015).
Dubai is one of the largest hubs of the hawala global network. A large portion of the immigrant worker population in Dubai use the hawala network to send money to Pakistan, India, and Somalia. (Pathak, 2003) At the same time, the regulatory environment in Dubai is permissive towards hawala (IMF, 2008). There is global consensus over the need to regulate money laundering, which is a crime in Dubai and in other jurisdictions. Regulation of money laundering necessarily covers the hawala system. While regulations exist, it is important to consider compliance of the hawala in Dubai to determine issues and areas for improvement.
Hawala is an international system with Dubai as one part of the network. Effective regulation involves the integration of efforts in different countries. Ensuring compliance with anti-money laundering regulations affecting the hawala network in Dubai involves the consideration of the anti-money laundering regulations in the UAE, counterpart measures in other countries, and regulatory standards at the international level.
Compliance with Local Anti-Money Laundering Regulations
Wang (2011) explained that anti-money laundering regulations take the form of registration or licensing. Registration is less strict. It involves the process of enlistment of hawala brokers with the designated authority as the means of complying with anti-money laundering regulations. Licensing is stricter. It requires hawala brokers to observe several requirements as a means of complying with anti-money laundering regulations. Some of the requirements may include proof of zero criminal history, managerial skills, capital surety, and/or business plan. Moreover, licensing is more costly. Entry may involve a $50,000 licensing fee in the first year and $50,000 annual fee for the succeeding years.
Of these two general forms of anti-money laundering regulations, licensing applies in the UAE. Anti-money laundering regulations in the UAE that affect the hawala network is a recent development.
In the 1980s and early 1990s, the UAE government adopted three regulations pertaining to informal money remittance brokers. Law No. 10/1980, Resolution No. 31/2/1986, and Resolution No. 123/7/92 contain provisions allowing individuals and entities operating as moneychangers to acquire a license to engage in money remittance. To acquire and maintain this license, brokers need to have a record of the parties transferring money in other currencies. To comply with the recording requirement, brokers must request valid identification documents from their clients. Valid identification documents are passport, driver’s license, UAE identification card for nationals, and labor card for non-nationals. Brokers are only required to take note of the telephone number of senders. At the same time, the rules on recording only applies to transactions equal to or more than 2,000 dirham. (IMF, 2003)
After 9/11, the UAE adopted the Abu Dhabi Declaration on Hawala. The Declaration accepted the positive contributions of hawala in providing a quick and cheap money remittance service to customers in many countries. It also expressed the need for effective regulation of hawala networks without being excessively restrictive. The Declaration also asked the participating countries to continue with their individual regulation of hawala and participation in collaborative regulation of hawala networks. The shared goal of the participating countries is to protect legitimate money remittance services and transactions and to prevent the exploitation of the hawala networks by parties with criminal intent. (Pathak, 2003) In adopting the Declaration, the UAE established a formal system of licensing for hawala brokers in 2002. The UAE Central Bank published a notice of the licensing system in the news. Licenses are free of charge. Hawala brokers applying for a license will receive a certification by showing records of the remitters and recipients of money transfers abroad. Information on the hawaladars are confidential. Hawaladars are required to report suspicious transactions to retain their license. (IMF, 2003) Among the initial batch of applicants, the UAE Central Bank issued 55 licenses (Pathak, 2003).
UAE enacted its anti-money laundering legislation through Law no. 4/2000 and its counterterrorism statute through Law No. 1/2004. Regulation No. 24/2000 provide the implementing rules for these registrations. These legislations and regulation require banks and moneychangers to apply customer identification rules (Sullivan, 2015). Reporting covers all cash transactions greater than $54,500 and suspicious transactions. Violation of reporting rules and reported suspicious transactions are subject to investigation, freezing of assets, and coordination with law enforcement for criminal prosecution. The Financial Intelligence Unit (FIU) took charge of investigating suspicious activity and coordinating with law enforcement and the courts. (Odeh, 2010)
Compliance with regulations covering hawaladars based in Dubai depends on the initiative of brokers. Licensing and reporting are largely voluntary. Not all hawaladars operating in Dubai are licensed. Reporting of suspicious transaction is low when considering the size of the hawala market and volume of transaction channeled through Dubai. (IMF, 2008)
Several measures are necessary to improve compliance. One measure is to improve existing laws and regulations to achieve several outcomes. Clarification of the grounds on which hawala brokers should report suspicious transactions that may involve money laundering or financing of terrorism would increase reporting (Odeh, 2010). Knowing what to report and the purpose of reporting makes it easier for hawaladars to comply with this requirement. Amendment of the anti-money laundering law should focus on expanding the money laundering predicate offences and the corresponding punishments (IMF, 2008). Prosecution should provide stronger impetus for hawaladars to exercise vigilance in identifying and reporting suspicious transactions. Another area for amendment is the expansion of the role and resources of the Financial Intelligence Unit. Currently, the FIU is a small division operating under the Supervision Department of the UAE Central Bank. As the division tasked to investigate reports and incidents pertaining to money laundering, the FIU should become an autonomous division with more people and bigger resources. Increasing the capability of FIU to investigate reports of possible money laundering and regulation violations of hawaladars would encourage brokers to exercise measures in order to stay away from money launderers or from being implicated in money laundering investigations. (IMF, 2008) Another practical measure is to intensify information dissemination to hawaladars on the red flags of criminal transactions and consultation or joint efforts with hawaladars to update and share emerging red flags as new anti-money laundering routes arise (Soudjin, 2015). Compliance with reporting increases when hawaladars are well informed and consulted.
Compliance with Inter-Country Cooperation in Regulating Money Laundering
Hawala networks based in Dubai also fall under the regulatory measures of other countries, but limited to brokers operating within a foreign country. For example, hawaladars located in the US who have partners in Dubai fall under American regulations on money laundering and terrorist financing (Cox, 2014). Section 259 of the USA Patriot Act consider hawala brokers as part of financial institutions required to comply with licensing and reporting rules. Reporting is required for transactions exceeding $10,000 and suspicious transactions. It is also punishable to circumvent this reporting requirement by using several transactions for amounts greater than $10,000. (Sullivan, 2015) The Bank Secrecy Act classify hawaladars as money service providers who are required to register with the Financial Crimes Enforcement Network, report suspicious transactions, keep transaction records, and file transaction reports with the designated authority (Levy, 2016).
Compliance with inter-country regulation of money laundering is problematic because of differing goals of regulation. In considering the cooperation between the UAE and US, the goal of regulation in the UAE is to strengthen the hawala network by preventing its exploitation by criminals and terrorists while the goal of regulation in the US is to constrain hawala by encouraging clients to use formal financial services (Pathak, 2003). There is disconnect between regulations in the US and the reality of hawala practice. Many hawala operations in the US are not aware of anti-money laundering regulations. Even with knowledge of these regulations, brokers do not have incentives to comply. Many brokers are unlicensed and operations occur underground. (Cox, 2014) Monitoring and investigating agencies are incapable of understanding the language used and norms involved in hawala operations (Levy, 2016).
Differing goals of anti-money regulation in the US and UAE resulted to poor relations between the monitoring bodies in each jurisdiction and limited success in stopping money laundering or financing of terrorists. To reconcile these differing priorities, the US needs to adopt a two-pronged regulatory approach. On one hand, it can motivate more people to use the formal financial system by offering fast and affordable remittance services that comply with reporting standards. On the other hand, the US can also simplify the licensing and reporting requirements to encourage compliance by hawaladars. (Wang, 2011) On the part of the UAE, it should also clarify the criteria for suspicious transactions based on the output of consultation with brokers as well as build cooperative relations between banks and brokers in order to bring more money within the purview of regulations (Soudjin, 2015). These changes should align regulatory measures in the US and UAE to improve compliance.
Compliance with International Anti-Money Laundering Regulation
In 2012, the Financial Action Task Force issued the revised FATF 40+9 recommendations on money laundering and financing of terrorism. The recommendations comprise the international standard on anti-money laundering and anti-terrorist financing. Countries, including the UAE, develop their legislations in line with these recommendations. (Wang, 211) The FATF 40 recommendations fall under the four categories of ‘legal system’, ‘preventive measures’, ‘institutional and other measures’, and ‘international cooperation’. The FATF 9 special recommendations focus on rules on anti-terrorist financing. (Alkaabi et al., 2010)
Compliance with international anti-money laundering and anti-terrorist financing regulations by the UAE is limited. A FATF report (Alkaabi et al., 2010) on compliance by different states showed that the UAE complied with some but not all recommendations. Of the three recommendations pertaining to the legal system, the UAE satisfactorily complied with the second and third recommendations. Compliance with the first recommendation on establishing offences pertaining to money laundering is only partial. Existing UAE laws have narrowly covered predicate offences. With regard to the 22 recommendations under preventive measures, the UAE failed to comply with the fifth recommendation on requiring due diligence from clients and the thirteenth recommendation on reporting of suspicious transactions. It achieved only partial compliance with the twenty-third recommendation. These are largely due to the voluntary nature of licensing and reporting in the UAE as well as lack of clarity of the factors for determining suspicious transactions. In relation to the 14 recommendations on institutional and other measures, the UAE only accomplished partial compliance with the twenty-sixth recommendation on the establishment of a body to oversee anti-money laundering initiatives. The report (Alkaabi et al., 2010) also showed that the FIU faced difficulties in gathering, evaluating and sharing reports on suspicious activities. The unit also does not publish annual reports on the outcomes of the performance of its investigative functions. Of the five recommendations categorized under international cooperation, the UAE partially met the thirty-eighth and fortieth recommendations. Partial compliance is due to the lack of clear directives on the sharing of information with other countries in a manner that ensures the highest possible protection of confidentiality. With regard to the nine special recommendations on controlling financial support for terrorism, the UAE failed to comply fully with the first, third and fourth special recommendations. This connect to the issues on reporting of suspicious transactions and enforcement of punishments for violations.
Socio-cultural factors largely explain the non-compliance and partial compliance of the UAE with the FATF 40+9 recommendations (Alkaabi et al., 2010). FATF recommendations reflect the perspectives of the participating countries. The US is one of the proponents of the FATF recommendations, while the UAE did not participate in the development of these recommendations (Zagaris, 2007). FATF recommendations recognize the role played by hawala networks in facilitating remittances to destinations not effectively served by the formal banking system (Sullivan, 2015). However, the goal of these recommendations is primarily to encourage movement from the informal to formal remittance services (Wang, 2011). In contrast, the regulation in the UAE seeks to provide a regulatory environment conducive to the growth of the informal remittance services while preventing the exploitation of these services by people seeking to launder money or provide funds to terrorists (Soudjin, 2015). Hawala is deeply embedded in the culture and tradition of the UAE. It cannot be replaced by the formal banking system. (Trautsolt and Johnson, 2012)
Improving compliance with the FATF recommendations involves some degree of flexibility in accommodating local values and norms (Alkaabi et al., 2010). A key aspect of compliance is the separation of clients who use hawala services within the law and those who intend to abuse the network for criminal or terroristic purposes (Levy, 2016). To distinguish these parties, guidelines or criteria for reporting of suspicious transactions should emerge from consultations with brokers (Soudjin, 2015; Trautsolt and Johnson, 2012). For example, it is normal for people in the UAE to transact with large amounts of cash. What constitutes suspicious transaction in the UAE is markedly different from other countries. Another example is the close family and community ties in the UAE. A broker no longer exercises diligence when dealing with clients they know. (IMF, 2005) Brokers can help develop guidelines for determining large remittances that are suspicious and ways of practicing due diligence within the context of social norms.
Hawala is an international remittance network with Dubai as one of the large hubs. It is susceptible to exploitation by money launderers and terrorist financiers due to the anonymity of transactions. Regulations should cover hawala to prevent its exploitation for criminal and terrorist purposes. Conducting compliance with anti-money laundering regulations by hawala based in Dubai that have customers in all continents in the world involves the consideration of the anti-money laundering regulations in the UAE, counterpart measures in other countries, and regulatory standards at the international level. Clarifying rules and aligning the goal of regulation across jurisdictions are necessary steps to compliance.
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Cox, D. (2014) Handbook of anti-money laundering. West Sussex, United Kingdom: John Wiley & Sons Ltd.
International Monetary Fund (IMF) (2003) Informal fund transfer systems: an analysis of the informal hawala system. Washington, DC: IMF Publication Services.
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Soudjin, M. (2015) ‘Hawala and money laundering: potential use of red flags for persons offering hawala services.’ European Journal on Criminal Policy and Research, 21(2) pp. 257-274.
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Zagaris, B. (2007) ‘Problems applying traditional anti-money laundering procedures to non-financial transactions, “parallel banking systems” and Islamic financial systems.’ Journal of Money Laundering Control, 10(2) pp. 157-169.