Poor Man's Private Banking

19 May2002

The Abu Dhabi Declaration at the end of the First International Conference on Hawala on 15 and 16 May 2002 reflected the quintessential conclusions of a two-day long, threadbare discussion on hawala. Pleasantly contrary to expectations, the 300-odd global delegates addressed the agenda with much gusto and a great deal of vigorous, intellectual articulation. The subject itself had hitherto been regarded as a bit of an elusive "will-o'-the-wisp"; that is prone to multiple innuendoes and interpretations.

Hawala emerged as a popular, informal, low-cost remittance scheme for the post-World War expatriate work force. The 'Hundi' and Hawala South Asian variants and versions that were widely prevalent in the colonial era were more domestic than cross-border usage by the semi-skilled and unskilled migrants (tea, sugar, rubber, plantation etc.) / indentured labourers that were despatched to Mauritius, Fiji, West Indies, Sri Lanka and Malaysia by the English who were followed by the traders that thronged to many parts of Africa. These labourers acquired citizenship of the countries that hosted them and gradually severed links with their home country brethren.

In that sense, hawala was not such an ancient phenomenon, that was ingrained and seeped in the social and cultural habits of the South Asian populace as would render it difficult to reform. It is only when the expatriates began to go cross-border, as they did to the Gulf in droves, did hawala become a pervasive means of remitting workers' earnings home, as the families they supported stayed home while they soldiered on in terms of "tears, blood, toil and sweat" (to paraphrase Churchill!). Hawala thus became a cost-effective, door to door service that the commercial banks could not quite match upto in terms of cost and service.

It is in this historical context that following September 11th, 2001 and the ensuing paranoia about alternate channels of money transfers that the symposium organized by the UAE Central Bank proved to be of a genre; in as much as over half the audience comprised overseas delegates, including representatives from the United Nations, officials from the Financial Action Task Force (FATF), the U.S. FBI, Treasury and Customs Departments, the universities and the central banks from different parts of the world, and a galaxy of senior financial institution-executives. Some of them may have been a little intrigued, as to why the Central Bank was dignifying a 'hideous' practice that remains shrouded in mystery if not in cloak and dagger! Many unwittingly and readily paint Hawala as unsavoury and unethical in the broad brush approach that we have come to know of international perceptions i.e. either you are with us or ………!

Journalism is sometimes described as 'history in a hurry' . News reporters tend to pick up and publish snippets of what they think are newsworthy. Sometimes, it would appear that the participants of a symposium find the proceedings and conclusions as reported; being radically different from reality. This is not an accusation of inaccurate reporting but one of differing emphasis and substance. The well informed financial community / audience respond to events differently from the multi-purpose press reporters. For instance, a columnist who has published a piece on Thursday, the 15th of May 2002 (i.e. halfway through the conference) would be surprised to know that the deliberations, in fact, went beyond what he thought might be the case. No one was 'sipping tea' and merely talking high and mighty.

In the event, the press reports about the Conference and even the Abu Dhabi Declaration or communiqué did not do full justice to what was an outstanding programme. While Dubai runs regional and international conferences every other week, the Abu Dhabi ones are less frequent and certainly less well-attended.

The UAE Central Bank Governor must therefore be complimented for setting the tone in his opening remarks in a very direct and illustrative manner; commencing with a video-clip that captured the 'why's' and the 'what's' of hawala in the heavily expatriate-driven social milieu, such as prevailing in the UAE and in the Arabian Gulf.

The welcome address was followed by H.E. Sultan Bin Nasser Al Suwaidi also moderating the first panel session; during which Mr. Mohammed El Qorchi of the International Monetary Fund (IMF) in Washington summed up, succinctly, the content and conclusions of a recent research report that the IMF had commissioned. Even in the Q & A that followed, Mr. Qorchi displayed a rare sensitivity and was obviously well aware of the nuances of hawala. He took a practical and not a patronising or prejudiced approach. On the other hand, the two lady members on the panel, one from the United Nations Office for Drug Control and Crime Prevention in Vienna and the other from the Security Council's Counter-Terrorism Committee from the United Kingdom proved to be disappointing; as they preferred to, parrot-like, pronounce verbatim, what the UN's official dikdats on the subject were. Clearly, neither seemed to have the experience, exposure and the stature to participate in such high level international conferences. Hopefully their quality did not signify the general paucity or poverty of original thought that supra national bureaucrats sometimes betray!

The next panel discussion had Mr. Abdulaziz Al Ghurair, Mr. Khalifa Mohamed Hassan, Mr. Mukhtar Yusef Ibrahim (the CEOs of Mashreq, ADCB and CIB Egypt respectively) as well as the undersigned. By then, what hawala was all about, had been variously and severally defined and the process detailed at great length. In my brief closing remarks in the panel, I described the hawala as a 'poor man's private banking' or the blue-collar version of "Eastern Union" (a la the ubiquitous famous Western Union Financial Services that even had two delegates at the conference!)

While there are no verifiable estimates of what current money-laundering volumes are, an IMF report in 2000 (attributed to Tanzin and Quirk) alluded to some 2% of the global gross domestic product (of anywhere between US$ 500 billion to a trillion) consisted of laundered money! In my view, much of the steam from regional hawala trade was taken out; when the import duty on gold was slashed in India and Pakistan and a generous 5 kilograms gold import allowance was given to their non-resident nationals. This literally took the sails out of the smugglers' dhows; as gold and silver 're-exports' (an euphemism for smuggling!) lubricated the hawala machine / mechanisms. They allowed for a robust reverse money flow for facilitating the settlement of the hawala payments in the Indian sub-continent.

The hawala route was later also found by other fringe players to be a good way to evade and avoid taxes wherever and whenever black money was generated and was cleanly and clearly siphoned out of the country. In those years, there was a constant shortage of foreign currency holdings in the South Asian countries and their exchange control regimes perpetuated the perverse practices further. Even legitimate overseas travel, hotels, accommodation and other business activities had to be financed by individuals by borrowings from their friends and relatives; as the forex allowances rationed out and released officially were meagre and often less than a princely sum of US$ 100!

These underlying factors were crying out to be addressed and remedied and had to take the forms of relaxing the forex regime, slashing down import duties (already put in motion as part of the WTO process) as well as ensuring that the banking system that had previously been somewhat remote, unfriendly and inefficient could be geared up to compete effectively with the nimble hawala operations and the newly proliferating money exchange companies.

Ultimately, all retail remittance schemes tend to be low-margin, high-volume businesses that can be operated as a lean, mean, agile process. Not as heavy-footed, structurally speaking, large financial institutions that lack focus or the staying power. As they say in retail, if you cannot cope with the heat, stay out of the kitchen! As it is, several exchange companies have now adopted the "door to door' approach that the Philippine banks successfully introduced and implemented to stave off the unofficial market operators. The more innovative institutions in India are now using low-cost couriers to deliver door to door service. This compensates for the lack of presence physically in different parts of the hinterland of a large country. The state-owned banks in India and Pakistan however, through their sheer branch network, have been able to compete for the cake and give the hawala operators a run for their money!

So it has been a double-whammy effect for the hawala-dhars. Closed economies that have opened up in Asia has undercut their trade. The smaller more numerous, exchange companies also match the 'hawala-dhars' in speed and efficiency of execution, settlement and delivery of money and services.

These factors may prove to be the slow, natural, death-knell for a system such as hawala that is also prone to errors and fraud and easily falling prey to pernicious elements i.e. drug money, the terrorists, the unscrupulous, devious fraudsters and gangsters, who have hijacked what had traditionally been the poor man's private banking vehicle.

Indeed this private banking is on par with the corresponding 'high net worth variety' in terms of its personalised service and the important elements of trust, nominees and pleasant brief case informality. Given the hijacking of hawala by the mafia, I would suggest that we adopt the airlines approach! The latter have replaced metal cutlery with plastic cutlery in their cabin service. The financial systems, particularly exchange companies can likewise adopt 'plastic banking' i.e. charge cards, ATM and affinity cards to the next of kith and kin to widely permit easy transfer of money possibly enabled through the Internet in a legitimate, well-trained and transparent manner; using technology, couriers and other low cost means of achieving what the hawala operators do through their nefarious network especially when the latter get a subsidy from the illicit activities that fund these transactions, at both ends

As the U.S. FBI and treasury officials indicated clearly, the "9/11" terrorist money did not go through the hawala mechanism. Instead, it was the conventional banking system that was the conduit for this flow. The U.S. officials also conveyed the message that they were at the conference to learn and were thus approaching the subject with humility and that "you cannot throw the baby with the (unclean) bath-water"! Many elements of hawala are indeed the home-grown answer to what was a widely-felt need of the low-income group. By proscribing or banning it, one will merely push the activity underground. What may instead need to be done is to see how hawala can be licensed and / or registered / authorised a little more simply (KISS principle) and carefully; so that it is protective of the users of the system and at the same time, is not allowed to be abused for harmful purposes.

The post-lunch presentation by Professor Nikos Passas of the Temple University's Department of Criminal Justice in Philadelphia was outstanding for its clarity, illustration and considerable research done on the subject. Similarly the session involving the money-changers and experts in precious metals reflected their practical insights based on 'hands-on' exposure to threats of their trade that is interwoven into the hawala tapestry. In the final panel, late in the evening of the first day, Mr. Meenakshi Sundaram of the UAE Central Bank proceeded to sum up the day's deliberations in his own inimitable manner. A lot of pressure developed on the final speaker, Mr. Munir Mahmood to keep the audience engaged, as, by then, it appeared that everything that needed to be mentioned may have already been said!

The Abu Dhabi Declaration / the conference communiqué was the subject of a good deal of sum up and synthesis on the second day; moderated by Mr. Saeed Al Hamiz, the UAECB Executive Director. In a large measure, the success of the conference goes to the bold decision taken by the organisers to tackle, head-on, in a transparent, sympathetic and well-informed manner, a subject that had until recently been branded around loosely and bandied about in some international quarters, and the press, in hush-hush, accusatory tones; as being akin to an Asian witchcraft that needs to be exorcised.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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