HUMANITARIAN ACCESS TEAM (HAT) SITUATION REPORT Hawala Registration in Idleb Governorate

JUNE 15, 2017 Executive Summary

Since mid-May 2017, Hay’at Tahrir Al-Sham has taken several noteworthy steps toward regulating the hawala sector in northwestern Syria. These actions could pose a significant challenge to international and local humanitarian organizations implementing projects in northwestern Syria due to potential donor-compliance issues related to Hay’at Tahrir Al-Sham. This report provides a brief overview of the hawala market in northwestern Syria, a summary of the steps that Hay’at Tahrir Al-Sham has recently taken to establish control over this sector, an analysis of the goals of Hay’at Tahrir Al-Sham recent actions, and an assessment of the immediate impact with respect to the hawala market.

On May 9, Hay’at Tahrir Al-Sham attempted to formally regulate the hawala industry in Idleb by establishing a new governing body, the General Institution for Cash Management and Customer Protection, and demanding that hawalas in northwest Syria register and pay associated fees. Hay’at Tahrir Al-Sham’s attempt was initially unsuccessful; few hawala agents in northwestern Syria accepted Hay’at Tahrir Al-Sham’s new regulations. Subsequently, Hay’at Tahrir Al-Sham waived all fees, and as a compromise, hawala agents in Idleb governorate registered with Hay’at Tahrir Al- Sham. This regulatory initiative occurred shortly after multiple large-scale fluctuations in the USD-SYP exchange rate, the consequence of a substantial cash infusion into opposition-controlled Idleb in mid-April as a part of the Foah and Kefraya evacuation negotiations. Ostensibly, Hay’at Tahrir Al-Sham’s regulations sought to stabilize the exchange rate. In reality, Hay’at Tahrir Al-Sham’s initiative is also very likely an attempt to impose formal administrative control the hawala industry, especially through small-scale hawala agents, and thereby build Hay’at Tahrir Al-Sham-affiliated governance institutions in northwestern Syria.

Despite the fact that nearly all hawala agents in Idleb have registered with Hay’at Tahrir al-Sham, registration should be viewed as something of a formality, with little operational impact. Hawala networks in Idleb wield considerable influence, as much of the region’s economy is dependent the availability of hard currency. These hawala networks are also deeply enmeshed in the social and economic fabric of northwestern syria, and are connected across borders through family and pre-existing commercial ties. Therefore, Hay’at Tahrir Al-Sham is unlikely to further consolidate control over existing hawala networks in the immediate term due to the social and economic power of hawala traders.

While hawala registration, thus far, has not caused any operational impact on hawala agents, the HAT recommends that humanitarian organizations consult with their attorneys and donors on the implications of Hay’at Tahrir Al-Sham’s actions on their use of hawala in Idlib and on any additional due diligence measures that might be necessary. Idleb Governorate: 12 June 2017

Sheikh El-Hadid Afrin Deir Jmal Kafrnaya

Jandairis Mayer Nabul Zahraa

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Turkey Andan Daret Azza Haritan Qabtan Eljabal Tilaada Maaret Elartiq Kafr Hamra Termanin Harim Anjara Dana Aleppo

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Orm Eljoz Kafrlata Najiyeh Mhambal Maar Dibsi Rami Khan Elsobol Abul Thohur Border Crossing Ehsem Maasaran Roads Balyun Qastun Bara Contested Areas Maar ShurinGhadqa Kansafra Government of Syria Karfuma Telamnas Kafr Oweid Kurdish Forces Kafr Nobol Has Jarjnaz 0 5 10 20 Eastern Deir Kilometers Armed Opposition Groups

Hawala Networks in Idleb

Hawalas are a mechanism to transfer capital through a network of agents operating internationally. Despite the presence of formal banking services, hawalas have been prevalent throughout Syria since well before the onset of the conflict; for example, in 2006 the Government of Syria formally recognized hawalas and required that hawala agents register.1 Since 2011, the prominence and reliance upon hawalas has increased, and hawalas currently operate in both Government of Syria and armed opposition-held areas. Hawala networks in opposition-held areas have typically not been required to register, while those in Government of Syria-held areas must.

Hawala networks rely on a substantial amount of trust between all actors involved in transactions. Hawalas normally function in the following way: the sender of funds approaches a hawala agent in their country and provides cash and a copy of the intended recipient’s ID. The hawala agent then sends the recipient’s ID to a hawala agent in Syria.2 The hawala agents may or may not be associated with the same company, but would normally have a preexisting relationship. With ID on hand for verification, the recipient in Syria approaches the pre-identified hawala agent and receives cash, minus a transaction fee. Both hawalas maintain careful records to ensure accuracy regarding credit and debits between each hawala agent in the process.3

1. Prior to the Syrian conflict, hawalas were used primarily to allow migrant workers to send remittances home to their families. 2. Fees, typically a percentage of the transferred cash, are either added to the initial cash sum, or subtracted from the distributed sum, depending on a mutual arrangement between the sender and recipient. 3. Although no physical cash has been traded, each agent balances their books in one of two ways: by directing the same amount cash transfers back to the sending agency, or having a third party intermediary either deliver cash across borders or through banking systems via wire transfers to the receiving agent’s account in a third country. Typically, this takes place as each hawala party’s cash reserves begin to shrink substantially, and is not necessarily on a set schedule.

MERCY CORPS Situation Report: Hawala Registration in Idleb Governorate A 2 Outside Syria Inside Syria

Pre-existing Relationship Sender 1 Recipient 1

$ $ $* Transaction 1 $* Sending Hawala Recipient Agent Pre-existing Relationship Hawala

$* $* $ Transaction 2 $ Reconciliation of Books

Recipient 2 Sender 2 Pre-existing Relationship

$* Non-Cash based transaction $ Physical-Cash based transaction Pre-existing Relationship

Northwestern Syria is an almost entirely cash-based economy and is heavily reliant on cross-border hawala networks in the absence of a functioning banking system. While hawala networks have local branches throughout the governorate, the central point of almost all hawala networks is the town of Sarmada, located in Dana subdistrict, due to Sarmada’s proximity to the Turkish-Syrian border; Sarmada benefits from cross-border trading and smuggling activities, and thus there are large amounts of accessible cash reserves for hawala agents. The reputation and credibility of a hawala agency depends on a number of factors, to include the existence of a headquarters or a branch office in Sarmada, as well as cross-border family and commercial connections.

Broadly speaking, there are three categories of hawalas in northwestern Syria, based largely on the amount of accessible capital, which in turn determines their function. Small-scale hawala agents typically control approximately 20-30,000 USD; these agents typically act as currency exchanges and deal in small personal remittances. There are approximately thirty small-scale hawala agents in Idleb. Medium-scale hawala agents and large-scale hawala agents serve a similar purpose and differ only in scale of transactions. Medium-scale deal in sums between 100- 300,000 USD, and there are approximately twenty medium hawala agencies in Idleb. Large-scale hawala agents deal in sums of one million USD or more, and there exist approximately four large-scale hawals in Idleb. Medium- and large-scale hawala agents are typically used for commercial trade, donor-supported NGO activities, and other non-humanitarian activities.

Due to the vital importance of the medium and large-scale hawala agencies to the economy in Idleb, these agencies generally exist outside of the influence of many of the key political and military actors in northwestern Syria. This is largely due to the their intricate cross-border networks, their affiliation with prominent families in Idleb, and their vital economic role in Idleb. Thus, armed opposition groups in Idleb have not had the capacity to enforce oversight over medium and large-scale hawala agents; Hay’at Tahrir al-Sham’s recent attempt to implement registration and fee requirements is thus the first large-scale attempt to register hawala networks under any governance body in Idleb.

MERCY CORPS Situation Report: Hawala Registration in Idleb Governorate A 3 Hay’at Tahrir Al-Sham Attempt at Centralization

On May 9, Hay’at Tahrir Al-Sham attempted to formally centralize hawala networks in Idleb by establishing a new ‘public’ body, called the General Institution for Cash Management and Consumer Protection. This newly founded institution’s mandate is to “administer and supervise the currency exchange market and financial transfers” in areas in Idleb under Hay’at Tahrir Al-Sham control. Subsequently, on May 11, Hay’at Tahrir Al-Sham announced three requirements for hawala agents: first, registration with the General Institution for Cash Management and Consumer Protection, second, the payment of an initial registration fee of $10,000, and a monthly renewal fee of $250 per month, and third, closer monitoring of hawala agents by Hay’at Tahrir Al-Sham. On May 13, Hay’at Tahrir Al-Sham issued a notice giving all hawala agents until May 20 to register with the new institution, stating that any hawalas that did not register would be “in violation of the law of the General Institution for Currency Administration and Consumer Protection, and would be held accountable.”

Hawala agents, especially the medium and large-scale agents, largely balked at Hay’at Tahrir Al-Sham’s registration requirements and stipulations; none of the medium or large-scale hawala agents as well as the vast majority of smaller hawala agents registered or paid any fees. Reportedly three small-scale hawala agents did register with Hay’at Tahrir Al-Sham’s institution, and all three accepted a loan offered by Hay’at Tahrir Al-Sham, totalling SYP 10 million each, allegedly to be paid back within two months. This loan effectively put the three small-scale hawala agents under the de-facto aegis of Hay’at Tahrir Al-Sham and also drastically increased their size of their capital and capacity.

As Hay’at Tahrir Al-Sham was unable to enforce their newly declared hawala requirements among the majority of the hawalas in northwestern Syria, fee payments were subsequently waived. Following the waiver of fees, by May 20 all hawala agencies in Idleb provisionally registered with the Institution for Currency Administration and Consumer Protection, an action viewed locally as a political compromise with little operational impact. Despite registering, Hay’at Tahrir Al-Sham reportedly does not have the ability or the capacity to exert any oversight over the medium and large-scale hawala agents, and the registration, in its current form, is reported to be a mere formality. Beyond registering hawala agents in Idleb, Hay’at Tahrir Al-Sham has thus far not taken any further steps formalizing their control over the hawala market, and the registration process has not impacted hawala operations, as confirmed by local customers who have not reported any changes. Notably, the hawala agents in Idleb have reportedly begun to communicate through a joint WhatsApp group, and are attempting to coordinate their operations and mediate their disputes as a united body. Context

There are three potential reasons why Hay’at Tahrir Al-Sham has to attempted to regulate hawala operations in the areas they control. First, the ostensible reason according to Hay’at Tahrir Al-Sham is that high fluctuations in the exchange rate harms many traders and local businessmen, and they are therefore implementing regulations to protect the Idleb-based business community. The second potential reason is that Hay’at Tahrir Al-Sham seeks to institutionalize their control over a small subset of hawalas for the purpose of guaranteeing their future ability to receive cash. The third potential reason is that Hay’at Tahrir Al-Sham seeks to broaden their governance role over economic structures within Idleb.

MERCY CORPS Situation Report: Hawala Registration in Idleb Governorate A 4 ~May 14: Reportedly, three small-scale hawala agents register with the General Institution for Cash Management and Consumer Protection; all three are given a loan by Hay’at Tahrir Al-Sham, of SYP 10 million each, allegedly to be paid back within two months.

April 14-15: Foah –Kefraya May 9: Hay’at Tahrir Al-Sham establishes Evacuation takes place. the General Institution for Cash Management and Consumer Protection. May 20: Hay’at Tahrir Al-Sham waives the registration fee due to pressure from hawala agencies; Idleb hawalas then register. USD/SYP Currency Volatility

2017 Apr May 2017

April 12-21: Payments from Qatar reportedly May 13: Hay’at Tahrir Al-Sham issues a arrived, which caused the exchange rate to notice giving all hawala agents until May 20 fluctuate. to register with the new institution.

May 11: Hay’at Tahrir Al-Sham announces three requirements for hawala agents: first, registration with the General Institution for Cash Management and Consumer Protection, second, the payment of an initial registration fee of $10,000, and a monthly renewal fee of $250 per month, and third, the ability to monitor hawala agents.

Due to recent instability of USD-SYP exchange markets in Idleb, Hay’at Tahrir Al-Sham is likely attempting to curb currency instability by regulating the financial sector. The current Hay’at Tahrir Al-Sham initiative comes shortly after the influx of several million USD from the Government of Qatar, a component of the Foah-Kefraya/Madaya- Zabdani evacuation agreement.4 These payments from Qatar reportedly arrived between April 12 and April 21, and immediately caused the exchange rate to decrease from 550 SYP/USD to 480 SYP/USD; however, in Government of Syria-held areas, the rate remained at 550 SYP/USD. Recognizing the opportunity, hawala agents, traders, and businesses began to move USD-denominated capital to Government-held areas, exchange at SYP 550, and then transfer SYP back to armed opposition-held areas in Idleb. In turn, this action caused yet another currency fluctuation, with the exchange rate rising from 480 SYP/USD to between 520-530 SYP/USD. Eventually, hawalas and other stakeholders in Sarmada, Dana, and Saraqeb expressed concerns over these fluctuations and its impact on their businesses.5 Likely in an attempt to assist these traders and provide some stability over the market, Hay’at Tahrir Al- Sham imposed its regulations.

Hay’at Tahrir Al-Sham may also be attempting to exert direct control over the hawala industry, especially through smaller hawala agents. By providing a 10 million SYP loan to three small-scale hawalas, Hay’at Tahrir Al-Sham may be seeking become an actor within the hawala industry by controlling, and subsequently expanding, select small- scale hawala agents. Additionally, Hay’at Tahrir Al-Sham has previously had relatively close relationships with several small, medium and large-scale hawala agents; allegedly, several hawala agencies receive security from Hay’at Tahrir Al-Sham personnel or have social ties or family ties to Hay’at Tahrir Al-Sham. However, despite these relationships, the hawala industry in Idleb has remained relatively independent and is deeply enmeshed within social and economic structures in northwestern Syria due to family connections, cross border relationships, and ties to Sarmada. Therefore, Hay’at Tahrir Al-Sham’s attempt to enter the hawala industry is likely to be extremely difficult, and will likely be limited to providing loans to small-scale hawala agents.

4. Reportedly, the Government of Qatar sent 1.5 million USD to Hay’at Tahrir Al-Sham and 1 million USD to Ahrar Al-Sham in exchange for the negotiated evacuation of Foah and Kefraya, two besieged Shiite majority villages in Idleb. 5. In a brief move to limit cross-line movement of capital, Hay’at Tahrir Al-Sham then proceeded to arrest three hawala agents attempting to take advantage of exchange rates in Government-held areas.

MERCY CORPS Situation Report: Hawala Registration in Idleb Governorate A 5 The establishment of Hay’at Tahrir Al-Sham’s General Institution for Cash Management and Consumer Protections can also be seen as an opportunity to expand governance structures within Idleb Governorate. By regulating hawalas, Hay’at Tahrir Al-Sham is likely attempting to expand their scope of control over Idleb’s economy, and create new public institutions to add to their already considerable control over many governance structures. Hay’at Tahrir Al-Sham, at times in association with Jaish Al-Fatah, has previously established numerous governance institutions throughout Idleb, such as the Hay’at Tahrir Al-Sham-affiliated Civil Administration of Services office. However, Hay’at Tahrir Al-Sham’s lack of experience, capacity, and competence in the financial sector will likely hinder their ability to adequately regulate hawala networks; this is especially true for oversight of medium and large-scale hawala agents. Operational Impact

The Hay’at Tahrir Al-Sham intervention in hawala networks, and the potential for future influence, has deep implications for humanitarian organizations operating in northwest Syria. As noted, while all of the hawalas in northwest Syria have registered with the Hay’at Tahrir Al-Sham General Institution for Currency Administration and Consumer Protection, this is not likely to affect their operations or character. The only agencies at present that could be considered more closely ‘affiliated’ with Hay’at Tahrir Al-Sham are those three small-scale hawalas which took loans.6

The largest potential concern is the use of smaller-scale hawala agencies. Small hawalas (those who typically have 20-30,000 USD in capital) are much more susceptible to Hay’at Tahrir Al-Sham influence and are also much more likely to accept conditional loans from Hay’at Tahrir Al-Sham to expand their business. Large-scale hawalas are more capable of resisting Hay’at Tahrir Al-Sham regulations and have less need for additional capital. Therefore, large-scale hawalas may pose less compliance risk for INGO transactions.

It is also important to note that due to the nature of hawala networks, the hawala agency which receives funds is not necessarily the agency which distributes funds inside Syria.7 We recommend that INGOs take this into account when conducting their due diligence on the hawalas they use and consider increasing their understanding of the local hawalas that might be used by their international hawala.

6. As noted, several hawala agencies receive security from Hay’at Tahrir Al-Sham personnel, and have social linkages to Hay’at Tahrir Al-Sham members. However, the degree to which these hawalas are influenced by Hay’at Tahrir Al-Sham is debatable. This only further highlights the need for greater vetting procedures. 7. At the very least, the agency may have two different names in Syria and abroad.

MERCY CORPS Situation Report: Hawala Registration in Idleb Governorate A 6 CONTACT PETER LUSKIN Humanitarian Access Team [email protected]

Contributing information sources to this document include public and non­public humanitarian information provided by local partners, UN Specialized Agencies, INGOs, non­state actors, and sources on the ground. The content is compiled by Mercy Corps, is by no means exhaustive, and does not reflect Mercy Corps’ position on the aforementioned subjects. The provided information, assessment, and analysis are designated for humanitarian purposes only. Mercy Corps and its Humanitarian Access Team will continue to closely monitor the evolving situation on the ground and inform accordingly.

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MERCY CORPS Situation Report: Hawala Registration in Idleb Governorate A 7