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Informal Value Transfer Systems, Terrorism and Money Laundering

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Informal Value Transfer Systems, Terrorism and Money Laundering The author(s) shown below used Federal funds provided by the U.S. Department of Justice and prepared the following final report: Document Title: Informal Value Transfer Systems, Terrorism and Money Laundering Author(s): Nikos Passas Document No.: 208301 Date Received: January 2005 Award Number: 2002-IJ-CX-0001 This report has not been published by the U.S. Department of Justice. To provide better customer service, NCJRS has made this Federally- funded grant final report available electronically in addition to traditional paper copies. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas INFORMAL VALUE TRANSFER SYSTEMS, TERRORISM AND MONEY LAUNDERING A REPORT TO THE NATIONAL INSTITUTE OF JUSTICE Nikos Passas Northeastern University November 2003 Grant number 2002-IJ-CX-0001 1 This document is a research report submitted to the U.S. Department of Justice. This report has not been published by the Department. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas TABLE OF CONTENTS Foreword 4 Summary of Significant Results and Policy Implications 6 Introduction 11 Definitions 13 Methods 18 A General Overview: Different Types of IVTS 22 IFTS 25 IVTM 26 Background and Methods of Operation Discovered or Suspected 29 Physical Transportation – Courier Service 29 In-kind Payments 35 Hawala and Hundi 36 Terms Used in Hawala Networks 39 Hawala Mechanics 40 The Settlement Process 46 How do Hawaladars make profit? 56 Documentation Kept 60 Law Enforcement Challenges Stemming from the Nature of Hawala Operations 65 Lack of Record Keeping and Potential Difficulties In Deciphering Records 67 Too Many Records 68 Mixing of Various Businesses 69 Problems Associated with the Context of Hawala Operations 72 Linguistic Issues 72 Cultural Differences 72 “Benami” Accounts 73 International Coordination and Cooperation 74 Difficulty of Policy Assessments 75 International Legal and Administrative Asymmetries 75 Indicators of Use and Abuse 79 Indicators of IFTS Activity 79 2 This document is a research report submitted to the U.S. Department of Justice. This report has not been published by the Department. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas Indicators of Criminal Abuse 79 The Nexus with Serious Crime and Terrorism 86 Policy Implications 90 Conclusion 100 References 103 Appendix: Outline of Thirty Cases 110 3 This document is a research report submitted to the U.S. Department of Justice. This report has not been published by the Department. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas FOREWORD Before the terrorist attacks of September 11, 2001, the Financial Crimes Enforcement Network (FinCEN) was interested in conducting a study into the risk posed to this country by informal methods of money transfers. I was contacted by the Office of Strategic Analysis, and we had preliminary discussions about the project. Because the terrorists were from countries in which informal payment methods are prevalent the project took on a new urgency, particularly as the US Congress showed a strong interest in hawala. So, the current project was initiated in October 2001 with the objective of establishing the facts on these methods, the use (actual or potential) by legitimate clients as well as terrorists and other criminal actors, the modus operandi observed and anticipated in the near future, and concluding with concrete recommendations for law enforcement agencies and policy/law makers. As principal investigator, I underwent a background investigation, which was completed towards the end of January 2002. This delayed, by a few months, access to law-enforcement agencies and sensitive data, but it eventually enabled the interaction with prosecutors and investigators working on active cases. This led to a mutual assistance process, whereby I assisted in interpreting events and transactions, while obtaining valuable insights on current cases and possibly illegal operations. I was also given access to Suspicious Activity Reports (SARs), which I reviewed in order to ferret out instances which merit further investigation by law enforcement around the country. In the meantime, a partnership was established between FinCEN and the National Institute of Justice (NIJ), allowing for considerable expansion of this study’s scope by incorporating data from other countries. This resulted in a substantial amount of valuable information from the UK, Pakistan, India, Afghanistan, the UAE, Somalia, Yemen, Netherlands, Greece, Italy, Germany, Australia and elsewhere as well as a spectacular increase in international contacts offering to assist in the project. While this embarrassment of riches is welcome, it has caused a time- and financial-resource strain because we had to decide what avenues to pursue and which ones to leave for another day. 4 This document is a research report submitted to the U.S. Department of Justice. This report has not been published by the Department. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas Because of the mutation of the initial study into a FinCEN-NIJ joint project and the late start of the NIJ funding (end of May 2002), it was agreed that the final report would be a joint publication by the two departments (Treasury and Justice) when the research for the NIJ part is completed (end of August 2003). Another development during the course of this study was the creation within FinCEN of a new unit, the Non-Traditional Methodologies Section. I was immediately contacted by the new team, to coordinate our efforts and integrate approaches. This process has been highly successful, and I would like to thank particularly Michael Rosenberg (head of the unit) and Sam Meale (Senior Adviser), along with Kevin Bleckley and Robert Long, for their extraordinary contributions, support and collegiality. Together, we established a large informational infrastructure that continues to produce waves of significant case materials and other information from around the country. I participated in the team’s outreach program with trips to Washington, DC, New York City and Chicago, making further contacts and opening up new research horizons. I assisted in the interpretation of evidence and prosecutorial efforts in several cases, while I prepared and presented several seminars with US agencies and representatives of foreign Financial Intelligence Units (FIUs). Further, I also worked very closely with FinCEN/NTMS and helped produce a report to the US Congress on “Hawala and Related Informal Value Transfer Systems 5 This document is a research report submitted to the U.S. Department of Justice. This report has not been published by the Department. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas Vulnerabilities, Law Enforcement and Regulatory Challenges, and Recommendations’, as mandated by the Patriot Act 2001 (the official title is “Report to Congress in Accordance with Section 359 of the USA Patriot Act”: http://www.fincen.gov/hawalarptfinal11222002.pdf). There are too many interviewees to name here and thank for their valuable assistance, openness and time they made to share their views and knowledge both in the US and in many other countries. NIJ rules do not allow the naming of interviewees, but they all know how grateful I am. The project benefited from the hard work of several research assistants, particularly Cynthia Medina, Dr. Hildrun Passas, Dr. Divya Sharma, Janelle Tufts and Jenny Young. NIJ’s Lois Mock has been a wonderful and generous supervisor of this project. I would like to express my deep appreciation for her dedicated efforts, the time she has made and warm support. In addition to the amazing support provided by FinCEN and its Non-Traditional Methodologies Section, my research has been supported by assistants and colleagues coming from India, Pakistan, China, Puerto Rico, Germany, Greece, Russia, Canada and the USA, who also drew on their personal and direct experiences on IVTS. Finally, I received from NIJ a supplementary amount of $20,000 to expand the scope of the present study and look into trade-based value transfers and misconduct using data from the US Customs and Border Protection and a Washington, D.C. law firm. This part of the research is continuing with new funding from NIJ. The main focus is on precious metals and stones, tobacco and alcohol. 6 This document is a research report submitted to the U.S. Department of Justice. This report has not been published by the Department. Opinions or points of view expressed are those of the author(s) and do not necessarily reflect the official position or policies of the U.S. Department of Justice. IVTS Report Nikos Passas SUMMARY OF SIGNIFICANT RESULTS AND POLICY IMPLICATIONS Although hawala, as a method of informal value transfer, was the initial point of interest after 9/11,
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