The Role of Hawala and Other Similar Service Providers in Money Laundering and Terrorist Financing

The Role of Hawala and Other Similar Service Providers in Money Laundering and Terrorist Financing

In December 2013 the Financial Action Task Force (“FATF”) published a report on the role of Hawala and other similar service providers (“HOSSPs”) in money laundering and terrorist financing. Many countries view HOSSPs as essential to unbanked countries with limited financial systems. For many of the communities within these countries without HOSSPs there would be no access to financial services. In contrast there are a large amount of law enforcement agencies who view HOSSPs “as one of the leading channels for terrorist financing and money laundering.” It is against the backdrop of these conflicting opinions that the FATF have written their report to demystify HOSSPs.

Due to the fact that HOSSPs is not a universally defined term and there are differing variations across jurisdictions the FATF clarified that for the purpose of their report HOSSPs are defined as “money transmitters, particularly with ties to specific geographic regions or ethnic communities, which arrange for transfer and receipt of funds or equivalent value and settle through trade, cash, and net settlement over a long period of time.”

The report explains that although there are some HOSSPs used by legitimate customers for reasons of geography, culture and lack of access to financial systems there are also many who use HOSSPs for illegitimate reasons. The use of HOSSPs, a cash in/cash out business, allow individuals to evade monetary controls related to currency and tax as well as transferring or concealing criminal proceeds. The report does state however, that HOSSPs can have detailed records and are not always high risk. The FATF found that HOSSPs often settle through banks who are able to notify the regulators of any suspicious activities made visible to them during this process.

The FATF highlighted the fact that although only a limited number of criminal HOSSP case studies were looked at it is clear why HOSSPs continue to pose money laundering and terrorist financing risks. The reasons included:

■  That there is a lack of supervisory will and/or resources;

■  In some cases HOSSPs allow for the settlement across multiple jurisdictions through value or cash outside of the banking system; and

■  HOSSPs use businesses that are not regulated financial institutions.

The key concern is that the lack of supervision attracts criminals and terrorist financiers. The FATF states that the international community should bring HOSSPs under a risk based anti-money laundering and counter terrorist financing regulatory and supervisory framework.

The spring edition of the DLA Piper Money Laundering Bulletin is now available. The bulletin is created by the DLA Piper Financial Services Regulatory team. Download a copy of the newsletter

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