In part three of our new series, “The Geopolitics of Narcotics”, John Scott examines the impact of a centuries-old practice of money transfer on the global narcotics trade, and how the increasing impact of this system on western criminal activities represents part of a broader technological, cultural and legislative revolution in narcotics that law enforcement agencies may be hard pressed to counteract.

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The students of warfighting among us will be aware of the concept of the ‘Revolution in Military Affairs’; that is the emergence of new instruments that permanently and fundamentally alter the logistics, strategy and dynamics of armed struggle. In a similar way, our economists will be familiar with so-called ‘innovation rents’ and the ‘permanent technological revolution’; and our historians may never stop debating the causes and effects of the Industrial, Scientific, and Digital Revolutions. Even looking to ideology, it is revolutions, renaissances and religious reformations that are so often the starting points of effectively understanding the modern world. In every sphere of life, it seems, there come waves of technological and social development, after which the old ways seem redundant, and through which, one side always gains an advantage.

The world of narcotics is almost invariably characterised in culture and legislation as a murky and mysterious one. In reality, the state forces that operate to curtail it would do well to recognise its true nature; at its core, the criminal world of drug sales is an entirely rational and opportunistic enterprise. It is an enterprise that operates under very similar economic rules to every other field of business and recreation. And this global drug trade is undergoing its very own revolution – what might cautiously be dubbed a ‘Revolution in Psychoactive Affairs’.

Three forces are converging to radically and permanently change the narcotics/counter-narcotics landscape for the first globalised century. The first is technological: the dark web and other obfuscated communications channels are already affecting consumption trends by anonymising transactions and granting buyers a level of discernment similar to the everyday customers on Amazon or Ebay. The second force is legislative: although some governments are exercising increasingly lethal force against the illicit drug sector, others are beginning to discuss more liberal alternatives. Experiments with decriminalisation and regulation are being proposed as progressive (and tax-lucrative) paths forward, thereby affecting trafficking routes. The third revolutionary force – and it is by far the least covered – is more of a cultural one. The hawala network, which merits particular attention here, represents a qualitatively new challenge for anti-money-laundering efforts in both the criminal and terrorist spaces.

What Hawala is, And Why It Matters

The system of hawala (which in Arabic translates as something halfway between ‘transfer’ or ‘trust’) may be an intimidatingly new phenomenon for many Westerners. In fact it is a fairly simple mechanism which is precisely why it endures even after twelve hundred years of use in Arabic and Asian lands. Especially, that is, for demographics that lack direct access to global banking as we understand it. The implications it carries for law enforcement, however, are more complex.

Whereas the vast majority of Westerners with access to capital have bank accounts, and can move their own revenues to other people through traditional inter-bank transfers, hawala is a more convenient, trusted, and traditional method of finance that is employed extensively in Central Asia, the Indian subcontinent, and the Arab world. Excluding the millions of hawala users who turn to it simply out of preference, the system constitutes a financial sector for the world’s ‘unbanked’.

In essence, an ordinary hawala functions as follows. Say, an individual in Tunisia wants to transfer the equivalent of $5,000 USD to their friend in Pakistan, who does not have a bank account. The Tunisian will pay their trusted local broker – known as a ‘hawaladar’ – that amount, then communicate a unique transaction code to their Pakistani companion. Over in Pakistan, that recipient will approach their local hawaladar with the code, and will be given the money directly out of that broker’s pocket. As such, the Pakistani recipient has gained the same value that the Tunisian has yielded, but without any cash actually flowing between the two countries. A debt is now owed between the two brokers. It will be settled through a separate transaction later on, and the integral trust – often created through familial links or decades-old business relationships between brokers – will be sustained.

Fig 1.0 – Example for the Hawala banking system: Person A wants to transfer money to person B, using the services of the “hawaladars” X and M. (blue – shared code word being told, red – money transferred)

From start to finish, the hawala transaction is (most commonly) undocumented, untaxed, unobtrusive, and unseen by any international regulator. Needless to say, the majority of the annually-estimated $390bn in global hawala transactions is benign, and comprises the same regular payments to friends, family or employees that occur through HSBC, Bank of America or even Paypal. So-called ‘black hawalas’, on the other hand, easily exploit the nature of this under-scrutinised infrastructure for illicit purposes.

The system of hawala inherently involves an embedded code of conduct and a simultaneous occupation of multiple financial jurisdictions. It is therefore unsurprising that it appeals to launderers and traffickers of the world’s contraband: narcotics, weapons, fake goods, terrorism finances, and vulnerable human beings. It is in the laundering process that hawala truly stands out as the most significant future thorn in the side of law enforcement.

Conventionally, trafficking profits undergo three phases of laundering: they are injected into the regular banking network; their paper trails are manipulated by rapid and complex transfers; and they are finally re-invested, either into lucrative legitimate businesses, or back into criminal operations. Considering that hawala transfers seldom involve any formal notification or registration, and often travel between countries and cultures, their paper trails are either exhaustingly complex or simply non-existent. Furthermore, illicit funds are immediately mixed into a legitimate cash flow and become opaque far quicker than in bank-to-bank laundering.

The Geopolitics of Hawala

Hawalas have existed for over a thousand years in one form or another, but have only seriously caught the attention of Western governments since 9/11. Their abuse for the purpose of terrorist financing has been fairly well established: hawala transfers have been connected to al Shabaab militants in Somalia, the Taliban in Afghanistan, the 1998 attack in Nairobi, and the recent attacks in New York’s Times Square and Paris. Moreover, sex traffickers in West Africa and fraudsters in Eastern Europe have also been monitored employing the technique.

Specifically regarding narcotics, the importance of hawala is starting to be revealed in landmark court cases in Europe and North America. For the first time in 2015, $4.5m USD of cocaine and amphetamine profits were uncovered whilst moving from Canada to the Sinaloa cartel in Mexico, via a ring of over twenty hawaladars across the Americas and South Asia. The following year, Europol uncovered hundreds of millions of euros’ worth of drug proceeds on their way to Moroccan traffickers. (In both operations, the discovery of black hawalas was only made after drug mules had already been apprehended.)

These cases are merely the tip of the iceberg, and many more black hawalas will go unnoticed before they begin to appear on Western enforcement radars. The majority of hawaladars who are unregistered bypass every financial intelligence shield currently in place, meaning this problem will require a much greater technical – and cultural – focus.

A hawala transfer – legitimate or otherwise – is intrinsically geopolitical. It crosses borders, upholds a large segment of the global remittance system, stems from culturally specific conditions, and creates a new international power dynamic. Whether the conditions that underpin the transfer are positive (ethnic ties, tradition, identity and so on) or negative (illiteracy, mistrust of new banking, or lack of access), they will become more important for the intelligence agencies that seek to confront the global narcotics trade.

If these agencies decide to take seriously the hawala-shaped gap in their expertise, then foreign entities will suddenly find themselves in possession of new power, new responsibility, and indeed new vulnerability. From Bangladesh to Uzbekistan to Morocco, a long belt of governments may find themselves possessing valuable experience in observing hawala networks. Their financial districts, too, will come under new scrutiny; with those in the Gulf States being particularly important. Emirati banks, for example, often contribute to the hawala net settlement process, and many of the online hawala systems globally use CPU servers based there.

Those with a detailed knowledge of how hawalas operate – and how they can be monitored – may find themselves caught between the two extremes of global counter-narcotics. On the one hand, those prominent criminal operators who have already begun extensive hawala operations will wish to extend their advantage, and their competitors who wish to keep pace will need their own consultancy. On the other hand, governments all over the world will require the same information. This includes the principal actor in international drug control, the United States; governments conducting domestic repressions such as the Philippines and Mexico; and more liberal administrations exploring the regulation option, such as Canada and Portugal.

Any campaign to curtail black hawalas will inevitably come into contact with their legitimate counterparts. White hawalas are a crucial lifeline for many people, and can reflect socio-economic conditions that are themselves rooted in the international order of trade, alliances, aid and development.

Post-Revolutionary Counter-Narcotics?

Some of the conditions that underlie the continued use of hawala may fade slowly in generations to come. Cash-based economies may be phased out, regional literacy may improve, and remittance alternatives will likely arrive. Its survival after so long, however, indicates that the social and cultural traditions outweigh these, and hawala will be a permanent instrument in trafficking for as long as enforcement lags behind. With this in mind, twenty-first century counter-narcotics will be forced to adapt.

Attempting to tackle hawala as a practice in general is a quagmire. Not only would that prove culturally ignorant by damaging an essential financial service to millions of people entirely uninvolved in criminality, but it would also be strategically misdirected. Another, perhaps ambitious, option would be to compete with hawala. Private companies like Western Union could be incentivised to implement very low cost remittance alternatives, open to those without bank accounts. Phone-based banking is certainly a development opportunity for major powers like China, which is already investing massively in Sub-Saharan Africa and Central Asia.

In any case, the existence of hawala has to be acknowledged and embraced, and the onus of policing may lie on local administrators with ties to hawaladars. The persistent ethnic and cultural foundations of hawala indicate that the somewhat diminished human intelligence aspect of global counter-narcotics may undergo a renaissance. That of course brings with it fresh discussions on ethics and surveillance, which will not be simplified by another delicate ethnic dimension.

For now, the entrepreneurial flexibility of traffickers and cartels is glaringly clear, and they enjoy the strategic market advantage. Parallel to both the revolutionary dark web and the legalisation wave, hawala will likely be of fundamental importance for the geopolitical narcotics landscape of this century.

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John Scott is a Scottish security analyst with expertise in counter-narcotics and non-state groups. John has degrees in Political Science from St Andrews and Glasgow University, and recently completed a NATO Military Security course in Lithuania. He has contributed policy research for a political group in the Central African Republic, and currently focuses on organised crime analytics for Intelligence Fusion.

For an in-depth, bespoke briefing on this or any other geopolitical topic, consider Encylopedia Geopolitica’s intelligence consulting services.

Research Sources Counsulted:

The Financial Action Task Force (FATF)

United Nations Office on Drugs and Crime

Interpol General Secretariat

CSIS Prosper

EUROJUST

US Department of Justice

The Economist

Photo credit: Hawala diagram – Wutzofant // Cover image – U.S. Navy photo by Mass Communication Specialist 1st Class Matthew Bash