The United States has been going after Islamic terrorist fund raising and money transfer activities with increasing effectiveness since the 1990s. The latest breakthrough was exposing Islamic terrorist use of social media and cryptocurrency (bitcoin) to solicit and move money around. The American investigators hacked into an Islamic terrorist charity website and for a month just collected information on who was donating and how they were doing it. Using those leads, the investigators used blockchain analysis software to reveal those banks, businesses and cryptocurrency exchanges that were handling a lot of terrorist money. This led to the seizure of over two million dollars in cryptocurrency and identifying major operators in this business. One money transfer firm in Turkey was found to have moved over $80 million for Islamic terrorists. The most active terror groups using were al Qaeda, ISIL (Islamic State in Iraq and the Levant) and Hamas (in that order). These thee organizations and their money managers are now scrambling to rebuild their operations and develop ways to avoid detection.
With operations like this, the U.S. continues to make life difficult for terrorist bankers, accountants and fund raisers. This is largely because of two critical advantages. The main one is its pivotal role in the world banking system. American investigators can quickly track down and disrupt Islamic terrorist attempts to move money through the international banking system. The Islamic terrorists responded by relying more on informal systems, like hawala. But these systems cannot handle the large sums of money terror groups like ISIL had amassed between 2014 and 2017. As ISIL lost its territory in Iraq and Syria between 2016-17, leaders of the terror group concentrated on moving as much of their assets, especially cash stolen from banks and businesses, to safer places. Much of that money was lost via embezzlement or physically destroyed by airstrikes and other forms of combat. Several hundred million dollars’ worth survived and is now used to finance ISIL operations worldwide. Much of the cash was hidden by using it to buy all or part of legitimate businesses in countries where that sort of thing was less likely to be discovered and seized by counter-terrorism operations. Nations with a large Moslem population and a culture of corruption, like Turkey, Iraq and Iran, are popular for this. Cash can be moved around using hawala (a traditional and informal banking network) when you don’t have a legitimate business reason for money.
The main problem with all this informal banking is that it is expensive. The higher the risk of losses to law enforcement, gangsters or corrupt government officials, the higher the commissions charged to move or park ISIL cash. Think of the ISIL cash hoard as a large iceberg that moved into warmer waters after ISIL lost its territory and ability to raise more cash. While investments in legitimate businesses generate some profit, the ISIL assets are, overall, shrinking because of constant counter-terror operations.
The hawala system is not considered a vulnerability and has been around for a long time. Hawala is the Arab version of the South Asian hundi system that was developed thousands of years ago to facilitate long-range trade between South Asia and the Middle East (via the Indian Ocean) and overland via the silk road (with China and Central Asia). Hawala works because there are trusted (by each other) Hawala brokers at each end of the transaction. Commissions vary from under one percent using modern communications to ten percent or more for large amounts of dangerous, as in Islamic terrorist, cash. Hawalas currently moves several hundred billion dollars’ worth of cash each year for legitimate reasons such as business transactions and expatriate workers sending money back home. Someone sending money to another country must find a hawala broker with partners in the other country. The sender gives the local hawala broker an amount of cash, minus a commission, which usually covers delivering the money in another currency at the other end. The sender receives a secret code that is then sent to the person to receive the money, who then goes to the local hawala broker and, in return for the secret code, receives the money. Hawala dealers settle (balance) their accounts by either transporting cash or, more frequently, by using the surplus at one end to buy local goods for export to the hawala broker the money is owed to. Because of this hawala brokers are often partners with import/export businesses.
Because hawala networks keep minimal records their services are often used by gangsters (and Islamic terrorists). This type of business is riskier and, to account for potential losses, higher fees are charged. For remittances, (of expatriate workers to family back home) hawala is often cheaper and faster than legitimate bank transfer systems. That is because these remittances are generally small amounts sent on a regular basis. But criminal organizations like drugs gangs and ISIL want to move large quantities of cash, often in a hurry. Many hawala networks can’t handle it but the more enterprising and fearless hawala brokers will gear up to do it and get rich or get broke, killed or imprisoned in the process.
Whenever criminals or Islamic terrorists gain control over a lot of territory, as in the religious dictatorship in Iran or the drug gangs in Afghanistan, Southeast Asia and South America, hawala brokers are welcome and protected. Because of the suitability of hawala being used for illegal transactions, hawala has been outlawed in many parts of the world, especially India and Pakistan. Hawala still operates in those areas, but the fees are higher. In the West, hawala has had a hard time dealing with modern police methods which now include a lot of pattern analysis of legitimate financial transactions and overall economic activity that has proved successful at detecting the large-scale hawala networks catering to criminal organizations.
The Western police investigation methods have also made it more difficult to use Islamic charities as part of international cash transfer networks. These charities have a legitimate reason for transferring cash to distant areas and sometimes hawala is used because it is the safest and most certain method for getting cash to remote areas. A number of large (and now defunct) Islamic charities existed mainly to support Islamic terrorist groups and other criminal activities. While the hawala brokers are resourceful, most of them see their work as a long-term career, not a high-risk get rich scheme. Financial investigators have learned to count their success by the growing broker fees hawala networks charge high-risk clients (like ISIL). Investigators have noted fees often going north of ten percent for ISIL-related hawala transactions. ISIL pays because they have no choice if they want to move money around, and they do because currently ISIL exists largely as a financier for promising ISIL franchises worldwide.