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Despite new laws, EA still exposed to channels for transfer of illicit funds

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File photo of a man displaying bundles of notes in Somalia. The informal money transfer system hawala used primarily by the Somalis has been linked to the recent terrorist attack at Westgate mall.

File photo of a man displaying bundles of notes in Somalia. The informal money transfer system hawala used primarily by the Somalis has been linked to the recent terrorist attack at Westgate mall. 

By STEVE MBOGO Special Correspondent

Posted  Saturday, October 19   2013 at  13:32

In Summary

  • New data shows that the region is increasingly becoming home to illegal remittance channels. Any attempts by regulators to tighten rules on legal remittance channels is sending cash transfers underground, where monitoring and tracing is more difficult.
  • Ordinarily, the system operates on trust. A person sending money will go to the local hawala agent, give the name and the telephone number of the recipient and the amount to be sent. The agent then calls the receiving agent and gives instructions to pay the deposited amount to the recipient. The recipient is called and the only security measure is to verify the telephone number of the sender. The agents have their own way of settling the accounts. There are no records of the receiver or sender except their telephone numbers, and no papers are signed.
  • Although its operators remain predominantly Somalis, the system is gaining popularity among the South Sudan Diaspora, driven by the lack of adequate banking facilities in their country to facilitate receiving money from the West.

Low supervision capacity of central banks in East Africa is giving criminals leeway to transfer illicit funds through informal money transfer systems, endangering the financial system and the national security of the region.

New data shows that the region is increasingly becoming home to illegal remittance channels. Any attempts by regulators to tighten rules on legal remittance channels is sending cash transfers underground, where monitoring and tracing is more difficult.

Kenya’s anti-terrorism police unit said financing for the Westgate shopping mall attack in Nairobi last month was done through an informal money transfer popular with Somalia Diaspora known as hawala. This particular money transfer system is currently being clamped down on in Britain and the US.

Security officials and other sources who did not want to go on record because of the sensitivity of the issue said attackers started receiving money through hawala eight months ago.

Security agencies have since said the financing of the 1998 US Embassy bombings in Kenya and Tanzania, and the July 13, 2011 attacks in Mumbai, India were facilitated through hawala.

According to the United Nations High Commissioner for Refugees report released this year titled Migrant Smuggling in the Horn of Africa & Yemen UNHCR 2013, illegal migrants are often abducted in Kenya, Ethiopia, Djibouti and Yemen and their relatives forced to pay ransom through hawala.

The report reveals that in early 2012, the rates of ransom per abducted immigrant across the region were $100-$300. But by the end of last year, the rates reported by freed migrants had gone up to $600-$800. By early 2013, the rates had risen to as much as $1,000.

“The informal hawala system possesses several characteristics that account for its widespread use, including speed, convenience, versatility and potential anonymity, which makes it useful for illicit purposes as well as legitimate transactions,” notes the report released last month.

Ordinarily, the system operates on trust. A person sending money, for example, from Turkey to Nairobi, will go to the local hawala agent, give the name and the telephone number of the recipient and the amount to be sent.

The agent in Turkey calls the Nairobi agent and gives instructions to pay the deposited amount to the owner of the Kenyan number. The owner is called and the only security measure is to verify the telephone number of the sender. The agents have their own way of settling the accounts. There are no records of the receiver or sender except their telephone numbers, and no papers are signed.

Rwanda passed an anti-money laundering law in 2008, Kenya in 2009, Tanzania in 2012, and Uganda in 2013. The structures to enforce and monitor the laws, like having financial reporting centres — a global standard in anti-money laundering, are either in their infancy or are yet to be set up in the region.

In April, the Central Bank of Kenya released new regulations for hawala and other informal money transfer operators.

But investigations carried out in Eastleigh in Nairobi, the headquarters of hawala transactions in East Africa, reveal that the operators are doing booming business and break every regulation that the bank issued.

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