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

Saturday October 19 2013

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.

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.

READ: ‘Disaster’: Barclays UK pulls out of remittance business

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.

READ: Uganda finally passes anti-money laundering Bill in sync with partners

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.

Dishon Kirima, the principal consultant of Compliance Solutions, an anti-money laundering solutions company, said lack of technical manpower to enforce the regulations is one of the challenges facing central banks in the region.

“Coupled with laxity in enforcing the law by enforcement officers and regulators, largely due to entrenched interests and corruption, these factors have complicated the security situation and fanned money laundering and terrorism financing,” said Mr Kirima.

“Regulators have also not invested appropriately in understanding the scope of money laundering and terrorism financing, and therefore are short of an appropriate strategy to combat the vices.

“The Financial Reporting Centre (FRC) whose mandate it is to ensure that the flow of illegally acquired funds or those used to fund terrorism is stemmed, should be equipped with the necessary expertise, resources and staff to have the capability to execute their mandate,” said Mr Kirima.


Aden Ali, who used to work at a hawala business in Eastleigh, said an average transaction in East Africa is between $600 and $700. Most of the money is transferred from the US and Britain, although transfers from Turkey and other Middle Eastern countries are increasing.

This is partly because of the tightening of anti-money laundering regulations in the US and Europe.

Although hawala was banned in the US in 2001, transfers from there, especially on lower value transactions like $500, still happen. The sender pays a transaction fee of a maximum of five per cent  of the amount being sent.

According to Mr Ali, majority of the Somalia Diaspora and those in Kenya use the money transfer system.

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.

“It is popular because of its efficiency and informality. But this is a disadvantage when criminals take advantage of the system,” Mr Ali said.

Kenya’s FRC, the financial intelligence unit whose objective is to identify proceeds from crime and combat money laundering, did not comment on measures being taken to identify illegal transfers through hawala.

FRC’s interim director Jackson Kitili referred The EastAfrican to the Central Bank of Kenya’s bank supervision department, or the national payments division.

The National Payment Division responded through the bank’s communication unit saying that is difficult to know how much money has been transacted through hawala because of its informal structure based on a large network of brokers who operate outside the traditional banking, finance and remittance channels.

“In a bid to reduce informality in money remittance, CBK has been engaged in a number of initiatives, including the recent issuance of the International Money Remittance Regulations, 2013. These regulations provide for the mitigation of risk associated with money remittance,” said the bank in the statement.

But since the hawala operators do not comply with the rules by the Central Bank, the country’s financial and security systems are exposed to manipulation by criminals.

Rules and regulations

The regulations require that a money remittance operator comply with the Proceeds of Crime and Anti-Money Laundering Act, includes the principle of “know your customer.”

The regulations require the CBK to inspect the books of accounts and other documents of a money remittance operator at any time, yet there are no records to inspect.

CBK requires operators to maintain a minimum core capital of not less than Ksh10 million ($117,650) before the commencement of operations and increase the core capital to twice that amount by December 31, 2014.

The bank also requires that a money remittance operator shall not allow or process a transaction that is or appears to have been deliberately split into small amounts equivalent to $10,000 or below, to avoid reporting to the FRC as provided under the Act.

When the regulations were released in April, John Wanyela, the chairman of the FRC, said the intention of the Act was to control unlicensed and informal services, and to obtain information on who is making the transaction and how much money is being transferred.

It remains unclear why the the crackdown on the hawala system is yet to start in the region.

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Hawala is being closed down in Britain. Last month, Barclays Bank UK extended the deadline to close accounts of at least 250 money transfer companies in the UK to October 16, over fears that the funds could end up in the hands of criminals.

But lobbyists, including the British aid organisation Oxfam, said the bank’s decision to close the accounts of cash transfer companies in the UK will hurt families in East Africa, particularly in Somalia, which relies on its diaspora remittances.

They said the system is also used by UN agencies and non-governmental organisations in Somalia, Kenya, Djibouti and Ethiopia to finance their operations, including paying local staff.

The US government banned hawala in 2001, and last year British bank HSBC had to make a $1.9 billion settlement over money-laundering controls. The bank denied the charges that it was running hawala operations.

It is estimated that over $500 million is sent annually from the UK through hawala. A recent study shows that 75 per cent of recipients use the money to buy essentials such as food and medicine.

One of the biggest hawala global operators with presence in Kenya, Dahabshiil, had not responded to inquiries regarding how it plans to comply with the new CBK regulations, by the time of going to press.

The company’s chief executive officer, Abdirashid Duale, while visiting Nairobi last month, said the company is ready to reform its systems to comply with Barclays Bank’s regulations.

“We’ve never had a problem. We’re fully licensed by the UK government; [Barclays] were happy with our system, and we’ve had a good relationship. Now Barclays has changed their eligibility criteria, but they haven’t shared with us what those criteria are,” Duale told The EastAfrican.

But on its website, Dahabshiil says it has developed “a comprehensive compliance and anti-money laundering programme,” that is used throughout its network to ensure full compliance with all relevant rules and regulations.

“We recognise the importance of complying with all anti-money laundering laws and combating the financing of terrorism. All our agents are required to implement and maintain the comprehensive anti-money laundering processes laid out in our AML manual,” states the website.