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12 May 2016updated 05 Oct 2023 8:50am

Could a crackdown on corruption among the super-rich risk hurting the world’s poorest?

In tackling tax havens, we must not inadvertently harm hawalas.

By India Bourke

The streets of Gaziantep in Turkey are filled with gold stores. Not because the city is rich, but because many of the Syrian refugees who inhabit it are increasingly poor – and gold jewellery is a handy way to keep wealth close in unstable times.

Yet ornate necklaces are not the only thing on offer in such outlets. In one shop’s spartan backroom sits the immaculately dressed owner, an ex-civil servant, and his brother, a builder. Both fled Aleppo at the beginning of the war and now help other exiles send money back to relatives still stranded in the war-torn state.

Through an arrangement known as hawala, they take cash from someone based in Turkey – today a young man sending his sister money for clothes – then notify their counterparts inside Syria to release the equivalent amount at the other end. The hawala operators then extract a small commission (often far undercutting competitors like Western Union), and either find a client wanting to send a matching amount in the opposite direction, or settle up between themselves at a later date.

It is an ancient, trust-based system of money transfer that allows cash to flow across borders, traditionally without trace and often outside the law. These latter qualities mean hawala transfers have been linked to criminal activity across the world, from Afghanistan’s drug trade, to money laundering by IS, to human trafficking.

But just as not all money flowing through offshore accounts is corrupt, so the vast majority of those using hawalas do so for entirely legitimate ends. Known as “the working-man’s bitcoin”, the system’s cheap, efficient and globally accessible service makes it an invaluable lifeline to those in places too poor or too unstable to access formal bank accounts. Much of the world’s $582bn remittance business flows through their channels, while NGOs depend upon hawalas to send relief to high-risk regions when global banks refuse to do so.

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Thus, in a week when the world is calling for greater financial transparency, the hawala trade begs the following question: how can transparency be improved without hurting those least able to pay its price?

David Cameron’s focus at today’s international anti-corruption summit in London will be on combating financial secrecy that too often provides cover for corrupt activities. “We will expose corruption, so there is nowhere for the corrupt to hide,” Cameron wrote in the Guardian.

Public outcry over the Panama Papers leak, combined with the goodwill the financial crisis generated towards regulatory cooperation, offers a unique opportunity to introduce banking reform at the highest levels – from demands for public registers of beneficial ownership, to the greater supervision of offshore companies and the prosecution of firms that fail to prevent criminal activity within them.

But it’s not just the world’s super-rich that such a push for change will impact.

Under pressure to stem the flow of funds to terrorists, states such as Turkey and the United Arab Emirates, are already requiring hawalas to register with mainstream banks. The banks in turn impose tight bureaucratic rules. And while the requirements to declare cash deposits over a certain sum, or provide copies of the client’s official ID, are all laudable in principle, in practice the costs of administration are passed on to those who can least afford to pay.

As Duncan McCann from the New Economics Foundation (NEF), a British think tank, explains: “Once you add a layer of regulation you risk reducing the amount getting to those in need. For example, if you remit £50 from the UK to Somalia, and instead of charging £5 you charge £10 to cover the extra paperwork costs, that’s a huge impact on the people you’re remitting to.

Many smaller hawalas are thus finding themselves out of business or shutting down. At the jewellery shop in Gaziantep, the owner is nervous of being identified by the authorities. Even though he only handles transfers of under 1,000 Turkish Lira, he still fears being fined for not having official registration: “If the government knew about us they would shut us down, as they’ve already done to others.”

It’s a situation that has led the Governor of the Bank of England, Mark Carney, to warn of the “financial abandonment” of whole regions. This is something for world leaders to watch out for as they call for a more transparent system of international finance.

Yet reform is not all bad news for hawalas. Some hope that calls to introduce public registers of beneficial ownership will push the responsibility for transparency directly onto companies themselves. Stephen Carter of Global Witness says such measures, “won’t directly effect hawalas” but should still help “tackle the wider infrastructure that enables corruption”.

Others, such as McCann, are encouraged by the rise of new, technology-based innovations that are translating much of hawalas’ benefits into modern banking. Transferwise is an online money transfer service that, like hawalas, slashes costs by matching transfers between countries and cutting out the hefty banking infrastructure, while a company called Ripple, McCann believes, could be a “hawala for the digital age”.

Transparent international finance – be that through tax havens or hawalas alike – is ultimately beneficial for all. Studies show that the more institutions and leaders practise financial openness and honesty, the more general populations do so too.

But, along the way, more must be done to ensure it’s not the world’s neediest who take the hit. “We just want to help families either move money from here, or send it from Syria, as cheaply as we can,” says the jewellery store owner. “We just want to serve our people who need us.”

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