If you are unfamiliar with hawala banking then I recommend reading Hawala Banking And Currency Controls Part I to become familiar with the concept before reading further. If you are familiar with how hawala banking works then you will probably know that hawala transactions are not inherently wrong and should not arouse any suspicion in the mind of a moral person.
However, there may be formal reporting to government depending on the peculiar nature of some of the assets depending on applicable rules for sale and transfer. In many countries there are legal rules which may impose civil and/or criminal penalties for each one of the transactions that I have described in earlier articles because they are considered money laundering by their governments.
HOW CURRENCY CONTROLS AFFECT HAWALA BANKING
The laws and regulations of various governments regarding financial transactions across the globe cover the entire spectrum from no regulation to very strict regulations. This is not a critique or recommendation based on any particular legal framework but only the fundamental principles surrounding the issue. Therefore, consult a local attorney before engaging in any financial transactions.
Currency controls can take many forms. Probably the most common form is the restriction, limitation or prohibition of the sale, purchase or exchange of certain goods or currencies within a country or between countries. Some of these controls include reporting requirements for financial transactions, registration of Money Service Businesses, record keeping requirements when you buy gold or sell silver, and identification requirements for transactors.
The informal nature of traditional hawala banking and the private nature of the transactions allows individuals to avoid interference with their fundamental human rights by currency controls which put a limit on transactions or demand “transparency” requirements. Even so, many nations have made hawala banking subject to these laws, but the laws suffer from these immoral fundamental flaws.
The limitation, regulation or prohibition of some exchanges makes the goods or currencies like real estate in that they can no longer be freely moved from one country to the next. Things like official foreign currency exchange rates and limits to the amount of cash that can be taken into or out of a country are typical examples.
The solution to this problem, where it is not illegal to do so, is to effect the transaction using one, or a combination, of the examples in Part I. This way the transactional limitations can be lessened or even avoided completely.
Nobody likes competition and therefore many vampire squid banks through the governments have made such transactions illegal. Even in the cases shown in Part I, where there is a legitimate reason or purpose behind “avoiding” the transactional limitations, most legal systems which outlaw avoidance would find these methods to be illegal as well.
Transparency requirements are those laws like the ones found in the ironically named USA PATRIOT Act which require “know your customer” identification requirements, registration with the government to transmit money, record keeping requirements and mandatory Currency Transaction Reports and Suspicious Activity Reports. This framework was suggested by the IMF to governments around the world.
However, these laws are much like the Stamp Act of 1765. In both cases the requirement was unnecessary and used to fund activity which provided no benefit to the people taxed. The Stamp Act was quickly repealed after ardent opposition by the colonists in America. A young John Adams heard James Otis, Jr., a Boston attorney, vehemently speak out about these nefarious Writs of Assistance:
But Otis was a flame of fire! ... American Independence was then and there born. The seeds of Patriots and Heroes, to defend the non sine Diis animosus infans;- to defend the vigorous youth were then and there sown. Every man, of an immense crowded audience, appeared to me to go away as I did, ready to take arms against writs of assistance.*
Then, and there, was the first scene of the first act of opposition to the arbitrary claims of Great Britain-then and there the child Independence was born. In fifteen years, i.e. in 1776, he grew up to manhood, and declared himself free. [Annals Of The American Revolution Or A Record Of The Causes And Events, page 225]
The fundamental nature of hawala banking, an informal transaction among trusted individuals, makes all of these requirements superfluous and unnecessary for the hawaladars to operate successfully. The history of hawala banking shows that without any of the record keeping and regulation that banks are subject to, hawala banking is far more efficient, less expensive, is not subject to institutional or political risk, has been the source of vital funds for war torn and impoverished nations and is much faster than other systems of exchange. So why force people to use the Pony Express rather than the Internet?
FIGHTING CRIME: Pretending To Be Batman
The competing claims that underlie this clash are between the right to privacy and the protection of innocent people against criminal activity. The argument used to justify the regulation of the informal hawala system is that it is necessary to identify and prevent crime and terrorism. Although it is untrue based on credible and verifiable sources, we will assume it is true that terrorism and organized crime use hawala transactions as a significant source for funding. The question then becomes, how much privacy may be sacrificed to ferret out crime and terrorism?
The Stamp Act opponents relied on the English Constitution for an argument against the Stamp Act, taxation without representation. The same offenses to liberty and human rights are present with anti-hawala laws but the same constitutional argument is not necessarily applicable here. The stronger one is to look to the US constitution, the Fourth Amendment which states:
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
It cannot be more clear that in order to protect individuals from crime, before there is a search through private papers, there must be probable cause and a warrant issued to do so.
No transparency requirement as adopted in the USA PATRIOT Act or other financial regulation of hawala banking meets this critical test. Because the transactions are private, there should be probable cause and a proper warrant to search. In addition, the fundamental human right to freedom to contract gives the individuals and the hawaladars the freedom to agree not to maintain records of the individual transaction if they so choose.
The same legal argument might not be available in all countries, but the fundamental rights of privacy and freedom of contract are the same for all people.
Thus, just like Batman does not always follow the law to ferret out crime, governments think they can ignore the law and legal principles to fight crime. But unlike Batman, costumed government officials do not actually succeed in reducing crime or terrorism by these means but they do manage to parasitically draw a paycheck from the productive members of society.
Hawala banking, where legal, provides opportunities to profit for hawaladars and significant other benefits for the parties to the transactions. Currency controls and other laws passed to regulate hawala banking are not only offensive to fundamental rights of freedom of contract and a right to privacy, but short of complete totalitarian control are impossible to effectively enforce in an informal system such as hawala. The private and informal nature of hawala banking makes detection of hawaladars extremely difficult. And it is the very currency controls that incentivize individuals to use the informal hawala banking system rather than the formal institutions which are slower, more expensive, less efficient, more intrusive and less secure.