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Austria and Europol call for crackdown on "under the radar" informal money transfer services
13.9.17
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The EU and its Member States should withdraw 500 and 200 euro banknotes from circulation and tightly regulate the informal hawala international money transfer system in order to help fight terrorism, irregular migration and money laundering, according to a note sent by Austria and Europol to the Council of the EU's internal security committee on 8 September.

See: NOTE from: Austrian delegation and Europol: The role of criminal “Hawala” and other similar service providers (HOSSPs) in illegal immigration, money laundering and terrorism financing – recommendations for changes and other initiatives (12005/17, LIMITE, 8 September 2017, pdf)

"Informal value transfer systems"

The document takes aim at the hawala system of informal money transfer that is used by many diaspora communities in the EU to send remittances.

The system works by an individual giving a sum of money to a hawaladar (broker) in one country and requesting "that the equivalent amount (usually in the currency of the receiving country) be sent to a designated recipient" in another country, a process described in detail in a UN paper from 2002 (link to pdf).

The hawaladar in the sending country will then contact a counterpart in the receiving country to arrange the details:

"At this stage of the process, a 'collection code' is agreed between the two hawaladars. The hawaladar in country A will then communicate this code to the client, who, in turn, will relay it to the designated recipient in country B. The hawaladar in country B will give the money to the recipient upon presentation of the collection code."

The UN paper explains that the system means "money is transferred between two parties living in different countries but cash does not cross borders," and "the money never enters the traditional banking system."

The Austria-Europol note puts hawala systems alongside other "informal value transfer services" (IVTS) that "include Hundi, Chinese underground banking and Black Market Peso Exchange."

These informal, trust-based systems have set alarm bells rining in Europe's law enforcement agencies, because - as the Austria-Europol note states - the networks are "frequently used by criminal groups for illegitimate remittances," but "there are no direct money flows between sender and receiver that LEAs [law enforcement agencies] can track and trace."

Describing the structure and functioning of some hawala networks that "are created to serve exclusively criminal needs" and highlighting several criminal cases across Europe involving the system, Austria and Europol call for "the practice of unregulated Hawala" to be made an "EU criminal offence".

In doing so, the note suggests a number of actions, including expanding the scope of 2016 proposals on money laundering from the European Commission (link), currently under discussion in the Council and Parliament.

The proposal foresees that "the conversion or transfer of property, knowing that such property is derived from criminal activity" should be a criminal offence, even if there has not been a "prior or simultaneous conviction for a criminal activity that generated the property."

The note suggests that the scope "could be further expanded to make it sufficient to have 'reasons to suspect' that a money laundering activity is pursued instead of the current formulation of 'knowing'" - thus putting at risk of criminal sanction those who transfer or convert money (or other property) if they have "reasons to suspect" their customer obtained it through criminal acts, even if those criminal acts have not been established by a court.

The note also demands stricter oversight of hawala and other informal transfer services, asserting that although they should be subject to the requirements of the EU's Anti-Money Laundering Directive and Payment Services Directive, "in the majority of EU Member States [they] are a 'tolerated business', lacking supervision."

Big cash, big problems

Further recommendations to combat criminal use of informal value transfer services come in the shape of proposals for limits on cash.

The note says that:

"Uniform cash transaction limits should be introduced across the EU in order to restrict the use of cash. A threshold should be introduced, e.g. 10,000 EUR. This would place an upper limit on the use of cash as payment settlement instrument."

Furthermore, both 500 and 200 euro notes are "a favoured tool used by criminals to store the proceeds of illegal activities in non-financial environments" and should be withdrawn from circulation.

The need to deal with both 500 and 200 euro notes is justified by the fact that: "Following the removal of €500 banknotes from the UK wholesale banknote market, UK Law Enforcement saw criminals moving to €200 banknotes."

This shift reflects an earlier point made about hawala and other informal transfer networks - that their use by organised crime groups has increased due to "the implementation of stricter antimoney [sic] laundering regulations in mainstream financial institutions" - and highlights the ongoing game of 'whack-a-mole' that law enforcement authorities are obliged to play.

After 500 and 200 euro notes, increasingly smaller denominations will presumably be next in the firing line.

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