Doctor of Philosophy
School of Law
Siddiqui, Shumaila Kafeel, The Regulation of Hawala and other IVTS in Post 9/11Years: A Case Study of Pakistan’s Hawala Regulation 2002, Doctor of Philosophy thesis, School of Law, University of Wollongong, 2014. http://ro.uow.edu.au/theses/4198
In 2002, the State Bank of Pakistan (SBP) created Money Exchange Companies with the aim to create a well-documented, corporatized foreign exchange market in order to eliminate the informal, undocumented and illegal hawala. This has not happened. The purpose of this research was to investigate why the 2002 reforms have failed to eliminate hawala in Pakistan. It is a descriptive case study analysis, which has relied on both primary and secondary data sources. The secondary data comprised the available literature and other published sources while primary research data was gathered by conducting semi-structured interviews with the various hawala market stakeholders so as to describe the ‘on the ground’ implementation of the reforms and explain the operational dynamics of the market in the post reform years. It was found that despite the 2002 reforms two types of hawala markets are functioning in Pakistan. One comprises exchange companies, their dealers and agents and the other is ‘pure hawala’ in Pakistan-Afghanistan border cities. It was also found that the formally regulated exchange companies and the unregulated hawala market are closely integrated, having domestic and international networks. Moreover, the project that the SBP initiated to counter hawala’s inherent incentive is mired in scandal and corruption in which billions have allegedly been doled out from the public exchequer as a result of alleged collusion between commercial banks and officials of the SBP. The 2002 reforms were fundamentally ill-conceived and introduced without taking steps that were required to mitigate the impact of those factors that directly challenge hawala regulation in Pakistan. These include the existence of a Frontier Crimes Regulation that excluded the Federally Administered Tribal Areas, the shadow economy and its criminal elements, rampant tax evasion, ineffective and overriding legislation and corruption and tax evasion by the Pakistani elite. Failure to address these factors led to the failure of the 2002 reforms.
Funds which are generated through tax evasion and corruption constitute a large part of Pakistan’s shadow economy and are subsequently siphoned off through the use of hawala. The Pakistani ruling governments are unwilling to take action to introduce fundamental taxation reforms as the majority of the elected politicians do not themselves pay income tax. An active role by the international donors who could have used their substantial influence to push the Pakistani ruling elite for essential reforms has remained elusive.
The integration of hawala in today’s globalized world is due to disparities and irregularities in international trade as well as repressive and restrictive government policies. Regulations that attempt to control hawala with the reporting and compliance standards applicable to banking and other formal structures could not produce successful results in mitigating the risks of abuse of the informal transfer systems as long as policy prescriptions do not consider the salient features of hawala-type informal systems that make them a preferable choice in the different geographical, economic and cultural realities. In Pakistan’s case, the ‘dual function’ of hawala — channelling development finance to the poor and the underserved as well as facilitating illicit financial flows — is the critical policy factor that needs to be considered for effective regulation of these informal transfer systems. Whilst Pakistan’s peculiar geo-political situation and administrative and institutional issues require a multi-track hawala regulatory strategy, the weak and failing Pakistani state lacks the capacity to undertake multifarious regulatory responsibilities. The SBP therefore, needs to review its hawala regulatory strategy from that of one which views hawala as completely outlawed to a more inclusive one by bringing the hawaladars into the legal network by offering them suitable incentives