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.
TRANSACTIONAL
LIMITATIONS
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
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.
CONCLUSION
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.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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