AFGHANISTAN: Dirty Money in Afghanistan

Largely because of its informality and opacity, the hawala system is also at the center of Afghanistan’s troubles with money laundering. Many brokers are unlicensed, operating without oversight in violation of domestic laws and foreign exchange regulations. Making matters worse, the line between the official banks and the hawala system is blurry. Hawala brokers often keep bank accounts and use bank transfers to pay other brokers abroad, and Afghan banks have used the system to send money to the country’s remote areas. This makes it nearly impossible for the government to determine which funds sent through the hawala system are above board and which are not. Together with the hawala system’s lack of formal limits on the size of transfers, such factors have made the system appealing to Afghans seeking to shield ill-gotten gains from the state.

Those who profit from Afghanistan’s massive narcotics sector are the biggest beneficiaries. In 2015, Afghanistan’s opium economy was worth some $1.5 billion, or around seven percent of the country’s GDP. A large part of this money ends up in the hands of the Taliban and other insurgent groups: according to the United Nations, in 2015, at least ten percent of the earnings from poppy cultivation in Afghanistan’s eastern and western provinces financed such organizations. In Afghanistan’s opium-rich provinces, according to the World Bank, more than 80 percent of the proceeds generated by the drugs trade run through the hawalasystem.

Cracking down on the laundering of drug money through the hawala system is especially difficult because in many cases, the transactions involve the exchange of goods as well as cash. In northern Afghanistan, for example, traffickers, abetted by Afghan officials who are willing to look the other way, load trucks bound for Central Asia with drugs, precious stones, and metals. The exporters of the illicit cargoes disguise the profits they reap from their sale by importing goods instead of transfering money in return, paying the government’s import tax at the border, and disguising their ownership of the imported goods by laundering the funds from their sale through shell companies and hawala brokers. The shell companies then invest the proceeds into normal commercial activities, such as real estate investments. These kinds of exchanges are extremely difficult to trace.

The ease with which drugs cross Afghanistan’s borders speaks to the broader difficulties that Kabul has had with customs control. In the past, traders managed to avoid border inspections by paying off customs officials. That problem has diminished recently, mostly thanks to changes President Ashraf Ghani has made to Afghanistan’s customs system. Yet powerful officials still flout a rule requiring that they declare cash worth more than $20,000 at the border; in recent years, they have carried millions of dollars out of the country.

Over the past decade, Afghanistan has successfully prosecuted only a handful of money-laundering or terrorism-financing cases. Between 2011 and 2014, the Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA), a financial intelligence unit, referred several cases to the country’s attorney general, but none were brought before the courts, and the authorities did not issue orders to freeze or seize assets in any of them. For its part, FinTRACA has never sanctioned a bank or hawala broker for regulatory breaches or for violating anti-money-laundering or terrorism-financing laws. And no hawala brokers have reported suspicious transactions to FinTRACA, even though all of Afghanistan’s financial entities are legally required to do so. What is more, money laundering is still treated as a minor offense in Afghanistan: it is punishable by an imprisonment of between two and five years or a fine of between $1,000 and $7,000.

Those who profit from Afghanistan’s massive narcotics sector are the biggest beneficiaries.

Afghanistan’s National Unity Government is taking on this problem with an approach that is tougher than its predecessor’s. In June, Ghani established an Anticorruption Justice Center to investigate and prosecute high-ranking officials, including former cabinet ministers and governors, suspected of graft—a move that, predictably, has angered many current and former officials. So far, the center has reviewed over 150 corruption cases, and it is preparing a number of prominent ones for prosecution. The government has also strengthened its ability to combat money laundering and terrorism financing. It has amended the laws that criminalize both practices, requiring the attorney general to order asset freezes against people involved in either offense as soon as the authorities have determined their involvement. Kabul is working to improve the ability of Afghanistan’s various government agencies to coordinate their efforts on money-laundering and terrorism-financing cases and is trying to improve compliance in the banking sector by increasing the government’s oversight of bank transactions. It has also computerized the government’s revenue and customs departments, both of which had been at the center of official corruption.

In recent months, Afghanistan has ramped up its inspections of hawala brokers and has strengthened its hawala licensing program so that it will punish brokers who do not regularly report suspicious transactions to the authorities by, for example, temporarily stripping them of their licenses. The program has also made it easier for the government to monitor and seize assets involved in money-laundering offenses. These efforts have been supported by a three-year, $45 million IMF grant aimed at bolstering Afghanistan’s banking laws and anticorruption regulations. More broadly, the government has overhauled the judicial sector, replacing more than 600 judges, removing 20 percent of the country’s prosecutors and 25 percent of customs officials from their posts, and prohibiting many others from leaving the country.