The tradional Islamic money transfer system known as hawala funds Al Qaeda, the Taliban, Lashkar-e-Taiba, and al-Shabaab. But America may not be ready for an outright hawala ban. Still, something more is needed than another layer of regulatory oversight. A federal or state-by-state hawala tax would force hawaladars to open up their books, file tax returns, and serve as an acknowledgment that the risks created by their business present genuine costs that must be recouped by the United States.

1. PUBLIC POLICY FOR HAWALA The case for a hawala tax

2. Hawala Hawala is the traditional Islamic method of transferring money without moving money

3. Example • A remitter gives a hawaladar (hawala dealer) $1,000 to transfer money to an overseas remittee.• The hawaladar contacts a foreign hawaladar, and asks him to give $1,000 to the remittee.• The money is given without being moved across borders or seas.• The hawaladars keep a relationship to keep the funds balanced verbally.

4. Diagram

5. The hawala problem • Hawalais done with no electronic records & without know-your-customer procedures.• Hawala has been used to fund Al Qaeda, the Taliban, and Lashkar-e-Taiba.• 83 percent of hawaladars in the U.S. are un-registered and have filed no paperwork with the government.• U.S. hawaladars transfer an estimated$5.7 billion a year to the Middle East in undocumented transactions.

6. Proposal: a hawala tax • A fee or set percentage of money transferred by each hawala transaction would be added (like a sales tax) to the total transferred.• The hawaladar would be responsible for charging, collecting, and paying the tax to the state tax agency.

7. Grounds for hawala tax • Hawala transfers pose a greater risk of financing terrorism than conventional Western money wires.• Hawala is remitted more often than conventional money wires to people in countries that are hostile to the U.S. • As such, hawala presents real security and law enforcement costs to the U.S.• These costs can be partly recouped, andhawala can be deterred, by a hawala tax

8. Precedence • A hawala tax would be a new, innovative approach to regulate informal transfers.• Nevertheless, Oklahoma law provides a useful starting point. • Oklahoma charges a $5 tax on overseaswire transfers of less than $500 and a 1% tax on remittances greater than $500.• In less than one year, Oklahoma received$4 million in remittance tax revenues.

9. Ensuring compliance • Any hawala tax legislation must include a rigorous tax whistleblower provision. • Persons with knowledge of a hawaladarfailing to charge and pay hawalataxes should be entitled to a 30 percent awardof any taxes due by the hawaladar. • For hawaladars that stay underground,U.S. attorneys will have the tax laws on their side as an additional weapon to usein the prosecution of terrorist financiers.

10. Expectations • A hawala tax would be stronger than the current minimal regulation approach.• A hawala tax would be more feasible politically than an outright hawala ban.• A hawala tax would put more aggressive folks—tax agents—over hawala instead of ambivalent financial regulators.• A 1 percent hawala tax could yield $50 million in annual tax revenues.

11. Conclusion • The existing hawala regulatory model is broken.• States must consider new options such as a tax on hawala.• The Oklahoma remittance tax proves that such a tax would be feasible to adopt and implement. Learn more at moneyjihad.wordpress.com