The Hidden Finances of Insurgency

by Joshua Foust on 5/29/2009 · 13 comments

For a while, I’ve been openly skeptical of the claim that opium cultivation in an of itself is “driving” the Taliban insurgency in Afghanistan. For one, it assumes a direction of causation that is merely stated and never argued; for another,  it creates the impression that, if only there were no opium, neither would there be a Taliban.

For otherwise smart people to make that sort of claim about an explicitly religious movement is puzzling and often annoying (when it gets repeated like it’s common, intuitive wisdom on the op-ed pages). But even if they derive money from collaborating with the drug lords, the Taliban’s funding has almost never been even mostly come from the opium trade. Indeed, reaching back far into the 1990s, it was obvious even then that most of their money came either directly from certain national intelligence services (namely Pakistan, Saudi Arabia, and the UAE), or from the donations of wealthy private individuals through a system called hawala.

Hawala is a rather ingenious method of international Islamic finance, used to transfer money for anything from donations and remittences to international NGO funds . The challenge in estimating how much money travels over hawala networks is that it is trust-based, and by western standards VERY informalized. As such, we have no idea how much money gets transmitted across state lines by hawala merchants apart from very rough estimates. Researching how much money these networks handle is damned near impossible: a hawala dealer will never work again if he develops a reputation for divulging his sources, funds, or methods—especially to an American government agent.

This is the problem Yochi Dreazen picks up in today’s Wall Street Journal.

Gen. Petraeus estimated that the Taliban raise a total of “hundreds and hundreds of millions of dollars” each year from the three sources, and said the U.S. doesn’t have precise figures.

The Taliban have depended in part on foreign support for decades. In an interview last week, Defense Secretary Robert Gates said some Afghan militants could draw on “external funding channels” created in the 1980s for wealthy Muslims — with U.S. support — to funnel money to Islamic fighters battling the Soviet military. “It wouldn’t surprise me if those channels have remained open,” he said.

Two senior U.S. officials said the Central Intelligence Agency has identified individuals and charities suspected of providing the bulk of the Taliban funding, but declined to name them, citing continuing operations to disrupt the money flows…

American officials said most of the money was sent to the Taliban through the informal hawala money-transfer system — a network of money brokers with little outside oversight. A 2006 World Bank report about Afghanistan said the hawala system “carries out the majority of the country’s cash payments and transfers.”

The thing is, this is not a new problem by any stretch of the imagination. Not only was the hawala system identified as quite probably THE primary method of fundraising during the crop of Taliban books in the late 1990s (think William Maley and Larry Goodson as much as you do Ahmed Rashid), but when the Taliban began reconstituting itself as a major insurgent force—in 2003, for those of who thought things were okay until 2007 or so. Just one story from the CS Monitor, dated May 8 2003:

Much of the funding came through a black-market banking system called hawala, which is common throughout the Middle East and South Asia. But Mr. Hamidullah says that Pakistan generally sent its money by hand, using ISI officers. “During Taliban times, Pakistani colonels would bring money to support Taliban soldiers,” he says.

Today’s Taliban continues to receive funding, he adds, some of it from rich Arab donors, but much of it from the intelligence agencies of Russia, Iran, and Pakistan. “There are some countries that are against the polices of the US and the United Nations, and they support the guerrillas. The most important role belongs to Russia, Iran, and Pakistan.”

And yet there Secretary Gates is, acting as if hawala is a new problem. I feel comfortable placing much of the blame for this on President Bush—the issue of non-opium funding has been in the open for decades now, yet as Rajiv Chandrasekaran revealed in his brilliant behind-the-scenes piece on Bush’s relationship with Afghan President Hamid Karzai,  President Bush expended a huge amount of effort trying to manipulate everyone, from the Afghan government to his own Department of Defense, into making opium eradication one of their primary tasks in Afghanistan.

As I’ve said repeatedly over the years, the over-focus on opium within Afghanistan—which, let us be honest, is a trailing indicator, and not a cause of anything aside from some (and only some) corruption—will lead to spectacular failure. Secretary Gates’ discussion of the Taliban’s alternate funding sources, while long overdue, is perhaps too late to bring about meaningful change in a policy that doesn’t even focus on the problem of narcotics, but just one, single cash crop that also happens to be most of Afghanistan’s economy.


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This post was written by...

– author of 1848 posts on 17_PersonNotFound.

Joshua Foust is a Fellow at the American Security Project and the author of Afghanistan Journal: Selections from Registan.net. His research focuses primarily on Central and South Asia. Joshua is a correspondent for The Atlantic and a columnist for PBS Need to Know. Joshua appears regularly on the BBC World News, Aljazeera, and international public radio. Joshua's writing has appeared in the Columbia Journalism Review, Foreign Policy’s AfPak Channel, the New York Times, Reuters, and the Christian Science Monitor. Follow him on twitter: @joshuafoust

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{ 13 comments }

JensonSDaniel May 29, 2009 at 2:40 pm

Treasury Department’s FinCEN has ben working on this for a while now. It’s certainly been understaffed because the commercial and retail banks have been increasing the volume of SARs (suspicious activity reports) to make sure they’re not hit with fraud penalities. That takes away from the terrorist work.

FATF methodology is pretty well accepted and implemented by USA banks and they have pretty good controls & coordination with foreign banks. Know Your Customer (KYC) is taught alongside risk management when you join a bank these days whether you work in origination or retail. There’s also a plenty of tracking on bills of lading, letters of credit, and import-export banking. For example in the past 2 years every international bank has increased funding export controls and documentation.

The issue is results. It’s still uncertain how much the money networks have been affected. I don’t know how much of this is President Bush’s fault but certainly not increasing funding for terrorist financing work lies at his feet.

Joshua Foust May 29, 2009 at 2:45 pm

Jenson,

Best I know, the Treasury program has been very effective at dismantling the quantified support networks, which rely on banks. It has had very little success in cracking the hawala networks, precisely because they’re so closed off and insular. It’s generally cash-based, informal, and works behind the scenes. I don’t know how their methodology, which HAS done a good thing in closing off the Caribbean and Swiss money sinks, would apply to unraveling an informal system that relies on trust-based relationships.

What I do know is, we’ve been aware of this problem for well over a decade, but they haven’t spent much energy on it.

Fnord May 29, 2009 at 4:25 pm

Part of the problem with acting against the hawala-network is that its also a lifeline for thousands of civilians. Somalia, par example, is wholly dependent on the money sent in from expats around the world. I dont know to what extent there is any other options in Afghanistan?

Bones May 29, 2009 at 4:43 pm

Steve Coll briefly mentions in Ghost Wars how the CIA used hawala to get money to Afghan commanders in the field during the 80s. Given the amount of cash they were dumping into Afghanistan, I wondered at the time if it had any effect on the hawala networks. Coll doesn’t give specific numbers, and his source is “interviews with US officials,’ so it’s hard to tell if they were flooding the system with American dollars or just routing a small amount through hawala. But here’s the Secretary of Defense directly linking the networks now with the “external funding channels” propped up by the US in the 80s. Perhaps the CIA did lay the groundwork for today’s hawala networks after all.

Aside from policy, Is Gates “acting as if hawala is a new problem” when the former CIA man admits that the ‘channels’ he opened probably never closed? That sounds more like confessing that we’ve been choosing to ignore an old problem, kind of like opium after 2001.

Ian May 29, 2009 at 6:50 pm

Hawala goes back at least to the 19th century–like crack cocaine, it wasn’t invented by the CIA. Check out this article by S. M. Hanifi which discusses it in the context of Abd al-Rahman’s disastrous economic policies.

Hawala is the only “bank” in most of rural Afghanistan, no surprise that people would use it for legit purposes 95% of the time and illegit purposes 5% of the time (my b.s.-stimate.) Like opium, if you shut it down without providing alternatives, it will ruin thousands of lives (think of what proportion of Afghanistan’s economy is remittances from Dubai.)

myra macdonald May 29, 2009 at 6:56 pm

Joshua, how about flipping around the whole opium thing and looking at it not in terms of funding, but rather from the point of view of the people who actually grow the opium?

There’s very little attachment in growing opium – you buy the seeds, sell the product, and usually get into enough debt to have to keep growing opium. As far as I know, there is also a three-four month down period when you can go off and make a bit of extra money fighting for the Taliban, or whoever in the neighbourhood is willing to pay.

If you help people grow other crops (including the much-mocked pomegranate) and create small farms where they will also be able to keep goats etc, they’ll be much more attached to the land and have a sense of security that is worth defending.

This argument was made to me recently and I found it rather convincing. I’d be interested in your take on it.

Myra

Joshua Foust May 29, 2009 at 10:29 pm

Myra, I think I’ve written about most of that before. We are in agreement.

UNRR May 30, 2009 at 6:53 am

This post has been linked for the HOT5 Daily 5/30/2009, at The Unreligious Right

Ian May 30, 2009 at 12:12 pm

If you help people grow other crops

…farmers will make far less profit than if they grew poppies. The attachment is to what good, easy money it is, even with the risk built in of going into debt if the yield is bad.

Bones May 30, 2009 at 3:48 pm

Ian, I think my comment didn’t properly convey that I was interested in how CIA interaction and piggy backing affected the pre-existing system of hawala in the region. I’ve attempted to bone up a little bit on hawala, and I think my point was a bit misdirected.

You’re absolutely right that the CIA had no hand in creating hawala. Initially, I was curious if a sudden influx of large amounts of American money changed the hawala landscape. Probably, but only as portion of the significant amount of money being funneled into Afghanistan to support anti-Soviet fighters. Anyhow, most American money was filtered through Pakistani intelligence; the CIA likely used hawala when they wanted to cut out the middleman and regain some control of where the money ended up. So probably not the right question to ask.

My understanding of hawala is that it revolves around the individual connections between hawaladar, hardly a revolutionary statement. Apparently, new connections were created to funnel money to fighters in Afghanistan and Pakistan. I wonder if those new connections were entirely new hawaladar, or were donors directed to complicit hawaladar, or were the hawaladar themselves unwitting mediums? As far as the CIA is concerned, their complicity in creating those connections was probably moral support at best.

It’d be interesting to know how exactly the Taliban use hawala. Is it just a straight money transfer where every party is knowledgeable about the source and destination? Or do they use fronts and false identities to deceive hawaladar?

Joel Hafvenstein May 31, 2009 at 9:55 am

Josh — great articulation of the dangers of over-focusing on opium. I agree with Ian, though, that seeing hawala as the problem is just as dangerous, if not more so. Economies across Africa and Asia depend on the hawaladars and the massive, sophisticated system they’ve built up for clearing international payments; any solution that depends on quickly formalizing or illegalizing the transfers will likely be ineffective and certainly be damaging. (Though some formalization is taking place; the hawaladar I’ve used in Britain has know-your-customer rules as required by the UK government).

Ian May 31, 2009 at 11:05 am

Bones, all good questions that I share with you. As for “how exactly the Taliban use hawala,” it’s not clear to me that they use hawala that much more than briefcases of cash flown on private jets from the Gulf. But little evidence exists publicly about either. What is definitely clear from the excellent research AREU has done is that ordinary Afghans prefer hawala to other forms of banking specifically because it is entirely anonymous, no need to sign one’s name or provide a passpost number to the hawaladar. That is not necessarily nefarious, maybe just a resistance to the heavy documentation that comes with bureaucratic modernity.

Also, rereading Josh F.’s post, I think it’s worth noting that hawala has nothing to do with Islamic finance. Hawala in South Asia was for many years the province of Hindu bankers (who were vilified for their money-handling role in Muslim areas much like Jews were in Europe).

Vengeance7 June 1, 2009 at 5:05 am

I don’t follow the money stuff much.

I argued in late 05 to stop the opium eradication, as did every other advisor who was on their second or third tour back then. I don’t know exactly how command viewed us on that one, “crazy” or “lazy” is the only thing I can figure. I guess it never dawned on them if the dudes working on the ground, in the villages, who had to face the Taliban, said “knock off the opium erradication bull shit” it must mean that it is having a negative effect.

something here, just this little area, kinda’ points to a disruption of cash flow. A couple of things happened about 6 weeks ago; nobody really looked too hard into it. I don’t know if it was a blip, or if the “traditional” cash flow has been replaced with something else now. That’s all just unimportant stuff; the really important stuff of full blown forced feeding of TRADOC doctrine and paper work down the throats of host nationals continues.

Hell, I’ll tell ya what torture is, taking a host national 2IC, out of the fight and sending him to the bigger FOB for 2 weeks of poperty book school.

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