Volume 1 - Iraq Watch

anks for some transactions in the belief that privatebanks would not be as closely monitored by the UNas the state owned banks and the CBI.Middle East BankUday Saddam Husayn al-Tikriti owned shares in theMiddle East Bank. The Middle East Bank is one ofthe largest private banks in Iraq. Uday also controlledthe appointees and directors of the bank.Islamic BankThe Islamic Bank was unconventionally established.Formed by the Humayim family, the bank was establishedon a decree from the RCC, which was contraryto Iraqi banking rules and regulations. Money ofBa’ath Party Members and supporters of the Regimewas deposited into this bank.The HawalaThe term “hawala” means “transfer” or “wire”in Arabic banking terms. The word hawala comesfrom the Arabic root hwl, meaning to “change” or“transform.” In common Arabic usage, hawala areperformed in three different ways—two of which arelegal:• Hawalas through Iraqi banks are synonymous withbank money transfers. Bank hawalas are legal.• Illegal hawala transfers are based on an ancientinformal banking system used throughout SouthAsia and the Middle East to transfer money acrossdistances past legal and fi nancial barriers. Inmodern times, unlicensed money exchangers usethis process, coupled with modern telecommunicationsto discreetly transfer money.Regime Financeand ProcurementThe Role Played by the Hawala SystemThe hawala system was the most common informalpayment system used in Iraq under Saddam. The IraqiRegime encouraged its citizens in Iraq and abroad toopen accounts in foreign currencies at Iraqi banks inorder to track funds that were traditionally transferredthrough informal payments arrangements. The reliabilityof the ancient hawala system came from trustand the extensive use of personal connections andfamily-tribal relationships. In its simplest terms, anindividual desiring to transfer money exchanged cashfor a hawala note, often coded or secretly marked tofoil potential counterfeiters. This note would thenbe transferred to the other party via mail or courier.The party on the other end of the transaction thenpresented the note to an associated exchanger in theircountry, who converted the hawala note back into theappropriate cash specified in the note, minus a handlingfee. In modern times, the use of e-mail, faxes,and telephones have made these private cash transfersalmost instantaneous and nearly impossible to trace orregulate.Before OIF, there was no regulation of the hawalasystem in Iraq and the use of them was outlawed.Regardless, illegal hawalas were often used by theaverage Iraqi individual or company to transfer fundsfrom expatriate communities to the homeland. The• Hawalas made using the old process via licensedmoney exchangers are considered legal. Not allmoney exchangers perform hawalas.illicit system is reliable and efficient and is preferredbecause it is faster and less expensive than bankhawalas.• The speed is due to the lack of paperwork andbureaucracy, while the cost effectiveness is due tonot having to deal with a bank’s artificial, higherexchange rates. However, the anonymity and lackof traceable documentation make this system vulnerableto abuse by individuals and groups transferringfunds to finance illegal activities.• For example, in order to import goods, a letter ofcredit was normally needed from a bank in Jordan.To get this, the Jordanian bank would need somecash. Because it was illegal to transfer cash out ofIraq through the normal banking system, the illegalhawala system was used to move the money.• The hawala system was positive for the economybecause it reduced the liquid cash within theeconomy and helped counter the effects of inflation.Hawalas were eventually legalized and regulated bySaddam in an attempt to reduce smuggling and helpstimulate the economy.255