Use of Hawala system by oligarchs hopeless but not illegal, experts say

  • The use of the informal Hawala payment system by the oligarchs could be seen as a desperate move.
  • Experts told Insider that using Hawala does not necessarily involve illicit transactions.
  • But the oligarchs know about this system – based on trust – because that’s how Putin works, according to an expert.

Russian oligarchs managed to circumvent financial sanctions by transferring money through the informal payment system called Hawala.

It’s a move that could be considered hopeless, experts told Insider.

In the months before Vladimir Putin ordered his military troops to invade Ukraine, the president’s inner circle – oligarchs and silovarchs – appear to have anticipated the sanctions and transferred funds through trusts or shell companies.

Shane Riedel, financial crime expert and CEO of elucidate, which analyzes money movement patterns, told Insider that sanctioning people using Hawala or a similar payment system can be seen as a desperate move. Riedel said, “If someone is the ultimate beneficial owner of an account and they are sanctioned, that account – or asset – is sanctioned.”

Therefore, any attempt to withdraw money from a sanctioned account – evading sanctions – is considered a criminal offence, according to Riedel’s comments. In addition, facilitating the evasion of sanctions is also a criminal offense and the US Treasury Department has recently targeted some animators.

David Claridge, CEO of a security intelligence firm Dragonfly, clarified that transferring money via Hawala cannot be done in large sums but rather up to tens of thousands of dollars. Claridge thinks that if the oligarchs were to use the underground payment system, it would involve hundreds of thousands of small transactions rather than one big one.

When using hawala, “a person essentially functions on the basis of trust,” Claridge said. He added: “This type of arrangement could very well be used by the oligarchs”, who already operate on the same basis, as Vladimir Putin’s business empire is “entirely based on trust because he owns nothing”.

Is Hawala used primarily to evade sanctions?

Someone using hawala does not necessarily mean that they are carrying out illegal transactions. Riedel said, “There are people who use Hawala for completely legitimate purposes – it’s a lot cheaper.”

“You can’t assume that something illicit is necessarily going on if you see hawaladars,” he said, referring to hawala dealers. Riedel added that due to the existence of an element of legitimacy, it would be much more difficult to determine the sanctioned people who used the informal payment system.

KleptoCapture, a working group convened by the US Department of Justice amid Russia’s invasion of Ukraine, targets sanctioned individuals and is dedicated to enforcing sweeping sanctions, export restrictions and economic countermeasures. One of its missions is to combat illegal efforts to undermine restrictions, including the prosecution of those who attempt to “evade know-your-customer and anti-money laundering measures”.

Insider reported in early April that US investigators had found evidence that Russian oligarchs were trying to evade sanctions by moving “for example, movable property in the form of yachts, planes…to jurisdictions where, I think , people feel like it would be harder to investigate and harder to freeze,” Andrew Adams, the task force leader told Reuters.

However, despite the Russian tycoons’ attempt to hide their assets, they still face an “unprecedented” level of international cooperation. “Especially in the current context and the current climate…the level of shared sense of purpose is, I think, at an all-time high,” Adams added.

Claridge said the attitude of Western authorities, in a post-9/11 world, is that “Bank Hawala or other forms of money transfers should be regulated.” The implication being that “they should be treated as official businesses, which would be subject to sanctions – like everyone else”.