The Taliban’s rapid takeover of Afghanistan set back decades-long efforts to integrate Afghanistan into the international community. Nowhere is this more apparent than on anti-money laundering and countering-the-financing-of-terrorism (AML/CFT) reforms, a policy area in which Afghanistan made substantial progress over the past several years to raise compliance standards and crack down on major vulnerabilities in its economy, particularly the under-regulated hawala money transfer system.
Now, the Taliban, a group sanctioned by the United Nations, the United States, and other international partners, oversees Afghanistan’s enforcement of AML/CFT and economic sanctions. The Taliban is unlikely to meaningfully enforce United Nations sanctions against itself or crackdown against the hawala industry in the same way as the previous government. As a former senior Treasury Department official recently noted, “I can’t think of any case in which a terrorist group that’s already designated became the power in charge of a full country.”
Particularly after the Islamic State-Khorasan’s (ISIS-K) tragic and brazen attack at the Kabul airport that killed 13 U.S. military personnel along with over 160 Afghan civilians, the Taliban must be held responsible for allowing terrorist groups to operate in Afghanistan. Addressing AML/CFT risks presents one concrete way for the international community to measure the Taliban’s actions rather than its rhetoric in addressing terrorism and terrorism financing.
Challenges With the Formal Banking System
Understanding Afghanistan’s post-9/11 economic history allows policymakers to better address the current crisis.
After decades of conflict and the Taliban’s prior five-year rule (1996-2001), Afghanistan’s formal financial system was “virtually non-existent,” according to a 2003 World Bank study. Instead, it relied (and still relies) heavily on hawala, a centuries-old informal money exchange system that provides for both domestic and international transfers. According to The Economist, “regulators around the world hate the system, because of its opacity and its role in helping to fund terrorism.”
The United States made AML/CFT a priority when supporting the nascent Afghan government in the wake of the ouster of the Taliban in late 2001. For instance, senior Treasury Department officials, including former Secretary Paul O’Neill and Deputy Assistant Secretary Juan Zarate, visited Afghanistan in 2002 “to facilitate the development of effective counter-terrorist financing policies…and, as appropriate, to offer Treasury technical assistance to strengthen these policies.” Unfortunately, the realities of the Afghan economy made this work daunting. The country’s illegal heroin and methamphetamine trades also required financial services. This led the U.S. Department of State to designate Afghanistan as a “major money laundering country” through 2020, when it last published a finding; such a designation is triggered when a country’s “financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.”
Today, the informal, lightly-regulated hawala financial system predominates in Afghanistan as most Afghans remain excluded from the formal banking system. The catastrophic 2010 Kabul Bank collapse, caused by high-level corruption and dubbed “The Afghan Bank Heist” by the New Yorker, shattered confidence in the Afghan banking system and cast a decade-long shadow. Poverty and a lack of available financial services also contribute to the under-use of banks. Less than one in six Afghans hold bank accounts, and that number plummets to one in 25 (3.8 percent) for women, according to the World Bank. There are only two bank branches for every 100,000 people. Many areas across the country lack branches; indeed, three of the largest cities—Kabul, Mazar-i-Sharif, and Herat—house about two-thirds of the branches in a country the size of Texas.
The Hawala Informal Money Transfer System Remains Popular
Even after 20 years of international technical assistance to strengthen its banking sector, Afghanistan still primarily uses hawala to receive remittances from overseas, send money around the country, and import goods from neighbors like Iran and Pakistan. More money circulates through the hawala system than the formal banking system. According to a 2019 academic analysis by Dr. Nafay Choudhury of Cambridge University, the loan volume at Kabul’s main hawala market, Sarai Shahzada, is roughly double the loan value originating through the commercial banking sector. Additional hawala lending takes place at other markets inside and outside of Kabul. Such evidence indicates that the hawala sector largely overshadows the commercial banks.
Western Union and MoneyGram provide some remittance services for low-dollar transfers from abroad to help Afghans in need. These remittances accounted for $789 million, about 4% of Afghanistan’s GDP in 2020. The two companies suspended their operations at the outset of the Taliban’s takeover last month, but resumed services on September 2, after engagement with the U.S. government, according to Reuters. These remittances serve to keep many Afghans out of poverty or from needing humanitarian assistance, thereby freeing up available aid to those most at risk of starvation.
Given the small size of the banking and formal remittance sectors, the hawala system fills the gap in everyday financial services for millions of Afghans. An undated Treasury Department and Interpol report on hawala identified six reasons for using the informal system over traditional financial services: cost effectiveness, efficiency (speed of transfer), reliability, lack of customer due diligence and identification checks, lack of transaction records, and tax evasion.
Despite improvements over the past several years, the hawala system lacks the same level of supervision as commercial banks in Afghanistan. Bankers complain regularly about the lax compliance obligations that create an unfair business advantage for the hawala industry. At a practical level, according to one expert in 2021, “Deals are executed by word of mouth, phone chats and WhatsApp messages, with minimal formal documentation.” Such informality makes the hawala system an ideal mechanism for terrorism financing in Afghanistan.
Taliban Use of the Hawala System
Due to economic sanctions against the Taliban and the limited financial connectivity in Afghanistan, the hawala system served as the primary financial lifeline for the Taliban.
In response, the Treasury Department took a series of actions against Taliban financial facilitators, including sanctioning hawaladar (i.e., hawala operator) Haji Khairullah Haji Sattar Money Exchange, Roshan Money Exchange, and Rahat Ltd. in 2012, as well as Etehad Brothers in 2014. Many of the Treasury Department sanctions designations recognized the malign role played by financial facilitators in Pakistan, but the start of U.S.-Taliban negotiations in 2018 appeared to change the sanctions posture and was marked by an absence of sanctions targeting Taliban officials and financial facilitators in 2019, 2020, and 2021. Rather, the Taliban negotiated with the Trump Administration for sanctions relief in their February 2020 agreement.
As revelations emerged in 2020 of Russia allegedly funding bounties to kill U.S. soldiers in Afghanistan, one part of that reporting described the use of hawala to move money for Taliban-linked militants. Afghan authorities described a series of arrests in northern Afghanistan and Kabul over a six-month period that targeted Taliban financial facilitators, including the seizure of $500,000 in one raid alone—a substantial sum of money in a country where the GDP per capita is only $509.
Put succinctly by the New York Times on September 2, 2021, “The Taliban used hawala to help fund their ultimately successful insurgency.”
Systemic Hawala Reforms Are in Jeopardy
Since around 2018, Afghanistan’s Central Bank, Da Afghanistan Bank (DAB), took bold and politically unpopular steps to improve oversight of the hawala industry. These efforts improved Afghanistan’s standing, and with substantial international assistance, the country was removed in 2017 from the intergovernmental Financial Action Task Force’s (FATF) grey-list of deficient jurisdictions. Reforms included requiring hawaladars (in particular, foreign exchange dealers, called sarafis) to convert their legal status from sole proprietorships to companies and apply for new licenses as corporations; banning hawaladars from making loans or holding deposits; requiring the collection of information (such as documents from their customers) to comply with Know Your Customer (KYC) obligations; and mandating the filing of Suspicious Activity Reports (SARs) on customers allegedly involved in wrongdoing like money laundering, terrorism financing, tax evasion, fraud, or narcotics trafficking.
Still, problems have persisted. In April 2020, DAB reported the results of onsite AML/CFT examinations of 57 hawaladars, and identified significant deficiencies and “weak” compliance with applicable laws and regulations. In March 2021, the U.S. government found that hawaladars have “an unwillingness to implement [customer due diligence] requirements” and “generally fail to file” SARs. While such assessments underscore lingering systemic problems, they also demonstrate the progress made by DAB to confront shortcomings and take action in response.
As a result, the hawala industry went on several strikes to protest reforms, including a 16-day strike in May 2021 as DAB worked to transition the hawaladars into companies. A 2018 strike protested against collecting customer information, a basic and uncontroversial standard for banks around the world to address financial crime risks and a provision codified in Afghanistan’s AML/CFT regulations.
DAB leadership met with the hawala industry as late as August 14, 2021, one day before the collapse of Kabul, as part of its ongoing engagement and to discuss the security situation to ensure the continuity of operations of the hawala system despite the violence and territorial gains made by the Taliban.
While incremental and plagued by setbacks, these reforms over the past three years have demonstrated a maturation of the hawala industry and DAB’s ability to supervise this substantial portion of the Afghan economy.
Taliban AML/CFT Capabilities and International Responsibilities
Now, the Taliban controls the levers of the Afghan government—and with that, the responsibilities and commitments made by the previous government to enforce AML/CFT rules, including oversight of the hawala industry. Unfortunately, the Taliban is unlikely to uphold those responsibilities and commitments. In its first major economic move, the Taliban appointed Haji Mohammad Idris, a relatively “obscure” figure, according to Bloomberg, with no known economic or financial education or training, as the central bank governor. Such a decision indicates that the Taliban prioritizes loyalty to the organization over technical competency.
Additionally, one-quarter of Afghanistan’s commercial banks are state-owned, which places even more of the country’s financial infrastructure under Taliban control. This may also create sanctions exposure for U.S. persons and other counterparties, depending on how the U.S. government defines “the Taliban” and activities under sanctioned individuals’ control for the purpose of economic sanctions implementation.
DAB, now part of a Taliban-controlled government, is itself subject to U.S. economic sanctions while being responsible for AML/CFT supervision and overseeing Afghanistan’s Financial Intelligence Unit (FIU), FinTRACA. The FIU, in particular, was previously responsible for investigating Taliban finances and coordinating responses through law enforcement and other channels. These organizations (DAB and FinTRACA) are likely to see major changes and revised roles under the Taliban. What’s more, as previously noted in response to the August 26, 2021 ISIS-K terrorist attack at the Kabul airport, and even more broadly, the Taliban’s capabilities and willingness to govern remain unknown.
Then there is the question of whether and how the new Taliban government will address other terrorist groups in Afghanistan: at least 16 terrorist groups currently operate in Afghanistan, in addition to the Taliban. The Congressional Research Service identified seven terrorist groups: Al Qaeda (Core), Al Qaeda in the Indian Subcontinent, ISIS-K, the Haqqani Network, Tehrik-e-Taliban Pakistan (also known as the Pakistan Taliban), the Islamic Movement of Uzbekistan, and the Eastern Turkistan Islamic Movement (also known as the Turkistan Islamic Party). The recently deposed Afghan government claimed that anti-Indian Lashkar-e-Taiba and Jaish-e-Mohammed trained and recruited in Afghanistan. Hezb-e-Islami Gulbuddin (HIG) maintains a presence across the country. The CIA also listed Iran’s Islamic Revolutionary Guard Corps/Qods Force, Jaysh al Adl (Jundallah), Lashkar i Jhangvi, Harakat ul-Mujahidin, Harakat ul-Jihad-i-Islami, and the Islamic Jihad Union.
The Taliban now has the obligation to address the terrorist financing risks posed by these organizations. Serious questions exist about their willingness and capacity to responsibly administer DAB and FinTRACA in general and specifically with respect to that counterterrorism goal.
Where Do We Go From Here?
The international community and the U.S. government must rapidly change their approach to engaging with the Afghan government and those in charge of its AML/CFT authorities. They must work to improve AML/CFT monitoring in and around Afghanistan, and strengthen international AML/CFT cooperation in order to manage the grave risks posed by terrorism financing, given the Taliban’s status as a terrorist group and its close relationship with other terrorist organizations like Al-Qaeda and the Haqqani Network (whose leader now holds a senior role in the Taliban-led government as the acting interior minister).
The Taliban’s takeover of the Afghan government raises novel and vexing questions for international partners with respect to recognition of, and engagement with, the Taliban-controlled central bank and FIU.
Policymakers should consider the following recommendations:
First, the United States and the international community must hold the Taliban responsible for fulfilling the previous Afghan government’s commitments to providing appropriate supervision of both the banking and hawala sectors and implementing key reforms of the hawala sector. Steps could include appointing independent, internationally recognized technocrats to lead and operate DAB and FinTRACA, as opposed to Taliban loyalists who lack requisite education or experience. An unsupervised hawala industry creates substantial vulnerabilities that could facilitate billions of dollars in terrorism financing, narcotrafficking, and tax evasion, and turn Afghanistan into an even larger money laundering hub with disastrous consequences for both crime and terrorism.
Second, the United States and the international community must hold the Taliban responsible for any misuse of financial intelligence information held by DAB, FinTRACA, or Afghan financial institutions. The Egmont Group of Financial Intelligence Units took swift action on August 15, 2021 to sever FinTRACA’s access to Egmont Secure Web (ESW), the secure FIU-to-FIU messaging platform. Additional steps can be taken to limit the Taliban’s access to sensitive financial intelligence information within Afghanistan and also among the 21 countries that have an existing information-sharing arrangement with Afghanistan. Afghanistan’s participation in the intergovernmental Financial Action Task Force (FATF) and its FATF-style regional body, the Asia-Pacific Group on Money Laundering (APG), should also be reviewed, and countermeasures should be considered for Afghanistan’s failure to adhere to international AML/CFT standards.
Third, building off of specific recommendations against ISIS-K, the U.S. State and Treasury Departments should identify and articulate concrete, measurable steps that the Taliban can take on counterterrorism financing against the sixteen known terrorist groups operating in Afghanistan, prioritizing ISIS-K, the Haqqani Network, and Al-Qaeda.
Fourth, the State Department, in consultation with the Treasury Department, should modify the definition of “the Taliban” as permitted under Executive Order 13268 for the dual purpose of increasing diplomatic leverage against the Taliban and its enablers as well as providing necessary regulatory clarity to financial institutions, aid organizations, and other stakeholders who must navigate economic sanctions, especially as a way to deter third parties from working with the Taliban. In the absence of clear guidance about the scope of the Taliban sanctions, prudent actors will likely treat the counterterrorism sanctions against the Taliban as a de facto jurisdictional sanctions program against the country of Afghanistan, which will have substantial economic impacts, especially for humanitarian assistance. Such an outcome may not be intended by the U.S. government at this stage of the crisis.
Fifth, the U.S. Treasury Department’s FIU, the Financial Crimes Enforcement Network (FinCEN), should consider using its new information-sharing authorities under Section 6103 of the 2020 National Defense Authorization Act (through the Anti-Money Laundering Act provision) to convene the FinCEN Exchange public-private partnership as a platform for supporting humanitarian assistance and other forms of aid in Afghanistan. Policymakers and regulators should also identify a suitable platform for a similar international convening capability to support efforts by allies to establish a humanitarian financial corridor to support the Afghan people.
Lastly, the United States and its allies should return to a regional rather than jurisdictional approach to AML/CFT and pursue economic sanctions that fully assess Pakistan’s malign influence in Afghanistan, as well as the role of Iran and other regional actors. The September 4, 2021 visit to Kabul by the head of Pakistan’s main intelligence agency, the Inter-Services Intelligence (ISI), to discuss “security and trade” demonstrates the continued close relationship between the Taliban and the Pakistani government, which should elicit far greater scrutiny by policymakers. As part of this realignment, the Treasury Department must establish an offshore counterterrorism financing capability for Afghanistan; this can be achieved in part by relocating the Afghanistan Financial Attaché position to the new Afghanistan operations center in Doha, Qatar, or in another major financial hub with exposure to Afghanistan, such as Dubai, United Arab Emirates.
The policy challenges are vast when a terrorist organization takes over the levers of a friendly government, but some of the most productive actions that can be taken now are fairly straightforward.