Gray Cash: How the U.S. and the Taliban Have Tried and Failed to Fix Afghanistan’s Informal Banking System

When the Taliban swept into Kabul a little more than year ago on August 15, 2021, life changed for millions of Afghans overnight. Soldiers, government officials, police, and female nurses and teachers—almost all lost their jobs. Many who had worked with U.S. and NATO forces were forced to flee amid a chaotic government collapse that left the country’s economy in freefall. But, there was one group who managed somehow to survive and thrive despite the unprecedented humanitarian crisis brought on by U.S. sanctions against the Taliban regime: Afghanistan’s moneymen.

Known colloquially as "hawaladars," the men—and they are almost exclusively men—who run Afghanistan’s multibillion dollar informal banking system have long been at the center of power in the country. After the United States withdrew its troops, Washington froze access to nearly $9 billion in funding left in reserves in Afghanistan’s central bank. Now, one year on, as a result, the country’s moneymen, the hawaladars, are at the heart of a battle for the future economic stability of the country. The Taliban’s government is cash strapped while many civil servants remain unpaid and average Afghans in many parts of the country are starving. Millions of Afghans were unbanked before the Taliban takeover but now almost everyone depends on hawaladars for the most basic of financial transactions and what makes money flow more readily is in no small part the Taliban’s influence—or sometimes lack thereof—over Afghanistan’s illicit opium trade.

Before the government of Afghanistan’s last president, Ashraf Ghani, was ousted last summer, a total of 741 money exchange service providers were officially registered in the country, according to records kept by Da Afghanistan Bank, or DAB, as the country’s central bank is also known. Thousands of unofficial, unregistered hawaladars, however, operate across Afghanistan. Quite a few are actually wholesale textile traders or have medical supply companies whose large volume of business draws large amounts of cash from neighboring markets in Pakistan and Iran, making them an ideal one-stop shop for informal banking. They trade in open air markets and at shop stalls in cities and villages in all 34 of Afghanistan’s provinces. Yet, hawaladar money exchanges are one of the least well tracked and least understood gears in the financial machinery of one of the most impoverished countries in the world.

While the lack of oversight and regulation of Afghanistan’s hawaladar money exchanges is very much a legacy of Hamid Karzai’s and Ashraf Ghani’s government, the unregulated flows of billions in cash that slushes through the hawaladar market is one of the most vivid illustrations of the failure of U.S. efforts to reconstruct the country’s ailing economy after decades of war. The gray market economy that energized the hawala system simultaneously funded the anti-American insurgency and hollowed out the Afghan government by making it possible for anyone looking to profit from corruption to do so with impunity. The U.S.-backed Afghan government’s failure to implement and enforce the regulation of hawala money exchanges was a boon for the Taliban’s leaders; lack of government oversight allowed them to blaze a trail right to the center of power in Kabul. But now, in an ironic twist, the Taliban leaders who, over the last 20-plus years, depended heavily on the informal services of hawaladars to transform opium into dollars that helped them wage war against American and NATO forces are pushing for formal change.

Desperate for both cash and international legitimacy, the Taliban have opted to keep in place regulations first proposed by U.S. advisers and imposed by Ghani’s government before its collapse. On April 3, 2022, the Taliban issued a decree banning both the cultivation and trade of opium, but they have not enforced the ban. They have, meanwhile, only destroyed a fraction of the fields though they have asked the farmers not to cultivate drugs during the next season. Media reports suggest that the Taliban’s efforts to restrict opium cultivation have been limited to the south, in places like Helmand, Farah, and Kandahar, where they enjoy strong social support. But even with a focused approach, the Taliban’s ban on opium has increased the price dramatically, resulting in more money in drug dealers’ pockets and more money being funneled through the hawaladars.

It seems the Taliban have once again turned to Afghanistan's traditional fixers—opium and money dealers—to fund their government.

Under the current regulations, hawaladars cannot make loans or hold deposits. They are required to collect information to comply with international Know Your Customer (KYC) regulations, which require the transmission of information on who sends and receives money. Money exchanges must also must file Suspicious Activity Reports (known as SARs) for any customers who could be involved in money laundering, terrorism financing, tax evasion, or narcotics trafficking. Depending on the province, hawaladars must also pay between 150,000-300,000 Afghani (around $1,685-$3,370) as a bank guarantee and have at least five million Afghani as an initial investment, making it difficult for many hawaladars to comply. But it’s not just the financial factors that are hindering compliance; the Taliban are finding few hawaladars in Helmand who want to comply with the regulations and they are encountering fierce resistance from some of Afghanistan’s top hawaladars. Without buy-in from the hawaladars, both the Taliban’s bid for international legitimacy and their attempt at having U.S. sanctions lifted are in danger, not to mention the cash flow from the opium trade could be disrupted.

In the southern province of Helmand where, officially, only two hawaladar money exchanges are officially registered with the government, there are actually hundreds operating in the province’s bustling currency exchange market. With over 1.4 million residents and some 20,000 square miles of land, Helmand is one of the most underpopulated yet most expansive provinces of Afghanistan. It has always been and currently is the center of the Afghan opium trade, and as a result it is the beating heart of the country’s financial sector. In fact, the best way to think about the role Helmand’s currency exchange plays in Afghanistan’s economy is that it operates in ways not dissimilar from Wall Street in New York. Traders from neighboring Iran and Pakistan looking to profit from smuggling routes for everything from opium to big screen TVs often pass through Helmand to liquidate their assets into hard and stable currencies, like U.S. dollars. Opium dealers, in particular, often need to move large amounts of opium products beyond the region to paying customers in Russia, Eastern Europe and beyond. Cash is king in this frontier market hub and trading volumes are exceptionally high among Helmand’s hawaladars.

The hawala system creates a gray zone—even though it’s technically regulated, even now by the Taliban, the plethora of unofficial and unregistered hawaladars present plenty of opportunities for misuse of the system. Depending on its clients, it can nourish communities in need with remittances from neighboring countries and licit activities. But insurgents and drug cartels also use the hawala system to bypass legal barriers to money laundering. In 2021, the opium trade brought 1.8-2.7 billion USD into the country. The cash flow that streams through Afghanistan’s hawala money exchange markets has financed armies and insurgencies in the country for generations. Afghanistan’s most politically powerful southern provinces, Helmand and Kandahar, illustrate the strong connection between the hawala money exchange markets and insurgencies. Taliban leaders have often come from long lines of families who essentially worked as sharecroppers in opium fields or were part of the clerical class who serve in rural areas both as judges and enforcers to sort out civil disputes.

Take, for example, the Barakzai tribe. The Barakzai predominantly live in southern Afghanistan and, as the ruling tribe, they own much of the agricultural lands from Lashkargah to Kabul. The Barakzai are one of the main sub-tribes of the Pashtun Durrani tribe that ruled the country from 1747 until 1973, when King Zahir Shah, the last in of the Durrani monarchs was ousted and his cousin Dawood Khan established a parliamentary republic in 1973. For a time, the Barakzais served as viziers, or ministers, to the Popalzai clan, a sub-branch of the Durrani tribe. However, as their power and influence rose, the Barakzai clan sought to supplant the Popalzai. Eventually, in 1826, Dost Mohammad Khan Barakzai declared himself as the amir of Afghanistan, marking the start of a new thrust toward modernity in the country by most accounts.[1] For a little more than 150 years, Afghanistan was ruled largely by the Barakzais until the coup that ousted Mohammed Dawood Khan and precipitated the Soviet invasion in 1978. But the Popalzais again regained power soon after U.S. military incursion in 2001 when Hamid Karzai was elevated as interim president. The Barakzai family, nonetheless, with their vast land holdings in Afghanistan’s southern provinces remained among the most wealthy and influential.

It’s because of this generational wealth and the multitude of familial connections that Haji Khairullah Barakzai, one of Afghanistan’s most successful hawaladars, was able to get his start. By the time Khairullah was born, his family was poor, but he inherited capital of another kind: tribal connections and social networks that he used to open his hawala business with trust as the main currency. By the time he reached his 50s, he had built a multimillion-dollar business with hawala shops across Afghanistan, Iran, Dubai, and Pakistan. One Afghan hawaladar who visited his office in Quetta described the amount of cash at his office as "walls of dollars and euros.”[2] By early 2010, Haji Khairullah Barakzai’s hawala business was thriving. Every day he would drive to Afghanistan's main money exchange market in Kabul and work in Shop Number 257, Haji Khairullah Haji Satter Money Exchange (HKHS), in Sarai Shahzada, a market just a few kilometers to the south of Afghanistan’s Presidential Palace and the North Atlantic Treaty Organization (NATO)'s headquarters.

Meanwhile, his representatives in Helmand province were operating as the Taliban’s bankers through fund collections, deposit accounts, and cash transactions for the Taliban's Helmand shadow governor and his fighters. Khairullah had a very close relationship with the then-supreme leader of the Taliban, Mullah Mohammad Omar. In fact, he met Mullah Mohammad Omar, a fiercely private man, more than 20 times, according to one account.

Khairuallah’s close working relationship with Mullah Mohammad Omar was really just part of the natural historical weave of the local drug economy. Mullah Omar was from the Ghilzai tribe, which once held power in Kandahar but were driven out by Ahmad Shah Durrani in 1747. The Ghilzais lost status and moved to the eastern part of the country where they launched several unsuccessful rebellions against the Afghan monarchy that resulted in further marginalization of the Ghilzai tribe and the imposition of heavy taxes by the country’s Barakzai and Popalzai leaders.[3] Mullah Omar’s decision to launch his bid to claim the leadership of Afghanistan in the predominantly Durrani Kandahar in the 1990’s and again after the U.S. incursion began in 2001 was in many ways reflective of this long tradition of intra-tribal frictions. But partly thanks to his close working relationships with individuals such as Khairullah, the Taliban transformed Afghanistan’s southern regions into a significant stronghold under Mullah Omar’s leadership.

Most Afghans use the hawala system, which is one reason why the country has always struggled to establish a more robust formal banking sector. According to the World Bank, only one in six Afghans had a bank account in 2018. While Western Union and MoneyGram provide remittance services into the country, these companies accounted for just $789 million in 2020, only 4 percent of the gross domestic product (GDP). By contrast, the hawala system serves 50 to 90 percent of all financial transactions, depending on the province. Some experts suggest that Kabul's main hawala market loan volume is roughly double that of commercial banking.

The hawala system is based on social networks and trust. Afghan hawaladars are typically well connected to all segments of society and transactions are made by a verbal agreement, making it difficult to follow the money or document any transgression.[4] The hawaladars provide a transaction number and a shop address in the recipient’s province to the sender, and the sender forwards the details to the recipient through WhatsApp or Telegram. The recipient then visits the shop, provides the number, and receives the money. It’s a perfect conduit for funds generated by the narcotics trade in Afghanistan because it's fast, anonymous, and makes it almost impossible to follow the flow of the money.

Afghanistan’s opium networks are incredibly inclusive, as market imperatives and financial incentives tend to override religious, political, ethnic, and geographical boundaries.[5] The drug trade is so lucrative that it has even formed the basis of political coalitions. It factors into the alliances that form in civil wars, where local communities use alliances with insurgents as a way to benefit from the drug and illicit economy.[6] U.S. military officials have used the terms "narco-terror" or "narco-insurgency" to illustrate the two-way relationship between the insurgents and narcotic smugglers. Graeme Smith, one of the leading international correspondents who has reported extensively on Afghanistan’s southern drug trade, has described the relationship between hawaladars, smugglers, and the insurgents as "the iron triangle." Others have called the three-way relationship between smugglers, insurgents, and government figures the "toxic triangle."[7]

But in actuality, there is a four-way relationship in the Afghan drug industry between the insurgents, hawaladars, smugglers, and former government officials. The drug traffickers and insurgents are not the only ones benefiting from the thriving drug economy; many Afghan officials and hawaladars have also profited. Take, for example, the former Helmand governor, Sher Mohammad Akhundzada (SMA). SMA is part of the Alizai tribe and his family played a vital role in shaping the political dynamics in Helmand for over 40 years, where they aided in expanding opium cultivation across the province.[8] In June 2005, the U.S. Drug Enforcement Agency Officials and Afghan police raided his office and found nine tons of opium. In December 2005, SMA was replaced with Mohammad Dawoud as the governor. SMA later confirmed that 3,000 of his fighters had joined the Taliban because he could not pay their salaries following his removal from the governor's office.[9] Now, these symbiotic relationships are being thrown off kilter with the Taliban’s new regulations on the hawala system and the banning of opium cultivation.

Hawaladars like Khairullah have always helped insurgents and traffickers move their money both domestically and abroad, which is why the U.S. government established the Afghan Threat Finance Cell in 2008. The cell was based on a similar task force used in Iraq and was meant to "attack insurgent funding and financing networks by providing threat finance expertise and actionable intelligence to U.S. civilian and military leaders." This multi-agency intelligence organization was instrumental in exposing corruption and sanctioning hawaladars. The U.S. Department of Treasury started sanctioning Afghan Hawaladars in 2011 with the New Ansari Money Exchange. The department sanctioned HKHS, Roshan Money Exchange, and Rahat Ltd in 2012; the Etehad Brothers in 2014; and Abdullah Samad Faroqui in 2018.

But the hawala system continued to be immune to effective oversight, due in no small part to its immense popularity; in Helmand province, one of the Taliban’s strongholds over the last 20 years, the intergovernmental Financial Action Task Force (FATF) estimated in 2014 that around 80 percent of transactions were conducted through the hawala system.

In 2017, the Afghanistan Central Bank, under international pressure, adopted measures to regulate the hawala systems. These measures improved transparency: Afghanistan was removed from the FATF gray-list of deficient jurisdictions. The reform included converting the legal status of monetary services (hawaladars) and money exchangers (saraaf) from sole proprietorships to companies. It also required new licenses to be issued and exchanges to be registered as corporations with increased guarantee fees while banning hawaladars from making loans or holding deposits. Hawaladars were also required to collect information about the identity of recipeints and senders of funds and to file Suspicious Activity Reports (SARs) on customers allegedly involved in wrongdoing like money laundering, terrorism financing, tax evasion, fraud, or narcotics trafficking, according to the new regulation. Hawaladars, under the new rules, also had to pay 300,000 Afghani (around $3,370) in Kabul, 200,000 Afghani or around $2,250 in Herat, Nangarhar, Kandahar, Paktika, Balkh, and Kunduz provinces, and 150,000 Afghani or about $1,685 in other provinces as a bank guarantee. The regulation also requires the hawaladars to have at least five million Afghani as an initial investment, which hawaladars believe is too much for their small businesses.

The hawaladars and money exchangers have consistently protested against the new regulation since the DAB enacted it in February 2018. The longest strike lasted for 15 days; they reopened their shops only after the then-President Ashraf Ghani got involved. Since most Afghan traders use the hawala system for their business, any long-term closure of the hawala shops could cause a collapse of the fragile Afghan economy. Many hawaladars felt that changing the hawala system from sole proprietorships to companies was impractical and that the country’s poor economic situation raised barriers to paying the required bank deposit guarantees and registration fees.

Then, with the start of direct negotiations between the Taliban and the United States in 2018, the sanctions policy shifted, and 2019, 2020, and 2021 were marked by the absence of sanctions targeting Taliban financial facilitators. The former government, under international pressure, kept the new regulations in place even though they were never enforced. This is evident from interviews with Helmand's hawaladars, who said they did not follow any regulations by the government.[10] The lack of enforcement is also clear from the limited number of hawaladars who registered under the new regulation in each province.

It came as no surprise then that the U.S. Department of State designated Afghanistan as a "major money laundering country" in 2020. Such a designation also showed that the United States has failed in its anti-money laundering and combating the financing of terrorism (AML/CFT) efforts in Afghanistan. According to the DAB's database of hawaladars, only two hawaladars were registered in Helmand province in 2021. While the exact amount of the Taliban's revenue from drug cultivation and trafficking is unknown, there is little doubt that the Taliban benefit from the flourishing drug economy and the informal hawala system that supports the opium trade. The UN Sanctions Monitoring Team (UNSMT) estimated that the Taliban gained around 400 million USD in 2019, and the Resolute Support Counter Threat Finance Cell estimated in 2021 that between 40 to 60 percent of the Taliban's revenue comes from narcotics trafficking. Although David Mansfield, a leading expert on the Afghan drug economy, argues that the Taliban's revenues from drugs could be far less. He estimates the Taliban earned between 27 to 35 million USD from taxing drugs in 2020.

With the fall of the government in Kabul to the Taliban on August 15, 2021, many Afghan hawaladars were looking forward to regulatory relief. The Taliban's policy toward the hawala system during their previous rule, which let the hawaladars operate in the traditional way, and their close engagement with the hawaladars during the insurgent uprising against the U.S. backed Afghan government suggested a reversal of earlier attempts to reform the money exchange market was in the offing. And, international institutions seemed to anticipate such a move with FATF issuing a statement two months after the Taliban takeover that expressed its concerns about the “evolving money laundering and terrorist financing risk” in Afghanistan.

On December 27, 2021, the Taliban’s acting cabinet (Haji Mohammad Edris was appointed acting governor and Noor Ahmad Agha, who is on the UN sanction list, was appointed deputy governor) issued a statement through DAB indicating that they would continue the previous government’s policy regarding the hawala system. The statement required the hawaladars to register their business within 40 days or face legal prosecution. Furthermore, on April 13, 2022, DAB issued another statement requesting all hawaladars to register their businesses and urged Afghans to avoid using unlicensed money exchanges and hawaladars. A month later, when the hawaladar’s efforts to convince the Taliban to reverse their decision failed, they went on strike against what they labeled "a western copied law by the ex-government obsessive individuals."[11] As one would expect from a totalitarian regime, the Taliban forced the hawaladars to reopen their shops a day after the strike started. The head of the Money Exchange and Monetary Service repeated what they’ve always said at the end of the strike: “The Taliban have promised to resolve their problem.”

The Taliban’s struggle to control the hawala system and, by extension, the cash flow and the drug economy is important. As an insurgent movement, the Taliban have been benefiting from both the drug trade and illicit cash flow and are well-connected to stakeholders in both businesses. It will be interesting to see if the Taliban will turn their backs to old friends to gain international legitimacy.

The Taliban’s unexpected move to regulate hawaladars, as noted by an ex-DAB official, could be based on the international community's appeal to fight money laundering; the Taliban are hoping to gain international recognition. The Taliban are aiming to benefit on two fronts from this decision: they need cash, which the considerable amount of money exchange and monetary services registrations will provide, and it is highly likely that such a decision will not actually be put into practice. This is evident from three interviews with Hawaladars in Helmand, who did not report any new restrictions being enforced by the Taliban.[12] The Taliban’s reluctance to enforce the regulations on the hawala system is also evident from their “quick move to regulate and centralise revenue collection on cross-border trade” and dismantling “the network of roadside checkpoints that had collected rents for powerbrokers in the provinces,” according to David Mansflied.

The international community and FATF has yet to react officially on the Taliban’s current policy on regulating the hawala system. However, on July 26, the U.S. Representative for Afghanistan, speaking at a conference in Tashkent, made it clear that “a future recapitalisation of the (Afghanistan) central bank and the Afghan financial system is possible provided that reasonable and serious steps are taken to professionalise the central bank, to enhance its AML/CFT (anti-money laundering and counter-terrorist financing) architecture and its independence.”

The Taliban is said to be open to allowing a “State Department-appointed contractor to monitor Afghanistan's central bank compliance with anti-money laundering standards, and that monitoring experts would be able to go to Afghanistan.” However, the Taliban have claimed they are against creating a parallel institution to the DAB.

But even if the Taliban works to address the concerns of the United States and the international community and puts in place—at least on paper—regulations to combat money laundering and terrorism financing, would it be effective within the hawala system? After all, hawaladars seem to have side-stepped previous U.S. efforts on this front, as illustrated by Kahirullah’s case.

On June 29, 2012, the U.S. Department of Treasury sanctioned Khairullah's business. The department's statement indicated that Haji Khairullah Barakzai and Haji Abdul Sattar, who owned HKHS, donated money and provided financial services to the Taliban to support the group's narcotics and terrorist operations. General Khodaidad, Afghanistan's counternarcotics minister from 2007 to 2010, confirmed Haji Khairullah's involvement in money laundering schemes and supporting the insurgency, stating that he was one of the biggest fish in the region.

But Khairullah, speaking to Reuters in December 2012, denied any affiliation with the Taliban and insisted that he was just a businessman. He also accused the United States of destroying his credibility by declaring him "guilty without any verdict from a judge." While these are unproven allegations against Khairullah, there is no doubt that his wealth skyrocketed as the Taliban's influence grew and the drug economy flourished in the southern region. It was also no secret that Khairullah was linked to the Taliban even before their regime collapsed in 2001. The U.S. Department of Treasury refused to publish any evidence, saying it was classified.

Shortly after Khairullah was sanctioned by the United States in 2012, the Afghan Financial Intelligence Unit (FINTRACA) seized the equivalent of 20,000 USD from his bank account—only a fraction of his wealth. As a successful hawaladar, Khairullah’s cash was most likely invested in local commodities and businesses. Media reports suggest that Khairullah was alerted before the raid and had sold assets under his name. A real estate office in Kandahar confirmed that Khairullah had sold 24 plots in a new development on the edge of Kandahar city for $360,000 after being sanctioned by the United States.

He vanished from the public eye the day after.

Today, almost every hawaladar in the Currency Exchange Market in Helmand knows Haji Khairullah, but they refuse to provide any details about his current whereabouts, his business, or his assets in the Helmand market. One hawaladar, on the condition of anonymity, told us that since Khairullah is well-connected to the Taliban and involved in drug trafficking, everyone is afraid of him, saying: “He is a fellow hawaladar with much mutual interests with us, so do not expect a blab!”

In contrast to their official policy, the Taliban have not regulated the hawala system in practice. Even as they seek recognition as a legitimate government by keeping the sanctions of the previous administration intact, they still rely on the cash flowing through the hawala system to prop up the decaying economy. The Taliban’s leadership have built close relationships with hawaladars and it is highly unlikely that they would go against their loyal and vital supporters, regardless of whatever the official regulations may be. Since the Taliban officially banned opium cultivation in April and destroyed a few hectares of opium fields in Helmand, the price of opium in Helmand has tripled. This means there will likely be more cash flowing into the hawala system compared to previous years.

After decades of war and U.S.-led intervention from the international community, Afghanistan’s economy is still failing. The hawala system and its total lack of oversight continue to allow the Taliban to profit from the opium trade and launder money with impunity. Instead of pushing for the Taliban to keep the unenforceable regulations from previous administrations in place, the international community should pressure the Taliban to observe basic human rights, particularly the rights of women. Once progress has been made on this most essential front, the international community should use points of leverage to prompt the Taliban to take tangible and concrete actions against the drug economy. These could include destroying drug processing labs, shutting down drug markets, and cutting links with large-scale drug smugglers. Such measures would strike at the heart of Afghanistan’s illicit economy, and therefore also at sources of funding and indirect support for the region’s militant groups.

Notes

[1] Barfield, Thomas. A Cultural and Political History of Afghanistan. Princeton University Press, 2010. p. 107.

[2] This visit occurred before 2001. Ex-Afghan hawaladar. Personal interview. Meath, Ireland. May 1, 2022.

[3] Barfield, Thomas. A Cultural and Political History of Afghanistan. Princeton University Press, 2010. p. 107.

[4] Hawaladars. Personal interviews. Dublin, Ireland. May 10-30.

[5] Goodhand, Jonathan, and David Mansfield, “Drug and (Dis)Order: Opium Economy, Political Settlements and State Building in Afghanistan,” Local Politics In Afghanistan, edited by Conrad Schetter, London: C. Hurst and Co, 2013. pp. 211–29.

[6] Christia, Fotini. Alliance Formation in Civil Wars. Cambridge University Press, 2012.

[7] Smith, Graeme. The Dogs Are Eating Them Now: Our War In Afghanistan. Random House Canada, 2013.

[8] Giustozzi, Antonio. “Tribes and Warlords in Southern Afghanistan, 1980 – 2005,” Crisis State Research Centre, Sep. 2006. p. 10.

[9] McElroy, Damien. “Afghan Governor turned 3,000 men over to the Taliban,” The Telegraph, Nov. 20, 2009.

[10] Three different hawaladars in Helmand. Personal interviews. May 5-30, 2022.

[11] Translated from the official statement by the Money Exchange and Monterey Service Union by the author.

[12] Hawaladars in Lashkargah, Helmand. Personal interviews. May 1-30, 2022.