What Is Hawala?
Hawala is an informal method of transferring money without any physical money actually moving. It is described as a "money transfer without money movement." Another definition is simply "trust."
Hawala is used today as an alternative remittance channel that exists outside of traditional banking systems. Transactions between hawala brokers are made without promissory notes because the system is heavily based on trust and the balancing of hawalabrokers' books.
Key Takeaways
- Hawala (sometimes referred to as underground banking) is a way to transmit money without any currency actually moving.
- Hawala networks have been used since ancient times. Today they are found among expats of developing countries sending remittances home.
- Hawala provides anonymity in its transactions, as official records aren't keptand the source of money can't be tracked.
- Hawala is also finding a footing in the world of financial technology, which grants access to money transfers among the unbanked and underbanked populations of the world.
- Some countries, like India, have made hawala illegal due to its informal nature and absence of regulation or oversight.
Understanding Hawala
Hawala originated in South Asia during the 8th centuryand is used throughout the world today, particularly in the Islamic community, as an alternative means of conducting funds transfers. Unlike the conventional method of transferring money across borders through bank wire transfers, money transfer in hawala is arranged through a network of "hawaladars" or hawala dealers.
Hawala dealers keep an informal journal to record all credit and debit transactions on their accounts. Debt between hawala dealers can be settled in cash, property,or services. A hawaladar who doesn't keep their end of the deal in the implied contractual system of hawala will be tagged as one who has lost their honor and will be excommunicated from the network or region.
Hawala is thought to come from the Arabic word for "assignment" or "bill of exchange" or the Hindi word for "reference."
Migrant workers who frequently send remittances to relatives and friends in their countries of origin find the hawala system advantageous. Hawala facilitates the flow of money between poor countries where formal banking is too expensive or difficult to access.
In addition to the convenience and speed of conducting hawala, the fees are usually low compared with the high rates that banks charge. To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees. The system is also easy to use, as one only needs to find a trusted hawaladar to transfer money.
Benefits of Hawala
Hawala allows people to transfer money even if they don't have formal banking relationships or access to established financial networks. For people without a government-issued ID or bank account, hawala networks may be the only way to send remittances, particularly if the destination is in another country. In other circ*mstances, it may be cheaper or faster than dealing with the paperwork of official channels.
For this reason, hawala networks are frequently used in countries where there are strict capital controls or sanctions on the flow of money. Traders and expatriates from sanctioned countries, like Iran, might use hawala networks to make payments to their counterparties in neighboring countries.
Example of Hawala
How does hawala work? Let’s say Maryam needs to send $200 to Amir, who lives in another country. She will approach a hawaladar, Nasir, and give him the amount of money she wants Amir to receive, including the details of the transaction: the name of the recipient, city, and password.
Nasir contacts ahawala dealerin the recipient’s city, Muhammed, and asks him to give Amir $200 on the condition that Amir correctly states the password. Muhammed transfers the money to Amir from his own account, minus commission, and Nasir will owe Muhammed $200.
The transaction initiated by Maryam and concluded by Amir’s receipt of the funds takes only one to two days or,in some instances, just a few hours. No money is movedand no IOUs are signed and exchanged by Nasir and Muhammed, as the hawala system is backed only by trust, honor, family connections,or regional relationships.
Hawala provides anonymity in its transactions, as official records aren't keptand the source of money that is transferred can't be tracked. Because money laundering aims to hide the source of cash that is generated from illegal activities, hawala is often used as a system for money laundering.
Hawala and Illegal Activities
The very features that make hawala an attractive avenue for legitimate patronsalso make it attractive for illegitimate uses. Thus, hawala is frequently referred to as underground banking. This is because money launderers and terroriststake advantage of this system to transfer funds from one location to another.
In addition, corrupt politicians and the wealthy who would prefer to evade taxes use hawala to anonymize their wealth and activities. Cash generated from business transactions that aren't recorded can't be taxed.
Hawala is also used to fund terrorism, which makes it more difficult to stop terrorism. A large portion of discovering terrorist cells involves tracing the movement of money, as terrorist organizations are funded and need money to buy weapons and feed their people. Hawala transactions make this movement of money easy as there is no paper trail from the source of funds to the terrorist organization.
Hawala and Government Regulation
Because hawala transfers aren't routed through banks and, hence, aren't regulated by governmental and financial bodies, many countries have been led to re-examine their regulatory policies in regard to hawala.
For example, in India, the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) are the two major legislative systems that deter the use of hawala in the country. India prohibits informal hawala transactions and people from entering into them by strictly defining the types of transactions not allowed, which include the creation or procurement of any asset outside India.
In Pakistan, informal Hawala transactions are prohibited as well. The country specifies what entities are allowed to make remittances and currency exchanges. There are laws in place that require money changers to register and comply with regulations to become foreign exchange companies within two years and if they don't register, they aren't allowed to operate.
Afghanistan's more than 300 money exchangers have organized themselves into a self-regulatory body that has created rules and regulations that all members must comply with. It has been more difficult for the country to bring unregistered money exchangers into the fold to prevent illegal activities through hawala exchanges.
Some countries have made hawala illegal due to the difficulty of enforcing regulations.
Most countries have laws related to informal funds transfer systems, like hawala, that seek to curb the negative activities created by such a system.
Hawala and Fintech
Some fintech companies are implementing the hawala system in providing financial services to the unbanked and underbanked populations of the world. Mobile banking and payment platforms, such as Paga and M-Pesa, are revolutionizing the financial system in certain Africancountries by promoting financial inclusion through the hawala system of financial services.
Is Hawala Illegal?
Hawala trades are illegal in the U.S. and many other countries because financial regulations require money services businesses to obtain appropriate licenses and follow anti-money laundering laws.
What Is Hawala Money?
Hawala money is funds that are transferred using the hawala system, in which no actual movement of funds from one account to another account happens, no paper trail is created, and no promissory notes exist.
What Is the Punishment for Hawala in India?
The punishment for hawala in India is:
- A monetary penalty of up to three times the sum involved with a cap of 200,000 Indian rupees (about $2,400).
- Confiscation of the currency, security, or other money and property related to the violation.
- Imprisonment, if the penalty is not paid.
Is Hawala Legal in Dubai?
Hawala is legal in Dubai as long as the hawala provider is registered with the United Arab Emirates Central Bank and abides by the regulations that exist.
The Bottom Line
Hawala is an informal funds transfer system that allows for the shifting of money from one person to another without the actual movement of money. It is a simple process that requires no documentation and, therefore, is an anonymous system of moving money. This has been beneficial for many poor countries where individuals move abroad to work and send money home, avoiding costly transfer fees and other required documentation.
Because of its anonymity, hawala also has been a means for illegal activity to take place, such as money laundering and the financing of terrorism. For this reason, many countries prohibit hawala or have placed regulations on it.
