Hawala is an informal system of value transfer. It is performed through large networks of moneybrokers known as hawaladars. Hawala has a long history and tradition, spanning multiple centuries. It operates on a trust based system, without the physical movement of cash. Hawala exists worldwide but is most present in South Asia, the Middle East, and North Africa.
While Hawala provides opportunities for money transfer in communities that do not have access to regular banking systems, its informal nature also facilitates illicit activities, including money laundering and terrorism.
1 Historic brief
The Hawala system traces its roots back to 8th century India, where traders used it as a means to facilitate cross-border transactions. The term “hawala” comes from Arabic and means “transfer” or “trust.” Over the centuries, the system spread wider across South Asia and the Silk Road, where the possession of physical cash posed a risk of theft.
While the modern banking system largely replaced Hawala, it remains in use in many parts of the world without access to banks or where such systems are not trusted. Today, it is predominantly used for legitimate purposes, such as personal and business financial transactions, and for remittances by migrants. This system allows for rapid transfers but lacks formal records, making it difficult to trace transactions. Consequently, it also remains vulnerable to misuse for criminal purposes. [source, source]
2 Mechanism of Hawala
Hawaladars, or hawala dealers, operate outside of official banking channels and rely heavily on trust, family relationships, and regional networks. The process usually involves multiple steps:
- Initiation of Transaction: A sender in country A approaches a hawaladar in country A to send money to a recipient in country B.
- Payment to Hawaladar: The sender pays the amount they wish to send, along with a commission. The commission typically ranges from 0.5% to 7% of the amount being sent, depending on various factors such as destination and currency type.
- Communication with Counterpart: The hawaladar contacts a counterpart in country B, who is located near the recipient.
- Issuance of Code: After arranging the transaction, hawaladar A provides the sender with a unique code. This code is essential for the recipient to collect the funds.
- Disbursement of Funds: Upon receiving the payment instructions from hawaladar A, hawaladar B disburses the equivalent amount to the recipient in country B upon presentation of the code.
- Settlement Between Hawaladars: After the transaction is completed, hawaladars A and B will eventually need to settle their accounts. This can occur through various methods, including:
- Reverse Transactions: Balancing accounts through incoming and outgoing transactions without the physical transfer of funds.
- Cash Payments: Direct cash payments between hawaladars, which may involve cash couriers, especially in regions with limited border controls.
- Cross-Provider Balances: Involving multiple hawaladars to settle accounts across different jurisdictions.
- Record Keeping: Some hawaladars maintain rudimentary records of transactions, however, the level of detail varies significantly. [source, source]
3 Driving Factors
The main factors that lead to hawala use are cultural preferences that make it a favored method of money transfer in many communities, particularly in South Asia and the Middle East. Its convenience allows for quick and easy transactions, often without extensive documentation, making it accessible to individuals who lack access to other banking services. Additionally, hawala typically offers lower fees compared to traditional banking channels and facilitates faster transactions, which is crucial for those needing to send money urgently. The system’s reach into remote areas where banks may not operate enhances its accessibility, while the trust and reputation of hawaladars foster a sense of security among users.
Furthermore, hawala provides a level of anonymity not available through formal banking, appealing to those who prefer to keep their financial activities private (for both legitimate and illicit reasons). Its flexibility in transaction amounts and the ability to send money to various locations, combined with the lack of banking access for many users, solidify hawala’s continued relevance in different communities worldwide. [source, source]
3.1 Current Trends
The hawala system displays a strong sense of adaptability. Hawaladars are adopting digital platforms and cryptocurrencies to facilitate transactions, making it easier to transfer money quickly. Additionally, it continues to serve as a viable tool for migrants, refugees and other social groups that do not have steady access to other financial services. Its global reach allows individuals to send money across borders with relative ease. [source]
That said, due to the nature of hawala, it is actively misused for criminal activities such as terrorism, drug trafficking, migrant smuggling, and money laundering. This has led to calls for greater regulation. [source, source, source]
4 Illicit Activities
Hawala’s inherent characteristics – anonymity, lack of formal documentation, and reliance on trust – make it an attractive option for individuals and organizations engaged in illegal financial transactions. Criminal activities include:
- Drug Trafficking and Money Laundering: Drug traffickers and other organized crime groups use hawala because hawaladars rarely question the source or destination of funds, making it difficult to identify the sender or recipient. In Afghanistan, hawaladars may be involved in transferring funds between poppy farmers and opium users. [source]
- Human Trafficking: The system may be used to facilitate payments related to human smuggling and trafficking operations, enabling the movement of individuals across borders while obscuring the financial transactions involved. [source]
- Terrorism Financing: Terrorist groups, such as Al-Qaeda and the Taliban, use hawala systems to transfer funds discreetly to collect money derived from other illicit activities. [source, source]
In a similar fashion, hawala is used for corruption-related payments, tax evasion, and other fraudulent activities.
4.1 Challenges and Countermeasures
Many countries have implemented different regulatory measures to steer the limits of Hawala. Those regulations vary significantly by country. While in most countries hawala is illegal, it is regulated in others. For example, in the United Arab Emirates (UAE) and the United Kingdom, hawala remains legal as long as hawala operators register with the respective central banks and comply with regulations such as anti-money laundering (AML) and know-your-customer (KYC) measures. In the US, hawala became illegal post 9/11 as the US government suspected that hawaladars may have supported the money transfer for terrorist organizations. [source, source, source, source]
The downside of strict regulations can be that it pushes hawala systems underground without addressing the demand side of the phenomenon. Consequently, they can then become a law enforcement issue of larger proportion. [source]
Law enforcement agencies face challenges due to the cross-border nature of hawala. Funds can be transferred without going through formal channels, hiding the origin and destination of illicit funds. Given its anonymity, kinship ties among hawaladars, and the informal nature of transactions, it remains difficult to investigate.This is particularly true in areas where regulations are lax or not properly enforced. [source, source]
The global reach of hawala is mirrored by a fractured international regulatory environment. Nevertheless, regulations are necessary to fight illegal activities and promote financial stability.
5 Conclusion
Contrary to other forms of informal value transfer such as the Chinese underground banking system, hawala has many legitimate purposes and users. It serves as a financial lifeline for many communities around the world, allowing for simple, quick, and affordable money transfers.
That said, the same qualities also attract criminal actors who threaten those very same communities. While governments try to regulate it, it mostly operates outside formal financial systems, thus complicating enforcement. Its transnational nature requires extensive law enforcement cooperation to tackle these threats effectively.
It is unlikely that hawala will cease to exist anytime soon. Its long history, cultural practices, and practical benefits make it a viable option for many. While countermeasures against the misuse are essential for combating money laundering and terrorism, their effectiveness is also determined by whether the reliant communities are given alternatives. It will remain a difficult balancing act.
