HAWALA BUSINESS A RED ALERT

What is Hawala System?

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a successful definition of the hawala system that is used is "money transfer without money movement"

"Muhammad Nabeel, CAMS"

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‘‘Hawala’ mode of banking: a key factor in money-laundering

Among the methods terrorists world-wide use to move money from regions that finance them to target countries some hardly leave any traceable trail. As regulators learned recently, one of the weak points in the payments chain through which illicit funds can enter is a system of traditional trust-based banking originating in South Asia which is known as ‘hawala.’ The word hawala means “trust” or “exchange”. Often used in relation with the word “hundi”, which stands for “bill of exchange”, hawala is an unofficial alternative remittance and money exchange system enabling transfer of funds without their actual physical move. Traditional financial institutions may be involved but more often the system is used to bypass banks. There are an estimated 3000 international ‘hawala’ brokers operating in Asia. Allegedly, the business is monopolized by Asian migrants, who mostly operate from countries in the Gulf and South East Asia. Networks include trading points in the financial centers of Singapore and Hong Kong, and some of the biggest family-based money-dealers are based in London.

In principle, ‘hawala’ works as follows: Individual “brokers” or “operators”, known as ‘hawaladars’, collect money at the one end of the chain and others pay the same money at the other. For example, an expatriate working in the United States or in the Gulf who wants to send money back to his family, turns to a moneylender or trader with contacts in both countries giving him the money. The trader calls a trusted partner in the home country who delivers the amount to the family, minus a commission. For identification and the details of the trade often a code is used. The two traders settle accounts either through reciprocal remittances, trade invoice manipulations, gold and precious gem smuggling, conventional banking system, or by physical movement of currency. Usually,‘hawaladars’ operate independently of each other rather than as part of a larger organization. In general, they are merchants or small business owners who operate hawala activities alongside their normal business.

For the Asian immigrants, the ‘hawala’ system provides a speedy and reliable method to remit money back to home. In principle, it allows cash delivered at one place to be made available elsewhere within the time it takes to make a telephone call or send a fax. The system proves superior to any legitimate banking operation: No identification needs to be presented, commissions are very low, transmission is very fast, and the system is in operation 24 hours a day and 365 days of the year even in regions where no banks or other financial institutions exist. The latter also explains why the system is not only used by expatriates, drug barons and terrorists, but in some countries is quite common in rural areas. For example, in the 1980s, about 70 per cent of the total credit outstanding in Pakistan were estimated to be in the informal sector, and about 80 per cent of all informal credit were in agriculture.

‘Hawala’ has been a traditional method of moving money in South Asia. In the ancient China, it was known as “fei qian” or “flying coins”. The system spread to other Asian regions, the Middle East, eastern and southern Africa, Europe and the North America following immigration patterns.

Based on a man’s word there is a strong market segmentation in that, for example, an Indian expatriate will only trust an Indian ‘hawaladar’ and a Pakistani expatriate will trust a Pakistani ‘hawaldar’ and so on.

These days, although mainly used for legitimate transfers and often operating in conjunction with normal banking operations. The system is regarded as a key factor in money-laundering, other financial crimes and financing of illegal organizations committed in and associated with South Asia. ‘Hawaladars’ in Dubai, India and Pakistan are said to be forming a “hawala triangle”, which is responsible for a significant number of international money- laundering activities that have spread far beyond the region.

‘Hawala’ is illegal in many countries. However, banks all over the world, and even central banks, make use of the system. For instance, in May and June 2001 the State Bank of Pakistan turned to hawala shops in Islamabad to buy dollars in order to support the own currency. Even top-ranking Western corporations turn to ‘hawaladars’ for transactions to regions without a modern western-style banking system. In several OECD member countries, licensed traders legally perform hawala. In Germany, some dozens of hawaladers for transactions to regions without a modern western-style banking system. In several OECD member countries, licensed traders legally perform ‘hawala’. In Germany, some dozens of ‘hawaladars’ have been granted a license to provide financial services under the Banking Act. In the United Kingdom, on the other hand, money services businesses such as, Bureaux de Change, money transmission agents and cheque cashers still operate widely unregulated. A regulation for money services businesses is under way since June 2001.

As far as the economic impact of hawala is concerned above all, there are two aspects. One is the macro-economic effect it has on individual economies and state sovereignty. For example, according to Pakistan estimates amounts reaching the equivalent of billions of US dollars are channelled past the country’s tax authorities in this way every year. In India, there are estimates that, although forbidden, up to 50 per cent of the economy uses the hawala system for moving funds.

Another aspect is the impact on international financial markets, financial regulation and monetary policy. In principle, informal money transfer systems tend to reduce the effectiveness of traditional instruments of monetary policy in making it more difficult to judge the need for money balances in an economy and the reactions to changes in rates and prices. Besides, they hamper the supervision of money and capital flows and the fight against risky or illegal financial practices. This is the reason that financial action task force (FATF) and the Asia/Pacific group [APG] on money-loundering are paying close attention to the system.

On the other hand, there are two aspects which help to put in perspective the importance of hawala: First, with an estimated annual volume of $200 billion it is a rather minor phenomenon amid the vast amounts of cash flowing through the global markets each day. For instance, average daily turnover in traditional foreign exchange markets world-wide is estimated at $1,210 billion. Annual transaction values in the US CHIPS and Fedwire payment systems, the British CHAPS or the German EAF reach up to hundreds of trillion dollars. The second is, considering the internets used by large multinational firms operating world-wide, hawala which is only one among many informal payment systems by- passing the traditional banking system.

"References" Click here for more information https://www.justice.gov/usao-cdca

"References"Click here to Visit my Page on ACAMS, Gold Member of ACAMS. Muhammad Nabeel ACAMS