The hawala system can be (and has been) utilized by criminal organizations to transfer funds in or out of a country with little notice by law enforcement. Because of this, Hawala money transfers are unregulated and while it’s legal in certain jurisdictions, it may be illegal in others. In India and Pakistan, for example, using systems of trade like hawala is deemed illegal. Hawala is not the only alternative money remittance system in existence. Similar means of transferring money outside the regular banking system exist in China, Hong Kong, the Philippines, and Thailand, though they go by different names. These systems make it easy to transfer money to those who live in countries with a lack of regulated facilities, such as banks. The hawala system is built on trust, honor, and relationships, rather than regulated banking structures. Below, we’ll take a look at an example of how it works. Say Ali emigrated to the U.S. from Pakistan but he has family still located there that he supports financially. Ali wants to send $10,000 to his mother. The first step for Ali is to seek out a local hawaladar in your area. Once found, Ali then gives $10,000 to the hawaladar, along with details of the transaction: the name of the recipient, a password, and the city where the money is going. Ali’s hawala dealer then connects with another hawaladar in Pakistan, directing them to give Ali’s mother $10,000 if she can provide the password. She tells the hawala dealer in Pakistan the password and collects the $10,000. At this point, the transaction is complete for Ali and his mother. The first hawaladar, though, will have to settle up with the one in Pakistan, which may be done through the payment of money or the transfer of goods.
How Hawala Works
Hawala works completely independently of the traditional banking system, and is focused strictly on trust and connections. It is a method of transferring money without actually moving it. As the previous example illustrates, the movement of money occurs between four entities:
The person sending the moneyThe sender’s hawaladarThe recipient’s hawaladarThe person receiving the money
This informal money transfer system is often used in areas where regulated banking doesn’t exist or in cases where the sender wants to avoid steep transfer fees or unfavorable exchange rates. No money actually crosses international lines in these transactions. Instead, the sender gives the money to their hawaladar, who then directs the recipient’s hawaladar to make payment to the receiver. Hawaladars can maintain their own record-keeping systems to track each remittance, but often, there are no records of these transactions. They can also record the fees they charge and how they’re reimbursed for money they pay out to recipients. Again, this reimbursement can come in the form of cash, property, or services. In Dubai, for example, unregulated financial dealings are more or less allowed. Because of this, many South Asian individuals, such as Indian and Pakistani businessmen, maintain offices in Dubai. This allows them to wire money to the city and avoid regulations elsewhere.
Benefits of Hawala
Hawala can be a desirable method of transferring money for several reasons. The main advantages of the hawala system include:
Privacy: Since transactions take place between senders, receivers, and hawaladars, no one else outside the transfer needs to know about them. There are rarely records kept, leaving no paper trail.Exchange rates: The exchange rate for transfers made through a hawaladar may be more favorable than those offered by a bank.Convenience: People who want to send or receive money through hawala don’t need to open a bank account first; instead, they can go to a local hawaladar. Speed: Money transfers made through hawala can be much faster than a typical wire transfer.
Criticisms of Hawala
While hawala is legitimate and legal in many places, it’s earned a poor reputation because of its misuse in money laundering operations. Hawala can be used by terrorist groups to transfer money undetected in order to fund terrorist activities in other countries. For that reason, it’s largely considered to be a security risk in the U.S. For example, it’s believed that Al Qaeda relies on the hawala system to transfer funds on a global scale. The United Nations Office on Drug and Crime has also estimated that, as of 2020, the Taliban collected nearly $150 million annually in drug profits by transferring funds through Hawala. Due to past events, today, Hawala is often linked to the Taliban in connection with the illegal opium trade in Afghanistan. Hawala can also be used to launder money in other settings. For example, a wealthy individual who wishes to avoid paying taxes on all of their income or assets may use hawala to transfer money.
Hawala vs. Traditional Banking
First, hawala does not require the sender or the receiver to have a bank account. This can make it appealing to people who are unbanked or underbanked. And again, hawala is not regulated; transfers are based on trust among the various actors in a transaction. There’s also a difference in speed. Transfers made through the hawala system can be near-instantaneous as hawaladars simply need to communicate the transfer of funds to one another. With an international wire transfer, on the other hand, it can take several days for money to hit the recipient’s bank account. Finally, hawala may offer lower fees and better exchange rates compared to money transfers made through a bank. A hawaladar may charge a commission that’s less than the fee associated with an international wire transfer. They may also offer a more favorable exchange rate than a bank. Before sending or receiving money through hawala, it is important to understand the potential risks if you are taking part in an illegal act, such as a money-laundering scheme. Money laundering is a federal crime punishable by fines and time in prison. The U.S. laws apply to anyone who engages in a financial transaction while knowing that the funds came from criminal activities.
