Hawala is an Arabic word that translates to “transfer.” It is an informal money transfer system in which money is passed on through a network of brokers known as hawaladars without cash’s actual/physical movement. It is the transmission of money in ways other than the regular banking routes, sometimes called underground banking.
A hawala transaction is a system that is not necessarily legally enforceable because it essentially depends on the concept of trust. The hawaladars hence, need not transact with the help of promissory notesPromissory NotesA promissory note is defined as a debt instrument in which the issuer of the note promises to pay a specified amount to a party on a particular date.. It is also referred to as hundi in some places.
Table of contents
- Hawala is an informal money transfer passed on through a broker’s network without cash’s actual/physical movement. It is the money transmission in ways other than the regular banking routes, sometimes called underground banking.
- Hawala is an Arabic word that translates to “transfer.” It is also known as “hundi.”
- It is a system that is not necessarily legal because it depends on the concept of trust. Hence, hawala need not transact with promissory notes.
- The features of the hawala system are: the concept of trust and reputation, legitimate and illegitimate transactions, funds remittance is the side business of hawala, no physical cash or bank transfers, and involves verification of identification cards, certificates, etc.
How Does Hawala Work?
Hawala or underground banking is a network through which hawala money is transferred without using banking systems. These transactions are unregulated and exclusively based on trust among the parties involved.
To facilitate tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. .
Ease of transmission is one of the major points why individuals tend to gravitate towards transactions of this nature. The time for sending is comparatively less than the official route. This route can be preferred when money has to be transferred from a remote area where banking facilities are not available.
However, since a hawala network is not ideal for an economy like the traditional banking system and taxation or regulation is not possible, the following steps can be taken to subdue or control these transactions.
- Tracking suspicious activities.
- Employing more investigating agencies.
- Introduction of stringent laws to punish the parties involved in such activities.
- Reduction of hindrances in the normal banking routes so that people willing to carry out genuine and legitimate transactions do not prefer the hawala route.
- Taking steps to reduce corruption.
Let us discuss with the help of examples to understand the hawala network.
- Mr. Robert, an employee in the U.S., wants to send $500 to his parents to stay in India. Robert will approach a hawaladar in the U.S., Mr. Harvey, and give him the money he wants his parents to receive, along with their details and a passcode.
- Harvey will, in turn, contact a hawala dealer Mr. Arjun in the city of Robert’s parents and ask him to remit the amount to them if they state the correct and matching passcode.
- Arjun transfers the money to Robert’s parents from his account after deducting the commission. Harvey will now owe Arjun $500. This whole transaction, beginning with Mr. Robert sending money to his parents to receive such an amount, seems complex. Still, that would complete it in a few hours in some cases, while in other cases, a maximum of 2-3 days.
From this, we can conclude that there are five major components in such a transaction, namely: –
- Sender(Mr. Robert)
- Receivers( Parents of Mr. Robert)
- Two Hawaladars( Harvey and Arjun)
- Money/funds ($500)
- The passcode
How the two hawaladars settle the dues is not as important as the transaction itself. But they do this with the help of a few transactions like cash transport, bank transfers, bets, smuggling of gold, etc.
India has been an epicenter of the hawala network. Since it is illegal, the police and the Enforcement Directorate (ED) constantly conduct raids and confiscate cash from individuals.
One such raid in February 2023, saw a bust of a net worth over Rs. 300 Crore in Kolkata, India.
This raid was conducted simultaneously at 5 places that were allegedly part of this network.
The following are features of the hawala system:
- It is based on the concept of trust and reputation.
- Transactions include both legitimate and illegitimate ones.
- Hawaladars need not be in the primary business of money transmission, i.e., the remittance of funds is a side business of hawaladars.
- There is no physical moment of cash or bank transfers.
- There is verification of identification cards, certificates, etc., involved in such a system.
The most common methods used for hawala transactions are as follows –
- Shell Companies: Companies incorporated with no commercial purpose or substance; the main aim is to conceal the main favorable parties behind the transaction.
- Smuggling Currency Notes
- Companies in Disguise: Companies that are incorporated to carry out an activity and carry out illegal activities and conceal such illegal profitsProfitsProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. with the help of earnings of the other legal business.
- Electronic Fund Transfer: This means wire transferring of funds. Electing nomineesNomineesA nominee is an individual or entity that under financial terms gains access to assets and securities, including bank deposits, real property, and stocks, on behalf of the original owner. While serving as a trustee or guardian to safeguard assets in the absence of the actual owner, the designated party gets powers to conduct financial transactions. who would carry out such transactions on their behalf.
- Smurfing – Also known as structuring, it is the practice of administering large transactions into smaller transactions so that it does not catch the eye of the regulatory authorities and does not raise suspicions.
Advantages & Disadvantages
Despite being an unregulated and a dark form of transferring money, there are advantages and disadvantages from the point of view of the individuals involved in the transactions. Let us understand the advantages and disadvantages of transferring hawala money.
- This system expedites money flowMoney FlowMoney flow (MF) refers to a mathematical function used to analyze changes in the value of a security by multiplying its typical price by daily trading volume. between countries where the banking route involves serious charges and seems expensive.
- Easy to use if a trusted hawala broker is found.
- People employed outside a country can send money to their family members and friends conveniently, at a greater speed, and at a comparatively lower cost.
- It completes transactions in a concise span.
- It avoids the efforts taken to open bank accounts.
- The services are qualitative, efficient, and highly reliable.
- It is illegal in a few countries.
- There are penalties imposed in a few countries for carrying out such transactions.
- Hawaladars usually do not maintain any records of their transactions. Hence, no information can be conjectured during an investigation of any fraudulent transactions.
- It becomes the main reason for the rise in black, unaccounted, and undisclosed money in an economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.. That, in turn, leads to corruption.
- It has gained disrepute as an easy way of sponsoring illegal and suspicious activities of terror groups.
Frequently Asked Questions (FAQs)
The Arabic word hawala refers to the transfer or change. It also refers to the bill of exchange, promissory note, or traveler’s check. At the same time, hundi refers to an alternative operating system outside legal banking networks.
Hawala trading is illegal in the United States and many other countries since economic controls need money services businesses to get valid licenses and adopt anti-money laundering laws.
The hawala broker, or hawaladar, takes the cash at their workplace and imposes an affordable commission to transmit the money. There is no delivery charge in the system.
Hawala means a transfer of informal money through a broker’s network. In comparison, money laundering means transforming illegal money into legal money. Moreover, in such cases, the government does not receive any black money tax due to the absence of accounting.
This article has been a guide to the Hawala meaning. Here, we explain its system, examples, methods, and advantages & disadvantages. You can learn more about accounting from the following articles: –