Hawala is an informal money transfer system in which money is passed on through a network of brokers (who are known as hawaladars) without the actual/physical movement of cash. It is the transmission of money in ways other than the regular banking routes and hence sometimes called underground banking.
Hawala is an Arabic word which literally translates to “transfer”. It is also referred to as “hundi”. This is a system that does not necessarily be legally enforceable because it essentially depends on the concept of trust. The hawaladars hence, need not transact with the help of promissory notes.
How does Hawala Work?
Let us understand in greater depth with the help of an example:
- Assume Mr. Robert an employee working in the U.S wants to send $500 to his parents staying in India. Robert will approach a hawaladar in the US, say, Mr. Harvey and give him the money which 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 asks 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 own account after deducting commission and Harvey will now owe Arjun an amount of $500. This entire transaction beginning from Mr. Robert sending money to his parents receiving such amount seems to be complex but would be completed in a span of a few hours in some cases and while in other cases, a span of a maximum of 2-3 days.
From this, we can conclude that there are 5 major components in such a transaction namely –
- Sender(Mr. Robert),
- Receivers( Parents of Mr. Robert),
- Two Hawaladars( Harvey and Arjun),
- Money/funds ($500) and
- The passcode.
How will the two hawaladars settle the dues between them are not as predominantly important as that of the transaction itself but they do this with the help of a few transactions like cash transport, bank transfers, bets, smuggling of gold, etc?
Features of the Hawala System
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 there are no bank transfers.
- There are is verification of identification cards, certificates, etc. involved in such a system.
Why would such a System be Preferred even in Modern Time?
- 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.
- The time taken for transmission is comparatively less compared to the official route.
- This route can be preferred when money has to be transferred from a remote area where banking facilities are not available.
The following are some advantages of the hawala system.
- This system expedites the flow of money between countries where the banking route involves heavy charges and seems to be expensive.
- Easy to use if a trusted hawala broker is found.
- Persons employed outside a country can send money to their family members and friends conveniently, at a greater speed and at a comparatively lower cost.
- Transactions would be completed in a very short span.
- The efforts taken to open bank accounts could be avoided.
- The services are qualitative, efficient, and highly reliable.
The following are some disadvantages of the hawala system.
- 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 and hence during an investigation of any fraudulent transactions, no information can be conjectured.
- It becomes the main reason for the rise in black, unaccounted and undisclosed money in an economy and this, in turn, leads to corruption.
- It has gained disrepute as an easy way of sponsoring terror groups, illegal and suspicious activities.
Methods of Hawala
The most common methods used for Hawala are as follows –
- Shell Companies: Companies incorporated where there is no commercial purpose or substance and 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 but also carry out illegal activities and conceal such illegal profits with the help of profits of the other legal business.
- Electronic Fund Transfer: This means wire transferring of funds. Electing nominees 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.
How to Subdue Hawala 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.
To sum up, hawala is a transfer of money without the movement of money. that means the transmission of money without standardized banking systems.
This has been a guide to what is Hawala and its meaning. Here we discuss how does hawala works along with features, advantages, and disadvantages. You can learn more about accounting from following articles –