WHAT IS HAWALA AND HOW IT WORKS ?
“Hawala” ,
a word which is making headlines very often these days and can be
easily associated with Naresh Jain, Madhu Koda, Hasan Ali Khan and many
other Hawala Kings. But, What exactly is Hawala? How it works? and Why is this illegal ?
What is Hawala?
What is Hawala?
The word "Hawala"
means trust. Its is an alternative or parallel remittance system, which
works outside the circle of banks and formal financial systems. Hawala
is an ancient system of money transfer which originated in South Asia
and is now being used across the globe. This system mainly developed in
India, before the introduction of western banking practices. It is also
sometimes referred to as “Underground Banking”. Though it is being used
across the world to remit funds, but it is not a legal system. It works
on the basis of many middle men called the hawaldars or the hawala
dealers. The reason, why Hawala is extensively used inspite of the fact
that it is illegal, is the inseparable element of trust and extensive
use of family or regional affiliations.
How Hawala works?
Hawala
works by transferring money without actually moving it. In a hawala
transaction , no physical movement of cash is there. Hawala system works
with a network of operators called Hawaldars or Hawala Dealers. A
person willing to transfer money, contacts a Hawala operator at the
source location. The hawala operator at that end collects the money from
that person who wishes to make a transfer. He then calls upon his
counterpart or the other Hawala operator at the destination
place/country was the transfer has to be made. Now the hawala operator
at the tranferee’s end, hands over the cash to the intended recipient
after deducting a certain amount of commission. The best way to
understand Hawala is through understanding a single hawala transaction.
For example, Chinappa is a taxi driver staying at UK on an expired
tourist Visa. He wants to remit some money for his family in India.
Chinappa cannot approach an authorized money transfer agent/bank there
as he is an illegal immigrant in the UK. Thus Chinappa finally lands up
at a hawala operators office, who not only promises him to deliver the
cash to his native place in India at a reasonable commission , but also
in a very short period of time. Chinappa then hands over the cash to the
UK hawala operator. The UK hawala operator then calls his Indian
counterpart and asks him to deliver funds to Chinappa’s family member.
Any member of Chinappa’s family can now collect cash from the Indian
Hawala operator, after deduction of commission charges and on producing
an authentication code, which is generally used in all hawala
transactions. A reverse Hawala transaction can also be initiated, where a
father approaches the same Indian hawala operator for remitting funds
for his son studying in UK through the UK hawala operator. In this
manner, money never actually moves. The position of the hawala
operator’s in each others books gets squared off.
Is Hawala Illegal?
Yes, Hawala
has been made illegal in many countries, as it is seen to be a form of
money laundering and can be used to move wealth anonymously. As hawala
transactions are not routed through banks they cannot be regulated by
the government agencies and have thus emerged as a major cause of
concern. This network is being used extensively across the globe to
circulate black money and to provide funds for terrorism, drug
trafficking and other illegal activities. In India, FEMA (Foreign
Exchange Management Act) 2000 and PMLA ( Prevention of Money Laundering
Act) 2002 are the two major legislations which make such transactions
illegal.
Why people still use Hawala?
Inspite of the fact that hawala transactions are illegal, people use this method because of the following reasons:
- The commission rates for transferring money through hawala are quite low
- No requirement of any id proof and disclosure of source of income is there
- It has emerged as a reliable and efficient system of remittance
- As there is no physical movement of cash, hawala operators provide better exchange rates as compared to the official exchange rates
- It is a simple and hassle free process when compared to the extensive documentation being done by the banks
- It is the only way to transfer unaccounted income.
How do the hawaldars at the source and destination settle their balances between themselves ?
Typically, Hawala brokers or Hawaldars are business partners engaged in import and export of goods. They may be engaged in illegal transfers of goods like drugs or precious gems and jewellery.
To move goods illegally they would print an invoice with lesser money than the actual value. When a hawala operator pays a recipient, he might be actually paying of the debts owned by him to the operator.
Apart
from business settlements, rarely, the funding can be from illegal
means as an effort to launder money. The back payment between the hawala
brokers can happen as a counter hawala transaction as well.
The hawala agents keep a tally of the money that they owe to each other. Once the settlement is done, they don’t keep any record of that transaction, making the hawala very difficult to trace.
So,
the next time you come across the word Hawala, I am sure you will be
able to draw a picture about the transaction in your mind.
Discalimer
: I do not recommend you to use the Hawala method for money transfer.
This answer is meant solely for the purpose of quenching your Hawala
thirst.
