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?

 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.