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written by | September 13, 2022

What Is the Hawala System and How Does it Work?

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Hawala is a traditional money transfer system used in the Middle East, North Africa and South Asia. The hawala system is used to transfer money between two parties without the use of a bank or other financial institution. The hawala system is based on trust and personal relationships between hawala brokers or hawaladars. 

The hawala system has been in use for centuries and is still used today because it is quick, efficient and secure. The hawala system is often used to transfer money between family members or to send money to friends and business associates. The hawala system is also used to send money to people in other countries who may not have access to a bank or other financial institution. 

Did you know?

The Hawala system was first developed in India during the 8th century.   

Understanding How Hawala System Works

The hawala system is used extensively in the Middle East, North Africa, South Asia, and Central Asia. In the United Arab Emirates, for example, an estimated 95% of all commercial transactions are conducted using hawala.  

The hawala system works as follows: 

1) A person who wants to send money contacts a hawala broker. 

2) The hawala broker contacts a hawala broker in the destination city. 

3) The sender gives the hawala broker the money that is to be sent, plus a fee. 

4) The hawala broker in the destination city gives the recipient the money minus a fee. 

The hawala system is often used by immigrants who want to send money to their families back home. Businesses also use it to send money to suppliers in other countries. 

The hawala system is not regulated, and there is no paper trail. This makes it difficult to trace the flow of money and makes the hawala system vulnerable to abuse.

Also Read: All About UPI– United Payments Interface

Parties in the Hawala System

Many different people use the hawala system for many different purposes. There are three main groups of people involved in the hawala system:

1) The hawaladars: People who run the hawala system and they are the ones who collect the money from the sender and then pay out the money to the receiver.

2) The senders: People who want to send money to someone else, and they give the money to the hawaladar, who then pays out the money to the receiver.

3) The receivers: People who want to receive money from the sender. They give their information to the hawaladar, who then pays out the money to them.

Features of the Hawala System

Let’s look into the features of the hawala system to see and how it varies from other existing systems 

1. Informal System

  • The hawala system is an informal value transfer system that operates outside of traditional banking channels.
  • The hawala system is based on trust and personal relationships.
  • Funds are transferred via a network of hawala brokers, with each broker trusting the next in the chain to make good on the transaction. 

2. Hawala brokers, or hawaladars, act as intermediaries 

  • Hawala brokers, or hawaladars, are intermediaries who facilitate the transfer of funds between sender and receiver. 
  • Hawaladars typically charge a commission for their services. 
  • The hawala system is often used to send money to family and friends in other countries. It is also used to facilitate business transactions and to pay for goods and services.

3. Funds are transferred via a network of hawala brokers

  • The hawala system is based on trust and personal relationships. 
  • Funds are transferred via a network of hawala brokers, with each broker trusting the next in the chain to make good on the transaction. 

4. Often used to facilitate illicit or illegal transactions.

  • Because the hawala system is based on trust, it is often used to facilitate illicit or illegal transactions.
  • The hawala system is used extensively in the Middle East, Africa, and South Asia. 
  • The hawala system has recently been used to launder money and finance terrorist activities.
  • US law enforcement agencies are currently investigating the hawala system

Also Read: How to make TDS Payment Online.

What Are the Benefits of the Hawala System?

Some benefits of the hawala system include: 

Fast and Efficient 

The hawala system is fast and efficient because hawala brokers can quickly and easily transfer funds between two parties without going through the traditional banking system.

Convenient 

Hawala brokers can often be found in convenient locations, such as markets or shops which makes it easy for people to use their services.

Cheap

Hawala brokers typically charge lower fees than banks. This helps people to send money at lower costs and makes it a more attractive option.

Simple to Use 

All that is typically required to transfer funds using the hawala system is the name and contact information of the hawala broker. This simplicity makes it simple for anyone to use. 

Relatively Safe

Hawala brokers typically have a good reputation and are trusted by their clients. Therefore, the system is run on trust and personal relationships, and it is relatively safe. 

Anonymous

Transactions can be handled confidentiality as hawala brokers typically do not keep records of their client's transactions. This ensures that the privacy of the users are protected. 

Flexible

Hawala brokers can typically tailor their services to meet the needs of their clients. Unlike banks and financial institutions, they can provide various services and are not bound by any restrictions. 

Widely Used

Though the network is more prevalent in the Middle East, millions of people around the world use the hawala system. The network has also been around for centuries. 

Efficient in Cross Border Transactions

This is because hawala brokers can quickly and easily transfer funds between two parties in different countries. Unlike the various procedures and requirements needed by banks and other institutions, hawala brokers barely require any documentation.  

Concerns Regarding the Hawala System

On the one hand, the hawala system has many benefits that make it a convenient and affordable way to transfer funds. On the other hand, criminals often abuse the hawala system for illegal activities such as money laundering, terrorist financing, and drug trafficking. While the hawala system has many benefits, the potential for abuse makes it a risky way to transfer funds, and this is why many countries have banned the hawala system.

There are a few illegal activities where the hawala system is used. These activities include money laundering, terrorist financing, and drug trafficking. The hawala system is often used for these activities because it is fast, efficient, and anonymous. While the hawala system has many benefits, it is also often abused by criminals, and this is why many countries have banned the hawala system.

In the modern era, the hawala system has been used to finance terrorist organisations and launder money. The hawala system has come under scrutiny in recent years because it has been used to finance terrorist activities. In response to this, the United Nations has enacted regulations to try to control the hawala system and prevent it from being used to finance terrorism.

Also Read: How Digital Payment Methods are Profiting Small Businesses - Modes of Digital Payment

Conclusion:

In India, hawala is commonly used to send money to family members who live in rural areas. This is because many rural areas in India do not have access to traditional banking services. In the USA, hawala is often used by immigrants to send money to their families back home. This is because it is a cheaper and faster way to send money than traditional methods such as wire transfers.

There is no specific penalty under Indian law for hawala transactions. However, if the hawala transaction is part of a larger criminal scheme, then the person may be charged with money laundering or other criminal offences. In the USA, hawala is illegal. The penalty for engaging in hawala transactions is up to 10 years in prison and a fine of up to $250,000 ( around ₹2 crores)

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FAQs

Q: What is the punishment for hawala?

Ans:

There is no specific punishment for hawala, as any central authority does not regulate it. However, if hawala is used to fund illegal activities, such as terrorism, then the punishments can be severe.

Q: What is Hawala in terrorism?

Ans:

Terrorist organisations have used the hawala system to fund their activities. This is because it is a quick and easy way to transfer money without being detected by authorities. Hawala can also be used to buy weapons and other illegal items.

Q: What is reverse hawala?

Ans:

Reverse hawala is a type of hawala transaction where the money is transferred back to the original sender, usually through a different hawala broker. This is often done to avoid detection by authorities or to avoid paying taxes. Reverse hawala can be used for legal or illegal purposes.

Q: Who controls hawala transactions?

Ans:

There is no central authority that controls hawala transactions. The system is run by hawala brokers, based on trust and reputation.

Q: What are the challenges for the hawala system?

Ans:

The hawala system faces challenges such as no central authority regulating it. This means that there is no way to track or monitor transactions, making it difficult to prevent money laundering and other illegal activities. Therefore, most governments have declared hawala networks as illegal.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.