Hawala

🔹 Definition

Hawala is an informal and trust-based system of value transfer that operates outside of conventional banking channels. It is widely used in parts of South Asia, the Middle East, and North Africa, and involves transferring money through a network of hawaladars (brokers) without any actual physical movement of funds.

Although hawala is not inherently illegal and may serve legitimate purposes—such as remittances—it poses significant anti-money laundering (AML) and counter-terrorism financing (CFT) risks due to its lack of transparency, regulation, and recordkeeping.

🔹 Frequently Asked Questions (FAQs)

Q1: How does the hawala system work?

1. A sender gives money to a hawaladar in one country.
2. That hawaladar contacts another hawaladar in the recipient’s location.
3. The second hawaladar pays the recipient the equivalent amount, often in local currency.
4. Settlement between hawaladars is done off-book through trade, cash, or future netting, often without any cross-border transaction records.

Q2: Why is hawala used?

• Speed: Transfers are often completed faster than traditional banks
• Access: Used in areas with weak financial infrastructure
• Anonymity: No formal account needed
• Cost-efficiency: Lower fees than many remittance services
  However, these same features make it attractive for illicit purposes, including money laundering, tax evasion, and terrorist financing.

Q3: What are the AML/CFT concerns with hawala?

• Lack of audit trail or transaction documentation
• Difficulty in verifying source and destination of funds
• Hawaladars may not be registered or supervised by financial regulators
• Often used to circumvent international sanctions or capital controls

Q4: How do regulators address hawala risks?

• Require registration and licensing of Money Service Businesses (MSBs)
• Impose recordkeeping and reporting obligations (e.g., suspicious transaction reports)
• Conduct supervisory inspections and targeted enforcement
• Promote financial inclusion to reduce reliance on informal systems
• Collaborate with FATF and international partners to monitor underground banking networks