Hawala

banking

An informal worldwide network of businesses that offer foreign exchange and international funds transfer services to clients, but operate outside of traditional western banking channels.

Originating in India ( hawala means “providing a code” in Hindi), the hawala system is often the only means of currency exchange and funds transfer in countries and regions where no banking services are offered to individuals and small businesses.

Hawala transactions are often simply legitimate transfers of funds from overseas workers to their families back home. However, the system is coming under scrutiny as it is also a favored conduit of funds by money launderers, drug dealers, arms dealers, and terrorists.

In extremely bureaucratic countries such as India, an international bank transfer might be illegal or could take as long as a month to complete. Hawala transactions, on the other hand, are often completed in as little as three days, regardless of official regulations.

Hawala dealers are often able to offer more favorable foreign exchange rates and quicker turnaround time because they typically operate outside of government control, do not use standard banking records and often do not pay taxes.

As a result, hawala operations are legal and subject to government control in some countries, but entirely illegal in others. In 1994 the U.S. required hawala dealers to register with the government. The hawala system operates primarily in the Middle East, North Africa and Central, South and East Asia, but the network is worldwide.

How it works:

An individual gives a local hawala dealer cash and asks that it be transferred to a named individual in a foreign country. The dealer charges the remitter a transfer fee of from 1 to 4 percent for large transactions and from 5 to 20 percent for small transactions.

The hawala dealer than calls, faxes or e-mails (in code) a counterpart in another part of the world with instructions to give the funds to a named individual who uses a password or code as identification when collecting the money. In India the codes typically involve animals, (e.g., “five pigs” or “twelve hens.”)

Unlike typical western banking, the hawala dealer does not forward the funds to his counterpart. Both dealers make a record in their ledgers with the assumption that a counterbalancing transaction will occur at a later date. If one dealer has paid out a substantial sum over time to another dealer, a compensating shipment of valuable or saleable goods may be made. Such a shipment might include gold jewelry (such as 22-24 karat gold) that has an internationally known market value, or merchandise that the dealer can easily sell in his local market.

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