What is Hawala?

Hawala is an illegal method of remittance across countries. A bunch of people called money brokers are the middle men who make the transfer. This method of remittance does not involve physical movement of cash.

It is also known as Hundi. The word Hawala means trust. The Hawala system works based on mutual trust between the Hawala agents.

It works outside the circle of banks and financial systems. The remittance happen based on communication between the hawala agents. It is an alternate to traditional remittance system and is used across the world though it is not legal.

So how does Hawala Remittance work?

Hawala system works with a network of operators called Hawaldars or Hawala dealers. A customer contacts a Hawala agent at the source location.

The Hawala operator at that end collects money from the person who wishes to make a transfer. He calls up his counterpart in the country were the transfer has to be made. The local guy hands over the cash to the recipient after deducting a commission. The source operator promises to settle the debt to the destination operator at a later time.

For example, a person in Afganistan wants to transfer some money to some one in US. He gives the money to the Hawala broker in Afganistan. The broker accepts it and calls up his colleague in US. He gives the money in dollars to the person to whom it has to be transferred.

The Hawala transfer happens on trust. Usually an identification code is also used. If you furnish the id code you will get the money.

In a Hawala transfer, the money enters the hawala system in local currency and leaves as foreign currency. The currency exchange happens at a rate set by the agents and not the official rates. This way they make an addition profit than the commission.

So who funds the Hawala money?

Hawala brokers keep a tally of the money that they owe to each other. The money that is paid to the recipient could be settled off in between. Sometimes the funds are retrieved from an illegal source of income.

It is quite possible that the Hawala brokers are doing other businesses than transferring money. To move goods illegally they would print an invoice with lesser money than the actual value. By paying for the hawala recipient the guy may be actually paying off the debt.

Why would people use Hawala?

People prefer Hawala as it provides better benefits than a traditional transfer.

Fast and Convenient - The delivery happens in one or two days maximum. You don’t need to provide id proof of anything to make the transfer.

Low Commission rate - The commission rate for transferring money is far low compare to banking methods.

Higher Exchange rates - As there is no physical movement of cash the brokers are able to provide better exchange rates than the official exchange rate.

No traceability - As this is a very informal method of money transfer government cannot actually regulate the transactions, making the money non-taxable and devoid of other legal concerns. Hawala is a scrutiny free remittance channel.

Efficiency - The Hawala system is very efficient as the money is delivered in one or two days as compared to one week time for an international wire transfer. It costs less and money is delivered fast.

Reliable - International money transfer system working is really complex with the correspondent banks. It is a real headache to track the money in case of some mistake. For a Hawala transaction there is no physical transfer of money, unlike a bank transfer where the money transfer status is ‘in transit’.

Hawala and Money Laundering

Basically money laundering involves introducing large amount of illegal money into the financial system. The illegal money could be obtained from crimes like drug sales or illegal goods sales.

A Hawala transaction involves conversion of foreign money to local currency without actually converting it. The local currency funding can be from a crime source making it illegal. Some of the Hawala transaction converts worlds black money to white money. With the way it works, it could be easily categorized as a way of money laundering.

Then why does Hawala work?

Hawala customers find it more cost effective than other remittance methods. It is easy to set up a Hawala Agency. The employees are paid less and they are not even in the records. Very less infrastructure as low as a mobile phone and a notebook can become a hawala agency.

The Hawala agents can be doing other businesses as well. And this money transfer simply helps in settling the accounts better. The Hawala agents can make profit from the commission and also from the foreign money exchange rates.

Facts about Hawala

Happens based on trust - The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system. Hawala transactions are usually based on trust and leave no written record.

No legal enforcement - As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment.

No records maintained - No records are produced of individual transactions; only a running tally of the amount owed by one broker to another is kept. Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions. The payment is almost made in person.

Hawala is illegal - Hawala remittances are surely not legal. They don’t come under government jurisdiction. And in some countries like US and India, it is declared illegal.

How to know if it is Hawala?

Hawala is actually a simple process of transferring money using a network of trusted individuals. Hawala agents advertise in local dailies or even internet as ‘send rupees to India’ or something similar usually in local language. This ad could be well placed along with some Indian stuff like latest bollywood movie rentals etc.

The Hawala money once enters the financial system is not easy to differentiate from the legal ones. That is the reason why Hawala though illegal can’t be regulated.

Hawala is a method for remitting money to India who doesn’t want to involve in the hassle of banks. It surely is a simple and attractive for the customers. Though Hawala is not legal, who can resist the offer of more value for your money?

That said, SendMoneyIndia.org team do not recommend using Hawala method for money tranfer. This article is just for your information.