Do you know how the Hawala system became a growing concern of money laundering? Although Hawala is not a universal term, it appears to be universally recognised for its existence and money transfer mechanism. With a lack of banking access, businesses primarily opt Hawala system in specific geographies. Nonetheless, law enforcement agencies view it as a leading source of money laundering. Expatriates, overseas workers, and business owners are spread worldwide and send money to their family and friends when needed. Some of them knowingly, while others unintentionally get involved in money laundering when they transfer funds internationally using illegal sources such as Hawala. Do you want to know how to transfer money safely without involving any unlawful way or scam?
Let’s glance at what Hawala is and how it is connected with the crime of money laundering globally.
What is Hawala?
The word ‘’Hawala ‘’ is derived from Arabic, meaning to transfer. It is also known as Hundi, meaning ‘’ collect’’, Chop Shop banking, and flying money. It is traditionally associated with a money transferring mechanism.
In Hawala, money is transferred without the actual involvement of money or any wire transfer. It is operated in South Asia, the Middle East and Africa. Risk-free remittance allows terrorists and money launders to use it for money laundering.
How does it work?
Any individual who wants to transfer money gets in touch with a Hawala dealer X. Dealer X charges a commission for sending money. The deal gets the required information of the beneficiary. The individual receives a unique code.
Dealer X contacts another dealer Y from the beneficiary’s country. The dealer Y gives the money to the beneficiary that the dealer X asks for. To get the money, the beneficiary will share the code.
The whole transaction is based on trust. These dealers are called Hawala Brokers. These brokers are neither licensed nor authorised. Also, they will only keep an informal record of the transaction. It doesn’t involve any supervision from any regulatory authority. Thus, expatriates need to know that they risk their hard-earned assets when they send money back home through Hawala and other similar methods of international money transfers.
Types of Hawala
Three types of Hawala or similar service providers operate across the globe. These types are categorised by legitimate use;
- Pure traditional (legitimate)
- Hybrid Traditional (something unwitting)
- Criminal (Complicit)
Unregistered Money Transmitters
Hawala service providers are not registered in their own country, unlike regulated financial service providers. Hence, they are illegal in their own country. Several countries have started the process of regulation. It’s in the early stages.
An Alternative to Remittance Method
It is an alternative remittance system outside banks or regulated financial institutions. Mostly, workers use this method to transfer their remittances.
No Actual Transfer Of Funds
It involves a local cash pool to pay the beneficiary. It settles money without the transfer of funds.
Group or network
Traditionally Hawala system involves familiar, regional or tribal affiliation. It’s a network that serves specific communities.
Reasons for the existence of Hawala
- Lacking authorised banking system or financial institutions for money transfer
- Lack of banking access either in sending or receiving country
- Less documentation or involvement of Regulations
- Cultural preferences
- Paperless work and trust base money transfer
- Evade currency controls
- Tax evasion
- Mask criminal activities
Hawala system and Money Laundering
Hawala system is vulnerable to money laundering and terror financing risk because it allows the transfer of funds with limited risk of being identified. Lack of supervisory resources and fewer regulations create a high risk of money laundering practices. The entire unregulated Hawala systems are prone to terror financing and ML. Hawala system maintains records in a format that is not easily accessible to law enforcement agencies.
Furthermore, enforcing a practical regulatory framework is difficult in places that lack banking facilities and continue to make setups. Moreover, Hawala’s complexity, variety, and diversity make it challenging to shift into a regulated financial setup.
The lack of trace of the complete network is a significant problem as well, and due to this fact, it makes these countries highly vulnerable to money laundering. Thus, sending money home from abroad involves immense risks when Hawala or any other similar method is used.
Hawala and money laundering cases
Among many cases where criminal organisations use Hawala transactions, one is between French and Italian. In February 2019, a criminal group was arrested for involvement in money laundering through the Hawala system. The police detained almost 19 suspects in the case. The Algerian authorities held gold equal to 1 million in value.
Lack of documentation is an ideal scenario for criminals. The anonymity of the persons involved in the transaction leads to numerous criminal activities. The federal government of Belgium lifted the anonymity of prepared telephone cards after the terrorist attacks on Brussel in 2016.
Indeed, Hawala transactions are used as an alternative remittance, fulfilling the need of financial institutions. However, to keep them transparent, the regulatory framework is necessary. They must follow FATF’s particular recommendations to avoid money laundering and terror financing risks.
Transitioning unregulated processes to regulated systems is essential to avoid money laundering and terror financing. Meanwhile, providing access to the banking system is necessary for the countries to eliminate the gap in banking services.
ACE Money Transfer is one of the leading remittance service providers helping millions of expatriates to transfer funds internationally through completely authorised and legal channels. A massive number of overseas workers send money to Pakistan, India, Bangladesh, the Philippines, Nepal, Kenya, Ghana, Gambia, Senegal, and countless other countries from their destination countries using ACE’s services. Thus, it won’t be wrong to say that companies like ACE Money Transfer play a vital role in eliminating the evils of money laundering through completely legal cross-border money transfers. When you use ACE’s remittance services, you can make an instant, safe, and secure money transfer online from the middle of your comfort zone with ultimate peace of mind.