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How Hawala money laundering technique is used


Hawala is an informal method of transferring money without physically moving the money. Hawala system (also called Hundi Bank or Chop Shop). It is one of the important systems used to transfer funds from one place to another. It is commonly known as underground banking or hawala.

Havaldars are people who potentially use their contacts and also help relatives. This is a unique money laundering system known as havaladars. This type of system is commonly used in the Middle East, Africa, etc. The Hawala system is one of the most cost-effective systems that have been developed. Hawala is now considered a unique parallel economy.

History of Havala

The khaval system in money laundering appeared at the beginning of the 8th century. Hawala used to be one of the important fund transfer technologies that can be transferred through geographic mode. From the early years, the hawala became quite sophisticated.

It has been identified as one of the important tools along with the Silk Road for trade from one country to another. As the 20th century progressed, the Hawala system was replaced by major changes in the banking system that were proposed.

Understanding hawala

Created centuries ago in India and China, before the creation of Western financial systems, it was used to ensure the safe and convenient movement of money. Merchants who wanted to send funds back to their country deposited them in a hawala “banker”.

For a small fee, banker would arrange for the funds to be made available to another “banker” in another country. The two bankers then settled their accounts, usually once a year. The two bankers are also involved in money laundering in general.

This process is still popular with immigrants or seasonal workers who want to (legally in this case) send small amounts to their home country. The system is considered unique and different from modern banking conditions. This is usually initiated through the honor system.

Another aspect regarding the oral and written record can be taken into account: the promissory notes being drawn up were never exchanged between the bearers. The dealer maintains documentation of credit and debit notes received from customers. He tries to calculate them in the form of monetary transactions, distribution of property, etc.

How does the Hawala system work?

Hawala system which is initiated as it works independently. The legal or judicial system is not involved in this. No written contract or agreement is initiated at the time of operation of the Hawala system. Hawala money transfer systems involve transferring the value of currency without physically moving it.

A Hawala broker in the recipient’s city/country contacts the beneficiary and delivers the funds. The recipient can receive funds without presenting identity documents other than the previously agreed upon code.

The crucial role of hawala

When concluding a Hawala transaction, there is actually no initiation of cash in physical form. There is one Hawala broker who monitors the transactions that take place. This person plays an important role in initiating transactions. The system is built on mutual trust. One of the important jobs that a broker must do is to document the transaction in an informal journal or ledger that is designed to enter all transactions. Hawala brokers are not licensed.

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The relationship between hawala and money laundering

Underground banking plays an important role in transactions. Hawala is considered one of the important forms of underground banking. Money launderers use this technique to launder money from one country to another, which includes geographic areas as a whole.

Everyone thinks that how can the system be used in the process of money laundering?. As seen, there is a lot of red tape in the system because they are not defeated through the formal banking system that is in place. There are no state regulations developed according to official bodies.

It ensures anonymity in its transactions as it is impossible to trace the source of the money transfer and there are relatively few written and official records.

The hawala system is used to allow for abuse

The Hawala system creates a legitimate purpose for labor migration. These systems make launderers susceptible to laundering illicit money through money laundering. Because they are anonymous and require minimal documentation, external control over transactions is limited and detection risks are minimized. It is believed that it can be abused by individuals and groups that have been used to transfer illegal funds to start illegal activities in general.

Lack of evidence

The lack of evidence plays an important role in understanding the connection between the system and money laundering. Irregular and illegal flow of money is one of the transactions that is difficult to trace. This is because criminals are adopting new techniques to avoid detection of the money laundering that is taking place. The empirical evidence that has been developed works to some extent. After that, it doesn’t exist.

Users prefer Hawala

The system is defined as one of the fastest transaction methods used to transfer money around the world. Knowing this new technology and the tool developed, most of the users are attracted to this system. There are many advantages like transferring money to a poor person through the system has now become the easiest way of transaction these days. This system is also useful for less developed countries where there is no formal way of banking. 3

Impact of hawala on India

The system that is developed is related to the illegal activities that take place in India as a whole. In India, black money is usually made through deregulated transactions. Because of this, corruption is one of the growing problems in India. As the system allows black money to flow into and out of India. It is most often used to receive bribes.

Reasons for hawala

The main reasons for this are:

➡️ Low bank fees

➡️ Speed ​​of exchanges

➡️ Difficulties with opening a “regular” bank account

➡️ Distrust of the traditional banking system

With the proliferation of anti-money laundering measures around the world, the system has unfortunately become more attractive to money launderers and terrorists. The main advantage for them is that there is practically no administrative footprint.

Money transfers are made using coded messages, increasingly using encrypted messages. This is a particularly effective way to complete the first stage of the money laundering cycle, the (cash) placement.


The Hawala system is considered one of the surviving parallel illegal exchange markets. It is a system used to transfer currency and money without the involvement of a central bank. It mostly concerns the common man. After all, they cannot have a higher rate. They do not get access to any of the bank accounts. then they have to choose illegal operations. The FEMA Act allows foreign currency exchange only by authorized dealers, so Hawala transactions are illegal under the FEMA Act. It punishes mainly the persons involved in the transaction.

It is a system that helps in increasing the black money market as it has a great impact on the growth of the country. “Bankers” tend to be traders, which allows them to mix the cash they receive with legitimate business income, making detection difficult.

Even with modern ones AML tools, the system is still thriving today with annual volumes in the billions, perhaps even tens of billions. Moreover, the government has taken an effective initiative to punish and put an end to the Hawala transaction that took place. But it exists, because we are talking about huge amounts.

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