Hawala, a word that has been making headlines across the globe for many years. Names like Naresh Jain, Madhu Koda, Hasan Ali Khan etc have been associated with Hawala in India and have gained popularity albeit in the wrong sense. Many of us may have heard this term in news channels or from friends but not many of us know what it is or how it works. The purpose of this article is to help you understand what it is...
Before we begin - Disclaimer: I am not suggesting that you try or use Hawala for your money transfer needs. It is illegal in most countries and you can face stiff penalties as well as jail time if you indulge in it. This article is purely for educational purposes only...
So, What is Hawala?
The word "Hawala" means trust. Its is an alternative or parallel remittance system, which works outside the circle of banks and financial systems established by countries worldwide. Hawala is an ancient system of money transfer which originated in South Asia and is now being used across the globe.
Where did Hawala come from?
Yes, you guessed it right. WE INDIANS CREATED IT!!!
This system was mainly developed in India, before the introduction of western banking practices. It is also sometimes referred to as "Underground Banking" by western countries.
Definition of 'Hawala' - Source Investopedia - http://www.investopedia.com/terms/h/hawala.asp
An alternative remittance channel that exists outside of traditional banking systems. Hawala is a method of transferring money without any actual movement. One definition from Interpol is that Hawala is "money transfer without money movement." Transactions between Hawala brokers are done without promissory notes because the system is heavily based on trust.
Is Hawala Legal?
Though it is being used across the world to remit funds, it is not a legal system. It works on the basis of many middle men called the hawaldars or the hawala dealers or the hawala brokers. It is illegal because money is transferred without paying the actual legal fee's and charges before moving money from one country to another. It is also illegal because Hawala moneybrokers have been known to facilitate terrorist financing.
If it is illegal, why is it used then?
The reason, why Hawala is extensively used inspite of the fact that it is illegal, is the inseparable element of trust and extensive use of family or regional affiliations. Some of the reasons why people still use Hawala are:
1. To Launder/Move black money - If you go via the proper channels you need show source of income
2. Does not require any ID or Address proof
3. You get better exchange rates (Because Hawala brokers dont need to pay any fee or charges for moving funds from one country to another)
4. You need not pay any taxes
5. To fund terrorist activity because Hawala is the only possible mechanism for them. Any other legal channel would outright refuse to do business with such individuals and expose them to the law enforcement authorities
How does Hawala work?
Have you seen the Rajnikanth Starrer directed by Shankar - Shivaji (The Boss)?
If you have seen the movie then you already know how Hawala works. Remember how Thalaivar (this is how we address Rajnikanth in Tamil Nadu) looted the black money from corrupt politicians and businessmen and then Vivek contacted an old man and delivered crores of money in pizza delivery bikes? Thalaivar handed over a 1000 rupee note to a guy in New York and voila, he got millions of dollars - USD. This is Hawala.
Hawala works by transferring money without actually moving it. In a hawala transaction , no physical movement of cash is there. Hawala system works with a network of operators called Hawaldars or Hawala Dealers.
Step 1: A person willing to transfer money, contacts a Hawala operator at the source location (Vivek in Chennai).
Step 2: The hawala operator at that end collects the money from that person who wishes to make a transfer.
Step 3: An authentication mechanism is agreed upon (The 1000 rupee note that Thalaivar carries with him to New York)
Step 4: He then calls upon his counterpart or the other Hawala operator at the destination place/country was the transfer has to be made. (The old man from Chennai calling up his compatriot in USA)
Step 5: Now the hawala operator at the tranferee’s end, hands over the cash to the intended recipient after verifying the authentication code & deducting a certain amount of commission. (Rajinikanth receives USD after the American sees the 1000 rupee note)
In this manner, money never actually moves. The positions held by the hawala operator’s in each others books gets squared off.
Hope this article helped you get a high level idea of what Hawala is. If you have any questions, feel free to leave a comment and I will get back to you...
Before we wrap up - Let me repeat the Disclaimer: I am not suggesting that you try or use Hawala for your money transfer needs. It is illegal in most countries and you can face stiff penalties as well as jail time if you indulge in it. This article is purely for educational purposes only...