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Anand

Thursday, May 30, 2013

What is HAWALA???


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...

9 comments:

  1. Thank you so much sir to share such a nice article.
    I have one question to ask. Over here what i understand is Havala operator at the transferor end will send it to Hawala operator at the transferee end where they will convert the money into USD and return it back to original transferor i.e Rajnikant. My question is "DON'T THE HAWALA OPERATOR AT TRANSFEREE END REQUIRE TO SHOW THE SOURCE OF INDIAN CURRENCY TO GET IT CONVERTED INTO USD. HOW MEANS THEY WILL USE TO SHOW THE SOURCE OF INCOME??"

    Thank you well in advance...

    ReplyDelete
    Replies
    1. Darshan,
      People who are hawala brokers, do not need to show any source of income whatsover because the entire transaction is illegal. The actual money will never leave the source country.

      As per our example, Rajnikanth gets his money in USD in New York from the broker there. The next time someone else, lets say Sharukh Khan wants to move some money from USD to India, he will contact the same New York Broker and get the India rupees from the Indian broker. This way, money never leaves the country and the two brokers, adjust against transactions that happen on either side.

      Understand?

      Anand

      Delete
  2. Thanks Anand! valuable information....

    ReplyDelete
  3. Very Nice example..able to understand clearly.

    ReplyDelete
  4. Anand Sir My question is .... In Hawala System 2 person is compulsory for the transaction.

    I Mean if Someone want to send money form india to foreign country and there is no any person for receive it than how I can do that transaction...

    As I think that I will have to handover that money to hawalander(In India) and after handover the money i should go foreign (Ex.Dubai) and receive it...

    If is it possible than kindly tell me sir,

    Thanks, :)

    ReplyDelete
  5. dear Anand sir it means we need two people to do this...one which handover the money in india hawalander and the second person who gives the money in US..who will receive it ...if there is no one is there to receive my money...

    so can i do both thing ...i mean to give money in india broker and after i will go US and for receiveing my money...is it possible

    ReplyDelete
    Replies
    1. Hi,
      Hawala is illegal and doing so may get you and the other parties jailed. Anyways - as many people as you want can get involved in hawala. you can do both the transactions in india and dubai. But, as i said - remember, either the dubai police or indian police can catch you and jail you

      Delete

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