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Word of the Week: Hawala

Updated: May 15

Definition

Hawala is an informal method of transferring money without any physical money actually moving. It is described as a "money transfer without money movement."


Hawala originated in the Indian subcontinent and constitutes one of numerous informal value transfer systems operating globally. Deliveries are made in cash quickly, cheaply, and conveniently in places where banking services are unavailable, expensive, or unreliable. Trust is a defining element of hawala, which makes the system not only more efficient, but also reliable.


How it works?

Clients hand in their cash and request an equivalent amount to be delivered in local or, more rarely, another specified currency. Hawaladars (hawala operators) and those acting as their agents accept cash on their premises—usually some other business, such as a corner store, a delicatessen, a music or electronics business, a travel agency—or may go to their clients’ workplace or home for a cash pickup. In most cases, no fees are discussed. Rather, the transaction cost is factored into the quoted exchange rate or the amount that will be delivered overseas in local currency for their U.S. dollars, pounds, dirhams, riyals, etc.


At the end of each day, hawaladars consolidate all deals into ledgers for each agent and counterpart they do business with, including a running balance. The funds transfer requests are organized into payment instruction sheets—containing the amounts and the name, address, and telephone number of the recipient—and faxed to counterparts in other parts of the world. The serial number of a rupee or other note in the hands of the intended recipient is also faxed: it is often used for identification. Some communications may also be done by e-mail or telephone. Hawaladars maintain such records at least until accounts are settled; in labor importing countries (e.g., United States, Europe, or U.A.E.), ledgers are often kept for several years.

The delivery takes from a few minutes to 48 hours, depending on the urgency and the destination of the funds. Cash may be handed over at the recipients’ premises or taken to their doorstep. Each hawaladar keeps a pool of cash, which enables payments as soon as instructions arrive. Thus, local cash is typically used for payments on behalf of overseas clients. In this way, actual fund transfers are minimized.


Research clearly shows that hawala is vulnerable to criminal abuse, just like all other financial institutions. We know that hawala clients include money launderers, militants, corrupt politicians, fraudsters, and tax evaders. Legitimate clients and funds are occasionally commingled with illicit ones.

Most vulnerable to abuse, however, is the process of settlement among hawaladars. The cash pools on which they draw for payments are always asymmetrical, as each operator transfers funds to and from multiple locations every day. Apart from compensatory payments, other ways of balancing accounts include formal transfers (check, wire, bank-to-bank, etc.), the use of couriers, and payments in kind, as well as commercial transactions, falsified invoices, and third parties. Not being subject to the same rules as formal institutions and operating frequently in parallel economies through not always known third parties make the whole process susceptible to illegal uses. The problem is not merely theoretical; there is evidence that money derived from drug

trafficking, illegal arms sales, body part trade, corruption, tax evasion, and all kinds of fraud have indeed moved through hawala networks.


The FATF distinguishes three major types of hawala and other similar service providers that operate across the globe as categorized by legitimate and illicit use – to which distinct ML/FT risks apply:

  • Pure traditional (legitimate) hawala and other similar service providers;

tend to be popular among migrants because of familial, regional or tribal affiliation and inadequate access to regulated financial services for senders/recipients in origin/ receiver countries. These service providers may primarily function to provide legitimate and efficient remittance/trade finance services to customers sending low value transactions. If sufficiently regulated and supervised, these providers, due to the low value of their average transactions, may present a low or lower money laundering and terrorist financing vulnerability.

  • Hybrid traditional (sometimes unwitting) hawala and other similar service providers

They provide legitimate services but at the same time they may also be used, wittingly or are also used, wittingly or not, for illegitimate purposes such as transmission of illicit money across the borders. These networks are not primarily set up to move illicit money but may be involved in illegal activities such as movement of money generated from tax evasion, to evade currency controls and to avoid sanctions, etc.

  • Criminal (complicit) hawala and other similar service providers

Set up or expanded to service criminals; they are driven by illegitimate money flows and are often controlled by criminals. These criminal networks are characterized by high value transactions between legal and natural persons that do not necessarily share the same cultural or geographic background. They are often used to send payments to countries with developed and regulated banking systems.


The Operations of a Criminal Hawala


Criminal hawala and other similar service providers (HOSSPs) are used for money laundering, sanctions evasion and to allow the transfer of funds into and out of sanctioned jurisdictions because these entities offer an alternative to banks and other regulated financial institutions that will no longer process transactions on behalf of sanctioned entities. Criminal HOSSPs are used instead because they can mask the identity of the ultimate originator from the banks or money transmitters that wire the funds on behalf of the HOSSPs.


Actors

Law enforcement case studies indicate that criminal HOSSPs generally involve at least four

individuals for the placement stage of criminal proceeds. These are:

  • Controller or Money Broker – a trusted individual normally who arranges for the collection of street money (e.g., drug proceeds) and arranges for the delivery of an equivalent value to its ultimate destination (e.g., to businesses controlled by a drug cartel).

  • Collector – instructed by the Controller to collect money from criminals and dispose it upon the controller’s instructions.

  • Co-ordinator – an intermediary who manages parts of the money laundering process for one or more Controller.

  • Transmitter – receives and dispatches the money to the control of the Controller.

Role of the Controller: The Controller (also called a money broker in some jurisdictions) is the key to success of the system. The criminal customer tells the controller who will hand over the money and where the value is to be paid. Acting as a third party money launderer, the Controller serves multiple criminal organizations in multiple countries. The Controllers back office needs to keep records of the money he collects, controls and disburses. The Controller will normally be responsible for the money from the time it is collected until the value is successfully delivered as instructed. He may bear the cost of funds that are lost or are not effectively transferred.

Role of the Collector: The Collector is the Controller’s trusted representative operating on

instructions sent to him by the Controller, or his back office, by text message, email, and Blackberry messenger or by other means. He faces the highest risk of arrest, because he has to meet the criminals to collect the cash. The Collector contacts the criminals and arranges to collect the cash at a discrete place or in circumstances where such activity, even if overt, does not attract attention. Over time the criminal and Collector may contact each other directly to arrange the pick-ups, but the collector will be told how much money he is responsible for and will dispose it on the instructions of the controller. The Controller will receive instructions from the criminal group directly or by such means which ensures the information is accurately received and understood.


Techniques

A common technique used by criminal HOSSPs is to use third party payments to transmit funds as well as to commit export and import fraud. Controllers build up large cash pools in countries where they service drug traffickers and other cash based criminals. To move the value of this cash, they directly or indirectly offer remittance services to other markets which have a demand for electronic remittances. They can do this by undercutting bank costs and exchange rates and use their cash pool to complete licit remittances, but they are also uniquely placed to service other criminal remittance corridors serving customers undertaking tax fraud, import fraud, export fraud or breaching exchange controls.

The Controller sends limited information to their transmitter, just enough information to complete a bank electronic transfer request. This will typically comprises of the beneficiary account Name, account number, SWIFT code and amount. In a country where the banks or regulators are vigilant the transmitter has often been observed creating false invoices to provide a false provenance for the transfer made.

This process is known as third party payment or invoice settlement, and has commonly been used by criminal HOSSPs, because it is an efficient way of moving excess values from a cash pool and HOSSPs get paid to do so.


Ample evidence underscores the use of criminal HOSSPs to launder drug proceeds. The use of trade by criminal money brokers has been identified by law enforcement as a common technique to facilitate the movement of drug proceeds generated in one jurisdiction to drug cartels outside of the jurisdiction. The net settlement technique called the “black market peso exchange” system is a common criminal HOSSPs method used in the United States and elsewhere by drug cartels.


Emerging Hawala in Europe?

The war in Ukraine had an influence on global financial flows. There are sweeping sanctions against Russian banks, individuals and entities, and financial institutions that were excluded from the SWIFT network. This all may lead to de-risking by banks, delays in fund transfers, and challenges in account opening. In Aperio’s Financial Crime Digest (April 2022), compliance officers said that de-risking by banks on Ukraine-related transactions may be generating conditions for hawala-like systems to emerge. Refugees coming to Europe will need to convert their funds in euros or other currencies, and open new bank accounts. Some of them may not have all necessary documents to so, others may be earning funds as undocumented immigrants and will need to send money in support of relatives or causes in Ukraine. In such cases hawala can be used.


Business Insider also published an article recently suggesting that hawala may have been used in the movement of Russian oligarchs’ money. Although hawala may not be the most “practical” for oligarchs, all sanctions and internal restrictions will likely create underground banking operations. The Central Bank of Russia banned banks from selling USD and EUR, and transfers in foreign currency are also limited (a maximum of $ 5,000 to one person per month (or the equivalent in another currency)). Additionally, Visa, Mastercard, JCB leaving Russia makes cross-border operations impossible for owners of their cards - from booking a hotel to paying for hosting abroad.

Forbes Russia published examples of how informal banking in Russia works using foreign accounts in a similar to hawala way, and also using Telegram as means for currency exchange.


Sources:

https://www.investopedia.com/terms/h/hawala.asp

https://www.elibrary.imf.org/view/books/072/05659-9781589064232-en/ch02.xml

https://www.fatf-gafi.org/documents/documents/role-hawalas-in-ml-tf.html

https://www.linkedin.com/pulse/war-creates-tough-questions-over-critical-ukraine-/?trackingId=7rhXlsnTSnSwsPT%2FJVQO%2Fw%3D%3D

https://www.businessinsider.com/russian-oligarchs-sanctions-movement-money-hawala-ukraine-war-2022-4

https://www.forbes.ru/finansy/459009-havala-dla-svoih-i-caty-obmenniki-kak-rossiane-obhodat-valutnye-ogranicenia









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