Hawala System

Hawala is an informal arrangement in which brokers transfer value on the basis of instructions and trust rather than sending the same money through banks. The recipient is paid from a local broker's funds, while the brokers settle their mutual obligations separately, making it an informal value transfer system.

How the transfer occurs

The system separates payment to the recipient from settlement between the brokers.

• The sender gives cash, recipient details and usually a code or token to a local hawala broker.
• That broker instructs a counterpart near the recipient to make an equivalent local payment, after deducting fees or applying an agreed exchange rate.
• The recipient proves entitlement through the code or other identifying information and receives money from the counterpart's local cash pool.
• Thus, value reaches the recipient even though no corresponding bank transfer occurs between sender and recipient.

How brokers settle their accounts

The paying broker acquires a claim against the sender's broker. Brokers periodically reconcile these claims through netting, rather than settling every customer transaction separately.

• Opposite-direction remittances may cancel corresponding liabilities.
• Remaining balances may be settled through cash movements, transfer of goods, trade transactions or other financial arrangements.
• Trust, family or commercial relationships and limited informal records can substitute for the documentation used in regulated banking.

Money-laundering risk and legal response

Hawala can obscure the origin, destination and beneficial ownership of funds, creating vulnerabilities to money laundering and terrorist financing. However, a hawala transfer constitutes money laundering under Section 3 of the Prevention of Money-laundering Act, 2002 only when it involves proceeds of crime in the manner specified by that law.

• Section 3 of the Foreign Exchange Management Act, 1999 restricts foreign-exchange dealings and specified cross-border payments outside authorised channels, subject to the Act's permissions.
• Record-keeping, customer identification and reporting duties under Section 12 of the PMLA help regulated entities detect suspicious entry and exit points connected with informal networks.