Hawala

The hawala system originated in India.[4] It has existed since the 8th century between Indian, Arabic, and Muslim traders who operated alongside the Silk Road and beyond, as a protection against theft. It is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century.

"Hawala" itself influenced the development of the agency in common law and in civil laws, such as the aval in French law and the avallo in Italian law. The words aval and avallo were themselves derived from hawala.[5] The transfer of debt, which was "not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages". The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent". In Roman law, the "contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him". On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general".[6]

Today, hawala is probably used mostly for migrant workers' remittances to their countries of origin.

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a successful definition of the hawala system that is used is "money transfer without money movement". According to author Sam Vaknin, while there are large hawaladar operators with networks of middlemen in cities across many countries, most hawaladars are small businesses who work at hawala as a sideline or moonlighting operation.[3]

Hawala example transaction; see text for an explanation

The figure shows how hawala works: (1) a customer (A, left-hand side) approaches a hawala broker (X) in one city and gives a sum of money (red arrow) that is to be transferred to a recipient (B, right-hand side) in another, usually foreign, city. Along with the money, he usually specifies something like a password that will lead to the money being paid out (blue arrows). (2b) The hawala broker X calls another hawala broker M in the recipient's city, and informs M about the agreed password, or gives other disposition of the funds. Then, the intended recipient (B), who also has been informed by A about the password (2a), now approaches M and tells him the agreed password (3a). If the password is correct, then M releases the transferred sum to B (3b), usually minus a small commission. X now basically owes M the money that M had paid out to B; thus M has to trust X's promise to settle the debt at a later date.

The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honour system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. Trust and extensive use of connections are the components that distinguish it from other remittance systems. Hawaladar networks are often based on membership in the same family, village, clan, or ethnic group, and cheating is punished by effective excommunication and "loss of honour"—leading to severe economic hardship.[3]

Informal records are produced of individual transactions, and a running tally of the amount owed by one broker to another is kept. Settlements of debts between hawala brokers can take a variety of forms (such as goods, services, properties, transfers of employees, etc.), and need not take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally, the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.

Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies unprofitable exchange rate regulations or when the banking system in the receiving country is less complex (e.g., due to differences in legal environment in places such as Afghanistan, Yemen, Somalia). Moreover, in some parts of the world it is the only option for legitimate fund transfers, and has even been used by aid organizations in areas where it is the best-functioning institution.[7]

Dubai has been prominent for decades as a welcoming hub for hawala transactions worldwide.[8]

Hundis

Main article: hundi

A 1951 hundi of Bombay Province for Rs 2500 with a pre-printed revenue stamp.

The hundi is a financial instrument that developed on the Indian sub-continent for use in trade and credit transactions. Hundis are used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in trade transactions. The Reserve Bank of India describes the Hundi as "an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order."[9]

Some government officials assert that hawala can be used to facilitate money laundering, avoid taxation, and move wealth anonymously. As a result, it is illegal in some U.S. states, India, Pakistan,[14] and some other countries.

After the September 11 terrorist attacks, the American government suspected that some hawala brokers may have helped terrorist organizations transfer money to fund their activities, and the 9/11 Commission Report stated that "Al Qaeda frequently moved the money it raised by hawala".[15] As a result of intense pressure from the U.S. authorities to introduce systematic anti-money laundering initiatives on a global scale, a number of hawala networks were closed down and a number of hawaladars were successfully prosecuted for money laundering. However, there is little evidence that these actions brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers.[16] Experts emphasized that the overwhelming majority of those who used these informal networks were doing so for legitimate purposes, and simply chose to use a transaction medium other than state-supported banking systems.[7] Today, the hawala system in Afghanistan is instrumental in providing financial services for the delivery of emergency relief and humanitarian and developmental aid for the majority of international and domestic NGOs, donor organizations, and development aid agencies.[17]

In November 2001, the Bush administration froze the assets of Al-Barakat, a Somali remittance hawala company used primarily by a large number of Somali immigrants. Many of its agents in several countries were initially arrested, though later freed after no concrete evidence against them was found. In August 2006 the last Al-Barakat representatives were taken off the U.S. terror list, though some assets remain frozen.[18] The mass media has speculated that pirates from Somalia use the hawala system to move funds internationally, for example into neighboring Kenya, where these transactions are neither taxed nor recorded.[19]

In January 2010, the Kabul office of New Ansari Exchange, Afghanistan's largest hawala money transfer business, was closed following a raid by the Sensitive Investigative Unit, the country's national anti-political corruption unit, allegedly because this company was involved in laundering profits from the illicit opium trade and the moving of cash earned by government allied warlords through extortion and drug trafficking. Thousands of records were seized, from which links were found between money transfers by this company and political and business figures and NGOs in the country, including relatives of President Hamid Karzai.[20] In August 2010, Karzai took control of the task force that staged the raid, and the US-advised anti-corruption group, the Major Crimes Task Force. He ordered a commission to review scores of past and current anti-corruption inquests.[21]

Between October 2010 and June 2012, the U.S. government charged four Somali defendants with laundering $10,900 for al-Shabaab using hawalas. The defendants were Basaaly Saeed Moalin, Mohamed Mohamed Mohamud, Issa Doreh, and Ahmed Nasir Taalil Mohamud. The indictment relied upon illegally collected metadata under the Foreign Intelligence Surveillance Act. The convictions were upheld by the U.S. 9th Circuit Court of Appeals.[22]

Economy related

• Global ranking of remittance by nations
• Remittances to India
• Hundi
• Informal value transfer system
• FATF

Related contemporary issues

• Jizya
• Zakat
• Riba
• FATF blacklist
• Terrorism financing

• Ballard, Roger, Hawala (collection of academic papers), UK: Casas, archived from the original on 2011-05-19, retrieved 2008-12-15, exploring the operation of contemporary hawala networks, and the role they play in the transmission of migrant workers' remittances from Europe to South Asia.
• Bowers, Charles (2009), "The international legal/political consequences of hawala and money laundering", Denver Journal of International Law and Policy (academic paper), archived from the original on 2010-08-29, retrieved 2009-03-17.
• Thompson, Dr. Edwina A, The Nexus of Drug Trafficking and Hawala in Afghanistan (PDF), The World Bank and the United Nations Office on Drugs and Crime (UNODC).
• Wilson, John F (October 2003), Informal Funds Transfer Systems: An Analysis of the Hawala System (PDF) (occasional paper), et al., International Monetary Fund, archived from the original (PDF) on 2010-09-23, retrieved 2011-01-05.
• "Fears over US hawala crackdown". BBC News. London. February 4, 2004.
• "Hawala" (PDF), Key issues, US: Department of The Treasury, Treasury Department Financial Crimes Enforcement Network (FinCEN).
• Hawala fraud, UK: BBC News, April 2007.
• Hawala, everything2.com.