Hawala

Hawala is a system for transferring money, where the money is paid to a broker who then instructs another broker to deliver payment to the targeted recipient. The hawala remittance system is an alternative remittance arrangement that completely avoids the formal financial system. The essential process flow is:

  1. A person gives money to a broker, instructing the broker to give money to the recipient.

  2. The first broker contacts a second broker at the location where the money is to be given to the recipient.

  3. The second broker gives the money to the recipient.

These payments and receipts depend on the honor of the brokers, because money is not transferred between the brokers as part of the transaction. Instead, payments to recipients are sourced locally, from the friends and family and other associates of the disbursing broker. The originating broker and the broker who pays the recipient will eventually settle by any of the following means:

  • Trade arrangements

  • Cash couriers

  • Wire transfers

  • Cyber-currency payments

  • Mobile payments

These settlements typically occur at relatively long intervals, allowing time for the brokers to aggregate a series of transactions and then bundle them into a single settlement payment.

The hawala system is common throughout the Middle East, portions of Africa, and South Asia.

This system can be used to launder money. For example, a business could use the hawala system to “transfer” money out of a country that has controls over the transfer of cash out of the country. Or, a drug dealer wants to transfer funds between countries while avoiding the formal financial system. These activities are known as black hawala, and are certainly used by money launderers.

Hawala transactions are nearly impossible to track, since money transfers occur without the physical movement of cash, and there is only enough documentation of the transfers to ensure that the various brokers settle up with each other, after which they may discard the associated paperwork.

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Money Laundering