Hawala (from Arabic, meaning "transfer"), or hundi, banking systems pose unique challenges to anti-fraud investigators. So what is hawala banking, exactly? It is best described as an alternative remittance system running in parallel with the established regulated banking system. It is unregulated but legal in some jurisdictions and illegal in others. It is very difficult to detect and yet as headlines show is an effective method of utilising criminal funds for illicit purposes. The first “western bank” in India was the Bank of Hindostan, established in Calcutta around 1770 --however, for hundreds of years prior to this the hawala/hundi systems of remittance have operated. There are many such systems operating around the world, and each has different variations on a theme due to cultural differences -- for example, fei-ch’ien (China), hui kuan (Hong Kong), hundi (India), hawala (Middle East), padala (Philippines) and phei kwan (Thailand). These systems have proved useful for transferring money to those where there is a lack of regulated facilities (such as in Afghanistan, for example).
Let us start by giving an example of an hawala transaction. Consider Amish, an Indian national, who is resident in the UK as a student -- but unfortunately for Amish, his student visa has expired. He is working and wants to send some money back to his parents in India. He is afraid to go to the bank or to Western Union (or other regulated money merchants) as he fears his expired visa will be exposed to the authorities. Instead, he goes to Peter, who he knows is a hawala banker (known as a hawaladar). Amish gives Peter £200 and asks that the money be paid to his father, Ajay. Peter texts his business partner in India, Kamran, with instructions to pay and an eight digit code. He gives Amish the eight digit code, which he texts to Ajay. Ajay visits Kamran, confirms the code and is paid the equivalent amount in rupees. In this scenario Peter deducts a small percentage as a commission for the transaction. The books of the two hawaladar bankers will be settled when they next meet, and of course many more trades will take place with parents sending money from India to their children studying in the UK. In this scenario, Peter and Kamran are business partners, so balancing the books may be easier. Peter imports carpets from Kamran and sells them in the UK, so it is easy for Kamran to under or over invoice him for product to balance the amount owing or due from their hawala activities.
This system is effective in moving money without actually moving it. What other advantages does it have over the regulated system? There are several:
The exchange rate is better than the “official” exchange rate.
The transaction is fast -- a conventional transaction through the regulated banking system using a correspondent bank may take 5-7 days to clear and can cost between £7 and £21. Using this system the funds can be paid immediately.
There is no bureaucracy, so the tortures of opening a bank account can be avoided and there is little or no paper trail. Where hawaladars do keep records, they will show a date, some initials or a number which will identify the customer to the hawaladar but unlikely to reveal their identity to a third party reading the coulomb, the amount of the transaction, exchange rate and identity (again in shorthand or code) of the associated hawaladar.
These systems are difficult to detect because they are based on trust, and outside of those actually involved in the transactions, no one else need know about them. However, where hawaladars operate within countries that have regulated banking systems, it is likely the systems will be used by the hawaladars for security. With successful hawaladars in the UK being handed frequent and large quantities of cash, this cash needs to be banked for physical safety. These frequent deposits of cash are red flags -- as are international transfers on regular occasions for no apparent reason.
The Financial Action Task Force (FATF) realises that hawala exists (in its many forms) and is trying to ensure that countries adopt the forty plus nine rules which require the registration on those concerned with money movement. This is a challenge, as onerous registration and compliance will fail to encourage hawaladars to become a formal part of the regulated sector. Yet all the time an alternative system exists, it seems on the balance of probabilities that those engaged in criminal and terrorist activities will use it, rather than risk using the more regulated banking systems of the world.