In popular parlance, the unofficial economy goes

by the name of black money and the official, of white

money. Black and white are also variously substituted
by number two and number one, unaccounted and
accounted, unreported and reported, unrecorded and
recorded and so on. Prof. J.C. Sandesara

However by contrast with the one-off swaps, Hawala is a well

organised system which is readily available as a means of settling
invoices of all kinds swiftly, reliably and cheaply on a truly global
scale: indeed it is so efficient that commercial enterprises no less
than migrant workers remitting relatively minute amounts to their
kinsfolk back home can also find that the system offers significant
financial advantages. This is particularly so when the proprietors of
commercial enterprises are also in a position whereby they can
establish their own bona fides of trust within the system, since entry
costs then drop to virtually zero.

A simple example will serve to illustrate this. Consider, for

example, the case of a Cash-and-Carry clothing merchant in
Manchester who is of Pakistani origins, and who buys most of his
stock from manufacturers in China. If he has a personal contact with
a Hawaladar in Dubai (and such Hawaladars routinely visit UK to
make those contacts), he might well telephone him to let him know
that he wishes to settle an invoice for 50,000 from his Chinese
supplier; let us also suppose that an Indian running a machine-tool
business in Leicester has sold 50,000 worth of equipment to a
customer in Iran, who is only in a position to pay by Hawala, in a deal
which will be routed through Dubai. Whilst neither of the two Asian
businessmen in the UK will know or ever need to know of each
others existence, the Dubai Exchanges specialise in matching up
such transactions. In the simplest of examples (reality is normally a
great deal more complex) a deal would be done whereby 50,000 is
collected in cash from the clothing manufacturer and delivered
directly to the machine tool business in Leicester. A double
settlement is thereby quickly, efficiently and very efficiently achieved
 and matched by a complex series of further transactions overseas,
all orchestrated from Dubai.

A frequent criticism of this system which is as frequently voiced

by those in pursuit of terrorist finance as it is by formal bankers who
alarmed to find their business being undercut by competition from
hawaladars is that Hawala is a system without records. How far is
this true?

One point worth making at the outset is that if that charge is indeed
true, Hawala is nevertheless a remarkably safe mode of money
transmission. Despite handling many millions and possibly
hundreds of millions of dollars every day, there is very little sign of
customer dissatisfaction, or of huge sums of money going missing on
the way. How can that be? Two answers can be proffered. Firstly the
role of trust: the whole system does indeed depend on absolute trust
or to put it another way, that the sanctions which can be deployed
against any one foolish enough to betray that trust are be extremely
severe. Secondly it is not a system without records.

Just as in any other system, the way in which data is recorded

and checked is specific to the system: every office orders its records
differently. This is partly because there are numerous possible ways
of doing so, and these choices are further conditioned by the
business the office is supervising. Whatever the personal preferences
of the office manager, the records of a steel mill will be quite
differently organised from those in a doctors surgery. So, too, with
Hawala. Whilst it is just as much of a money transmission as
operation as is a formal banking sector business such as Western
Union, the business is organised in a very different way. Above all it is
a distributed system which is grounded in expectations of absolute
trust, and hence of mutual guarantees, which hold across the entire
system. As a result it has no need for expensive central headquarters
in London or New York to which details of every single transaction are
returned for scrutiny. Hawala has no central filing system of this sort
because its records are as distributed as the system itself: that is the
source of its efficiency as well as its flexibility, and of course its ability
 to compete on price with the bureaucratic behemoths of which the
formal banking sector is now composed.

As a result number of interlocking factors have precipitated a rapid

growth of and in some senses a comprehensive re-invention of the
Hawala system. These factors include:

An explosion in the number of migrant workers from the third world

moving to the Gulf and Euro-America during the past three decades,
followed by a parallel explosion in the volume of remittances they
have sent back home.

The growth of electronically based international banking, as opposed

to Telegraphic Transmission. Until not so long ago TT really involved
sending a telegram.

The high levels of commission which mainline banks still charge for
TTs, even though telegrams were no longer sent.

An explosion in the scale of manufacturing-for-export business

through South and South East Asia. Whilst the ultimate market for
these manufacturers is Euro-America, such manufacturing has also
generated a large volume of intra-regional trade (and now migration,
for that matter).

Why Did Hawala Develop?

In earlier times, IFT systems were used for trade financing. They
were created because of the dangers of traveling with gold and other
forms of payment on routes beset with bandits. Local systems were
widely used in China and other parts of East Asia and continue to be in
use there. They go under various namesFei-Ch'ien (China), Padala
(Philippines), Hundi (India), Hui Kuan (Hong Kong), and Phei Kwan
(Thailand). The Hawala (or Hundi) system now enjoys widespread use
but is historically associated with South Asia and the Middle East. At
present, its primary users are members of expatriate communities who
migrated to Europe, the Persian Gulf region, and North America and
send remittances to their relatives on the Indian subcontinent, East Asia,
Africa, Eastern Europe, and elsewhere. These emigrant workers
reinvigorated the Hawala system's role and importance. While Hawala is
used for the legitimate transfer of funds, its anonymity and minimal
documentation have also made it vulnerable to abuse by individuals and
groups transferring funds to finance illegal activities.
Economic and cultural factors explain the attractiveness of the
Hawala system. It is less expensive, swifter, more reliable, more
convenient, and less bureaucratic than the formal financial sector.
Hawaldars charge fees or sometimes use the exchange rate spread to
generate income. The fees charged by Hawaladars on the transfer of
funds are lower than those charged by banks and other remitting
companies, thanks mainly to minimal overhead expenses and the
absence of regulatory costs to the Hawaladars, who often operate other
small businesses. To encourage foreign exchange transfers through
their system, Hawaladars sometimes exempt expatriates from paying
fees. In contrast, they reportedly charge higher fees to those who use
the system to avoid exchange, capital, or administrative controls. These
higher fees often cover all the expenses of the Hawaladars.
The earlier migrants to the Middle East, just after the oil boom
of the early1970s, were victims of lack of facilities to transfer to
money to India. There were no branches of the Indian banks and
the British banks had a stranglehold over the transactions. Imagine
the plight of the worker who wanted to send money to his family in
Kerala. The cheque though deposited, say in Kochi would go for
collection to Britain, since the British bank had no branch in Kochi
and the Indian bank had none in the Middle east. Result was a delay
of over a month before the money could be credited and this too
after hefty commissions deducted by the banks. With the middle
east fast becoming the preferred route for smuggling of gold, the
smugglers needed dollars. the migrant labour thus became the
source of the dollars. The gold smuggled into India, resulted in
cash which was remitted to the family of the person who had given
the dollars and virtually no commission and instead a premium of
almost10-14% over the official exchange. Everyone except the
Government was happy. But the blame mainly rested with
Government and RBI, since they were too slow to realise the
enormous flow of funds by the migrant labour.

The system is swifter than the formal financial transfer systems partly
because of the lack of bureaucracy and the simplicity of its operating
mechanism; instructions are given to correspondents by phone,
facsimile, or e-mail; and funds are often delivered door to door within 24
hours by a correspondent who has quick access to villages even in
remote areas. The minimal documentation and accounting requirements,
the simple management, and the lack of bureaucratic procedures help
reduce the time needed for transfer. Also the absolute honesty in deals.
Even in the heyday of the Hawala in the 1970s and 1980s there were
few cases of cheating since the punishment for default was swift and
sure.
In addition to economic factors, kinship, ethnic ties, and personal
relations between Hawaladars and expatriate workers make this system
convenient and easy to use. The flexible hours and proximity of
Hawaladars are appreciated by expatriate communities. To
accommodate their clients, Hawaladars may instruct their counterparts
to deliver funds to beneficiaries before expatriate workers make
payments. Moreover, cultural considerations encourage expatriate
workers to remit funds through the Hawala system, and such
considerations also apply to family members in the home country. Many
expatriate communities are exclusively male, because wives and other
family members remain in the home country, where family traditions
prevail. These traditions may require family members, especially women,
to maintain minimal contacts with the outside world. A trusted
Hawaladar, known in the village and aware of the social codes, would be
an acceptable intermediary, protecting women from having direct
dealings with banks and other agents. Thus, a system based on
national, ethnic, and village solidarity depends more on absolute trust
between the participants than on legal documents.

Is Hawala Legal?

Since Hawala is a remittance system, this question really

addresses regulations governing remittance services and the
circumstances of the remittance.
 In the Indian sub-continent, the situation is more complicated. India
and Pakistan have laws that prohibit speculation in the local currency,
prohibit foreign exchange transactions at anything other than the official
rate of exchange, and impose strict licensing requirements on money
remitters and foreign exchange dealers. In addition, there are
regulations governing inbound and outbound remittances.
The important point is that post 1992, when gold import was
liberalised, the Hawala took a knock on the chin, but partial convertibility,
high import duties contributing to underinvoicing etc, did not kill off the
menace of Hawala. The existence of the regulations curtailing free
convertibility is another reason Hawala is still used. Many people use
Hawala since they have money (mostly Black) that they would like to
move to another country due to concerns about stability, to pay for
education or medical treatment. Hawala provides a ready means of
doing this, and its use as a facilitator of 'capital flight' on both large and
small scales is very common.

Launder Money Through Hawala

Up to this point, no distinction has been made between Hawala

transactions where the source of the money is legitimate and where the
source, and intent, of the transactions is illegitimate. Following Indian
usage, the term 'white Hawala' is used to refer to legitimate transactions,
and the term 'black Hawala' refers to illegitimate transactions, specifically
Hawala money laundering.
This distinction is valuable for money laundering enforcement.
Many 'white' Hawala transactions are essentially remittances, and, while
illegal under Indian and law, are not illegal in other jurisdictions. `Black'
Hawala transactions, however, are almost always associated with some
serious offense (e.g. narcotics trafficking, fraud), that is illegal in most
jurisdictions.
Money laundering consists of three phases: placement, layering
and integration. Since Hawala is a remittance system, it can be used at
any phase.