Understanding The Hawala Trading System- An Old Yet A Wild Horse

Posted on February 27, 2011 in Specials


By Anuj Gulati:

Hawala is an old method that exists parallel to existing money exchanging and other banking systems. It may be regarded as an ‘underground banking’ system but it isn’t completely true as such services are advertised in local newspapers and practiced openly.

How does Hawala work?

Hawala is different from other services as it runs on trust and contacts. A person who wishes to transfer money from one country to other contacts the so called ‘hawaldars’. Consider person A sitting in country X wishes to transfer money to person B sitting in country Y. A contacts a local hawaldar and hands him the required sum of money. This hawaldar gives him in return a ‘secret code’. He then calls colleague sitting in country ‘Y’ . Meanwhile, A is expected to share the ‘secret code’ with B as this is the only means to authenticate the credibility of ‘B’. Once share, a meeting is fixed between B and the corresponding country’s ‘hawaldar’. B is expected to share the secret code and the bag full of money is delivered to him after deducting small amount of service charge. Below is an image taken from Interpol’s website that would help to understand the situation better —

The startling fact here to note is that the money is transferred from source to destination without actually physical transfer of the money. Many people prefer hawala system over the other systems because:-

  1. This system is fast and money is delivered with 24-48 hours as compared to other services offered by banks (eg- western money transfer) which take usually around 1 week.
  2. Hawala system allows more money to be transferred for a given sum.
  3. No record of persons is kept. Hence they can easily transfer there black money.

Is hawala legal in India ?

Hawala system has been declared illegal from a long time. Prime reason is that no record of any person is kept, hence the money goes escaped from the laws of tax deduction. Further, the money being transferred may be a result of mischievous act of drug smuggling, terrorism funding etc.

There has been multiple cases that led to the exposure of hawala being operated in full swing. The latest one involves Hurriyat leader SAR Geelani who was asked via letter from New Delhi police to appear in association with a hawala case where one of his key associated was arrested in December. He however gave medical excuses and is yet to appear before the cops.

Hawala transactions are more common from Dubai, UAE , India and Pakistan to various countries of the world. It runs solely on trust.

This system has been running from a long time impacting various governments financially. Still, world authorities are unable to curb it. They nab few officials, take them to the task, but then new one’s emerge. The big fish remains un-conquered.

We have to find out ways to curb this menace. Strict rules and regulations should be imposed and anyone found guilty should be prosecuted accordingly. A vigil eye should be kept on the bank accounts — frequent withdrawals and deposits generally from various sources like UAE, India, US etc.

Image courtesy: http://admi.net/cgi-bin/wiki?MoneyLaundering