Hawala Underground Banking: Legal or Illegal – How to Identify the Risks?

Underground banking or Informal Value Transfer Systems is the most chosen way to move around funds, not only for money launderers and terrorism financers but also for immigrants who must support their families back home.

Hawala is an Arabic term and a type of informal banking that means “to change” or “to transform”. In simple terms, Hawala is "money transfer without money movement."

Process & operation

The basic principle of Hawala involves the transfer of the value of a currency without necessarily physically moving it. The below picture serves to illustrate the basic process. Value may be transferred to and from both jurisdictions. In either case, the Hawaladars need to be paid for their services:

Hawalader’s operate visibly in the open or the Hawala is provided as an additional service from otherwise legitimate businesses, such as:

  • Jewellers;

  • Car Rental;

  • Grocery stores/Deli;

  • Travel Agency;

  • Money Exchange Houses.

These businesses often serve as a front for the financial services that are being provided and in background they act as Hawaladars.

The Risks with Hawala

The lack of paper trail and no Know Your Customer (KYC) verification is the main concern with illegal or unlicensed/unregistered Hawala operators. The challenges faced by jurisdictions, law enforcement and financial institutions in detecting unlicensed Hawala service providers as well as lack of information of the concept make it difficult to assess the amount of funds, which are often illicit, that are moved through this type of remittance system.

There is a growing nexus between terrorist financers and the abuse of Hawala. The fact that hawala circumvents AML/CTF measures to facilitate both legitimate and illegitimate funds, makes it more difficult to detect the funds linked to terrorist financing and financial crime.

Reason for existence

Some Hawala operators/money remitters are now regulated as Money Service Bureau’s (MSBs) and must abide by the reporting requirements, register & licensed in the states they operate in and must file suspicious activity repor