Hawala
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Hawala (also known as hundi) is an informal value transfer system used primarily in the Middle East, Africa and Asia.
Its origins are not entirely clear, but it is believed to have been used first in the financing of long-distance trade in the early medieval period on trading routes such as the Silk Road, the Eastern Mediterranean and the Indian Ocean. Hawala is mentioned in texts of Islamic jurisprudence as early as the 8th century. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century. Today hawala is probably used mostly for migrant workers' remittances to their countries of origin.
In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.
The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system. As the system does not depend on the legal enforceability of claims, it can operate even in a defunct legal and juridical environment. No records are produced of individual transactions; only a running tally of the amount owed one broker by the other is kept. Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.
In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at (black) market rates rather than official rates.
Hawala is attractive to customers because it provides a fast, convenient and safe transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies distortive exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is underdeveloped (e.g. due to weak legal environment in places such as Afghanistan, Yemen, Somalia).
Furthermore, the transfers are informal and not effectively regulated by governments, which is a major advantage to customers with tax, currency control, immigration, or other legal concerns. For the same reasons, governments disfavor the system, and accusations have been made in recent years that terrorist funding often changes hands through hawala networks.
After the September 11, 2001 attacks, the American government suspected that hawala brokers may have helped terrorist organizations to transfer money to fund their activities. The 9/11 Commission Report has since confirmed that the bulk of the funds used to finance the assault on the twin towers were not sent through the hawala system, but rather by inter-bank wire transfer to the SunTrust Bank in Florida, where two of the conspirators had opened a personal account. However as a result of intense pressure from the US authorities, widespread efforts are currently being made to introduce systematic anti-money laundering initiatives on a global scale, the better to curb the activities of the financiers of terrorism and those engaged in laundering the profits of drug smuggling. Whether these initiatives will have the desired effect of curbing such malfeasance has yet to be seen; although a number of hawala networks have been closed down, and a number of hawaladars have been successfully prosecuted for money laundering, there is little sign that these "successes" have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers.
External links
- BBC news article about recent changes to hawala and their impacts (http://news.bbc.co.uk/1/hi/world/middle_east/3463683.stm)
- A collection of academic papers exploring the operation of contemporary hawala networks, and the role they play in the transmission of migrant workers' remittances from Europe to South Asia (http://www.art.man.ac.uk/CASAS/pages/papers.htm#remittances)
- Study of the Hawala money transfer networks (http://samvak.tripod.com/nm104.html)
- Interpol Report about Hawala (http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/hawala/default.asp)