In February 2019, another criminal group was arrested in Europe for laundering money through hawala transactions. Based on the Europol press release, the cooperation between French and Italian police led to the arrest of 19 suspects. Algerian authorities also seized gold for almost the equivalent of €1 million in value. This is one of the many cases where criminal organisations use Hawala transactions to move their cash in different countries.

Hawala is used in India, Middle East and South Asia and it is an ancient system of transferring money.
Hawala can be defined as a money transfer method, which takes place outside the traditional banking system and requires a minimum of two Hawala dealers (or hawaladars) that take care of the “transaction”.

What is Hawala transaction dealing?
An individual who wants to transfer money to another country gets in contact with a Hawala dealer (dealer A). He gives him/her the money plus a commission and the information of the beneficiary of the funds.
At this moment, the individual receives a unique code. The dealer contacts (i.e. via phone or fax) a Hawala dealer (dealer B) from the country where he wants to send the money. The dealer B will give the amount of money that the dealer A asked him to give to the designated person, who must reveal his code in order to prove that it is him/her the receiver of the money.

The “Report from the Commission to the European Parliament and to the Council on the assessment of the risks of money laundering and terrorist financing affecting the internal market and relating to cross-border situations” (hereafter "EU Report") and the accompanying Staff Working Document explain clearly way how Hawala works and give examples of this informal funds transfer (IFT) system.

There is no physical movement of cash. Hawala brokers are the key people in these transactions. The whole system is based on the trust (which is what “Hawala” means) between them. They keep an informal journal to record all their transactions, and they settle their debt in different ways. It is essential to mention that Hawala brokers are neither licensed nor supervised.

The question that arises is why use the Hawala system and not a conventional banking system? Although a traditional banking system seems and probably is a safer way to transfer money, Hawala is used a lot by immigrants who want to send money back to their families or vice versa. It is a popular way to move money because in comparison to the banking system, Hawala is cheaper, faster and less transparent.

The Financial Action Task Force (hereafter "FATF") published a report on Hawala, in December 2013. The report refers to the results of a questionnaire answered by individuals in 22 countries and the reasons why Hawala is used according to them. Based on the results, the main reasons for the use of Hawala can be summarised as:

  • Cheaper Money Transmission
  • Faster Money Transmission
  • Cultural Preference
  • Lack of banking access in the receiving or sending country
  • Higher trust in Hawala system than the banking system
  • Avoid Currency Controls
  • Avoid Law Enforcement Agencies
  • Tax evasion
  • Transfer and mask criminal actions

The nature of these transactions, as revealed by the reasons for the use of Hawala system, have inevitably led to compliance implications.

Compliance professionals have to face the danger of Money Laundering and especially Financing of Terrorism arising from Hawala transactions. The anonymity and the lack of documentation have made Hawala ideal for illegal transactions, which are difficult to trace. This is the reason why Hawala is illegal in a lot of jurisdictions.

Hawala dealers may use different techniques to settle their debts to each other. Some of them are the “reverse Hawala” between two Hawala dealers; the multilateral settlement between several Hawaladars who are part of the same network; the settlement through trade transactions, like over-invoicing; the settlement through cash via cash couriers, banking and money services business ("MSB") channels.

To tackle some of these difficulties, the Belgian parliament also voted a bill against the use of anonymous prepaid telephone cards. The lifting of the anonymity of the prepaid cards in Belgium came into force on the 7th of December 2016. This was part of a package of anti-terrorism measures agreed by the federal government of Belgium after the terrorist attacks in Brussels, on 22 March 2016. Belgium has taken the right step forward, tot only in the light of the Hawala transactions but also in the fight against criminal use of these anonymous prepaid cards. In the ideal world, the topping-up of prepaid cards should always be electronic and traceable.

Hawala transactions as alternative remittances are flourishing and taking into consideration the FATF special recommendations is vital. The difficulty with these transactions is that they are entirely out of the radar and are unlike the western way of doing business.

The Money Laundering and Terrorist Financing (Amendment) Regulations 2022 is the latest regulation which came into power on 9 March 2022. The regulation aims to extend the “travel rule” which is the information that should be shared when doing a wire/bank transfer.

Some experts believe that the future for fighting against illegal transactions is Artificial Intelligence and an efficient way to collect data for goods and money that move in the country, analyse them and combine them to achieve transparency.
Another aspect is that successful Hawaladars at some point have to use the banking system in order to store loads of money (mainly for physical safety). This is a red flag for compliance professionals, as there is a big deposit of money without an apparent reason.

Therefore, compliance processes are crucial in order to dismantle bit by bit money laundering schemes and terrorist financing processes. Compliance officers or criminal investigators need to complete difficult puzzles, combining several years of experience and a holistic view on the transactions and the people behind them.
Learn more about Hawala transactions and any regulatory compliance challenges by contacting our professionals.
Piet De Vreese - Pideeco Network Partner
Piet De Vreese Managing Director
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