Recently, India has arrested a Chinese businessman for cheating and living in India on a forged Indian passport and facilitating Hawala transactions in India.
What is ‘Hawala System’?
- In Hawala, a client in country A (e.g. Rahman in USA) hands over a sum of money to a Hawaladar (USA) and requests that the equivalent amount (usually in the currency of the receiving country) be sent to a designated recipient in country B (Hamid in India).
- The sending broker relays all the necessary information concerning the transaction to a counterpart broker in country B, either through telephone, facsimile, or email. At this stage of the process, a “collection code” is agreed upon between the two brokers. The broker in country A will then communicate this code to the client, who, in turn, will relay it to the designated recipient in country B.
- The broker in country B will give the money to the recipient upon presentation of the collection code. If the sending client is also the recipient, he would have to present the code to the counterpart broker, upon arriving in country B before the money could be released to him.
- In many cases, the payment will be made by the counterpart broker to the designated recipient within hours after the request to remit money was placed by the client in country A. The income of the broker from the transaction may come from charging a commission of 0.25% to 1.25% of the amount involved or from disparities in currency exchange rates.
Why Hawala is attractive?
- The Hawala system is advantageous for all the elements involved in the transaction. For users, the charges levied are very low by the hawala operator. A formal remitter charges the sender approximately 10-20% of the total amount transferred whereas a hawaladar will typically charge 0.25%-1.5% commission.
- Hawala reaches to remote locations. Formal remitters provide service to larger population centres while hawala provides better and responsive services to large population centres as well as remote areas of the world.
- Hawala transmits money more quickly than other formal systems. Transfers initiated by formal remittance agencies typically take days or weeks, whereas hawala transactions are conducted within hours with even home pick-up and delivery services.
- Hawala has very simple identification procedures to receive or transmit the system. Recipients must present identification when receiving transfers at a formal agency, whereas hawala only requires an anonymous code for the receipt of funds.
- Tracking and following money travelling through hawala is the most challenging proposition for national and international agencies involved in counter terrorism financing efforts. In addition, money launderers are drawn to hawala for the unparalleled confidentiality that they offer, allowing them to conduct transactions in near anonymity.
Why Hawala thrives in India?
- India does not have appropriate provisions to deal with hawala since the repeal of Prevention of Terrorism Act (POTA). In fact, India has among the weakest Foreign Exchange Management Act, (FEMA) 1999, hawala is only a civil offence and persons violating its provisions are penalised with fine up to three times the amount detected in a contravention. This is a grossly inadequate deterrence to terrorists indulging in hawala for their sustenance and operation.
- Criminals find it difficult to use formal channels due to strict foreign-exchange laws, transaction reporting requirements and the banking industry’s diligence policy. Therefore, large proportion of the illegal money is laundered through Hawala or Hundi.
- The hawala market is linked with entrenched national and international gangs. These gangs have made inroads into the socio – political system of the country because of which the law enforcers sometimes are hamstrung in prosecuting the Hawaladars, especially the big players. (Example – Hassan Ali case)
- Hawala is also linked to criminal activities. Former director of Criminal Bureau of Investigation (CBI) has stated, “Hawala has become a channel for drugs trade, arms trade, human trafficking, and legalising kickbacks.” While India’s formal money transfer system and banking sector is well regulated, the informal sector goes unattended and unaddressed.