Forensic Investigation Of Hawala Alternative Money Transfer Systems

At Mark Jenner & Co a substantial number of cases investigated have involved Hawala transactions at some point. Some of the matters revolved around the system of informal money transfer and some simply involved frauds that were assisted by moving money using this method. Typically cases either involved whole scale money laundering, failure to pay taxes on the Hawala activity and the incidental use of the Hawala facility to assist with movements of criminal proceeds.  All the cases involved fraud and criminal activity of some sort, but the actual process of informal money transmission is not considered to be illegal in the UK.

This article introduces what is sometimes thought to be a secret and sinister activity, and reveals its almost simplistic nature as a system for transmitting money internationally. Hawala is considered further in the following associated articles:

How Exactly Does The Hawala Banking Mechanism Work?

Hawala Banking Regulations In The UK

The History of Hawala Banking?

The original objectives of the Hawala money transfer system are thought to be the facilitation of international trade.  It can be traced back to well before the Middle Ages as a method of conducting international business alongside the growth of Islam and the spread of its influence throughout the Middle East and beyond.  It is thought to have developed in India before Western banking practices.

The spread of like-minded people possessing heightened loyalties to each other throughout the world allowed the principal of trading and conducting financial transactions based on trust to flourish. The translation of the word Hawala is “trust”.  Technical observance of strict Islamic law prevented usury (money lending for profit) but did allow the circulation of money based on these trust principles.

With the mass migration from east to west over recent years there has been a massive increase in the use of the Hawala style money transmission system by ex-patriots wishing to send their money and savings back to family members still residing in their home country.

The type of system is also well known in China where it is often called “chop”, “chit” or “flying money”.  Together with Hawala banking, this form of money transmission is often considered to be “underground” banking.  However, many such money transfer businesses operate in the open, openly advertising their services and using Hawala methods with complete legitimacy.

A “Hawalador”, is a term often used for a person running such an informal money transmission business and who deals with other similar Hawaladors in different geographical regions in order to facilitate money transfer.  The Hawalador may use the services of agents in different locations to collect money from customers and may himself run other businesses alongside the Hawala banking activity.

Why use the Hawala system?

Hawala money transmission can be considered to be an informal method for sending money abroad compared to the formal nature of the Western banking system.  Migrants have tended to use the Hawala system to transfer funds back to their families, often trusting the Hawala operators who had a clear connection with their own community, and who in turn had many connections with a particular community abroad.

Although such money transmission must be considered a profitable business in its own right, it generally charges very low rates of commission for sending money abroad.  Sometimes there is no commission at all, with the Hawala operators making a small margin of perhaps a 1 to 2 per cent on the exchange rate used.  In contrast, transmitting small sums through the traditional banking system can be very expensive and even prohibitive.  Other mainstream transmission businesses such as Western Union can charge as much as 9% of the principal being sent as a fee.

In addition to its use by individuals, the system is also favoured by many oriental and Asian businessmen for conducting business deals, on account of its efficiency, lack of bureaucracy and cost.

A further reason for using the Hawala banking system is the potential for illegal money transmission.  There can be a marked lack of paper trail (audit trail) between the person sending and the person receiving money.  In addition, Hawaladors might facilitate the transfer of taxable or otherwise criminal funds out of a jurisdiction to one that normally invites less scrutiny from the tax and criminal authorities.

See other related articles in this Hawala Banking series:

How Exactly Does The Hawala Banking Mechanism Work?

Hawala Banking Regulations In The UK

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About Mark Jenner

Mark Jenner is an experienced forensic accountant specialising in fraud and white collar criminal matters. He provides independent financial investigation and expert accounting witness services to police forces, fraud regulators and criminal defence lawyers, also providing assistance and solutions to organisations embroiled in financial disputes.

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