A properly established and regulated money transfer business must register with HMRC in order to comply with UK Money Laundering Regulations. This is not a costly exercise but of course brings the business under the scrutiny of the authorities.
In cases where a Hawalador is the main part of the business, utilising agents around the country to collect individual sums for pooling, it may not be necessary for the individual agents to register unless they also conduct additional business that is not on behalf of the principal Hawalador.
HMRC provides guidance for Hawala style money transmitters who often transfer money from one location to another without the physical cash moving.
Particularly in cases where large sums of money are being deposited in a Hawalador’s bank accounts, or in accounts of foreign customers he is serving within the UK, Money Laundering Regulations ensure that any UK business must be able to demonstrate that they have procedures that enables them to monitor their bank accounts, are able to identify any person paying money into the bank accounts and in cases where any money has been deposited by an unknown third party in the UK under Hawala arrangements to set off any corresponding amounts paid out in their home country, then the details of the Hawala operator must be obtained.
It appears that the UK treats a Hawala money transfer business like any other form of business that comes into contact with cash and money such as estate agents, lawyers, accountants and other high value dealers – and has a potential for being used as a conduit for money laundering. Far from being an illegal activity, it is the responsibility of the Hawala operator to ensure that the transactions being conducted are legitimate and to this end the Hawalador must pay heed to the “Know Your Customer” rules and other anti-money laundering measures on a risk based approach.
Regardless of whether or not the money transmission business is a limited company, it must maintain and keep adequate records for its activities that allow an accurate picture of its taxable income to be shown. The tendency in the past for such businesses to maintain few basic records, that may not be retained longer than needed for their immediate use, has meant that Hawala money transfer businesses have been targeted by HMRC for unpaid tax. There is therefore an obligation for the business to maintain proper books and records.
The Problem With Informal Money Transfer Businesses
In the UK Hawala banking is not illegal. However, a money transfer business must comply with UK regulation such as that laid down in respect of Money Laundering and the need to evidence levels of taxable income.
Thus, when investigating the activities of a money transfer business using this Hawala system I have inspected files that include application forms filled out with customers’ details together with proof of identity in the form of photocopied passport and driving license. In cases where more than a few £100 was being transmitted, I have noted the more stringent “know your customer” checks that would include proof of sight of additional documents, address confirmation etc. However, among the legitimate business there were payments being sent abroad to fund the import of drugs and other criminal transactions.
I have also investigated accounting records for Hawala businesses that evidenced none of these checks. In these cases there was very little in the way of accounting records for transactions with the individual customers, with the few records seen evidencing the Hawaladors’ focus on the apparently most important aspect of recording – their indebtedness with other Hawaladors. In these cases, the businesses were simply operating as money transfer services for ex-patriot customers throughout the UK sending cash to India and Pakistan. However, criminals who saw a way to launder their cash targeted these businesses with the consequence that a number of illegal transactions were processed.
Therefore, I am aware that Hawala systems can and often are used as part of money laundering operations, although the same can be said for the conventional banking system. I am aware of the International concern regarding the informal money transfer systems – that both serve a legitimate purpose and are widely attractive to the criminals wishing to launder money.
See other related articles in this Hawala Banking series:
Forensic Investigation Of Hawala Alternative Money Transfer Systems
How Exactly Does The Hawala Banking Mechanism Work?
 HMRC Appendix 6 Agents and Principals – MLR3C17050
 HMRC Business sector specific guidance – MLR3C10125
 HMRC High value dealers – MLR3C10245