Mark Jenner & Co has wide experience of dealing with cases involving Hawala Banking. Therefore, it is able to approach any case where some or all of the transactions subject of the fraud, money laundering or other crimes involve alternative money transfer systems and can be readily understood, distilled and presented such that the defendant is able to explain his activities fairly and accurately to the Courts.
As with any system, Hawala money transmission has many variations developed by different operators working to different degrees within or alongside the UK and International banking networks. In this report I will describe a hypothetical Hawala operation to illustrate the methods used.
The UK Customers
A migrant in the UK may want to send say £200 every month from his salary back to his parents in Pakistan. To do this he will simply approach his local Hawala agent and hand £200 in cash over. He may also have to pay a commission of a few pounds on top, probably between £1 up to £10 at the very most. He does not need to open a UK bank account, is not confined to a mainstream bank’s retail exchange rate or have to pay perhaps a transaction fee of around £10 to £20. Similarly, Western Union and similar companies will charge fees for this amount ranging from about £12 to £18 with the possibility of a disadvantageous official rate of exchange being applied at some point in the transaction.
At this stage the customer will simply tell the Hawala agent for whom the money is intended and their location. In return he will be told the amount of Pakistani rupees that his parents will receive – which will likely be more than he would have purchased at the bank irrespective of the additional transaction charge. He might receive no receipt or other indication that he has paid any money over, but will be confident that fairly quickly in a matter of a day or two his parents will be able to collect the money from their local Hawala agent. Sometimes merchants using this system would be provided with a promissory note (often called a “hundi”) recording the system’s indebtedness to them
The Hawala agent would collect a number of such sums of cash from customers in his locality and convey them to his Hawalador. This could be by depositing the money in the Hawalador’s bank account, the details of which would have been provided to the agent.
A Hawalador is a principal who is running a money transfer business. Transfers of money take place based on communications between members of a network of Hawaladors. In modern times, communication has increased the efficiency and speed of these transactions, with Hawaladors using fax, phone and email to communicate details. Thus transfers can often be affected on the same day as the arrangement is made, but generally take a day or so.
The Hawalador is therefore potentially in possession of a large sum of money obtained via several agents from many different customers at any point in time. This money has to be sent in turn to many different locations in Pakistan and indeed to other countries requested by the customers in the UK. In the ideal situation where funds are flowing back and forth between Hawala centers in different countries there will be no actual transfer of cash or any other money instrument. So long as the money being sent one way equals the money being returned by different persons, no net funds are being transferred. This is the principle of moneyless transfer and effectively replicates a key part of contemporary banking practice.
The Transfer of Value
The Hawalador will communicate with his counterpart in Karachi, Hong Kong and other places he must send money to. He will effectively arrange for the foreign Hawaladors to supply the required amounts of money, potentially through their own agents, to their respective destinations. In doing so he will now be in debt to the foreign Hawaladors, but possess a corresponding sum of cash – or funds that have been deposited in his UK bank account.
The debt with corresponding Hawaladors is managed by offsetting it with transactions of money flowing into the UK. This is why, in an ideal situation, no actual money will be transferred and the whole process conducted cost effectively.
Thus the UK Hawalador will take instructions from the foreign Hawalador to pay out cash or funds within the UK.
In the past, Hawala operators would often rely on their memory for details of the transaction, giving rise to the notion that this money transfer system was paperless and even worked without records. This is not generally the case, and Hawaladors and agents will maintain some records, particularly in order to keep an accurate record of the overall indebtedness in place at any time between the Hawaladors.
I believe that the need to keep records by Hawaladors has developed alongside the increased scrutiny by the authorities, who consider Hawala banking to be a prime route for money laundering and also in association with the increased banking regulatory framework generally. Thus, for example, a Pakistani Hawalador in the UK who runs an informal money transmission service alongside his travel agency business, generally servicing his own ethnic community, will now maintain files of records evidencing full details of the amounts sent, commissions received and customer identity procedures adopted (“know your client” – see summary of UK regulatory framework).
Variations in Operation
In practice, the system can become very complicated, with the Hawala system also transmitting funds through banks in the conventional way.
The indebtedness built up between different Hawaladors in different locations can be managed in different ways to the simple offset of monies being sent between individuals back and forth. For example, a businessman in India might wish to buy some machinery from the UK. Rather than approach his local Barclays Bank in Delhi he might decide to use the Hawala system. He provides Indian rupees to his local Hawalador, who then contacts the relevant counterpart in the UK. The UK Hawalador pays the machinery suppliers who are then happy to ship the equipment to India. Again, the transactions have remained outside the mainstream banking system. In the past, such arrangements have provided a way round prohibitive currency exchange controls or expensive “official” exchange rates imposed by the authorities – particularly in India and Pakistan.
Therefore, it is possible to begin to see how the Hawala system can be exploited for circumventing normal channels and even for criminal purposes. This becomes more apparent when it can be seen that much Hawala activity also includes the electronic transmission of funds through the conventional banking system.
Dubai, for example, has a massive ex-patriot Asian population, a relatively relaxed attitude to financial dealings compared to the likes of India and Pakistan and has a very large gold bullion market. Gold is a commodity often used by Oriental and Asian businessmen for investments. For these reasons, many Asian businessmen maintain an office in Dubai. They conduct international Hawala based transactions between East and West, which often involve an element of electronic money transmission through conventional banks as one or more of the legs of more complex deals.
An example of the complexity of financial activity that includes Hawala transactions can be seen in the following illustration:
A Hawalador in the UK is in the business of transferring money for clients to Pakistan for example. He takes receipt of cash from customers and deposits it into his UK bank account. In Pakistan, the intended recipients receive their money from their local Hawalador. These transactions mean that the UK Hawalador builds up a creditor balance with the Pakistani Hawalador.
The Pakistani Hawalador has different business that he conducts with a Hawalador based in Dubai, transferring his local clients’ money out of the country to relations or businesses in the Middle East (e.g. capital flight). As a result, he owns a large balance of cash (available to settle future transfers being made from the UK migrants in the UK to families residing in Pakistan) but builds up a corresponding creditor balance with the Hawalador in Dubai.
To balance the books, the UK Hawalador sends an electronic transfer of the pooled money in his bank account through the mainstream banking system to the Hawalador in Dubai. By pooling the money together from many of his clients, he is able to execute an electronic transfer more cost effectively than if his customers had individually sent their own transfers directly to Pakistan. Thus the Hawalador is still able to maintain an element of cost saving by operating partly outside the conventional banking system and partly within.
I have observed this system in records that I have been previously asked to consider while conducting forensic accounting investigations, and am aware that the transactions have the potential for becoming even more complicated. This is because the system of indebtedness has now become a commodity itself, allowing remote transactions to take place for a number of reasons that include cost and efficiency as well as tax evasion and money laundering.
For example, the Hawalador in Dubai from the above example may decide that he wants the UK Hawalador to settle his outstanding liability by purchasing equipment from the USA to be sent to the Middle East. It may be that he has a business customer in Dubai who only has funds in India who needs to purchase the equipment. Thus it can be seen how flexible the Hawala system can be, with indebtedness being transferred without, in many cases, any funds being moved.
See other related articles in this Hawala Banking series:
Forensic Investigation Of Hawala Alternative Money Transfer Systems
Pingback: Hawala Reguation In The UK | Mark Jenner & Co Limited