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Hawala

Hawala

Overview
Hawala is an informal value transfer system
Informal value transfer system
An informal value transfer system refers to any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form...

 based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa
Horn of Africa
The Horn of Africa is a peninsula in East Africa that juts hundreds of kilometers into the Arabian Sea and lies along the southern side of the Gulf of Aden. It is the easternmost projection of the African continent...

, and South Asia
South Asia
South Asia, also known as Southern Asia, is the southern region of the Asian continent, which comprises the sub-Himalayan countries and, for some authorities , also includes the adjoining countries to the west and the east...

. It is basically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditional banking or financial channels.

Hawala has its origins in classical Islamic law
Sharia
Sharia law, is the moral code and religious law of Islam. Sharia is derived from two primary sources of Islamic law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Fiqh jurisprudence interprets and extends the application of sharia to...

 and is mentioned in texts of Islamic jurisprudence
Fiqh
Fiqh is Islamic jurisprudence. Fiqh is an expansion of the code of conduct expounded in the Quran, often supplemented by tradition and implemented by the rulings and interpretations of Islamic jurists....

 as early as the 8th century.
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Encyclopedia
Hawala is an informal value transfer system
Informal value transfer system
An informal value transfer system refers to any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form...

 based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa
Horn of Africa
The Horn of Africa is a peninsula in East Africa that juts hundreds of kilometers into the Arabian Sea and lies along the southern side of the Gulf of Aden. It is the easternmost projection of the African continent...

, and South Asia
South Asia
South Asia, also known as Southern Asia, is the southern region of the Asian continent, which comprises the sub-Himalayan countries and, for some authorities , also includes the adjoining countries to the west and the east...

. It is basically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditional banking or financial channels.

Origins


Hawala has its origins in classical Islamic law
Sharia
Sharia law, is the moral code and religious law of Islam. Sharia is derived from two primary sources of Islamic law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Fiqh jurisprudence interprets and extends the application of sharia to...

 and is mentioned in texts of Islamic jurisprudence
Fiqh
Fiqh is Islamic jurisprudence. Fiqh is an expansion of the code of conduct expounded in the Quran, often supplemented by tradition and implemented by the rulings and interpretations of Islamic jurists....

 as early as the 8th century. Hawala itself later influenced the development of the agency
Agency (law)
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...

 in common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 and in civil laws, such as the aval
Aval
Aval , in Spain, is a joint commitment to payment of an obligation in favor of the creditor or beneficiary. It is granted by a third party, in case the principal debtor does not fulfil the obligation of payment of a credit title....

in French law
Law of France
In academic terms, French law can be divided into two main categories: private or judicial law and public law .Judicial law includes, in particular:*civil law ; and*criminal law ....

 and the avallo in Italian law. The words aval and avallo were themselves derived from hawala. The transfer of debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

, which was "not permissible under Roman law
Roman law
Roman law is the legal system of ancient Rome, and the legal developments which occurred before the 7th century AD — when the Roman–Byzantine state adopted Greek as the language of government. The development of Roman law comprises more than a thousand years of jurisprudence — from the Twelve...

 but became widely practiced in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages". The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent". In Roman law, the "contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him". On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general".

Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia
South Asia
South Asia, also known as Southern Asia, is the southern region of the Asian continent, which comprises the sub-Himalayan countries and, for some authorities , also includes the adjoining countries to the west and the east...

, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

 in the first half of the 20th century. Today, hawala is probably used mostly for migrant workers' remittances to their countries of origin.

How hawala works


In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a successful definition of the hawala system that is used is: 'money transfer without money movement'. A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.

The unique feature of the system is that no promissory instrument
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...

s are exchanged between the hawala brokers; the transaction takes place entirely on the honor system
Honor system
An honor system or honesty system is a philosophical way of running a variety of endeavors based on trust, honor, and honesty. Something that operates under the rule of the "honor system" is usually something that does not have strictly enforced rules governing its principles...

. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. Trust and extensive use of connections, such as family relations and regional affiliations, are the components that distinguish it from other remittance systems.
Informal records are produced of individual transactions, and a running tally of the amount owed by one broker to another is kept. Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...

s. Generally, the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.

Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies distortive exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is less complex (e.g. due to differences in legal environment in places such as Afghanistan, Yemen, Somalia). Moreover, in some parts of the world it is the only option for legitimate funds transfers, and has even been used by aid organizations in areas where it is the best-functioning institution.

Furthermore, the transfers are usually informal and not effectively regulated by governments, which is a major advantage to customers with tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

, currency control, immigration, or other concerns. In some countries however, hawalas are actually regulated by local governments and hawaladars are licensed to perform their money brokering services.

Hundis


On a similar note, hundi
Hundi
Hundis were legal financial instruments that evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis...

s
referred to legal financial instruments evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj
British Raj
British Raj was the British rule in the Indian subcontinent between 1858 and 1947; The term can also refer to the period of dominion...

 these Hundis served as Travellers Cheques. They were also used as credit instruments for borrowing and as bills of exchange for trade transactions.

Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Being a part of an informal system, hundis now have no legal status and were not covered under the Negotiable Instruments Act, 1881. They were mostly used as cheques by indigenous bankers.

Angadia


The word angadia means courier (in Hindi) but it is also used for people who act as Hawaladars within the country (India). These people mostly act as a parallel banking system for businessmen. They charge a commission of around 0.2–0.5% per transaction from transferring money from one city to another.

Horn of Africa


According to the CIA, with the dissolution of Somalia's formal banking system, many informal money transfer operators have arisen to fill the void. It estimates that such hawaladars are now responsible for the transfer of up to $1.6 billion per year in remittances to the country, most coming from working Somalis in the diaspora. Such funds have in turn had a stimulating effect on local business activity.

Post 9/11


Hawala has been made illegal in some U.S. states and other countries as it is seen to be a form of money laundering and can be used to move wealth anonymously. It continues, however, to be a legal and effective system in many countries across the globe.

After the September 11 terrorist attacks
September 11, 2001 attacks
The September 11 attacks The September 11 attacks The September 11 attacks (also referred to as September 11, September 11th or 9/119/11 is pronounced "nine eleven". The slash is not part of the pronunciation...

, the American government suspected that some hawala brokers may have helped terrorist organizations to transfer money to fund their activities. The 9/11 Commission
9/11 Commission
The National Commission on Terrorist Attacks Upon the United States, also known as the 9/11 Commission, was set up on November 27, 2002, "to prepare a full and complete account of the circumstances surrounding the September 11, 2001 attacks", including preparedness for and the immediate response to...

 Report has since confirmed that the bulk of the funds used to finance the assault were not sent through the hawala system, but rather by inter-bank wire transfer to a SunTrust Bank in Florida, where two of the conspirators had opened a personal account. However as a result of intense pressure from the U.S. authorities, widespread efforts are currently being made to introduce systematic anti-money laundering initiatives on a global scale, to better curb the activities of the financiers of terrorism and those engaged in laundering the profits of drug smuggling.

Whether these initiatives will have the desired effect of curbing such activities has yet to be seen; although a number of hawala networks have been closed down and a number of hawaladars have been successfully prosecuted for money laundering, there is little sign that these actions have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers. Experts emphasize, though, that the overwhelming majority of those who use these informal networks are doing so for legitimate purposes.

In November 2001, the Bush administration froze the assets of Al-Barakat
Al-Barakat
al-Barakat or al-Barakaat , which means "Blessings" in Arabic, is a group of companies established in Somalia in 1986. Al-Barakat has involved itself in the modern form of hawala, an informal value transfer system, and the remittance trade. By 2001, it was operating in 40 countries and was the...

, a Somali remittance hawala company used primarily by the large Somali diaspora
Somali diaspora
The Somali diaspora refers to expatriate Somalis who reside in areas of the world that have traditionally not been inhabited by their ethnic group...

. Many of its agents in several countries were initially arrested, though later freed after no concrete evidence against them was found. In August 2006 the last Al-Barakat representatives were taken off the U.S. terror list, though some assets remain frozen. In October 2009, the Swedish branch of Al-Barakat was removed from the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...

' list of terrorist organizations; the company had been on the list for the past eight years, and had had its bank account funds frozen. According to the Swedish Public Radio broadcaster SR
Sveriges Radio
Sveriges Radio AB – Swedish Radio Ltd – is Sweden's national publicly funded radio broadcaster. The Swedish public-broadcasting system is in many respects modelled after the one used in the United Kingdom, and Sveriges Radio - like Sveriges Television - shares many characteristics with...

, the UN did not explain why it had elected to remove Al-Barakat from its terror list. However, it has been suggested that the recent change in the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

's position regarding the many organizations "that have been too easily included in the UN terror list" might have influenced the UN's position. Al-Barakat is now able again to access its bank account funds.

Media has been speculating that Somali pirates use the hawala system to move funds internationally, for example into neighboring Kenya, where corruption is high and these transactions are neither taxed nor recorded.

The 2010 court case United States v. Banki
United States v. Banki
On January 7, 2010, the U.S. Attorney for the Southern District of New York announced that naturalized U.S. citizen Mahmoud Reza Banki, born in Iran, had been arrested for criminal violations of the Iran Trade Embargo. On March 17, 2010, the US Attorney filed an indictment in United States...

dealt with the question of whether hawala transactions violated the current U.S. sanctions against trade with Iran.

In January 2010, the Kabul
Kabul
Kabul , spelt Caubul in some classic literatures, is the capital and largest city of Afghanistan. It is also the capital of the Kabul Province, located in the eastern section of Afghanistan...

 office of New Ansari Exchange, Afghanistan
Afghanistan
Afghanistan , officially the Islamic Republic of Afghanistan, is a landlocked country located in the centre of Asia, forming South Asia, Central Asia and the Middle East. With a population of about 29 million, it has an area of , making it the 42nd most populous and 41st largest nation in the world...

's largest hawala money transfer business, was shuttered following a raid by the Sensitive Investigative Unit, the country's national anti-graft task force
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...

 vetted and trained by the US Drug Enforcement Administration
Drug Enforcement Administration
The Drug Enforcement Administration is a federal law enforcement agency under the United States Department of Justice, tasked with combating drug smuggling and use within the United States...

 (DEA), allegedly because this company could be involved in laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...

 profits from the illicit opium
Opium
Opium is the dried latex obtained from the opium poppy . Opium contains up to 12% morphine, an alkaloid, which is frequently processed chemically to produce heroin for the illegal drug trade. The latex also includes codeine and non-narcotic alkaloids such as papaverine, thebaine and noscapine...

 trade and moving the cash earned by Taliban through extortion and drug trafficking. Thousands of records were seized to dig into the movement of billions of dollars in and out of Afghanistan. There were links between the money transfers by this company and political and business figures in the country, including relatives of President Hamid Karzai
Hamid Karzai
Hamid Karzai, GCMG is the 12th and current President of Afghanistan, taking office on 7 December 2004. He became a dominant political figure after the removal of the Taliban regime in late 2001...

. In August 2010, Karzai took control of the taskforce that staged the raid, and another US-advised anti-corruption group, the Major Crimes Task Force. He ordered a commission to review scores of past and current anti-corruption inquests. Senior US military and civilian officials viewed Karzai's move as an effort to protect those close to him and, in the process, to quash the investigation into New Ansari.

The hawala system is in Afghanistan also instrumental in providing financial services for the delivery of emergency relief and humanitarian and developmental aid for the majority of international and domestic NGOs, donor organizations, and development aid agencies.

On September 1, 2010, the Financial Crimes Enforcement Network
Financial Crimes Enforcement Network
The Financial Crimes Enforcement Network is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat money laundering, terrorist financiers, and other financial crimes.As reflected in its name, the Financial...

 issued an advisory on "Informal Value Transfer Systems".

See also

  • Anti-money laundering
  • Hawala scandal
    Hawala scandal
    The Hawala scandal or hawala scam was an Indian political scandal involving payments allegedly received by politicians through four hawala brokers, the Jain brothers...

    , 1990s political scandal in India
  • Islamic banking
    Islamic banking
    Islamic banking is banking or banking activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money...

  • Money laundering
    Money laundering
    Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...

  • Offshore banking
  • Organized crime
    Organized crime
    Organized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...

  • Riba
    Riba
    Riba means one of the senses of "usury" . Riba is forbidden in Islamic economic jurisprudence fiqh and considered as a major sin...

  • Remittance
  • Terrorist financing
    Terrorist Financing
    Terrorist financing came into limelight after the events of terrorism on 9/11. The US passed the USA PATRIOT Act to, among other reasons, attempt thwarting the financing of terrorism and anti-money laundering making sure these were given some sort of adequate focus by US financial institutions...

  • US Patriot Act
  • White Collar Crime

Further reading

  • Hawala. An Informal Payment System and Its Use to Finance Terrorism by Sebastian R. Müller (December 2006), ISBN 3-8655-0656-9

External links

and U.S. Treasury Department Financial Crimes Enforcement Network
Financial Crimes Enforcement Network
The Financial Crimes Enforcement Network is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat money laundering, terrorist financiers, and other financial crimes.As reflected in its name, the Financial...

 (FinCEN) United States – Department of The Treasury
  • Ballard, Roger. http://www.casas.org.uk/papers/hawala.htmlA collection of academic papers exploring the operation of contemporary hawala networks, and the role they play in the transmission of migrant workers' remittances from Europe
    Europe
    Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

     to South Asia
    South Asia
    South Asia, also known as Southern Asia, is the southern region of the Asian continent, which comprises the sub-Himalayan countries and, for some authorities , also includes the adjoining countries to the west and the east...

    ]
  • CBC
    Canadian Broadcasting Corporation
    The Canadian Broadcasting Corporation, commonly known as CBC and officially as CBC/Radio-Canada, is a Canadian crown corporation that serves as the national public radio and television broadcaster...

    's "Money-transfer systems, hawala style"
  • Wilson, John F. et al., Informal Funds Transfer Systems: An Analysis of the Hawala System, International Monetary Fund
    International Monetary Fund
    The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

    , October, 2003
  • Hawala fraud on BBC News
    BBC News
    BBC News is the department of the British Broadcasting Corporation responsible for the gathering and broadcasting of news and current affairs. The department is the world's largest broadcast news organisation and generates about 120 hours of radio and television output each day, as well as online...

    , April 2007
  • "The Nexus of Drug Trafficking and Hawala in Afghanistan", Dr. Edwina A. Thompson, for the World Bank
    World Bank
    The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

     and the United Nations Office on Drugs and Crime
    United Nations Office on Drugs and Crime
    The United Nations Office on Drugs and Crime is a United Nations agency that was established in 1997 as the Office for Drug Control and Crime Prevention by combining the United Nations International Drug Control Program and the Crime Prevention and Criminal Justice Division in the United Nations...

     (UNODC)
  • Hawala at everything2.com
  • Bowers, Charles. An academic paper concerning the international legal/political consequences of hawala and money laundering at Berkeley Electronic Press
    Berkeley Electronic Press
    The Berkeley Electronic Press, also known as Bepress, is an electronic publishing firm which was founded by academics in 1999. It is dedicated to producing products and services to aid scholarly communication, including institutional repositories, subject matter repositories, working paper series,...

  • In Praise of Hawala by J. Orlin Grabbe
    James Orlin Grabbe
    James Orlin Grabbe more commonly referred to as J. Orlin Grabbe, or just JOG, was an economist and prolific writer with contributions in the theory and practice of finance...

    , The Laissez Faire Electronic Times, Vol 1, No 13, May 13, 2002