Hawala, an ancient money transfer system that originated in South Asia and the Middle East, is steeped in history and operates on the foundation of trust, independent of conventional banking systems.
Despite its long history and widespread use, this informal method of transferring money has garnered significant attention in recent years from regulators and federal law enforcement agencies due to its simplicity and the potential for misuse in illegal activities such as money laundering and terrorism financing.
Simply put, hawala is an informal method of transferring money without moving any physical money. Thus, it's often described as a money transfer without money movement.
Hawala is used as an alternative remittance channel outside traditional banking systems. Transactions between hawala brokers are made without promissory notes because the system is based on trust and the balancing of hawala brokers' books.
Hawala provides anonymity in its transactions, as official records aren't kept, and the source of money can't be tracked. Hawala networks have been used since ancient times and are found among developing countries sending remittances home.
Hawala is used worldwide today, particularly in the Islamic community, as an alternative means of conducting funds transfers. Unlike the conventional method of transferring money across borders through bank wire transfers, money transfer in hawala is arranged through a network of hawala dealers.
Because it cannot comply with strict regulatory requirements, Hawala is considered illegal in the United States. Engaging in Hawala transactions can lead to potential violations of anti-money laundering statutes, which can result in severe penalties, including fines and imprisonment.
Other countries, such as India, have made hawala illegal due to its informal nature and absence of regulation or oversight.
What is Hawala?
Hawala, meaning "transfer" in Arabic, is an informal method of transferring money without physically moving it. It relies on a network of Hawaladars (Hawala dealers) who act as intermediaries in the transaction, operating based on trust and interpersonal relationships.
This system predates modern banking and is often used by people who lack access to traditional financial institutions or need to move money quickly and discreetly.
Since no money changes hands in a Hawala transaction, the Financial Crimes Enforcement Network (FinCEN) categorizes Hawala as an "informal value transfer system" (IVTS), which places it outside the bounds of appropriate financial regulation.
Hawala dealers keep an informal journal to record all credit and debit transactions on their accounts. Debt between hawala dealers can be settled in cash, property, or services.
A so-called "hawaladar" who doesn't keep their end of the deal in the implied contractual system of hawala will be tagged as one who has lost their honor and will be excommunicated from the network or region.
Migrant workers who often send remittances to relatives and friends in their countries of origin find the hawala system advantageous. Hawala facilitates the flow of money between poor countries where formal banking is too expensive or difficult to access.
Also, the fees are usually lower than the high rates banks charge. To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees. The system is also easy to use, as one only needs to find a trusted hawaladar to transfer money.
How Does Hawala Transactions Work?
Hawala transactions are straightforward yet intricate due to their reliance on trust. Here's a theoretical example to illustrate:
- Initiation: A person in New York (Sender) wants to send $10,000 to a family member in India (Recipient). The sender approaches a local Hawaladar.
- Hawaladar Agreement: The Sender gives $10,000 to the New York Hawaladar, who provides a unique code or identifier.
- Communication: The New York Hawaladar contacts their counterpart in India, informing them of the transaction details and the unique code.
- Disbursement: The Indian Hawaladar gives the equivalent amount in rupees to the Recipient upon code verification.
- Settlement: At a later date, the two Hawaladars settle the debt between themselves through various means, which may include trade or offsetting future transactions.
What is the Dark Side of Hawala?
While Hawala serves legitimate purposes, it is also a conduit for illegal activities such as money laundering and terrorism financing. Its unregulated nature and lack of documentation make it an attractive option for evading detection.
Hawala's anonymity makes it difficult for authorities to trace the origin and destination of funds. Criminal enterprises and terrorist organizations exploit this to launder money or fund illicit activities.
By bypassing traditional banking systems, they minimize the risk of detection through standard regulatory mechanisms.
A large portion of discovering terrorist cells involves tracing the movement of money, as terrorist organizations are funded and need money to buy weapons. Hawala transactions make this money movement easy as there is no paper trail from the source of funds to the terrorist organization.
What is the Legal Status of Hawala in the U.S.?
While no specific federal statutes explicitly outlaw Hawala or Hawala transactions, the system's lack of regulation and compliance with anti-money laundering (AML) laws render it illegal.
The U.S. financial system is highly regulated, with stringent AML and counter-terrorism financing (CTF) laws designed to prevent illicit financial activities. There are regulatory requirements.
Under U.S. law, money transmitters, including those operating informally, must register with the Financial Crimes Enforcement Network (FinCEN) and comply with the Bank Secrecy Act (BSA).
This involves maintaining records, filing suspicious activity reports (SARs), and implementing robust AML programs. Failure to comply with these requirements can result in severe penalties, including fines and imprisonment.
What are the Legal Implications for Hawala Operators?
Although operating a Hawala itself is not explicitly illegal, failing to comply with federal and state regulations makes it an unlawful activity. Hawala's status as an IVTS makes Hawaladars ineligible to register as legitimate money service businesses (MSBs) in the U.S.
Those involved in Hawala transactions may not be immediately indicted for conducting a Hawala transaction, but they become vulnerable to numerous federal investigations. These investigations can lead to indictments on various financial violations, including:
- Money Laundering: Engaging in financial transactions involving proceeds from unlawful activities.
- Unlicensed Money Transmission: Operating a money transmission business without the proper licensing and registration.
- Failure to Implement AML Programs: Not establishing and maintaining an adequate AML program as required by the BSA.
- Structuring: Breaking down large transactions into smaller ones to evade reporting requirements.
- Failure to Report: Not filing required reports or maintaining records can result in severe penalties.
- Conspiracy: Participating in a network that facilitates illegal activities opens the door to conspiracy charges.
Suppose you operate a Hawala business or engage in Hawala transactions in the United States. In that case, you may be vulnerable to a federal investigation by federal agencies and susceptible to various federal criminal charges.
Due to the complexities of U.S. finance laws, if you find yourself in this situation, you must be represented by a federal criminal defense attorney with extensive experience and knowledge of federal financial regulations. Contact our law firm for additional information. Eisner Gorin LLP has offices in Los Angeles, California.
Related Content:
