Hawala is an Arabic word. This word in Arabic means of transfer of something. It also means trust and this word has become infamous off late. Hawala is now a very well known terminology even among the common people, who have never come across to use this system. This word has become the news paper headlines in this country for quite some time.
Hawala is a very popular and informal way of transferring money or other valuables. It has become a parallel or alternative system of remittance, through unofficial channels, away from the sight of government authorities.
This parallel and unofficial system of transferring money and other valuables works out side the periphery of banks, financial institutes and other recognised and formal financial systems.
History of Hawala-
Hawala is a centuries old custom and it is an ancient system of transferring money from the sender to the receiver. The word basically is supposed to have originated in the region of South Asia. This system of money transfer is now practised in all countries, all over the world.
It is said that the system of Hawala was originally developed in India. This system of money transfer was popularly in practice in ancient India, before the introduction of western banking system in the country.
Hawala is also referred as unofficial banking or underground banking. This is a money transfer and remittance system that is being practised every where in the world. Yet, it has not been given a legal status in any of these countries.
How does Hawala work?
Hawala is a money transferring and money remittance system that works on the basis of number of middlemen working to make this money transfer possible. These middlemen are popularly known as Hawaladars or the Hawala dealers.
Hawala being an illegal money transfer system could never be made extinct even in the present time, simply because it enjoys enormous trust and faith of all people who are associated with the business of Hawala. Such money transfer system is still extensively used in the world, because of the amount of trust it enjoys and for extensive use of family and regional affiliations.
Hawala money transfer system transfers the money from the sender to the receiver; but it never moves the money in question physically, from one place to another place, in a transaction.
The system of Hawala money transfer and remittance has a very wide network of Hawala operators, who are popularly known as Hawaladars. They are also called as Hawala dealers. Any person, who is interested to transfer an amount of money illegally or unofficially, contacts a Hawaladar or a Hawala operator at the location of the source. This operator receives the money, which needs to be transferred to the receiver, from the person, who wishes to transfer the money. The money to be transferred now remains with the operator.
In the next step of Hawala money transfer, this particular operator, who has the money now contacts and calls upon his counterpart, or the other Hawala operator. This second operator is located at the place where the money needs to reach. It may be a different country all together. The second operator at the recipient’s location contacts the person, who needs to receive the money. The second operator then hands him over the cash that was sent to him through Hawala money transfer system.
This second Hawala operator who actually hands over the cash to the recipient does so after deducting a certain amount of money, which is charged as Hawala commission.
Hawala money transfer system’s way of working is best explained through a single Hawala money transaction. Any one working and staying illegally in United Kingdom, with an expired tourist Visa, wishing to send some money to his wife staying in India, has his money remittance solution in Hawala transaction. Since he is an illegal immigrant, he cannot take the help or avail the services of any legal banking service in United Kingdom. That person has to land up in the office of a Hawala operator, to take his help in this matter.
This operator, who is approached by the illegal immigrant for transferring his money to India, makes a promise to the man, now illegally staying in United Kingdom. The operator makes him a promise of delivering the cash to his wife, who is residing in India. The operator charges a commission for materialising this money transfer to the person’s wife in India.
Every hawala transaction uses a code for authentication of the receiver and as proof of delivery. This transfer of money can be executed from any place in this world to any other place. A man in India can send money to his son, having education in United Kingdom, through Hawala, the same way. The way of operation of all Hawala transactions are same, everywhere in the world.
Is Hawala really illegal?
Hawala has been officially declared as an illegal practice in many of the countries in this world and it is an effective way for money laundering. The amount of money being transferred from one place to another place officially has to comply with certain government rules and regulation.
The sender and the receiver of money have to be legal entities in their respective locations. The money being transferred has to be legal, after meeting with every applicable tax obligation, with their respective governments. But the money being transferred through Hawala is never subjected to any of these legal regulations. This makes this system of money transfer illegal, because it deprives the related governments of their legitimate tax revenues.
Most of the money transferred through Hawala is being done by people who are wanted criminals by many of the country’s governments. The money transferred by this system is being used in illegal activities, such as smuggling of drugs and in sponsoring global terrorism.
India has two acts named Foreign Exchange management Act FEMA, year 2000 and Prevention of Money Laundering Act PMLA year 2002, which make the Hawala transaction illegal in India.