Topic: What is Hawala?

Introduction

An unstructured, unlicensed method of transmitting foreign cash within a nation is known as “HAWALA.” All with no documentation, checks, or transparency, this system functions and runs in a manner comparable to that of conventional financial institutions. Transfer is the English translation of the Arabic term hawala. “Hundi” is another name for it. Because it mostly relies on the idea of faith, the arrangement is not always one that can be enforced by the law. Therefore, the hawaladars are not required to use promissory notes in their transactions. These transactions are not regulated by the central bank of the country i.e. RBI. Hundi is making headway in the field of financial innovation that gives financially excluded people around the globe exposure to money transfers.

The Key role of Hawala Dealers

There is no actual transfer of money. The most important parties in such deals are hawala brokers. The foundation of the entire system is their mutual trust, it’s what the term “Hawala” literally means. They keep a casual diary to keep track of all their dealings, and they use various methods to pay off their debt. It is important to note that these brokers are not subject to regulation or licencing.

Legality of Hawala

Absolutely, Hawala has been outlawed in many nations since it is thought to be a method of evasion of tax and a way to move funds secretly. These transactions are a big source of worry because they cannot be monitored by federal agencies because they are not channeled through financial institutions. This system is widely used all over the world to transfer illegal funds and to finance operations like drug smuggling, terrorism, and other crimes. The two main laws that outlaw such transactions in India are the “FEMA (Foreign Exchange Management Act, 2000) and PMLA (Prevention of Money Laundering Act, 2002)”. The Indian government has created a number of laws and regulations to control this.  The “Hawala Transaction Act” is not a particular law in India. It is controlled by a number of other laws. 

Why such Transaction exists?

While it would seem safer to utilize a standard financial system, hawala is frequently used by immigrants to send money back to their relatives or conversely. Hawala is a well-liked method of money transfer since it is less accessible, cheaper, and quicker.

In the year 2013, the “Financial Action Task Force (hereafter “FATF”)” released a report on hawala. The study makes reference to the findings of a questionnaire that people in 22 different nations responded to, as well as their stated justifications for using hawala.

How Hawala Works?

Comprehending the significance of the dealers of hawala and how heavily the system depends on faith, family ties, connections, and geographical ties are essential components of learning about this system.

For instance, Ali wishes to give his brother Imran who lives in Pakistan $1,500, while Ali works in Dallas, USA.  Ali goes see Irfan, who is a hawaladar in Dallas, and tells him the information he needs to complete the deal, including the name of his brother’s place of residency and a secret password.

Ali contacts his brother Imran in order to give him the secret pass code as well. Now, using his network of connections, Irfan gets in touch with Apurv, another hawaladar in the city where Imran lives, and convince them to go visit Imran so that he can give him Ali’s $1500. Such transaction is exchanged ‘n’ number of times and they happen most of the time. It’s indeed significant to notice that, even though time zones are quite the opposite in both the countries, the money transfer between Ali and Imran via hawaldars i.e. Apurv and Irfan happen between a few hours or quite a few days. As a result, the movement is completed far more quickly than if it had used the conventional financial institutions of any country which makes this system unique and also leads to strong connections country wide.

Promissory notes are still not traded amongst hawala merchants, and there is very little traditional narrative verification, which is yet another significant differentiating factor. All the transactions be it debit or credit might be completed in different ways, such as dollars, assets, goods, or other means, are recorded informally by the merchants on their accounts.

As a result, this system of hawala runs autonomously of every legal or justice system, which implies it doesn’t depend on the capacity to execute complaints or take other kind of lawful action. Dishonest people may face expulsion and forfeit the faith and loyalty of their fellow members.

Lastly, contrary to fund transfer handled through any financial institution, hawala may also provide reduced costs and better rates of exchange. The commission a hawaladar might impose would be less than the cost of an overseas money transfer. Additionally, they could provide a better exchange rate than any other financial institution of the country.

Case Study

  • Infrastructure Firms – Rs. 3300 Crore Racket

The Income tax Department conducted a raid on one of the largest infra firm of the country and it was the biggest tax evasions in history. This raid was carried out during the first week of November in the year 2019 and covered 42 sites, including those in metropolitan cities like Delhi, Bombay,Goa etc. These cities were raided to find a bunch of individuals engaging in hawala transactions using bogus banknotes.

The Income Tax department was able to glean the damning evidence in this case, as well as connect major corporations with hawala operators and identify the complete money-laundering supply chain. Authorities discovered that money worth Rupees Three Thousand Crores was being moved fraudulently by creating fictitious contractual commitments. Additionally, they discovered 4.19 Crore rupees in inexplicable cash, as well as 3.2 Crore rupees in unauthorized jewellery.

Hawala traders literally took the money which was intended for public infrastructure projects. The businesses engaged in these transactions are based in the most prominent cities of the country i.e. Mumbai and NRC. On the top of that, these false bills, the firms claimed their false billing. Major public facilities and poor and underdeveloped area projects were engaged in this, and they were primarily located in the south. 

References

https://pideeco.be/articles/hawala-business-compliance-meaning/

https://corporatefinanceinstitute.com/resources/knowledge/finance/hawala/

https://www.thebalance.com/what-is-hawala-5197853

https://wise.com/gb/blog/what-is-hawala

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