Among the methods terrorists worldwide use to move money from regions that finance them to target countries some hardly leave any traceable trail. As regulators learned recently, one of the weak points in the payments chain through which illicit funds can enter is a system of traditional trust-based banking originating in southern Asia which is known as hawala.
The word hawala is Hindi meaning "trust" or "exchange". Often used in relation with the word hundi which stands for "bill of exchange" hawala is an unofficial alternative remittance and money exchange system enabling the transfer of funds without their actual physical move. Traditional financial institutions may be involved but more often the system is used to bypass banks. There are an estimated 3000 international hawala brokers operating in Asia. Allegedly the business is monopolized by migrants from India who mostly operate from countries in the Gulf and South East Asia. Networks include trading points in the financial centres of Singapore and Hong Kong, and some of the biggest family-based money-dealers are based in London.
In principle, hawala works as follows: Individual "brokers" or "operators”, known as hawaladers, collect funds at one end of the payment chain and others distribute the funds at the other.
For example, an expatriate working in America or Kuwait who wants to send money back to his family in Pakistan or Syria turns to a moneylender or trader with contacts in both countries giving him the money. The trader calls a trusted partner in the home country who delivers the amount to the family, minus a commission. For identification and the details of the trade often a code is used. The two traders settle accounts either through reciprocal remittances, trade invoice manipulations, gold and precious gem
smuggling, the conventional banking system, or by physical movement of currency. Usually, hawaladers operate independently of each other rather than as part of a larger organization.
For Asian immigrants the hawala system provides a speedy, reliable and trustworthy method to remit money home. In principle, it allows cash delivered in one place to be made available elsewhere in the time it takes to make a telephone call or send a fax. The system proves superior to any Western banking operation: No identification needs to be presented, commissions are very low, transmission is very fast, and the system is in operation 24 hours a day and every day of the year even in regions where no banks or other financial institutions exist. The latter also explains why the system is not only used by expatriates, drug barons and terrorists, but in some countries is quite common in rural areas. For example, in the 1980s, about 70% of total credit outstanding in Pakistan were estimated to be in the informal sector, and about 80% of all informal credit were in agriculture.
Hawala has been a traditional method of moving money in south Asia long before Western banking became established in the region protecting early merchants along the silk road against robbery. In ancient China it was known as "fei qian" or "flying coins". The system spread throughout the world – to other Asian regions, the Middle East, eastern and southern Africa, Europe and North and South America – following immigration patterns. Based on a man's word there is strong market segmentation in that, for example, a Pashtun trusts only a Pashtun hawaladar, a Sikh only a Sikh one, and so on.
These days, although mainly used for legitimate transfers and often operating in conjunction with Western banking operations, the hawala system is regarded as a key factor in money laundering, other financial crimes and financing of illegal organizations committed in and associated with South Asia.
Hawaladars in Dubai, India and Pakistan are said to be forming a "hawala triangle" responsible for significant international money laundering...