Legal Perspective: The legitimacy of money transfers through hawala

The issue of "hawala" and its role in money laundering has been under discussion for a long time. Hawala is one of the known means by which individuals transfer money.

What is peculiar about hawala is that such money transfer takes place completely away from banks and other licensed financial institutions such as money exchange companies.

Hawala is an Arabic word which literally means transfer.

Legally speaking, there is nothing illegal or wrong if a person prefers to use this method to transfer or send some money to his family, however, some of the hawala dealers diverted this system for illegal purposes, particularly money laundering.

The main features of the network which makes it popular is the trustworthiness between the sender and the messenger.

Hawala takes place by transferring money without actual movement of such money. This happens because the dealer (messenger) never sends the money to the agreed destination, but, instead he keeps the money with him and pays the other party from his own money in that destination.

The legitimacy of "hawala" transfer varies from one jurisdiction to another. As an example, in some countries there is exchange control or payment of certain taxes when money enters or leaves the country. In such jurisdictions, hawala could be used in violation of such laws.

In one Asian country, the currency control laws prohibit citizens to take money to gamble in another and also they are not allowed to bring gambling money back in to the country. Due to this prohibition, the gambling operators have engaged hawala dealers to accept money on deposit from gamblers and pay winnings through them as well.

This example demonstrates the legitimacy and reliability of hawala transfers and indicates that the system could be used for illegal purposes.

Another case takes place in America, where an individual represented himself as being in the gold business as a "gold broker". This individual made very large cash deposits at several banks.

His accounts were examined in conjunction with tax investigations. This individual claims to supply various gold coins and jewellery to certain customers.

Interviews with those customers and related businesses indicate that this is not the case. The investigations revealed that this individual is acting as a bank for various customers and businesses, assisting them in evading payment of taxes.

An Asian living in America was doing "hawala" transfers for other expatriates. Large cash transactions at the bank were brought to the attention of customs and tax authorities.

Subsequent investigation uncovered a scheme in which surgical instruments manufactured, in a certain county, where being imported at inflated prices to facilitate the transfer of money to that country. Such transfers were found to be violating the law due to making false statements and tax fraud.


The author is a legal consultant on banking and stock market laws.