What is hawala?
Hawala is an informal funds transfer system which is highly acceptable in many Asian and Arab countries.
Hawala operates outside the traditional banking framework and is used in many countries for transferring funds, domestically and internationally.
How the system works:
An individual in Country A wants to send money to another individual to Country B
The individual in Country A finds a "Hawalandar" (Hawala broker) in Country A and hands an amount of money to be transferred to the individual in Country B
The Hawalandar in Country A provides the individual with a code for authentication purposes.
The Hawalandar in Country A contacts a Halawandar in the location of the recipient in Country B to notifying him about the transaction and the details.
The recipient of the funds in country B presents the authentication code to Hawalandar in Country B and receives the funds.
In Hawala, there is no money movement between brokers for the transfer to take place. The Hawala brokers keep informal journals where they record all credit and debit accounts. Brokers then settle their "debts" between them in cash, property, services, payments of other stuff etc.
Due to the anonymity of the transactions, the hawala system could not be missed by criminals. In September 2022 "Spanish Police Dismantled Europe's Largest Money Laundering Gang" (see link below).
In that criminal ring, an associate provided illegally derived money to the Hawalandar in one country in exchange for a code. Then that associate travelled in another destination, contacted a Halawandar in that location, provided the code and get the money back in the local currency.
Some countries have taken measures to prevent the misuse of Hawala for money laundering purposes.
For example, in Dubai and some other countries, the Hawala brokers need to be registered. In other jurisdictions, Hawala is prohibited or is prohibited when used for money laundering.
Whatever the case is, where allowed, Hawala is preferred by many people because it is considered a reliable, less expensive and fast way of transfer of funds without the need to go through the banking system.
Additionally, the system is a method of providing "financial services" to the unbanked.