All you need to know about Hawala Transactions

Individual hawaladars and other members of the network monitor all transactions. This is enabled by the customary trust that exists between the hawaladars, a trust that stems from a homogeneous set of beliefs that govern code of conduct within ethnic groups and communities. Any individual engaging in acts contrary to the code of the network is punished accordingly22. The informal mechanism does not have the detailed documentation that is the essential part of monitoring in the formal system.

Hawala brokers, or hawaladars, act as intermediaries

This all started with the search for the funding of the terrorist money which was sent to Hizbul Mujahideen organisation of Kashmiri militants. The International Criminal Police Organization – INTERPOL’s definition of hawala is ‘money transfer without money movement’. Suppose Shubham needs to send Rs.10 lakh to Ahaan, who lives in a different country.

What Are Hawala Business Compliance Challenges?

If the amount of the transaction exceeds Rs 1 crore rupees, the imprisonment term may extend to 3  years. If the amount is less than Rs 1 crore, then it is 6 months compulsory, which shall increase till the person makes full payment of his penalty. As mentioned earlier all the transactions of transferwise are done with the collaboration of HDFC and Yes bank.

While a Hawala system is similar to the workings of a formal bank, there’s no paperwork, questioning or accountability involved. A Hawalador in the UK is in the business of transferring money for clients to Pakistan for example. He takes receipt of cash from customers and deposits it into his UK bank account. In Pakistan, the intended recipients receive their money from their local Hawalador. These transactions mean that hawala agents in india the UK Hawalador builds up a creditor balance with the Pakistani Hawalador. The Hawalador is therefore potentially in possession of a large sum of money obtained via several agents from many different customers at any point in time.

1. As a result, the recipient may end up receiving less amount than was promised.
2. The informal mechanism does not have the detailed documentation that is the essential part of monitoring in the formal system.
3. FEMA Act makes hawala transaction illegal by allowing only RBI authorised persons to transact with the exchange of foreign currencies.
4. Transactions can be handled confidentiality as hawala brokers typically do not keep records of their client’s transactions.
5. If hawaladar N is properly licensed, the fund transfer within country B may not, in all cases, be illegal.

It mandates that the person dealing with a foreign exchange be registered with the RBI. On 1st week of November 2019, IT Department raided on the major Infrastructure firms in India, it was one of the biggest tax evasion made by the corporate firms. This raid was conducted in 42 premises that include major cities of the country which are Delhi, Mumbai, Hyderabad, Erode, Pune, Agra and Goa on the group of people who were indulging in hawala transaction by producing fake bills. As mentioned earlier this transaction takes place between two persons through the help of intermediary hawaladars who connect with each other in order to transfer money to the intended person.

Hawala is also a parallel, illegal exchange market that drives customers out of the official foreign exchange banks. The biggest difference between the two systems is the monitoring process. As mentioned, the formal system relies on an impartial third party to monitor all transactions and ensure compliance with the rules. Any party that departs from fair transactions would become liable to penalties imposed by the laws governing the system. On the other hand, the informal system does not rely on third party monitoring.

Informal System

While records exist they are neither standardised nor available in a form that would be accessible to monitoring agents in the formal system. The hawala system is based on a hierarchy of agents, each involved in a certain segment of the transaction, making it very difficult to trace the fund’s transfer chain. It will vary from one transaction to another, the basis for this commission is the amount which has been transacted and the location to which the money has been sent. Hawala is very attractive to the customers because of their commission rates it ranges from, they charge a very nominal rate of interest as commission. Which is very lesser compared to the bank transfer, as the person has to pay a huge amount of tax to the Government of India. And sometimes to promote hawala transaction, hawaladars exempt expatriates from paying fees to them.

Hawala provides anonymity in its transactions, as official records aren’t kept and the source of money that is transferred can’t be tracked. Because money laundering aims to hide the source of cash that is generated from illegal activities, hawala is often used as a system for money laundering. In addition to the convenience and speed of conducting hawala, the fees are usually low compared with the high rates that banks charge. To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees. The system is also easy to use, as one only needs to find a trusted hawaladar to transfer money. Hawala dealers keep an informal journal to record all credit and debit transactions on their accounts.

The target of Enforcement Directorate on Rs. 700 crore Hawala Racket

1. In addition, corrupt politicians and the wealthy who would prefer to evade taxes use hawala to anonymize their wealth and activities.
2. In order to encourage this system sometimes hawaladars wave off their commission and hand over the entire money to the receiver, by this they build their trust in the minds of the customer and also goodwill for their future transaction.
3. A migrant in the UK may want to send say £200 every month from his salary back to his parents in Pakistan.
4. Section 8 it created some restrictions on the individuals who deal with the foreign currency and also states some restrictions on the conversion of Indian currency into foreign currency.
5. No money is moved and no IOUs are signed and exchanged by Nasir and Muhammed, as the hawala system is backed only by trust, honor, family connections, or regional relationships.

If he sent this money through Authorized dealer, he receives rupees at prevailing exchange rate (regulated b Reserve Bank of India) of INR 19/AED. The mandate introduced by the Govt for providing  Aadhar details during the new bank account opening in any bank and along with providing PAN and Aadhar details while transacting amounts is more than 50000. The Hawala transactions are illegal as per the below-mentioned legislation. The Terrorist and Disruptive Activities (Prevention) Act, 1987 was India’s first attempt at a counter-terrorism law.

Under these statues, prosecutions were undertaken, among other offences, for the use of hawala for the financing of terrorism. However, both these statutes have since been repealed and at present India does not have a specific anti-terrorism law. (ii) Transfer black money as a loan to individuals residing in the same country or in foreign. The money involved was about 18 million US dollars that is equal to Rs. 650 million. Advani, V.C. Shukla, P.Shiv Shankar, Sharad Yadav, Balram Jakhar, and Madam Lal Khurana and many others.

Is Hawala Illegal?

It can also act as a catalyst for money laundering and all sorts of illicit activities. People using Hawala can be easily exposed to financial and legal risks. The transaction initiated by Maryam and concluded by Amir’s receipt of the funds takes only one to two days or, in some instances, just a few hours. No money is moved and no IOUs are signed and exchanged by Nasir and Muhammed, as the hawala system is backed only by trust, honor, family connections, or regional relationships. An influx of low-paid migrant workers to the UAE to meet the accelerating needs of the construction and service industries has boosted the flows of cash sent through this system, which predates the modern banking system.