Fiducitation: Hawala – Traditional Asian
Remittance System
Author: Shah Cheema
Date: October 3,
2001 © 2001 Fiducite.com, Inc.
Fiducitation: A
synthesis of public Internet resources on the topic.
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Known as hawala
in India, hundi in Pakistan or fei qian in China, Asia's
underground banking system is enormous and widespread.
While an ancient form of financial transaction, the
secretive “hawala/hundi” system has come to recent scrutiny due to its almost
certain usage by terrorist organizations such as Osama Bin Laden’s Al Queda network. While on one hand symbolic of graft, drug
trafficking, money-laundering and black money, the hawala system at the same
time enjoys both widespread acceptance and widespread usage among much of the
population of South Asia and the Middle East.
The vast majority of hawala remittances have been routine transactions. Indeed, the vast majority of the hawala
transactions occur in country as an affordable means of fund transfer. However, statistically as a whole, the
hawala system is a large phenomenon as evidenced by the following numbers:
- As
much as 60% of money from Burma's drug trade passes through these
underground payment system
§
$2 billion to
$5 billion moved through the hawala system annually in Pakistan, more than the
amount of foreign transfers through the country's banking system
With a mostly deliberate absence of record keeping, these
non-bank financial entities leave virtually no trail for investigators to
follow. It works like this: A client
approaches a local underground dealer in, for example, New Dehli--usually a
business like a goldsmith's shop, currency trader or a travel agency. He
deposits $10,000 to be remitted to an associate in, for example, Bangkok. The
shop in New Dehli, one among hundreds found in every major bazaar, gives the
sender a receipt or chit, something as simple as a specially marked
movie-ticket stub or a low-value rupee note. The chit is mailed to the Bangkok
recipient, who then presents it to an associated goldsmith or travel agent and
withdraws the $10,000 in Thai baht. With no banks involved, there is no record
of the cross-border transaction.
Veiled in secrecy, performed through personal contacts,
lacking records and difficult to prove – the hawala system has often been used
as a blunt instrument for accusation by corrupt political candidates,
governments and law enforcement agencies to further agendas where the proof of
charges is often unnecessary. Much of
the myth and murkiness of the hawala system stems from these types of
instances.
An Overview of Hawala Dealings:
The mechanics of how hawala transactions take place.
Tax Evasion and Political Graft:
The Hawala Connection - Terrorism and Organized Crime:
Author:
Ancient Secret System Moves Money Globally
Annotation:
Article
from New York Times highlighting the illegal “hawala” money transferring system
and its usage by terrorist organizations such as Osama bin Laden’s
network. This article sets the stage
for further examination of the hawala system.
Users need to register for access.
Clip: Finance Minister Shaukut Aziz, a former executive
vice president of Citibank in New York, said $2 billion to $5 billion moved
through the hawala system annually in Pakistan, more than the amount of foreign
transfers through the country's banking system.
Source: http://www.nytimes.com/2001/10/03/international/03LAUN.html
Cached
File: 
Hawala Transactions
Annotation: A brief
introduction to the hawala system of transactions. This document does a good
job of explaining the hawala system in light of India’s Foreign Exchange
Management Act, 1998 (FEMA).
Clip: Assume that Mr. F is an Indian
resident, settled in India. His son Mr. L has gone to London for employment. He
has become a non-resident of India (NRI). Mr. L wants to send a regular monthly
remittance to his father in India. If he sends pounds 100 through the banking
channel, his father will get Rs. 7,000 in India. If he sends pounds 100 through
the hawala channel, his father will get Rs. 7,700. Hawala premium is assumed @
10%.
Illustration
|
Mr. L |
|
HDL Hawala
dealer operating in London. |
|
|
|
|
|
Mr. F |
|
HC |
Source: http://www.rashminsanghvi.com/femabook5.htm
Cached File: 
Hawala system faster than banks in domestic transfers
Annotation: Spun off a story on corruption and Kashmir (listed below in “The Hawala Connection – Terrorism & Organized Crime:”), this article gives a poignant example of the hawala system at work in “Windows On Graft” on the bottom half of the page.
Clip: While
reporting today's story on how corruption flourishes in war-ravaged Kashmir,
India (…), the
Monitor's Scott Baldauf decided he needed a clear example of how the hawala
(literally, "in the air"), or illegal cash-transfer market worked.
Source: http://www.csmonitor.com/durable/2001/07/13/p6s2.htm
Cached File:
Report On Money Laundering Typologies, 1999-2000
Annotation: See page
eight for a comprehensive explanation of the “hawala” system from the Financial
Action Task Force on Money Laundering, an organization of thirty-one member nations,
territories and organizations originally created from the G-7 member States,
the European Commission, and eight other countries.
Clip: The second of the major alternative remittance systems dealt with by the FATF experts is the hawala or hundi system. This system originated in southern Asian but has now spread throughout the world following the immigration patterns from that region (to Europe, the Middle East, eastern and southern Africa, North and South America, and other regions of Asia). Hawala is a traditional method form moving funds in south Asia, and its use is known to pre-date the introduction of Western banking practices by hundreds of years.
Source: http://www1.oecd.org/fatf/pdf/TY2000_en.pdf
Cached File:
Rules of Hawala (Transfer of Debt)
Annotation: Though
illegal in most of the countries where its practice flourishes, the hawala
remittance system follows a set of ancient rules that have been collected and
translated here by Grand Ayatollah Fazel Lankarani, member of the First Council
of Leadership Experts, first person for Taqleed (sayings of the Prophet
Mohammed), Islamic Republic of Iran.
Clip: If a debtor directs his creditor
to collect his debt from the third person, and the creditor accepts the
arrangement, the third person will, on completion of all the conditions to be
explained later, become the debtor. Thereafter, the creditor cannot demand his
debt from the first debtor.
Source: http://www.lankarani.org/resaleh/draft.htm
Cached File: 
Address by the Deputy Governor of the Reserve Bank of India
Annotation: This is the
transcript of a speech given by India’s central banker in 1997, on the
influence of the hawala system regarding gold prices and exchange. It helps to illustrate the widespread nature
of this type of exchange and the depth to which it is engrained in the society. See page two for details.
Clip: On account of the present policy, the
purchaser of gold jewellery pays a higher price of about Rs.3,000 crore every
year because of the “hawala” premium, etc. In percentage terms, at wholesale
level, it is an extra 17 per cent. Also, because of lack of consumer protection,
and improper certification of quality, the purchaser loses about Rs.4,000 crore
each year.
Source: http://www.bis.org/review/r970829a.pdf
Cached File: 
Microfinance Institutions Ordinance, 2001
Annotation: This
ordinance has been established in an attempt to legalize and regulate the
domestic activities of a variety of small financial organizations. While thick with political rationalization,
the hawala system falls squarely under section 2-p of the ordinance as shown on
page eight of the document.
Clip: WHEREAS it is expedient to promote the
establishment of Microfinance Institutions for providing organizational,
financial, and infrastructural support to poor persons, particularly women, in
order to mitigate poverty and promote social welfare and economic justice
through community building and social mobilization;
Source: http://www.finance.gov.pk/law/Microsoft%20Word%20-%20MFIOrdinancedt3.pdf
Cached File: 
Tax Evasion and Political Graft:
Illegal earnings, money
laundering and clandestine transfer of funds are frequent accusations in South
Asian regional politics
Underground Banking and National Security
Annotation: Touching on
one of the most famous and well documented instances of political graft
involving the hawala system, the “Jain-hawala case,” this document goes
on to give a very comprehensive historical account and future prospects of the
hawala and its related systems.
Clip: The sophisticated techniques above have
not yet been adopted by the Indian or Pakistani Underground bankers for the
most part, but they are expected to make the transition to newer technology
early in the 21st Century as a result of available technology and a rising
generation which is more "tech friendly."
Source: http://www.subcontinent.com/sapra/bulletin/96feb-mar/si960308.html
Cached File: 
Lok Sabha Debates
Annotation: This rare
transcript of the Lok Sabha debates provides an inside view at high-level
internal discussions of the hawala system and other economic crimes by India’s
government. Discussion of the hawala
system begins about one-fifth down the document.
Clip: Mr. Speaker, Sir, the Government of India
suffers a loss of about Rs. 30,000 crore annually on account of Hawala market.
How does the Government propose to check it? The Government says that it is
considering it. When the Government cannot check the outflow of money from the
country to other countries through legislation, by which law, it can check
inflow of money from foreign countries to this country. Will the Government
move any such amendment?
Source: http://alfa.nic.in/lsdeb/ls10/ses2/0122119101.htm
Cached File: 
JMM case was filed in retaliation to Hawala case, says Rao
Annotation: An article
from South Asia showing one politician decrying the accusations of another
stemming from bribery and the hawala system, illustrative of the systemic
corruption in South Asian government as well as the use of scandal as a
political tool.
Clip: Former Prime Minister P V
Narasimha Rao on Thursday told a special court that he was implicated in the
JMM MPs bribery case in retaliation to the prosecution initiated by his
government against 34 politicians in the Hawala case, reports PTI.
Source: http://www.indiavotes.com/elections/news/y2k0421pg2-1.html
Cached File: 
The Hawala Connection - Terrorism and Organized Crime:
Although it is nearly impossible
to prove, it has long been argued that the Hawala system has been utilized by
terrorist and organized crime organizations.
Stopping Terrorism: Follow The Money
Annotation: This position
paper from The Heritage Foundation looks at terrorist financial operations and
offers recommendations for action. In
doing so, the hawala system is discussed briefly as an important aspect of
terrorist groups’ financial networks on pages two and three.
Clip:
One example is the “hawala” system (Hindi for “in trust”) used in
Pakistan and India to avoid paying bribes or taxes when transferring money
across borders. The hawala system can be used to transfer large sums from one
country to another without the money’s ever crossing borders.
Source: http://www.heritage.org/library/backgrounder/pdf/bg_1479.pdf
Cached File: 
National Drug Intelligence Center National Drug Threat Assessment 2001 - The Domestic Perspective
Annotation: Just over halfway down this document on
money-laundering, a clear tie between drug trafficking and the Hawala system is
made by the National Drug Intelligence Center of the Department of Justice.
Clip: Parallel or underground banking systems such as the Colombian BMPE, the Chinese Underground Banking System (CUBS), and the South Asia-based Hawala/ Hundi system are used to launder drug proceeds to source countries. Drug traffickers use these systems because they offer anonymity and are generally less expensive and more efficient, for their purposes, than the official banking system.
Source: http://www.usdoj.gov/ndic/pubs/647/money.htm
Cached File: 
Scope of match-fixing probe widens
Annotation: This article discussing sports related corruption illustrates the depth and widespread occurrence of the hawala system as the trading system is brought to light by this episode.
Clip: "The ED is looking into all 'hawala' dealings and offences related to illegal foreign currency transactions," Joint Commissioner of Police (Crime) K K Paul told India Abroad News Service. The illegal transfer of money using underworld routes to all over the world are known here as 'hawala' transactions.
Source: http://www.thatscricket.com/news/2000/match-fixing/11-enforcementdir.html
Cached File:
In Kashmir, war is also business
Annotation: While focusing on kickbacks, bribe-taking, and war profiteering, the author addresses the difficulty of controlling the flow of money into an area such as Kashmir. To frame the scope of the problem, the hawala system is briefly described with reference to a famed corruption case against the Jain brothers in India.
Clip: In Urdu,
hawala is slang for "in the air," and its mechanics show why
prosecution is so difficult, and why militants rely on it. In a typical
transaction, an expatriate Kashmiri in the US might buy carpets from a partner
in India. Rather than pay the value of these carpets, the buyer may pay two or
three times that amount. Because the Indian government can only monitor
invoices and not actual bank account balances, the Indian partner can now
disburse this money as cash gifts to public officials or business partners - or
use it to purchase lavish homes.
Source: http://www.csmonitor.com/durable/2001/07/13/p1s3.htm
Cached File:
ENFORCEMENT: Significant Cases - Hawala Banking Scheme
Annotation: A case where a couple of Indian nationals were caught running a hawala system provides yet another example of this kind of illegal operation.
Clip: Two Indian nationals pled guilty to the structuring of thirty-nine separate transactions totaling nearly $5 million, through corporate accounts utilizing the "Hawala" or underground banking system. In addition, one defendant pled guilty to Conspiracy to launder at least $100,000 in currency from narcotic sales.
Source: http://www.usis.usemb.se/drugs/Money/ENFORCEMENT.htm
Cached File: 