Hamid Aziz
Key findings
• Hawala is a Money or Value Transfer Service (MVTS) that has been used for centuries, originating in the Middle East and South Asia. It is overwhelmingly used for legitimate purposes, including personal and business financial transactions and for the sending of remittances by migrants and refugees to family members. Cultural preferences, convenience, low-threshold accessibility, low processing fees, reliability, and faster value transfer services are some of the reasons for using hawala, and customers using the service come from all walks of life.
• Despite being widely used for legitimate purposes, some attributes of the hawala system also make it vulnerable to use by organised crime for the purposes of transferring illicit funds and values. This includes financial transfers by drug traffickers, migrant smugglers and other criminal actors and organisations, as well as safekeeping of funds obtained from illegal activity. The 113 hawaladars interviewed for this study do not commonly ask about the source of money or the reason for sending and receiving money. Additionally, when they did have doubts about the source of the funds, over half of the interviewed hawaladars reported that they had never refused a hawala transaction.
• There is no single global regulatory framework for the hawala system. However, the Financial Action Task Force (FATF) has produced international standards and recommendations for countries to take measures to regulate the hawala system and ensure regular monitoring and compliance. Specific regulations and monitoring regimes vary by country, but FATF recommends countries take a risk-based approach to regulating the hawala system. Of the 18 countries covered by this study, the hawala system was regulated in most of them. However, in four countries it was not regulated, and in Afghanistan – following the events of August 2021 – the current regulatory status of the hawala system is unclear as of the time of writing.
Introduction
Throughout history, many different means and mechanisms of payment have evolved, enabling people to trade and exchange value, especially where state institutions have been limited or nonexistent. Under such conditions, traders needed ways of conducting business under conditions of unpredictability or which were subject to arbitrary power. The most basic method of payment was bartering or purchasing through the exchange of goods. But bartering is slow and inflexible, hence using a currency to facilitate exchange became normal practice.
A range of Money or Value Transfer Services (MVTS) have historically operated in parallel to other financial institutions, such as banking systems. In some geographical areas, these are trust- and reputationbased and can provide methods of transferring money when formal banking structures are unavailable or not widely used6. Some MVTS are historically rooted in certain cultures and civilizations and date back centuries, albeit under different names such as hui kuan in Hong Kong, hundi in India, hawala in the Middle East, padala in the Philippines, phei kwan in Thailand7.
The history of MVTS dates to at least the Tang Dynasty in China (618–907 CE), when sustained economic activity prompted the emergence of the feich’ien8 remittance system. Over time, this system spread to other countries via Chinese traders, including into Southeastern, West and Central Asia. The hawala system itself developed in South and SouthEast Asia in the 8th Century, presumably evolving from or based on the systems found in China9 .
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