What is the Hawala & Hundi - Everything you should know!!

Hawala

Definitions:

Hawala is also known as Hundi.

• Hawala is an informal method of transferring money without any physical money actually moving.
• Hawala is an alternative remittance system which was evolved to conduct legitimate remittances. But launderers took advantage of this channel and started using remitting illegal funds across nations.
• Interpol's definition of hawala is "money transfer without money movement." Another definition is simply "trust."

There are two different cases being explained in the figure:

First case:

o   Worker in Country “A” wants to send money to his family in country “B"

o   In order to avoid huge service commission, exchange rate fee and various other hidden fees charged by banks he approached a Hawaladar in his country.

o   Worker has handed over the money to Hawaladar in country “A”for which Hawaladar has given some remittance code.

o   Remittance code is used as a verification tool before money changes hands. Now this remittance code is shared by Worker in country “A” to his family in country “B”.

o   Hawaladar in country “A” contacts Hawaldar in country “B” gives him the remittance code and informs him about the money that is required to be remitted to the desired party.

o   Now, the Hawaladar in country “B” pays the required amount to the worker’s family after verifying the remittance code.

   This is how the transfer takes place. Hawaladar in country “A” charges some commission for doing so. And there would be a common understanding between both hawaladars and also both maintain accounts of each other.

Second case:

The second case also explains the same in which the money is transferred through

Hawaladar from Father in Country “B” to Son in Country “A”

Terminology related to Hawala System

There are two terminologies related to hawala system. They are termed as:

• White Hawala
• Black Hawala

White Hawala :

If hawala is used as a remittance system to transfer legitimate funds, then it

is called as white hawala system or also termed as social hawala.

For eg, A father sending money through hawaladar to his son staying in a different country.

 

Black Hawala:

If hawala is used as a remittance system to transfer illegitimate funds, then it is called as Black Hawala system or also termed as criminal hawala.

For eg, income generated through narcotics trafficking, transferred through hawaladars comes under black hawala system.

Advantages of Hawala

Below are the reasons in using hawala as an alternative remittance system instead of traditional remittance system.

• Cost Effectiveness
• Efficiency
• Lack of Paper trail
• Tax Evasion
• Lack of Bureaucracy
• Exchange rate speculation

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