Tuesday, April 5, 2016

Hawala

Hawala1 is an alternative or parallel remittance system. It exists and operates outside of,
or parallel to traditional banking or financial channels. It was developed in India,
before the introduction of Western banking practices, and is currently a major remittance
system used around the world. It is but one of several such systems; another well known
example is the chop, chit or flying money system indigenous to China, and also,
used around the world. These systems are often referred to as underground banking;
this term is not always correct, as they often operate in the open with complete legitimacy,
and these services are often heavily and effectively advertised.

The components of hawala that distinguish it from other remittance systems are trust and
the extensive use of connections such as family relationships or regional affiliations.

Unlike traditional banking or even the chop system, hawala makes minimal (often no)
use of any sort of negotiable instrument. Transfers of money take place based on communications
between members of a network of hawaladars, or hawala dealers.
.
How Does Hawala Work?

Hawala works by transferring money without actually moving it. In fact money transfer
without money movement is a definition of hawala that was used, successfully, in a
hawala money laundering case.

An effective way to understand hawala is by examining a single hawala transfer. In this
scenario, which will be used throughout this paper, Abdul is a Pakistani living in New
York and driving a taxi. He entered the country on a tourist visa, which has long since
expired. From his job as a taxi driver, he has saved $5,000 that he wants to send to his
brother, Mohammad, who is living in Karachi.
.
Even though Abdul is familiar with the hawala system, his first stop is a major bank. At
the bank, he learns several things:

The bank would prefer that he open an account before doing business with them;
The bank will sell him Pakistani rupees (Rs) at the official rate of 31 to the dollar; and
The bank will charge $25 to issue a bank draft.

This will allow Abdul to send Mohammad Rs 154,225. Delivery would be extra; an
overnight courier service (surface mail is not always that reliable, especially if it contains
something valuable) can cost as much as $40 to Pakistan and take as much as a week to
arrive. Abdul believes he can get a better deal through hawala, and talks to Iqbal, a fellow
taxi driver who is also a part-time hawaladar.

Iqbal offers Abdul the following terms:

A 5% commission for handling the transaction;
35, instead of 31, rupees for a dollar; and
Delivery is included.

This arrangement will allow Abdul to send Mohammad Rs 166,250. As we will see, the
delivery associated with a hawala transaction is faster and more reliable than in bank
transactions. He is about to make arrangements to do business with Iqbal when he sees
the following advertisement in a local Indo-Pak newspaper (such advertisements are
very common):

Abdul calls the number, and speaks with Yasmeen. She offers him the following deal: A fee of 1 rupee for each dollar transferred; 37 rupees for a dollar; and Delivery is included.

Under these terms , Abdul can send Mohammad Rs 180,000. He decides to do business with Yasmeen.

 •Cheap tickets to India, Pakistan, Bangladesh, Sri Lanka, Dubai •Great rupee deals (service to India and Pakistan) •Large movie rental selection •Video conversions •Latest Bollywood hits on CD and cassette •Prepaid international calling cards •Pager and cellular activations (trade-ins welcome) •Conveniently located in Jackson Heights (718) 555-1111 ask for Nizam or Yasmeen (718) 555-2222 [fax] (718) 555-2121 [pager] MUSIC BAZAAR AND TRAVEL SERVICES AGENCY

The hawala transaction proceeds as follows: Abdul gives the $5,000 to Yasmeen; Yasmeen contacts Ghulam in Karachi, and gives him the details; Ghulam arranges to have Rs 180,000 delivered to Mohammad.

Even though this is a simple example, it contains the elements of a hawala transaction.
First, there is trust between Abdul and Yasmeen. Yasmeen did not give him a receipt, and
her recordkeeping, such as it may be, is designed to keep track of how much money she
owes Ghulam, instead of recording individual remittances she has made. There are
several possible relationships she can have with Ghulam (these will be discussed later);
in any case she trusts him to make the payment to Mohammad. This delivery almost
always takes place within a day of the initial payment (a consideration here is time
differences), and the payment is almost always made in person. Finally, in some scenarios,
he trusts her to repay him the equivalent of either $5,000 or Rs 180,000.

As was stated above, hawala works through connections. These connections allow for the
establishment of a network for conducting the hawala transactions. In this transaction,
Yasmeen and Ghulam are part of the same network. There are several possible ways in
which this network could have been constructed.

The first possibility is that Yasmeen and Ghulam are business partners (or that they just
do business together on a regular basis). For them, transferring money is not only another
business in which they are engaged but a part of their normal business dealings with one
another. Another possibility is that, for whatever reason, Ghulam owes Yasmeen money.
Since many countries make it difficult to move money out of the country, Ghulam is
repaying his debt to Yasmeen by paying her hawala customers; even though this is a very
informal relationship, it is quite typical for hawala. A third (and by no means the final)
possibility is that Yasmeen has a rupee surplus and Ghulam is assisting her in disposing
of it.

In the last two cases, Ghulam does not need to recover any money; he is either repaying
an existing debt to Yasmeen, or he is handling money that Yasmeen has entrusted to him,
but is unable to move out of the country. In the first case, where Yasmeen and Ghulam
are partners, a more formal means of balancing accounts is needed.

One very likely business partner scenario is an import/export business. Yasmeen might
import CDs and cassettes of Indian and Pakistani music and 22 carat gold
 jewelry from Ghulam, and export telecommunications devices to Ghulam.

In the context of such a business, invoices can be manipulated to conceal the movement of money.

If Yasmeen needs to pay Ghulam the Rs 180,000 that he has given to Mohammad, she
can do it by under invoicing a shipment to him. She could, for example, send him
$20,000 worth of telecommunications devices, but only invoice him for $15,000. Ghulam
pays Yasmeen $15,000 against this invoice. The extra value of goods, in this case
$5,000 (the equivalent of Rs 180,000) is the money that she owes him.

In order to move money the other way (in this case, from Pakistan to New York), over
invoicing can be used. For this example, it is assumed that Ghulam owes Yasmeen
$5,000. She could buy $10,000 of telecommunications devices, and send it to Ghulam
with an invoice for $15,000. Ghulam would pay her $15,000; this covers the $10,000 for
the telecommunications devices as well as the other $5,000.


(via the US Treasury, FinCen, Interpol)