Most people who have encountered this term Hawala or Hundi may not fully grasp the meaning of it. Nowadays, we link these terms to money laundering or financial crime, however, they have roots in financial history before even the word money laundering was coined.
The Hawala or Hundi are the same. In this paper, we will use the term Hundi. Hundi is an alternative remittance system that operates outside formal banking channels. The word Hawala has its origin in the Arabic language which means transform or change. It is defined as a bill of exchange or a promissory note or travelers check. Later, it also gained the additional meaning of Trust and Reference. The word hundi comes from the Sanskrit meaning collect. It was usually referred to collection box found in Hindu Temples. Further, it has also the same meanings as Hawala.
Hundi operator is known as Hundiwala meaning banker or foreign exchange dealer.
So you can see that that this system was developed long before formal banking practices were established when it was the only available medium to transfer money from one place to another.
As said earlier, hundi means trust, this system uses extensive use of connection based on family relationships and regional affiliations for carrying out the transaction.
How it Operates:
Hundi Operates by transferring money without actually moving it. For instance, Mr.X is in America and wants to send money to Mr.Y in Nepal, he will go to Mr.Z, a hundi operator, and ask him to transfer the funds. Mr.Z will contact Mr.W, a hundi operator in Nepal. Mr.W will give the money to Mr.Y on the behalf of Mr.X. Here, Mr. Z did not give Mr.X a receipt, and Mr. Z’s recordkeeping is designed to keep track of how much money he owes to Mr.W rather than individual remittances that he had made.
Mr.Z record-keeping may look like below:
The first column indicates the date of the transaction, 2nd shows the name of the hawala broker to whom the debt is owed. It is very common to use partial names or alias. The third column is the amount of debt. The third column shows the dollar/INR exchange rate in effect for the transaction. The fourth column shows the value of the transaction in the dollar. The fifth column reflects the way in which the payment was made. The first nine records in the table show the payment was made through check while 52 “Ta” means that payment was settled in 52 Tolas of gold, indicating that hawala broker may be jeweler or gold dealer.
The interesting thing here is that Mr.Z and Mr. W may use trade-based money laundering to settle their dues.
If you want, you can go through our trade-based money laundering article here:
Why Hundi is prevalent.
Let us talk about some of the reasons why people want to opt for Hundi
- The primary reason is that Hundi is cheaper than traditional banking transaction costs.
- Hundi is time-saving that is within almost 2 days any sum of money can be transferred from any place. However, for international wire transfers, the payment has to go through different corresponding banks and it takes time.
- There is less complexity involved in hundi that is, if you have to wire transfer, first you need to open a bank account. Considering, if someone has a working visa in a certain foreign country, then the bank may want additional documents besides proof of his/her identification like utility bills as part of their due diligence which is quite cumbersome. Further, some may work as illegal immigrants. Thus, they only have options of Hundi only.
- There is no paper trail in hundi that is Hundi operator does not record the individual transactions. This facilitates those who want to remain anonymous while doing cross border transactions like those involved in tax evasion.
- As said earlier, the other meaning of Hundi is trust. Hawala dealers are almost always honest in their dealings with customers and fellow hawaladars. Breaches of trust are extremely
Now, we focus on what are advantages to the hundi operator:
- Usually, Hundi Operators are those who are already operating a legitimate business like Travels and Tours, Gold and Jewelry who are a cash-intensive business. So, they do Hundi as a side business, it helps them to mingle their hundi money by proceeding from a legitimate business. Further, in these businesses remittance and wire transfers are frequent, this also helps them hide their hundi transactions in the cover of legitimate wire transfers for their business.
- Most Hundi Operators are involved in foreign currency speculation or black market currency dealing. Since they deal with different currencies with different customers, this puts them in a viable position to be involved in foreign currency speculation. This is also a reason, why they are able to give better rates to their customer than banks.
Hundi and Money Laundering
Now, we focus on how money laundering is perpetuated through Hundi at different stages of money laundering
- Placement Phase: In this phase, money is introduced to the banking system by criminal organizations. Since the Hundi transactions operate on the cover of legitimate business, it is easy for Hundi operators to make small deposits in the bank account below the threshold amount or above the threshold as legitimate income from the business.
- Layering Phase: There is a mix of legal goods and illegal money by the Hundi Operator. Further, when these hundi operators are involved in trade-based money laundering, this creates a very confusing paper trail.
- Integration Phase: At this phase, the source of income has become inconspicuous, therefore the money can be again reinvested in expanding their legitimated business and to carry hundi transactions.
How to identify Hawala Transactions:
This is the important part for Anti-Money Laundering Professionals as we are going to look at some of the red flags for Hawala Transactions:
- There is frequent cash deposit in form of cash or check in the bank accounts of hundi operators.
- The deposit is followed by frequent wire transfers usually to these major financial centers like UK, Switzerland, and Dubai.
- It is said that Hundi prevails more in certain ethnic communities (e.g. Afghan, Bangladeshi, Indian, Pakistani, Somali). So, the wire transfers in these accounts should be closely monitored.
- If the wire transfers or check payments are made for the purpose of Gold, Jewelry, and valuable ornaments, they should be closely monitored.
- The total debit and credit balance in Hawala accounts are usually not in balance as they differ substantially. This is because they have to settle their dues with other Hundi Operators.
- Excessive trips to a safe deposit box by a small retail shop owner
- These are certain businesses are also more likely than others to be involved in hawala. They are no an exhaustive list, but to name a few:
- Travel and Related Services
- Jewelry (gold, precious stones)
- Foreign Exchange
- Used Cars
- Car Rentals
This is all that we have to offer about Hawala and Hundi concepts. You can add your experiences, suggestion, the advice in the comment section below.
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