Difference between revisions of "Hawala (Middle East, India and Pakistan)"

In Arabic, the root h-w-l signifies ‘change’ or ‘transformation’. The word ''hawala'' is derived from this root and is defined as a bill of exchange or promissory note that can be used as ''hawala safar'' or a traveller’s cheque <ref>Jost, P. and  Sandu, H. S. 2000.  The Hawala alternative remittance system and its role in money laundering.  Interpol General Secretariat, Lyon.</ref>. The word permeated into Hindi (national language of India) and Urdu (national language of Pakistan), retained its original meaning but acquired the additional connotations of ‘trust’ and ‘reference’. This reflects the basic principles on which the system operates. A ''hawala'' dealer is described as a ''hawaladar'' <ref>Jost, P. and  Sandu, H. S. 2000.  The Hawala alternative remittance system and its role in money laundering.  Interpol General Secretariat, Lyon.</ref>

In Arabic, the root h-w-l signifies ‘change’ or ‘transformation’. The word ''hawala'' is derived from this root and is defined as a bill of exchange or promissory note that can be used as ''hawala safar'' or a traveller’s cheque <ref>Jost, P. and  Sandu, H. S. 2000.  The Hawala alternative remittance system and its role in money laundering.  Interpol General Secretariat, Lyon.</ref>. The word permeated into Hindi (national language of India) and Urdu (national language of Pakistan), retained its original meaning but acquired the additional connotations of ‘trust’ and ‘reference’. This reflects the basic principles on which the system operates. A ''hawala'' dealer is described as a ''hawaladar'' <ref>Jost, P. and  Sandu, H. S. 2000.  The Hawala alternative remittance system and its role in money laundering.  Interpol General Secretariat, Lyon.</ref>

[[File:Hawala Market Afghanistan.jpg|400px|thumb|left|]]

[[File:Hawala Market Afghanistan.jpg|400px|thumb|left|]]

An alternative term is ''hundi'', a word which is etymologically rooted in Sanskrit and means ‘to collect’. This meaning is synonymous with promissory note, bill of exchange, or ''hawala''. A ''hundi'' operator is referred to as a ''hundiwala''.<br><br>Padayachee and MorrelL define ''hundi'' as:  

An alternative term is ''hundi'', a word which is etymologically rooted in Sanskrit and means ‘to collect’. This meaning is synonymous with promissory note, bill of exchange, or ''hawala''. A ''hundi'' operator is referred to as a ''hundiwala''.<br><br>Padayachee and MorrelL define ''hundi'' as:  

<blockquote>“A kind of bill of exchange or written order for payment that its drawers used much in the same way that the Americans used checks to draw on their checking accounts. In order to draw a Hundi, a client had to open up an account and maintain a correspondence relationship with a [private] banker.”<ref>Padayachee, V., Morrell, R. 1991. ‘Indian merchants and dukawallahs in the natal economy’. Journal of South African Studies, 17 (1): 71-102.</ref></blockquote>

<blockquote>“A kind of bill of exchange or written order for payment that its drawers used much in the same way that the Americans used checks to draw on their checking accounts. In order to draw a Hundi, a client had to open up an account and maintain a correspondence relationship with a [private] banker.”<ref>Padayachee, V., Morrell, R. 1991. ‘Indian merchants and dukawallahs in the natal economy’. Journal of South African Studies, 17 (1): 71-102.</ref></blockquote>

[[File:Hawala Market Photo.jpg|400px|thumb|right|Stacks of cash in a Hawala market in Afghanistan]]

[[File:Hawala Market Photo.jpg|400px|thumb|right|Stacks of cash in a Hawala market in Afghanistan]]

Informal Value Transfer Systems were established means of transferring valuables and money long before any of the formal methods were conceived. However, since the growth of formal value transfer systems, informal systems have operated in the shadows, albeit maintaining a devoted following. Many of today’s IVTS originated among ethnic Asian peoples who based codes of conduct for value/money transfer on mutual trust within groups and individuals. The various systems derived their names from the geographical locations and the ethnicity of the groups that practised them. Passas has summarised some of the more common names for IVTS practices in different parts of the world:<ref>Passas, N. (1999). Informal value transfer systems and criminal organizations: A study into so-called underground banking networks. Netherlands Ministerie Van Justice, The Hague, Netherlands. Obtained through the Internet: http://www.minjust.nl:8080/b_organ/wodcpublications/ivts.pdf [accessed 1/5/2003].</ref>

Informal Value Transfer Systems were established means of transferring valuables and money long before any of the formal methods were conceived. However, since the growth of formal value transfer systems, informal systems have operated in the shadows, albeit maintaining a devoted following. Many of today’s IVTS originated among ethnic Asian peoples who based codes of conduct for value/money transfer on mutual trust within groups and individuals. The various systems derived their names from the geographical locations and the ethnicity of the groups that practised them. Passas has summarised some of the more common names for IVTS practices in different parts of the world:<ref>Passas, N. (1999). Informal value transfer systems and criminal organizations: A study into so-called underground banking networks. Netherlands Ministerie Van Justice, The Hague, Netherlands. Obtained through the Internet: http://www.minjust.nl:8080/b_organ/wodcpublications/ivts.pdf [accessed 1/5/2003].</ref>

[[File:Hawala Diagram 2.gif|400px|thumb|right|Model of Hawala Transfer]]

[[File:Hawala Diagram 2.gif|400px|thumb|right|Model of Hawala Transfer]]

''Hawala'' persists due to a number of reasons, which include; anonymity, cultural friendliness <ref>Chene, M. 2008. Hawala remittance system and money laundering, U4 expert answer, U4 Anti-Corruption Resource Centre.  Obtained through the Internet: http://www.u4.no/helpdesk/helpdesk/query.cfm?id=170, [accessed 17/4/2009]</ref>, low transaction costs <ref>Maimbo, S. 2003. The Money Exchange Dealers of Kabul. Washington, D.C.: The World Bank.</ref>, less transit time <ref>Schramm, M., & Taube, M. 2002, June. ‘The institutional foundations of Al Qaida’s global financial system’. In DIW Workshop “The Economic Consequences of Global Terrorism”</ref>, enhanced level of trust versus banks and other conventional channels <ref>Schramm, M., & Taube, M. 2002, June. ‘The institutional foundations of Al Qaida’s global financial system’. In DIW Workshop “The Economic Consequences of Global Terrorism”</ref>, and increased efficiency<ref>Ballard, R. 2005b. ‘Remittances and economic development in India and Pakistan’. In S. Maimbo, & D. Ratha (Eds.), Remittances: Development Impact and Future Prospects. Washington, D.C.: World Bank</ref>.

''Hawala'' persists due to a number of reasons, which include; anonymity, cultural friendliness <ref>Chene, M. 2008. Hawala remittance system and money laundering, U4 expert answer, U4 Anti-Corruption Resource Centre.  Obtained through the Internet: http://www.u4.no/helpdesk/helpdesk/query.cfm?id=170, [accessed 17/4/2009]</ref>, low transaction costs <ref>Maimbo, S. 2003. The Money Exchange Dealers of Kabul. Washington, D.C.: The World Bank.</ref>, less transit time <ref>Schramm, M., & Taube, M. 2002, June. ‘The institutional foundations of Al Qaida’s global financial system’. In DIW Workshop “The Economic Consequences of Global Terrorism”</ref>, enhanced level of trust versus banks and other conventional channels <ref>Schramm, M., & Taube, M. 2002, June. ‘The institutional foundations of Al Qaida’s global financial system’. In DIW Workshop “The Economic Consequences of Global Terrorism”</ref>, and increased efficiency<ref>Ballard, R. 2005b. ‘Remittances and economic development in India and Pakistan’. In S. Maimbo, & D. Ratha (Eds.), Remittances: Development Impact and Future Prospects. Washington, D.C.: World Bank</ref>.

[[File:Hawala Agent Afghanistan.jpg|400px|thumb|left|Hawaladar in Afghanistan]]

[[File:Hawala Agent Afghanistan.jpg|400px|thumb|left|Hawaladar in Afghanistan]]

In contrast, while ''hawaladars'' keep some records of transaction these are not to monitor their activity but as reminders for details of individual accounts, transactions, and balances. This record-keeping is a matter of individual practice, in contrast to the standardised procedures followed by the formal sector. However, the settlement process for ''hawala'' works on the same basis as the formal system: open accounts are kept and there is occasional netting off between ''hawaladars'' to settle accounts, although they may not necessarily use formal channels<ref>Wilson, J. F. 2002. ‘Hawala and other informal payments systems: an economic perspective’. Paper delivered at the IMF Seminar on Current Developments in Monetary and Financial Law, IMF Headquarters, Washington D.C. on 16 May 2002. Accessed: http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/wilson.pdf </ref>.  

In contrast, while ''hawaladars'' keep some records of transaction these are not to monitor their activity but as reminders for details of individual accounts, transactions, and balances. This record-keeping is a matter of individual practice, in contrast to the standardised procedures followed by the formal sector. However, the settlement process for ''hawala'' works on the same basis as the formal system: open accounts are kept and there is occasional netting off between ''hawaladars'' to settle accounts, although they may not necessarily use formal channels<ref>Wilson, J. F. 2002. ‘Hawala and other informal payments systems: an economic perspective’. Paper delivered at the IMF Seminar on Current Developments in Monetary and Financial Law, IMF Headquarters, Washington D.C. on 16 May 2002. Accessed: http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/wilson.pdf </ref>.  

The biggest difference between the two systems is the monitoring process. As mentioned, the formal system relies on an impartial third party to monitor all transactions and ensure compliance with the rules. Any party that departs from fair transactions would become liable to penalties imposed by the laws governing the system. On the other hand, the informal system does not rely on third party monitoring. Individual ''hawaladars'' and other members of the network monitor all transactions. This is enabled by the customary trust that exists between the ''hawaladars'', a trust that stems from a homogeneous set of beliefs that govern code of conduct within ethnic groups and communities. Any individual engaging in acts contrary to the code of the network is punished accordingly<ref>Schramm, M., & Taube, M. 2002, June. ‘The institutional foundations of Al Qaida’s global financial system’. In DIW Workshop “The Economic Consequences of Global Terrorism”</ref>. The informal mechanism does not have the detailed documentation that is the essential part of monitoring in the formal system. While records exist they are neither standardised nor available in a form that would be accessible to monitoring agents in the formal system. This makes it difficult to track suspicious fund transfers. The ''hawala'' system is based on a hierarchy of agents, each involved in a certain segment of the transaction, making it very difficult to trace the fund’s transfer chain.

The biggest difference between the two systems is the monitoring process. As mentioned, the formal system relies on an impartial third party to monitor all transactions and ensure compliance with the rules. Any party that departs from fair transactions would become liable to penalties imposed by the laws governing the system. On the other hand, the informal system does not rely on third party monitoring. Individual ''hawaladars'' and other members of the network monitor all transactions. This is enabled by the customary trust that exists between the ''hawaladars'', a trust that stems from a homogeneous set of beliefs that govern code of conduct within ethnic groups and communities. Any individual engaging in acts contrary to the code of the network is punished accordingly<ref>Schramm, M., & Taube, M. 2002, June. ‘The institutional foundations of Al Qaida’s global financial system’. In DIW Workshop “The Economic Consequences of Global Terrorism”</ref>. The informal mechanism does not have the detailed documentation that is the essential part of monitoring in the formal system. While records exist they are neither standardised nor available in a form that would be accessible to monitoring agents in the formal system. This makes it difficult to track suspicious fund transfers. The ''hawala'' system is based on a hierarchy of agents, each involved in a certain segment of the transaction, making it very difficult to trace the fund’s transfer chain.