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

‘Underground banking’ is a core term widely used to describe hawala. This term, however, is inherently fallacious.  The actual transfer process rarely involves any banking procedures. It is structured more as an exchange on open accounts between two or more individuals (Passas 1999). For these reasons, ‘underground banking’ is a misnomer and incorrectly implies a submerged activity of illegality and corruption. Another term coined by media hype is ‘black hawala’, which alludes to illegal hawala transactions (Jost and Sandhu 2000). However, for some critics, ‘black hawala’ has come to define all hawala transactions. This is typical of the partisan thrust of many present day media commentaries.

By their nature, hawala networks enable transnational economic activity conducted in a world of increasing interconnectedness. However, unlike ‘formal’ transnational economic activities that operate from relatively static identifiable entities (such as banks and other multinational corporations), and which are regulated by national and international governmental institutions, the hawala economy is constituted by networks of spatially dispersed heterogeneous actors with no specific centre.  As hawala is located in the ‘grey’ area of legality and may be illegal in some circumstances, one might expect that the default rate and default risk would be high, fraud would be rife, and exploitation common. However, there is a surprising consensus among scholars that the hawala has a history of being reliable, speedy and convenient (Ballard 2005a, 2005b, Schramm & Taube 2003).  Thus, hawala produces positive economic outcomes but without the traditional visible elements of management control (reporting processes, audit/documentation, formalized clearing system) normally associated with the formal sector.

Hawala gained increasing attention in the US and international media after the 9/11 terrorist bombings involving Al-Qaida. It has been alleged that Al-Qaida used hawala to transfer money – undetected – across international borders to finance its terrorist activities. Since then, research into various aspects of hawala by governments, academics and journalists has increased significantly. This sudden surfeit of information has generated a “fact by repetition” phenomenon (Passas 1999). Emanating mostly from the West, a large number of negative commentaries have cast hawala as a dangerous practice that needs regulation, monitoring, or even abolition. However, contrary to popular misconception hawala did not have their beginnings in criminal enterprise or financial malpractice, and continue to be used primarily for legitimate purposes all over the world (Passas 1999). De Goede (2003) has commented on the general misconception that hawala is an “underground” banking system, noting that these informal networks are connected to Western banking system in many ways.

Although hawala is considered an alternative to formal transfers involving banks and financial institutions, the processes involved are quite similar. Formal value transfers can take several forms: cash carriers, exchange houses, and money remitters. Apart from cash carriers, formal value transfer systems do not physically move cash or valuables, but an institution forwards a sum to an individual/business entity on behalf of another institution representing a different individual/business entity. An illustration of this is a transfer of funds through Western Union. Detailed records are kept which are then settled through the formal banking sector, while impartial third parties monitor and enforce rules and regulations.  

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 (Wilson 2002).  

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 (Taube and Schramm 2002). 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.