Hawala is a traditional money transfer system where one can transfer a particular amount from one place to another without any physical movement of the money. In India, this transaction system is illegal under the Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA). Read on to learn more about what exactly is the meaning of Hawala and why is it illegal. Some fintech companies are implementing the hawala system in providing financial services to the unbanked and underbanked populations of the world.
It is most common where the recipients of remittances do not have access to a bank account. I have observed this system in records that I have been previously asked to consider while conducting forensic accounting investigations, and am aware that the transactions have the potential for becoming even more complicated. This is because the system of indebtedness has now become a commodity itself, allowing remote transactions to take place for a number of reasons that include cost and efficiency as well as tax evasion and money laundering. To balance the books, the UK Hawalador sends an electronic transfer of the pooled money in his bank account through the mainstream banking system to the Hawalador in Dubai. By pooling the money together from many of his clients, he is able to execute an electronic transfer more cost effectively than if his customers had individually sent their own transfers directly to Pakistan. Thus the Hawalador is still able to maintain an element of cost saving by operating partly outside the conventional banking system and partly within.
In other circumstances, it may be cheaper or faster than dealing with the paperwork of official channels. Hawala is a traditional money transfer system used in the Middle East, North Africa and South Asia. The hawala system is used to transfer money between two parties without the use of a bank or other financial institution. The hawala system is based on trust and personal relationships between hawala brokers or hawaladars.
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. FEMA Act considers hawala transactions as illegal by only allowing only RBI-authorised persons to transact with the exchange of foreign currencies and by imposing penalties on the persons involved in these transactions. The probe agencies like ED and CBI actively work to break down all the Hawala networks. Hawala transactions are those transactions which aren’t regulated by the RBI.
This means that there is no way to track or monitor transactions, making it difficult to prevent money laundering and other illegal activities. On the one hand, the hawala system has many benefits that make it a convenient and affordable way to transfer funds. On the other hand, criminals often abuse the hawala system for illegal activities such as money laundering, terrorist financing, and drug trafficking.
Considering that the system has been used to fund terrorism and money laundering, it has been banned in many countries. The value of the funds being transferred is subject to market conditions and exchange rate fluctuations. As a result, the recipient may end up receiving less amount than was promised. Considering that the Hawala system is entirely unregulated, the system can be easily used to fund terrorist activities.
The aim focus of transferwise is to provide a platform for people who want to transfer money from one country to another with the cheaper commission rates unlike traditional banks charging a very high amount of commission. And as of now, this is being in functioning in seven different languages and the profile is created with the help of connecting person’s social media account like Facebook. These overseas companies are also owned and controlled by Pankaj Kapur himself. Hawala money is referred to that money which is being transacted through the hawala system. The money which is sent through the system is black money of certain people who want to transfer it from one country to another without paying any tax. Hawaladars bypass official exchange rates to profit from these transactions.
The Hawalador will communicate with his counterpart in Karachi, Hong Kong and other places he must send money to. He will effectively arrange for the foreign Hawaladors to supply the required amounts of money, hawala agents in india potentially through their own agents, to their respective destinations. In doing so he will now be in debt to the foreign Hawaladors, but possess a corresponding sum of cash – or funds that have been deposited in his UK bank account. In March 2007, Hasan Ali’s properties were raided by India’s Enforcement Directorate (ED) and Income Tax officials based on allegations of hawala transactions. Transfer of informal funds domestically and internationally harms the formal line of money transfer, eventually affecting the entire economic system of the country. As per Section 2(da) of PMLA – An authorised person is one dealing with the exchange of foreign currency and with an off-shore banking unit with prior permission from the RBI.
Mobile banking and payment platforms, such as Paga and M-Pesa, are revolutionizing the financial system in certain African countries by promoting financial inclusion through the hawala system of financial services. Because hawala transfers aren't routed through banks and, hence, aren't regulated by governmental and financial bodies, many countries have been led to re-examine their regulatory policies in regard to hawala. For this reason, hawala networks are frequently used in countries where there are strict capital controls or sanctions on the flow of money. Traders and expatriates from sanctioned countries, like Iran, might use hawala networks to make payments to their counterparties in neighboring countries.
Hawaladars maintains an informal journal where they record all the debt which are to be cleared and the credit which needs to be received. Debt money can be settled between hawaladars in cash, property or providing an equivalent service. There should be no third party involved in the money transfer other than the parties and the official foreign exchange banks. Section 8 it created some restrictions on the individuals who deal with the foreign currency and also states some restrictions on the conversion of Indian currency into foreign currency. It mandates the person to possess the authorised license by the RBI to deal with the foreign currencies that may be selling and borrowing or transferring the foreign exchange. Section 9 covers the domestic hawala transactions, by prohibiting the payments or providing credit to the person outside India.
For example, the Hawalador in Dubai from the above example may decide that he wants the UK Hawalador to settle his outstanding liability by purchasing equipment from the USA to be sent to the Middle East. It may be that he has a business customer in Dubai who only has funds in India who needs to purchase the equipment. Thus it can be seen how flexible the Hawala system can be, with indebtedness being transferred without, in many cases, any funds being moved.
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