JOURNAL

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ACADEMICS STAND AGAINST POVERTY

e-ISSN 2690-3458 ISSN 2690-3431 Volume 5, 2024: pages 20-43
Research Paper

Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

Bilal Moin
Yale College & Yale Jackson School of Global Affairs, New Haven, CT, USA, ORCID: 0000-0002-5624-0252
e-mail: [email protected]

Abstract: This paper examines the Hawala system, an ancient Keywords:

remittance mechanism enabling money transfers without 1. Political economy
physical fund movement. Originating from medieval commerce 2. Global justice
in the Near and Middle East and China’s Tang Dynasty, Hawala
3. Banking
now handles an estimated $100-$300 billion annually, operating
in parallel with formal financial systems. Despite its vital role for 4. Hawala
unbanked communities, especially in South Asia and among 5. Illicit financial flows
migrant populations globally, Hawala is often associated with 6. Financial regulation
corruption and illicit activities, with post-9/11 links to terrorism
and money laundering intensifying calls for its eradication. This
study delineates Hawala’s historical roots, unique 2024 Journal ASAP
characteristics, and structure through illustrative examples. It
dissects its widespread popularity, exploring geographical DOI: 10.5281/zenodo.11411586
prevalence and competitive advantages. Focusing on India, the
paper provides a comprehensive overview of Hawala’s socio-
economic impact and regulatory complexities, advocating for a
Received 10 February 2024
balanced dual-pronged approach to integrate Hawala into the Revised 20 April 2024
Accepted 25 May 2024
formal economy without driving it underground. Available online 1 June 2024

1. Introduction

In an era dominated by digital banking and instantaneous money transfers, the ancient Hawala
system stands as an enigma. An alternative remittance system, Hawala performs the curious act
of transferring money without any actual movement of funds. Remarkably, Hawala predates the
modern banking era, tracing its roots back to premodern medieval commerce in the Near and
Middle East and China’s Tang Dynasty (Nakhasi, 2009). Today, the vast scale of Hawala
transactions, estimated between $100 billion to $300 billion annually, unfolds discreetly, in
parallel to the formal financial structures that dominate our modern world (Henry, 2017). A
migration-driven surge in remittances further fuels the system’s allure, defying any
presumptions of Hawala’s obsolescence in today’s world (El Qorchi, 2004). Notably, countries
like India, Pakistan, and the U.S. emerged as key nodes in this intricate network, with India

Journal of Academics Stand Against Poverty, 2024, 5, 20-43

Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

showcasing the system’s resilience and its controversial intertwining with ‘bad politics’ and
corruption (Daudi, 2005; Kapoor, 1996).
Yet, it’s essential to underscore that Hawala isn’t merely an instrument of vice. It operates
in a realm of duality: on one side, facilitating terror and illicit activities, and on the other, a
lifeline for innocents seeking affordable, speedy transfers. Post the 9/11 paradigm shift, the
narrative around Hawala has been marred with vilification, often tying it inextricably to
terrorism and money laundering (Teichmann & Wittmann, 2023; Wilson, 2005; Daudi, 2005).
While these interpretations emphasize the need to eliminate Hawala entirely as a means to
combat illicit financial flows (Malit Jr et al., 2017), they oversimplify the complex reality. This
reductionist view fails to capture the nuance of Hawala’s everyday functioning, its humanitarian
value, and its contributions to global development. It is thus essential to discern between its
illegitimate and legitimate uses, a distinction that hinges less on legality and more on the
purpose behind the transaction. With this backdrop, our essay aims to transcend the monolithic
narrative that paints Hawala solely as a malevolent system. Rather, recognizing its existence as
both an unregistered entity and an entrenched financial network, we aim to address its multi-
layered impact on global economic health. An unregulated Hawala is a double-edged sword —
while it facilitates legitimate remittances, its very nature masks illicit financial flows and fosters
tax evasion. Addressing this, we investigate the formidable challenge of taming the untamable
i.e., formalizing an entity that, at its core, thrives on informality.
The structure of our essay will unfold as follows: firstly, we will delineate Hawala, navigating
its historical roots, unique characteristics, and structure through an illustrative example. Then,
we seek to dissect its widespread popularity, shedding light on its expansive geographical
prevalence and delving into the driving factors behind its enduring appeal, particularly
illuminating its competitive advantages. Furthermore, we take a multifaceted look at the
contemporary manifestations of Hawala flows, accentuating its role as an indispensable tool for
humanitarian aid, an everyday remittance network for the unbanked, as well as its darker side
as a conduit for criminal undertakings. Next, we grapple with the complexities of regulating
Hawala, laying out the imperatives for such oversight, and evaluating current global efforts.
Acknowledging the challenge of regulating such an inherently informal system, we survey the
merits and shortcomings of various approaches, using India as a focal point. In doing so, we
argue for a dual-pronged approach, balancing both investigative and public-policy efforts. This
essay posits that rather than merely seeing Hawala through a criminal lens, a comprehensive
understanding that positions it within the broader socio-economic landscape is crucial for
effective oversight and integration into the modern financial realm.

2. Origins and Characteristics of Hawala

2.1. Definition and Historic Origins

At its core, Hawala is an alternative remittance system, offering “financial services, traditionally
operating outside the conventional financial sector, where value or funds are moved from one
geographic location to another” (Passas, 1999). This description also includes other similar
Informal Value Transfer Systems (IVTS) scattered across the globe, each marked by their
regional nuances. These systems are efficient, discreet, and often operate around the clock,
presenting a unique blend of secrecy and reliability. Their very nature makes them “fast,
inexpensive, reliable, convenient, and, most notably, discreet,” fostering a sense of mystery for
those outside the ethnic communities that rely on them (Wheatley, 2005).

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While the West witnessed the rise of its formal banking systems, the historical origins of
Hawala predates these by several centuries, finding its genesis in the early medieval commerce
of the Near and Middle East (FATF, 2003). Its historic inception can be traced back to the need
for Arab traders to safely move their wealth without the physical burdens and perils of robbery
on the Silk Road (Schramm and Taube, 2003). The etymology of the term ‘Hawala’ further
underscores its significance. In Arabic, Hawala translates to ‘payment’ or ‘debt transfer’,
paralleling the Roman ‘delegation debiti’. Interestingly, when integrated into the Hindi lexicon,
it further acquired the connotation of “trust” – an invaluable attribute that remains a bedrock
of the Hawala system (Wheatley, 2005; Jost and Sandhu, 2000). Simultaneously, religious tenets
furthered Hawala’s acceptance, with Muslims leveraging it to fulfill their religious obligation of
almsgiving (Wheatley, 2005)1.
Entering the modern era, we witness the reshaping of Hawala under various sociopolitical
and economic influences. The 1970s, marked by the oil boom in the Middle East, saw a surge in
Islamic banks. Additionally, the gold smuggling endeavors between the Middle East and South
Asia in the 1960s led Indian and Pakistani expatriates working in the Middle East to rely on
Hawala for transferring funds to their families (Wheatley, 2005; Nissman, 2002) describes the
South Asians who profited from gold sales utilized the Hawala system to distribute the proceeds.
Today, Hawala remains a pivotal instrument within Islamic commercial law, serving both as a
mechanism for transferring claims and enabling payments through intermediaries (Redin et al,
2014). Its international ubiquity has even garnered it a quasi-legitimate status in regions like
South Asia and the Middle East (Passas, 1999). Thus, as Jost and Sandhur (2000) caution, terms
like ‘underground banking’ may misrepresent these systems; many, like Hawala, function in
plain sight, enjoying overt cultural recognition and socio-legal legitimacy.

2.2. An Illustrative Example

The brilliance of Hawala lies in its striking simplicity and the fact that money doesn’t cross
borders physically, but trust and faith certainly do. Drawing inspiration from Teichmann and
Wittmann (2022), Wheatley (2005), and U.S. Hearing on Hawala (2002), we can break down this
phenomenon with a real-world example:

Rajesh, an Indian expatriate working in Dubai, decides to send some of his savings
to his family residing in Delhi. His first thought is to use a bank. However, he soon
realizes that to make a transaction, he’d need to have a dedicated account. This,
paired with charges at the official exchange rate, and potentially extra costs if he
opts for courier services, could mean his family wouldn’t receive the funds for up
to a week. Disheartened by this complicated and costly process, Rajesh
remembers a conversation he had with a colleague about a local merchant in
Dubai. This merchant, named Ali, not only runs a textiles business but also
operates as a Hawaladar (a Hawala-broker). Unlike the bank, Ali only charges a
minimal two percent commission and offers a more lucrative exchange rate. To
add to the appeal, delivery charges are non-existent. Choosing the path of

1
The practice of Hawala is not confined to the Middle East or South Asia, and other analogous informal value transfer
systems manifested across various civilizations and epochs, such as the hundi in South Asia, defined by L.C. Jain as “a
written order... for the payment, on demand or after a specified time, of a certain sum of money to a person named therein”
(Jain, 1929). Moreover, in Tang Dynasty China, merchants developed fei-ch'ien, translating to ‘flying money’, echoing
the foundational principles of Hawala (Ballard, 2005; Thompson, 2008). Other analogs include padala and chit in the
Philippines and Thailand respectively (Wheatley, 2005; FATF, 2003). Given structural similarities across analogs, our
proposals are applicable across these global systems.
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

efficiency and cost-effectiveness, Rajesh approaches Ali with his $1,000. Ali, with
the aid of modern technology, promptly sends a WhatsApp Message to his
business associate in Delhi, a fellow textile merchant and Hawaladar named
Vivek. In this email, he instructs Vivek about the transaction. Rajesh, in the
meantime, sends a previously agreed-upon password to his family. The following
day, Rajeshs family visits Vivek, presents him with the password, and in exchange,
they receive the converted amount in rupees, after deducting the commission.
Astonishingly, the entire transaction is finalized within just 24 hours.

To further shed light on the intricacies of this system, one could look at the real-world
account of Rahim Bariek, who testified before the U.S. Senate’s Subcommittee on International
Trade and Finance in 2001. As per Wheatley (2005), Bariek’s Hawala venture catered to 200 and
300 customers in Northern Virginia with remittances ranging from $20 and $400 dispatched
monthly to Pakistan, aiding in housing and basic sustenance. Bariek’s services also
accommodated larger transactions between $1,000 and $5,000, for occasions such as weddings
and funerals. His operations were characterized by a five percent commission, twenty-four-hour
delivery, and the mandatory password or identification protocol.

2.3. The Features of Hawala

In a Platonic sense, the ‘being’ at the heart of Hawala’s ‘form’ are fundamental elements that
both define and differentiate it from traditional banking structures. Namely, Hawala systems
tend to be intricate, international networks, decentralized in nature, and typified by its
operations—transfers of money that don’t involve the actual movement of money. Such traits
not only distinguish Hawala from conventional banking but also set the stage for the competitive
advantages it offers, a question we will discuss in a subsequent section (3.3).

2.3.1. Money as a Social Relation

The very essence of Hawala seems to echo the Marxian sentiment: “money is not a thing, but a
social relation” (Marx, 1847). Rather than being a mere transactional tool, money, in the Hawala
system, is intrinsically tied to trust, community, and social networks. In our example, money is
transferred without being moved: the Hawaladar Vivek assumes a debt for another, Ali,
leveraging funds that were already positioned in India. Vivek’s act weaves him into the
expansive fabric of Hawaladars worldwide, a network held together by trust and social ties
(Lascaux, 2015).
Interestingly, as the FATF (2003) observes, though theoretically there should be a balance of
funds transferred in both directions, one side often dominates. Wheatley (2005) sheds light on
this, stating that Hawala usually involves an unequal transfer, gradually offsetting one
Hawaladar’s debt to another. But this isn’t always the case. Hawala can also be woven into
broader commercial undertakings. Hawaladars might be entrenched in trade, with the Hawala
transaction merely a segment of a grander scheme. Over time, these debts oscillate, and as
Looney (2003) describes, Hawala often mirrors conventional banking, where transactions are
cleared between units to level the books.
Addressing the eventual clearing of these debts, there are multiple avenues Hawaladars
might explore. According to reports of the FATF (2003), they might resort to regular bank
transfers, trade transactions, or even the physical transfer of cash. Teichmann and Wittmann
(2022) emphasize the prominence of import-export transactions used by Hawaladars. This
approach is so prevalent and lucrative that, in some instances, customers aren’t even charged

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for a Hawala’s services. Instead, the Hawaladar profits from the foreign exchange rate disparity
between the black market and the standard rate. Settling debts can involve strategies like gold
smuggling, manipulating invoices, or dealing in precious gems (Wheatley, 2005). Such strategies
don’t just clear debts; they can also mask the very existence of Hawala transfers. As Lascaux
(2015) summarizes: “Hawaladars form cross-border networks and alliances with other informal
bankers. They arrange capital flows and counterflows in multiple directions, while
simultaneously entering into the multilateral relationships of debt.”

2.3.2. A Matter of Trust

Central to the efficiency and reliability of the Hawala system is the incontestable element of
trust. As Wheatley (2005) aptly notes, "In the absence of trust, the system would collapse and
financial systems based on other principles would fill the void." In this universe of parallel
transactions, theft is virtually an alien concept and the transaction points out, rests on a single
line of communication and seldom the comfort of written documentation (Johnson, 2007;
Looney, 2003). The power of trust within the system is so strong that, as Passas (1996) puts it,
asking for formal identification would be considered an affront.
Another lens to scrutinize this trust phenomenon through is one of social control and
reputation mechanisms. Each Hawaladar operates in a realm where their business thrives or
withers based on their reputation of trustworthiness and competence (Schramm and Taube,
2003; Ballard, 2005; Redin et al, 2014). Looney (2003) points to the dire consequences of broken
trust, where community ostracism becomes the Hawaladar’s proverbial guillotine. Lascaux
(2015) further suggests that Hawala’s foundational trust is a manifestation of social control
intertwined with community norms, religious beliefs, cultural affinities, and the weight of one’s
reputation. Hawala’s underlying architecture ensures all parties have strong incentives to honor
their commitments (Schramm and Taube, 2003). The value proposition is clear: honor your
obligations and reap the benefits of an efficient value transfer system; deviate, and face
economic exile (Lascaux, 2015). Razavy and Haggerty (2009) argue, though, that while trust and
informal sanctions underpin the Hawala’s operations, one must be wary of overly romanticizing
such arrangements “to suggest that they are unambiguously preferable to the frustratingly
alienating encounters based almost exclusively on bureaucratic credentials.”

2.3.2. Behind Closed Doors

Hawala’s clandestine operations with its minimal or non-existent paper trail poses significant
challenges for law enforcement and regulators (Wheatley, 2005). While the Hawala system
might not adhere to Western accounting norms, it’s a fallacy to believe that it operates in
complete anonymity and secrecy. While the system may heavily rely on memory, it is
inconceivable that all its transactions remain unrecorded, given their complexity (Ballard, 2005).
From the hundi—a promissory note—to encrypted ledgers, Hawaladars maintain records, albeit
with their unique practical purposes (Maimbo et al., 2003; Passas, 1999; Keene, 2007)2. Martin
(2009) rebukes the erroneous belief that Hawala transactions are undocumented, challenging
the derogatory tags attached to it as ‘informal’ or ‘unorganized’, and suggesting that these arise
from a skewed perception that indigenous banking systems are primitive. Importantly though,
the intent of these records isn’t for external auditors but to keep track of their finances (Redin
et al., 2014). Furthermore, Redin et al. (2014) and Martin (2009) converge on the idea that while
Hawaladars keep records, their confidentiality levels and unique record-keeping methods
challenge conventional scrutiny. Therefore, while the absolute secrecy of Hawala accounting is

2
An example of a Hawaladar’s bookkeeping can be found in Appendix-D of Jost and Sandhu (2000).
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

a misconstruction, its inherent confidentiality emanates from the principles governing it, making
its finances and books largely inaccessible to outsiders – namely, regulators.

3. The Size, Scale, and Survival of Hawala

3.1. Size and Scale

Any attempt to precisely quantify the scale of the Hawala system is fraught with uncertainty.
Due to its covert operations and lack of oversight, few definitive statistics exist (FATF, 2019). To
begin, the task of measuring remittances and other formal money flows is inherently
convoluted. The dynamics of these transfers are so fluid that when external factors come into
play there can be substantial discrepancies between reported flows and actual transfers (World
Bank, 2023a). There’s a substantial underreporting of remittances, given that “[n]ot all small
transactions by migrants conducted via money transfer operators (such as Western Union), post
offices, mobile transfer companies (like M-Pesa in Kenya) are included in all the countries,
neither are informal transfers (such as via friends, relatives or transport companies returning to
the origin community).” (World Bank, 2023a) Hence, estimates of remittances are likely to
underreported — in par cular in the context of South-South corridors — potentially by up to
50% (World Bank, 2011; Irving et al., 2011).
Estimating the total value funneled through the Hawala system annually is even more
formidable. The entire Hawala network remains predominantly invisible within countries,
resulting in its near-total exclusion from national financial compilations like balance of payments
or monetary accounts (Wilson, 2005). The extent of a Hawala transaction’s scale is confined
solely by the sender’s readiness to transport cash and the recipient agent’s capability to
facilitate the transaction. This flexibility in Hawala transaction’s scale, ranging from modest
amounts by blue-collar workers to substantial exchanges in the tens of thousands of dollars,
further complicates estimations of Hawala flows (Looney, 2003).
While exact figures remain elusive, snapshots from history provide some scale. For instance,
Interpol’s staggering 1998 assessment posited that India’s Hawala dealings, accounting for up
to 50% of its GDP, reached a monumental $680 billion. (Looney, 2003; Baldauf, 2002). In 2002,
approximately $10 billion of the $14 billion channeled to India was routed through unofficial
systems like Hawala (Daudi, 2005). A year later, the General Counsel of the U.S. Department of
Treasury acknowledged the global transfer of “tens of billions” through similar systems,
underscoring their convenience, affordability, and speed (Kapur, 2003). By 2008, Roger Ballard,
a Hawala expert at Manchester University, emphasized the globalization of the world economy,
estimating Hawala remittances at a staggering $100 billion (Fifield, 2008). In Pakistan, despite
its illegality, the system has been a significant source of hard currency, with estimates ranging
from $2 billion to $5 billion annually (Wheatley, 2005). In Europe too, Hawala’s dominance is
evident among migrants, who rely on it for approximately 90% of their transactions - This system
manages an estimated $2.5 billion annually in the human smuggling trade alone, with an
additional $390 billion in remittances sent home (Legorano and Parkinson, 2015).
Recent trends in remittances further highlight the scale. By 2021, remittances to low- and
middle-income countries soared to an impressive US$605 billion (World Bank, 2023b). Given
earlier estimations, a substantial portion of these remittances could very well be funneled
through informal channels, including Hawala. Thus, while the exact scale of the Hawala system
remains shrouded in mystery, the fragments of data available paint a picture of a mammoth
informal financial system. We address the appeal of Hawala in the subsequent section to explain
its competitive advantages as a global financial behemoth.

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3.2. The Persistence of Hawala

3.2.1. Cost-Effectiveness
In a world of rising transaction costs, Hawala stands out as a cost-effective solution. A report
from the World Bank (2023b) highlighted the high costs of sending money internationally,
averaging 6%, even with technological advancements. This becomes even more pronounced
when considering the 8.8% average for Sub-Saharan Africa. In sharp contrast, Hawala’s
transaction costs hover between 2 to 5% (Redin et al., 2014), with some regions like Afghanistan
reporting even lower fees of 1 to 2%. Wheatley (2005) illustrates this point with a stark
comparison: “Western Union charges $22 to transfer $200 from Karachi, Pakistan to New York
City. In comparison, a competing Hawaladar charges a mere ten dollars.” In certain corridors
like Australia-Africa, Hawaladars even offer free services, as noted by Passas (1999). This cost-
effectiveness arises because Hawaladars operate on leaner profit motives, have alternative
commercial activities, and lack the extensive overheads that banks incur (Teichmann and
Wittmann, 2022).

3.2.2. Speed
Time, in many situations, is more valuable than money, and it is precisely here that Hawala
shines. Armed with modern communication tools like phones, emails, and faxes, Hawaladars
can execute transfers rapidly, often within hours. Wheatley (2005) notes, “Some Hawaladars
advertise that they can complete a transfer in two hours, but most do so within two days.”
Building on our illustrative scenario highlights this efficiency. Rajeev, who chooses Hawala for
his transactions, bypasses the usual hassles. There are no banks to engage with, no cumbersome
forms to fill, and no waiting period for a bank’s courier. A simple phone call to a Hawaladar often
suffices. Remittances between major international cities can be accomplished in a mere 6 to 12
hours, with even the more time-consuming rural transactions taking a maximum of 48 hours
(Passas, 2005; Maimbo et al., 2003).

3.2.3. Lean and Mean: The Adhocratic Appeal

Hawala has earned its stripes not just because of speed or affordability, but due to its
accessibility in places where formal banking systems might be absent. This is in stark contrast to
Western-style banking systems, which are often mired in redundant information transfers and
storage facilities. As Ballard (2013) aptly puts it, “[hawalas] are distributed systems: just like the
internet, Hawala networks can operate reliably on a global scale in the absence of a central
registry.” It’s this lean-and-mean approach that offers these ‘branchless bankers’ a formidable
competitive advantage (Shabib-ul-Hasan & Naz, 2012).
Private financial markets, as observed by the former U.S. treasury secretary, Lawrence
Summers, often sideline the impoverished, predominantly because they aren’t lucrative
clientele (Friedman, 2012). In juxtaposition, Hawala’s agility allows its agents to operate
anywhere – from the curbsides of South Asia to boardrooms in Switzerland and the USA. For
individuals like Rajeev’s mother from our example, who might reside in an inaccessible village,
a Hawala operator might be her only lifeline to the world of funds transfer, while a bank might
still be a distant reality. Hawala’s significance extends further when viewed through the lens of
banking inclusivity. The Federal Deposit Insurance Corporation (FDIC) classifies those without
basic banking facilities as ‘unbanked’ and those who complement their banking with alternative
financial services (like Hawala) as ‘underbanked.’ Hawala serves these ‘underbanked’
populations, meeting their financial needs when conventional systems fall short. As the 2002-
03 FATF Report (2003) notes, Hawala "may be the sole reliable method available for getting
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

funds to recipients in remote locations or those regions that do not have other types of financial
services available.”
Hawala bypasses bureaucratic quagmires and red-tape that ensnares many financial
institutions. Orthodox banking systems, with their requirement for formal identification or
registration, inadvertently exclude those who lack these documents – including those who wish
to stay under the radar due to their immigration status. Dean (2015) provides a gripping account
of Syrian refugees’ reliance on Hawala, driven by the confiscation of their identification in non-
government-controlled areas, which leaves them essentially invisible to formal remittance
providers. Razavy and Haggerty (2009) elaborate on the cultural contrast between Western and
Hawala systems, observing, “... individuals who lack credentials, Hawala is a subtle, culturally
specific and appealing local solution to a series of financial dilemmas that flow from this lack of
personal identification documents.” This potent ability of Hawala to operate devoid of
conventional identity markers is rooted in its reliance on a different trust framework than
Western financial systems.

3.2.4. Cultural Familiarity

There’s an inherent trust that threads its way through the fabric of the Hawala system. This
trust, rooted in cultural familiarity, often makes it more appealing and reliable than the
impersonal facade of global corporate banking entities. The nuances of culture, language
barriers, and even religious considerations underscore the choice of many to opt for Hawala.
For workers navigating these challenges in foreign lands, Hawala emerges as the preferred, if
not the only, option (Redin et al., 2014).
Ergo, as Wheatley (2005) emphasizes, “in the developing world, Hawala possesses qualities
that wire transfers lack.” Its operations mirror what the World Bank recognizes as the
quintessential elements for a payment system’s efficiency, like “payment certainty, lowest cost,
credit risk control, reliability, record maintenance, confidentiality, and convenience.” (Martin,
2009)

4. The Many Faces of Contemporary Hawala

4.1. Remittances
Migration patterns, especially those traversing the North-South axis, augment Hawala's role as
the primary medium of remittance. As Malit Jr et al. (2017) note, the sustainability of Hawala is
firmly anchored in the diligent efforts of low-income migrants. For these migrants, sending
money back home is not just a financial transaction, but a means to ensure the socio-economic
well-being of their families3. Hawala has also come to symbolize the preservation of social and
cultural ties. The diaspora, living thousands of miles away from their homeland, finds solace in
the continuous interactions that Hawala facilitates 2004.

4.2. Humanitarian Purposes

In areas struck by the ravages of war, instability, and natural calamity, formal banking
infrastructure collapses, but the decentralized network of Hawala perseveres. Most aid

3
Dubai is considered the world's de facto clearinghouse for Hawala transactions. The stark disparity in formal financial
services between the UAE and the home countries of its vast expatriate labor force inadvertently channels remittances
through the Hawala network, further fortifying its importance in the UAE (Wilson, 2005). In lieu of reliable empirical
statistics, Wilson (2005) relies on a blend of literature, hearsay, and on-ground conversations to contend that “[t]here is
remarkable consensus that the ‘degree of Hawala’ for inward remittances to Pakistan is very high, and likely is also high
for several other South Asian countries.”

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organizations, as Daudi (2005) points out, lean on this informal financial sector for their
international and domestic remittance requirements. The United Nations too hasn't shied away
from leveraging Hawala, using it in In countries like Somalia for aid delivery (Houssein, 2005).
Thompson (2011) describes Afghanistan's five-year dependence on Hawala for tasks from
national elections to infrastructure development. So much so that the “[H]awala is the core of
Afghanistan’s financial system.” With limited banking access, most remittances, contributing up
to 18% of the GDP, pass through it (Economist, 2020).

4.3. Criminal Purposes

Hawala’s inherent attributes - its trust-based networks, speed, minimal checks, and low costs -
are precisely the characteristics that endow it with the potential for misuse in the realms of illicit
transactions, terrorist financing, and the evasion of taxes, exchange controls, and import/export
duties (Wheatley, 2005). Notably, the FATF underscores the allure of Hawala for criminals.
“Familiarity, culture, international reach, ease of use, and speed of transfers make Hawala
attractive to money transmitters. Criminals and terrorist financiers are also attracted to the lax
supervision, anonymity, and lack of political will enforcing regulations on transaction
information” (FATF, 2013).
Money laundering, with its intricate choreography of moving illicitly gained funds through
legal avenues, finds a natural partner in the Hawala system. As Wheatley (2005) observes,
“money laundering and terrorist financing … regimes rely upon factors that Hawala usually lacks,
namely detailed records, registration with the government, and connections to mainstream
banking.” Interpol, in its attempt to dissect the money laundering mechanism, has defined it
through three distinct phases: Placement – where illicit funds are first introduced into the
financial arena, Layering – a process that distorts the source of funds through a myriad of
financial transactions, and Integration – the point at which the once-illicit funds are fully
absorbed into the legal economy, appearing legitimate (Jost & Sandhu, 2000). Strikingly, the
Hawala system effortlessly aligns with these three stages. Funds discreetly introduced into its
channels align with the “placement” phase; its natural course of operations, involving transfers,
aligns with the “layering” phase; and ultimately, when Hawaladars, who often run parallel
legitimate businesses, deposit these funds in banks, they effectively achieve “integration”
(Daudi, 2005). The process concludes with the once illicit money appearing completely
legitimate, bearing testimony to John Kenneth Galbraith’s notion of disguised truth (Galbraith
1995).
The Hawala system's inherent characteristic of leaving a minimal paper trail positions it as
an attractive avenue for terrorism financing by obfuscating the origins and purposes of
laundered funds (Wheatley, 2005). The system’s traditional insulation from government
oversight and its sparse record-keeping makes it a strategic choice for these groups such as al
Qaeda (Landman, 2009). An illuminating case from the Financial Action Task Force on Money
Laundering (2003) recounts the use of the Hawala system by terrorist outfits. Funds from
international smuggling meant for a terrorist organization were laundered through the bureau,
and its significant cash reserves were tapped into by the terror group. Such incidents paint a
concerning picture of how informal money transfer systems can be manipulated by terrorist
groups.
However, it is essential to approach this subject with nuance and care. As Wheatley (2005)
accentuates, while some Hawala transactions might cater to illicit activities, the overwhelming
majority remain legitimate. In this same vein, Passas (1999) warns against the danger of
sensationalizing the misuse of IVTS like Hawala. He suggests that it's imperative not to be led
astray by atypical cases that gain media spotlight. Instead, Passas stresses the need for solid
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

evidence before formulating stringent policies, which might inadvertently jeopardize innocent
people’s privacy and malign cultural traditions. He goes on to explicitly state: “IVTS do not
represent a money laundering or crime threat in ways different from conventional banking or
other legitimate institutions. While criminal entrepreneurs do make use of IVTS, it appears that
the amounts involved represent a rather small part of the dirty money in circulation” (Passas,
1999).
Much of the post-9/11 literature on Hawala's supposed criminality may be superficial and
fraught with inaccuracies (Passas, 2003; Viles, 2008). By 2005, several experts believed that
concrete evidence linking IVTS to modern terrorist organizations was scarce (Cheran & Aiken,
2005; Viles, 2008). However, as highlighted by Wheatley (2005), a lack of extensive evidence
doesn't completely rule out illicit activity. A sizable minority of Hawala transactions might still
be employed for nefarious purposes.

5. Regulating Hawala

5.1. The Imperative to Regulate Hawala

The Hawala system poses a significant policy challenge in today's globalized economic
landscape. The dilemma stems from the necessity to achieve two simultaneous objectives:
harmonizing economic aspirations and implementing robust AML/CFT (anti-money
laundering/countering the finance of terrorism) mechanisms. The urgency to harmonize and
formalize the system emerges from two paramount concerns: the economic necessities and the
imperative to curtail criminal behavior.

5.1.1. Economic Necessity

At the heart of the economic concern lies a structural issue: the lack of transparency inherent
to Hawala. Nakhasi (2007) articulates this, pointing out that the efficient capital markets theory
predicates market prices on the availability of comprehensive information. In essence, this
theory suggests that for capital markets to function optimally, all pertinent information should
be accessible to stakeholders. The Hawala system, with its characteristic absence of formal
records and regulations, inherently creates information gaps. Such gaps not only skew the
market's perception of global economic health but also place the entire system on precarious
grounds, threatening to undermine global economic stability in the long run.
The challenges posed by Hawala aren’t just theoretical; they have real-world implications.
Wheatley (2005) underscores the enigma that Hawala represents for financial auditors and law
enforcement. This invisibility poses fiscal challenges as governments find themselves
handicapped, unable to tax transactions they cannot identify or regulate (Johnson, 2007).
Moreover, the ramifications of this unregulated system extend to both sender and recipient
countries. Maimbo et al., (2003) highlight the fiscal implications, emphasizing that informal
funds transfers remain outside the purview of the formal banking sector, thus escaping
conventional taxation structures. This not only deprives governments of potential income but
also indirectly impacts the formal financial sector, which loses business to its underground
counterpart.
Further complicating the economic landscape is the influence of Hawala on broader
monetary policies, with these informal transactions significantly altering the composition of
broad money (Maimbo et al., 2003). By influencing the supply and demand for foreign currency,
Hawala transactions have the potential to sway exchange rate operations.

29 Journal of Academics Stand Against Poverty, 2024, 5, 20-43

Moin, 2024

5.1.2. Deterring Illicit Activities

As argued above, Hawala, inherently, does not exclusively support illegal transactions. However,
the absence of malevolent intent does not exempt it from scrutiny or from the critical need for
oversight. It is imperative not to allow the Hawala system to function as an unchecked
playground for potential malefactors. Nakhasi (2007) draws attention to a critical concern: the
system's secretive essence has rendered the unregulated Hawala an attractive avenue for
money launderers. The very attributes that make Hawala a lifeline for many, such as its rapidity
and discretion, simultaneously transform it into a haven for those with nefarious intentions.
Furthermore, a tepid regulatory stance can send a misleading message. As Waterson (2013)
points out, inadequate regulation can be perceived as a tacit endorsement, leading criminals to
believe that they have a free pass to indulge in illicit activities due to the lack of stringent
enforcement and penalties.
Regulation, however, is not without its own set of challenges. Passas (2005) elucidates that
an ill-conceived regulatory framework could cause the underground to further recede into
obscurity, adopting even more clandestine informal value transfer methods. The repercussions
of such a shift are manifold: diminished transparency and traceability; attenuation of the
positive economic impacts of remittances; more costly remittance channels for expatriates;
undue penalization of legitimate participants; augmented financial burdens on immigrant
families; and, critically, the alienation of vast population segments whose cooperation is
indispensable in the fight against terrorism. Johnston (2005) adds that for regulation to be
effective, it must offer tangible benefits that outweigh the perceived cost i.e., the regulations
must be “incentive-compatible.” A salient example of the consequences of regulatory missteps
is provided by the Afghan central bank's experience in 2018. Under international pressure to
ensure transparency in the Hawala system, the bank introduced measures that restricted
traders from holding deposits and making loans. The mandate to collect comprehensive
customer documentation was also imposed. However, instead of ushering in a new era of
transparency, these measures sparked a massive backlash. Hawala traders, seeing their business
threatened, went on strike. Their collective action underscored the significance of the system;
as one scholar remarked, “shutting down Hawala markets would paralyse the economy”
(Economist, 2020).

5.2. Caveats
Before evaluating any regulatory measures, we must discuss some critical caveats. Beyond the
sheer economic and crime control rationale, the regulation must respect equity, face practical
enforcement challenges, and most critically, address the moral and cultural nuances of the
Hawala system.

5.2.1. A Holistic Approach

For starters, the dialogue surrounding Hawala has often been dominated by a focus on
AML/CFT. However, casting a blanket of suspicion over Hawala based solely on this narrow
viewpoint can be problematic for two reasons.
At its core, Hawala is a deeply entrenched socio-political norm, and any attempts at
regulation need to acknowledge its intricate web of social relevance. By disproportionately
spotlighting Hawala's association with illicit activities, regulators risk sidelining its predominant
use for legal, non-criminal endeavors. Such an approach, albeit well-intentioned, can
inadvertently perpetuate a black market of sorts, allowing unregulated Hawala transactions to
persist. Hawala is as susceptible to misuse as any other financial institution (Passas, 2006).
Looney's (2003) perspective further contextualizes Hawala's essence, emphasizing that it
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

primarily remains an economic entity, with or without the tangential issues of terrorism
financing, drug trade, or money laundering. Thus, limiting the lens to AML/CFT can potentially
cloud our perception of Hawala's broader societal significance.
Secondly, Hawala is a cog in the wheel but not the wheel itself. When it comes to criminal
undertakings, Hawala is but a conduit, a consequence following a primary illicit act. While
Hawala itself might be deemed criminal due to its opacity, it's crucial to understand that it's not
necessarily the root cause of these unlawful endeavors. Consequently, regulating Hawala solely
from a criminality perspective can be likened to addressing the symptom rather than the
ailment. Redin et al. (2014) echo this sentiment, arguing that Hawala isn't the magic bullet
against organized crime. Criminal funds might flow through Hawaladars, but they equally
traverse other conventional financial mechanisms. Moreover, as Wilson (2005) discerns after an
in-depth analysis of balance sheets and the Hawala model, economically, Hawala's modus
operandi is reminiscent of many other payment methods, particularly international remittances.
The perceived difference between Hawala and these other mechanisms lies predominantly in
their institutional versus informal channels.
In essence, a more nuanced, informed approach to regulating Hawala recognizes its
multifaceted existence and can mitigate the risks associated with money laundering, and tax-
evasion due to absent accountability.

5.2.2. Equity
Hawala fills the void between rich and poor, developed and underdeveloped regions, and more
importantly, caters to a segment often overlooked by conventional banking systems due to their
perceived lack of economic appeal or system overloads (Redin et al., 2014). A blanket, heavy-
handed approach to regulating Hawala might seem progressive but comes with its own perils.
After all, it is primarily the economically vulnerable who flock to Hawala, attracted by its cost-
effectiveness and speed (Looney, 2003). Over-regulation risks not only alienating this group but
also impeding essential humanitarian services that prefer Hawala's pragmatism over traditional
channels.
The IMF, emphasizing the importance of remittances, especially for migrant workers, warns
against painting all informal funds transfer systems with the same brush (Johnston, 2005). Such
a perspective becomes even more relevant when considering the World Bank's estimation,
which places informal remittances at par with half the volume of the formal sector.

5.2.3. Moral and Cultural Imperatives

Regulating the Hawala system raises profound moral and cultural questions that deserve careful
exploration. Delston (2014) ponders the moral question of consent when he questions the
legitimacy and obligations of global actors to enact financial laws to prevent terrorism.
Furthermore, the West's response to Hawala has been largely shaped by fear and mistrust,
intensified by the “secrecy and opacity” enveloping Hawala and often overlooks the deeply-
rooted moral and cultural context within which Hawala operates. The moral legitimacy of
Hawala isn't a derivative of Western perspectives but arises from its intrinsic goals, operational
methods, contextual circumstances, and the eventual outcomes of its transactions (Redin et al.,
2014). By elevating Western banking to a pedestal of legitimacy, there's an inadvertent, yet
palpable, sidelining of Hawala as a legitimate alternative (De Goede, 2003) touches on another
layer of this discourse. This kind of Eurocentric myopia not only marginalizes Hawala but also
disregards its historical significance and socio-cultural resonance. Additionally, Western
regulatory models, shaped by and for Western financial systems, might be ill-suited for IVTs like

31 Journal of Academics Stand Against Poverty, 2024, 5, 20-43

Moin, 2024

Hawala (Keene, 2007). A regulatory approach designed without an appreciation for Hawala's
cultural nuances is doomed for misalignment.

5.2.4. Enforcement and Practical Challenges

Johnson (2007) aptly points out the glaring inadequacy of traditional anti-money laundering
platforms: they do not tackle the foundational reasons that make Hawala so appealing and
internationally accessible. The unique operational modality of Hawala inevitably stymies
conventional monitoring efforts. Addressing illicit financial flows through such informal
channels demands more than just a replication of existing anti-money laundering measures. We
need to look beyond conventional tactics, like due diligence and suspicious activity reporting.
Keene (2007) elucidates this by highlighting the importance of acquainting oneself with the
intricate inner workings of Hawala and rallying the support of its key players. The intent behind
any regulatory move should pivot towards enhancing transparency, thereby facilitating
investigative endeavors. Yet, it's crucial to underline that the Western regulatory model, often
flaunted as paragons of efficacy, might not resonate with the ethos of systems like Hawala.
In essence, if we are to usher Hawala into an era of transparency and minimize potential
abuse, our efforts shouldn't be directed toward constricting the system itself. Instead, it should
be directed at comprehending and, if necessary, regulating the methods through which Hawala
operates.

5.3. The Case of India

The Hawala conundrum is especially profound in India. Despite being effectively outlawed,
Hawala persists in India and remains part of the transnational financial pipeline and shapes the
Indian economy and polity (Passas, 2005). The Interpol estimated that in 1998, the money
involved in India's Hawala system amounted to a staggering $680 billion—equivalent to 40% of
the country's GDP at the time (Wheatley, 2005; Baldauf, 2002). This demand for Hawala is driven
by a mix of political-economic conditions, a general distrust of formal financial sectors, and the
allure of gold markets (Johnson, 2007).
Since the early 1970s, the Indian government has sought to curtail this shadowy monetary
system (Daudi, 2005). Yet, even with legislation banning Hawala transactions, it remains a
“routine transaction” for many, indicating a palpable disconnect between law and practice. But
despite the regulations and stringent laws against it, Hawala remains deeply entrenched in
India's financial landscape. The network has been exploited for funding insurgency in regions
like Kashmir and enabling groups like Al Qaeda to transfer funds to collaborators in Pakistan.
“It's certainly not in the interest of my country to encourage Hawala. But for politicians and
criminals, it's a handy tool,” notes Jyoti Trehan, Inspector General for the Punjab Armed Police
and an expert on underground banking in India (Baldauf, 2002).
An analysis of India's regulatory efforts against Hawala reveals an intricate interplay of
policies, politics, and public interest. In the 1990s, a paradigm shift occurred as the Indian
government aimed to reduce Hawala's appeal. They introduced liberal economic reforms,
including the establishment of floating exchange rates and a relaxation of gold restrictions
(Passas, 2003). The lifting of the ban on importing gold and silver, for instance, resulted in a
significant decrease in the smuggling of these precious metals, subsequently reducing the
proceeds from their sales used in the Hawala system (Passas, 1999). However, economic
liberalization wasn't the sole strategy employed. To foster transparency and oversight, the
government introduced the India development bond scheme and the foreign remittances
(immunity) scheme, aiming to legitimize money entering the country, even if its origin was
dubious. These measures effectively converted illicit ‘black’ money into ‘white’, and
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

unsurprisingly, some of the major contributors to these schemes were influential politicians,
businessmen, and professionals (Passas, 1999). The sheer volume of transactions, compounded
by the inability to differentiate between legitimate remittances and illicit funds, rendered
record-keeping almost redundant. Adding to the complexity, many on the list included
government officials, making the initiative a potential political minefield.
Further policy shifts throughout the 1990s included India's revised stance on foreign
exchange regulations. In an epochal move, the government introduced a "no questions" policy
related to residents' foreign exchange holdings. This policy reform potentially paved the way for
the simple financial settlement of Hawala balances, which, as evidence suggests, did take place
(Wilson, 2005).
The legal framework concerning Hawala in India has been continuously evolving. The
Prevention of Money-Laundering Act of 2003 mandated Hawala brokers to keep detailed
transaction records and introduced the suspicious transaction report (STR) system to enhance
oversight (India Code, 2003). More comprehensively, India introduced the Financial Exchange
Regulation Act (FERA) followed by its consolidated form, the Financial Exchange Management
Act (FEMA), both of which explicitly prohibited "Hawala-type" transactions (Maimbo et al.,
2003). Under these regulations, only specified institutions could deal with foreign exchanges,
and specific transaction types were closely defined. The very wording of FEMA directly
addressed Hawala by prohibiting certain types of financial transactions linked to foreign asset
acquisitions. FERA went further, with sections outlining strict legalities around the Hawala
market and imposing rigorous licensing requirements on money changers (Daudi 2005). While
these laws are stringent on paper, the on-ground reality showcases the resilience and
adaptability of the Hawala system. The assertion that even the most stringent regulatory
frameworks might fail to curb Hawala transactions, especially given the evident corruption in
Indian politics, underscores the scale of the challenge (Daudi 2005).
The Jain Hawala Scandal of 1991 is a stark example of the intertwingling of Hawala with
political corruption and the pitfalls of the investigative process4. The very nature of Hawala,
combined with political interference, makes regulation extremely tough. As Daudi (2005) aptly
puts it, India's regulation of Hawala is an example where even the most stringent provisions
might prove ineffective.

5.4. Two Models for Hawala Regulating

5.4.1. An Investigative Approach

An investigative approach towards regulation would target the criminal acts directly instead of
merely controlling the hawala channels themselves. The US model for regulating informal
financial systems such as hawala is instructive, particularly the USA PATRIOT Act of 2001. This
legislation amended the Bank Secrecy Act to recognize “informal money transfer system[s]” like
hawala as financial institutions (Wheatley, 2005). As per this act, such informal systems must
now register as “money transmitting businesses.” Furthermore, the act also criminalizes the
conscious transfer of funds derived from or intended for crimes, encompassing acts of terrorism
(Office of the Federal Register, 2001). From December 2001 to 2003, there was a significant

4
The Jain Hawala controversy surfaced when the Central Bureau of Investigation found account books while investigating
a case tied to the funding of militants in Jammu and Kashmir. These books implicated India's elites, including the then
Prime Minister, P.V. Narasimha Rao, for accepting illicit payments via Hawala (Kapoor, 1996; Baldauf, 2002). After the
discovery of evidence in R.K. Jain's home, there were allegations of officials being pressured to overlook implicating
evidence against politicians and instead focus solely on terrorists. Those who resisted these pressures faced consequences
even losing their jobs. In the end, charges against the majority of implicated politicians were dropped (Baldauf, 2002).

33 Journal of Academics Stand Against Poverty, 2024, 5, 20-43

Moin, 2024

surge in registrations. By 2008, the number of registered hawala dealers reached over 40,000,
with these businesses now mandated to maintain records and adhere to "know your customer"
rules equivalent to traditional banks (Fifield, 2008). Similarly, the FATF issued a Special
Recommendation in 2001, aimed at increasing transparency in these systems and introducing
oversight (FATF, 2003).
However, investigative approaches by imposing quasi-regulation on a system that inherently
resists it presents its own set of challenges. The continued existence of many unregistered
money remitters indicates loopholes in the system, and hawaladars circumvent registration
requirements for IMVT services by rebranding themselves as non-profit organizations (FATF,
2003). Even those operating within the regulatory framework, like registered hawaladars, are
mandated only to file Suspicious Activity Reports, leaving room for potential illicit activities
(Wheatley, 2005).
Nakhasi (2007) posits that hawala transactions primarily gain value when converted to cash,
suggesting a pivotal relationship between hawaladars and mainstream banks. This connection
could be the hawala system's vulnerability, offering rich investigative opportunities. Echoing
this, Patrick Jost's testimony emphasizes that money entering the U.S. via hawala is largely static
until converted to a widely accepted form (Yousef, 2002). Nakhasi (2007) then advocates for
bank investigators to diligently monitor unusual banking activities, such as heightened deposit
activity or outgoing transfers to major financial hubs. Distinctive deposit patterns of hawaladars
might also provide leads (Jost & Sandhu, 2000). The implementation of Anti-Money Laundering
measures in the UK and USA resulted in several hawaladar convictions. Yet, as Passas (2007)
points out, these rarely led to identifying terrorists or drug traffickers, undermining the intent
of these regulations. Similarly, while FATF states that many jurisdictions have criminalized
terrorist financing, few report actual convictions.
Additionally, such measures may deter illegal activities but do not diminish the economic
attractiveness of hawala (Daudi, 2005). The hawala's inherent features, like vague paper trails
and limited interaction with mainstream banking, can render some investigations fruitless – a
challenge not just in India, but globally. Furthermore, investigative measures largely treat
Hawala as a Western financial institution, which it decidedly is not (Razavy and Haggerty, 2009).
While the operations of hawala in remitting countries might primarily face legal issues
concerning registration or licensing, in receiving countries, the challenges compound. Here,
potential clashes with exchange control regimes can further muddle the waters, dovetailing into
broader concerns about the black market and underground economies (Wilson, 2005).
Despite external pressures, many argue that the hawala system possesses intrinsic self-
regulation. Hawaladars often serve specific communities, forging personal ties that make
identification easier without demanding formal documents (Ballard, 2005). These personal
bonds mean hawaladars are better positioned to assist authorities in hunting major criminals,
provided authorities respect the legitimacy of their operations. Keene (2007) reiterates this
point, emphasizing the trust basis in hawala. Hawaladars, he contends, have a deeper familiarity
with their clients than traditional bankers. This personalized approach enables them to better
scrutinize suspicious transactions. As Martin (2009) suggests, the reputation mechanism
intrinsic to the hawala system shields it from criminal infiltration. However, self-regulation isn't
foolproof. Although Soudjin (2015) and Passas (2004) provide hawalas with indications to
identify criminal transactions, these are not enforceable.
Other regulatory attempts go beyond individual scrutiny, focusing on disrupting hawala’s
overall efficiency. Levitt (2007) and Viles (2008) emphasize “targeting key nodes” and
pressurizing “chokepoints” for funds transfers. This pressure tactic aims to constrict criminals’
operating environment. However, Ballard (2005) asserts that overly zealous AML/CFT
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

procedures detract from tracking substantive offenders, inadvertently leading to scapegoating

while the real culprits escape. Aggressive crackdown ignores the humanitarian aspect and
implementing standard AML/CTF rules in informal settings might hamper economic
development and poverty reduction initiatives (Passas, 2006b).
Yet, as with any investigative challenge, the success of these efforts depends on a global
approach and the adaptability of strategies to regional and local nuances. Financial control will
be effective only if trade transparency parallels it (Passas, 2005). Outcasting could be a method
by which international bodies and governments exert economic pressure on jurisdictions to
encourage them to adopt statutory and regulatory standards for AML/CFT regimes. However,
the inevitable presence of outliers, accompanied by moral and socio-political barriers, weaken
this mechanism Jurisdictions can superficially enact AML/CFT legislation and claim compliance
with international standards (Bowers, 2009). Inconsistencies in regulations provide hawaladars
with loopholes, enabling them to shift their transactions to jurisdictions with weaker
regulations, thus circumventing more stringent regulatory environments.

5.4.2. A Public-Policy Approach

Rather than imposing broad-based investigative regulations, it's more effective to mold policies
based on conditional incentives. These incentives are deeply rooted in regional realities such as
inefficient infrastructure, lack of comparable alternatives to hawala, and a global lack of
coordination in tackling the challenge (Passas, 1999). Viewing hawala as an “economic
phenomenon” influenced by demand and supply necessitates altering the economic landscape
to reduce its appeal (Wilson, 2005).
The inadequacies of the formal sector, especially in countries like India, are exacerbated by
burdensome bureaucracies, over-regulation, and a lack of public confidence in banking systems
(Passas 1999). Hawala thrives where formal banking is absent or weak, and a robust,
competitive private banking system can reduce hawala's allure (Maimbo et al., 2003; Nakhasi
2007; Looney, 2003). Notably, India is experiencing a shift with platforms like UPI and e-banking,
promoting financial inclusion and growing trust in banking since the 1980s. While the upsurge
of formal banking mechanisms is commendable, it cannot overshadow the intrinsic importance
of financial inclusion. Martin (2009) underscores this by explaining how a profound
understanding of traditional systems like hawala leads experts to a common conclusion:
diversifying financial services invariably benefits migrant workers and their families A revamped
financial architecture can lower transaction costs and elevate transparency, offering swift,
affordable, and reliable services in developing regions (Kapur, 2003). Microlending platforms
also have the potential to counteract informal sector incentives due to their alternative
availability to mainstream banking, cultural familiarity, affordability, and offered anonymity
(Bowers, 2009). State strategies should offer regulated banking alternatives aligned with global
standards to boost confidence in conventional banking, including adopting standardized Know-
Your-Customer procedures (Johnson, 2007).
Furthermore, liberalizing economies and adopting policies like lower taxes on remittances,
floating currency rates, and a more relaxed approach to currency regulations and interest rates
can counter the very conditions that sustain hawala (Wheatley, 2005). Building on this, shifting
more financial activity into the formal sector can significantly benefit countries like India
(Johnson, 2007). The logic is simple: More assets and revenue within the formal sector can
amplify a nation's lending capacity. While individual incentives might not catalyze radical
changes, the broader socio-economic benefits can be substantial.
The enduring popularity of Hawala largely arises from its lack of significant competitors,
suggesting it will remain dominant until such competitors emerge (Wheatley, 2005). A notable

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Moin, 2024

emerging rival is Western Union, which, through a strategic alliance with the Indian national
postal service, has transformed money transfers in India. This collaboration led to a pioneering
International Money Transfer Service via post offices, enabling money remittances from nearly
195 countries to India (India Post, 2019). By 2011, it recorded transfers of USD 6.5 billion across
7,000 postal locations (Economic Times, 2011).
Mobile Money platforms like Remitly, M-Pesa, UPA, and Orange Money are reshaping the
landscape of financial transactions. Mali (2019) accentuates the need to invest in the
technological aspects that bolster the digital services of the formal sector, making them equally
efficient and decentralized, akin to Hawala. The exponential rise of mobile money, especially in
regions like the Middle East and Central Asia, attests to its demand and efficacy. The
affordability of mobile banking striking: sending $200 using mobile money costs an average of
just 1.7% of the transaction amount compared to banks which have an average cost of 11.8%
(World Bank, 2023b). Mobile money, owing to its speed, is more prevalent than physical cash in
regions like Somalia (Economist, 2020). However, for this system to thrive, it requires synergy
between service providers and the government. The World Bank (2023b) underscores that the
potential growth of mobile digital money faces hurdles due to regulations aimed at thwarting
money laundering and terrorist financing. For costs to remain low and services to be accessible,
competition must flourish in both sending and receiving nations, and regulations must facilitate,
not stifle, this growth. India’s example demonstrates an aggressive push towards digitization
witnessed the birth of initiatives aiming to foster a transition from cash to digital payments.
These efforts were bolstered by the bold, yet economically-dubious, move of demonetization in
2016, signaling India's determination to tackle corruption and promote digital transactions
(Saraf, 2022).
Yet, even public-policy approaches for regulating hawala are fraught with challenges.
Nakhasi (2007) illuminates how the inherent nature of hawala, combined with risks tied to
privatization, creates daunting obstacles to the success of these formalization efforts.
Complying with banking regulations might open banks to civil liabilities and introducing
regulatory measures can escalate the costs associated with background checks in countries like
India. Alternatives to hawala might not address the customers' need for anonymity or the
efficiency and reliability that hawala offers. However, the digital age has made financial services
like digital banking almost instantaneous and reliable. Although they might lack the trust
associated with hawala, the global confidence in banking systems is growing. Initiatives like the
National Mission for Financial Inclusion and platforms like UPI in India are bridging the
accessibility gap. Alternatives also placate religious concerns, with the rise of Islamic banks
ensure compliance with Sharia Law and regulatory norms.

5.4.5. What’s Next?

A two-pronged approach emerges as a robust strategy. On one hand, there's the push towards
driving financial activities into regulated channels, and on the other, a focused investigation on
those hawala operators who remain beyond oversight. The ultimate goal should be to foster a
sense of supervision without pushing hawaladars so far that they feel compelled to retreat into
the shadows (Passas, 1999; Watterson, 2013). Johnson (2007) notes, “The lower the amounts
of money hawala operators handle, the more difficult it is for them to make multiple financial
deliveries or to handle large financial deliveries.” The cyclical compounding effects of reduced
money flow through hawala systems can change the very nature of Hawala. With less money
flowing through Hawala, operators may find it challenging to keep the system operational as
they would have to settle debts among themselves more frequently. This in itself could be a
Taming the Untamable: Rethinking, Regulating, and Revamping Hawala

deterrent for using hawala for illegal financial transfers, gradually steering users toward formal
banking systems that are more transparent and regulated.
However, while these strategies present a pathway to controlling the unchecked flow of
money through hawala, an absolute resolution seems elusive. These systems will continue to
exist and even expand as long as people find reasons to prefer them over formal financial
systems (El Qorchi, 2004).

6. Conclusion

In addressing the intricacies of the Hawala system, it's clear that regulating it is not just a matter
of legality or cultural understanding, but also a pressing issue for global security. The dual
approach of enhancing state-backed remittance services while tightening oversight on hawala
operators offers a pragmatic solution, considering the balance between supervision and not
driving hawaladars underground. While technological advances and evolving financial practices,
coupled with government incentives, could make formal systems more appealing, the tenacity
of informal systems like hawala remains. As history has often shown, every financial solution
will inevitably birth new challenges, emphasizing that in the realm of finance and governance,
vigilance and adaptability are paramount.

Award information
This paper was awarded 1st place in the Tenth Annual Amartya Sen Essay Prize Competition
2023. Amartya Sen Prize is awarded to the best original essays examining one particular
component of illicit financial flows, the resulting harms, and possible avenues of reform.
Awarded by Academics Stand Against Poverty in partnership with Global Financial Integrity and
Yale's Global Justice Program. The paper presentation can be found on the official Yale Global
Justice Program YouTube channel: https://youtu.be/E6xINBjg2w8

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