EP:9 - The Role of Hawala Networks in Financial Crime

        Hawala is an informal value transfer system (IVTS) that predates modern banking and is widely used in regions such as South Asia, the Middle East, and Africa. While it serves legitimate economic purposes, particularly for migrant remittances and business transactions, its lack of formal regulation, record-keeping, and reliance on trust-based transactions makes it highly susceptible to money laundering, terrorism financing, and other financial crimes.

Unlike traditional banking, Hawala operates on a trust-based network of brokers (Hawaladars), who transfer money across borders without any formal documentation. This anonymity and lack of oversight make Hawala an attractive channel for criminals seeking to move illicit funds, evade sanctions, and bypass anti-money laundering (AML) measures.

This paper explores the mechanics of the Hawala system, its role in money laundering and terrorism financing, major case studies of financial crime involving Hawala networks, and Thailand’s regulatory response to mitigate the risks associated with informal financial networks.

How the Hawala System Works

1. Definition and Key Characteristics

Hawala is a decentralized, informal money transfer system that operates outside the traditional banking infrastructure. Unlike conventional wire transfers, Hawala transactions are based on:

• Trust-based financial agreements between Hawaladars (brokers).
• Verbal or coded communication instead of formal contracts.
• No physical movement of money—settlements occur through trade, gold, or cryptocurrency.

The process follows these steps:

1. Initiation: A sender deposits money with a Hawaladar in their home country.
2. Communication: The Hawaladar contacts a counterpart in the recipient’s country with transaction details.
3. Payout: The second Hawaladar pays the recipient the equivalent amount, keeping a small commission.
4. Settlement: The two brokers later balance their debts through trade transactions, cash couriers, gold exchanges, or cryptocurrency transfers (World Bank 112).

Since Hawala does not rely on banks or digital ledgers, it is difficult to trace transactions, making it attractive for both legitimate users and illicit actors (OECD 98).

2. Legitimate Uses of Hawala

Despite its vulnerabilities, Hawala is widely used for legal financial transactions, including:

• Migrant Remittances: Millions of migrant workers rely on Hawala to send money home, especially in regions where banking infrastructure is weak.
• Business Transactions: Small businesses and traders use Hawala for fast, cross-border settlements in cash-dependent economies.
• Humanitarian Aid: NGOs operating in conflict zones often use Hawala to deliver aid where banks are unavailable (IMF 67).

3. Why Hawala is Attractive for Financial Crime

Hawala’s informal nature and lack of regulatory oversight make it ideal for:

• Money Laundering: Criminals can move large sums without triggering banking alerts.
• Terrorism Financing: Extremist groups use Hawala to transfer funds internationally while avoiding government surveillance.
• Tax Evasion and Corruption: Politicians and corporations hide wealth outside formal banking channels (Interpol 75).

How Hawala Facilitates Money Laundering

1. Anonymity and Lack of Financial Records

• Unlike traditional banking, Hawala does not require customer identification (KYC).
• Transactions are conducted through informal agreements, without receipts or electronic records.
• Authorities cannot easily track who is sending or receiving money (FATF 45).

2. Hawala and Trade-Based Money Laundering (TBML)

• Criminals settle Hawala debts through over-invoicing, under-invoicing, or misrepresenting trade transactions.
• Fake import/export deals justify money movements across borders.
• Drug cartels and human traffickers use trade invoices to launder illicit profits (OECD 102).

3. Hawala’s Role in the Drug Trade

• Narcotics traffickers use Hawala to move drug money internationally without banking oversight.
• Funds from drug sales are sent via Hawala networks to fund new drug shipments (World Bank 134).

4. Cryptocurrency and Modern Hawala Networks

• Bitcoin, Monero, and Tether (USDT) are increasingly used for digital Hawala transactions.
• Hawaladars use crypto wallets instead of cash settlements, making tracking even harder.
• Some Dark Web money laundering services mimic Hawala networks (Interpol 92).

Thailand’s AML Response to Hawala-Based Money Laundering

1. AMLO’s Crackdown on Informal Banking Networks

• Thailand’s Anti-Money Laundering Office (AMLO) has implemented:
• Increased financial intelligence monitoring on large remittances.
• Cross-border cooperation with ASEAN regulators to track illicit Hawala transfers (AMLO 23).

2. FATF’s Guidelines on Hawala Regulation

• FATF requires Hawala operators to register as financial service providers and report suspicious transactions (FATF 56).

3. Thailand’s Compliance with Global AML Standards

• Thai banks have strengthened KYC and Enhanced Due Diligence (EDD) for high-risk cross-border transactions.
• Law enforcement agencies work with international partners to dismantle illegal Hawala networks (Bank of Thailand 38).

Best Practices to Combat Hawala-Based Money Laundering

1 .Stronger AML Reporting Requirements

• Require financial disclosures for large Hawala transactions.

2. Enhancing AI-Based Financial Surveillance

• Use AI-driven analytics to detect irregular transaction patterns.
  
  

3. Encouraging Formal Banking Adoption

• Promote regulated remittance services as alternatives to Hawala (OECD 119).
  
  

4. Cross-Border Regulatory Collaboration

• Strengthen law enforcement cooperation with ASEAN and FATF.

Conclusion

Hawala remains a major challenge for AML enforcement, offering convenience for legal users but also anonymity for criminals. While it has been used for centuries for legitimate remittances, its informal structure and lack of regulation make it a tool for money laundering, tax evasion, and terrorism financing.

Thailand has tightened financial regulations to prevent Hawala from being exploited for illicit financial flows. However, global cooperation, enhanced monitoring, and stricter AML enforcement are required to effectively combat financial crime linked to Hawala networks.

Works Cited

AMLO. Thailand’s AML Enforcement on Informal Value Transfer Systems. 2023.
Bank of Thailand. Monitoring High-Risk Cross-Border Transactions in Thailand. 2023.
FATF. Guidelines on Hawala and Alternative Remittance Systems. 2023.
IMF. Financial Crimes and the Risks of Informal Banking Systems. 2023.
Interpol. Hawala Networks and Global Terrorism Financing Risks. 2023.
OECD. Trade-Based Money Laundering in Hawala Transactions. 2023.
World Bank. Hawala’s Economic Role and Its Vulnerabilities to Financial Crimes. 2023.