|This article appears to contradict the article Aval. (April 2012)|
Hawala (Arabic: حوالة, meaning transfer), also known as hundi, is an informal value transfer system based on the performance and honour of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and the Indian subcontinent. It is basically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditional banking or financial channels.
Hawala has its origins in classical Islamic law and is mentioned in texts of Islamic jurisprudence as early as the 8th century. Hawala itself later influenced the development of the agency in common law and in civil laws, such as the aval in French law and the avallo in Italian law. The words aval and avallo were themselves derived from hawala. The transfer of debt, which was "not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages". The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent". In Roman law, the "contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him". On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general".
Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century. Today, hawala is probably used mostly for migrant workers' remittances to their countries of origin.
How hawala works 
In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a successful definition of the hawala system that is used is ‘money transfer without money movement’.
The figure shows how Hawala works: (1) A customer (A, left-hand side) approaches a hawala broker (X) in one city and gives a sum of money (red arrow) that is to be transferred to a recipient (B, right-hand side) in another, usually foreign, city. Along with the money, he usually specifies something like a password that will lead to the money being paid out (blue arrows). (2b) The hawala broker X calls another hawala broker M in the recipient's city, and informs M about the agreed password, or gives other disposition instructions of the funds. Then, the intended recipient (B), who also has been informed by A about the password (2a), now approaches M and tells him the agreed password (3a). If the password is correct, then M releases the transferred sum to B (3b), usually minus a small commission. X now basically owes M the money that M had paid out to B; thus M has to trust X's promise to settle the debt at a later date.
The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honour system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. Trust and extensive use of connections, such as family relations and regional affiliations, are the components that distinguish it from other remittance systems.
Informal records are produced of individual transactions, and a running tally of the amount owed by one broker to another is kept. Settlements of debts between hawala brokers can take a variety of forms (such as goods, services, properties, transfers of employees, etc.), and need not take the form of direct cash transactions.
In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally, the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.
Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies unprofitable exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is less complex (e.g. due to differences in legal environment in places such as Afghanistan, Yemen, Somalia). Moreover, in some parts of the world it is the only option for legitimate funds transfers, and has even been used by aid organizations in areas where it is the best-functioning institution.
Furthermore, the transfers are usually informal and not effectively regulated by governments, which is a major advantage to customers with tax, currency control, immigration, or other concerns. In some countries however, hawalas are actually regulated by local governments and hawaladars are licensed to perform their money brokering services.
Regional variants 
South Asia 
On a similar note, hundis referred to legal financial instruments evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis served as Travellers Cheques. They were also used as credit instruments for borrowing and as bills of exchange for trade transactions.
Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Being a part of an informal system, hundis now have no legal status and were not covered under the Negotiable Instruments Act, 1881. They were mostly used as cheques by indigenous bankers.
The word angadia means courier (in Hindi) but it is also used for people who act as Hawaladars within the country (India). These people mostly act as a parallel banking system for businessmen. They charge a commission of around 0.2–0.5% per transaction from transferring money from one city to another.
Horn of Africa 
According to the CIA, with the dissolution of Somalia's formal banking system, many informal money transfer operators have arisen to fill the void. It estimates that such hawaladars are now responsible for the transfer of up to $1.6 billion per year in remittances to the country, most coming from working Somalis outside Somalia. Such funds have in turn had a stimulating effect on local business activity.
West Africa 
Post 9/11 
While Hawala has been discouraged in some U.S. states and other countries, it is legal in all US and world jurisdictions. Government officials assert it can be used to facilitate money laundering, avoid taxation, and move wealth anonymously. It continues, however, to be a legal and effective system in many countries across the globe.
After the September 11 terrorist attacks, the American government suspected that some hawala brokers may have helped terrorist organizations to transfer money to fund their activities. The 9/11 Commission Report has since confirmed that the bulk of the funds used to finance the assault were not sent through the hawala system, but rather by an official inter-bank wire transfer to a SunTrust Bank in Florida, where two of the conspirators had opened a personal account. However as a result of intense pressure from the U.S. authorities, widespread efforts are currently being made to introduce systematic anti-money laundering initiatives on a global scale, to better curb the activities of the financiers of terrorism and those engaged in laundering the profits of drug smuggling.
Whether these initiatives will have the desired effect of curbing such activities has yet to be seen; although a number of hawala networks have been closed down and a number of hawaladars have been successfully prosecuted for money laundering, there is little sign that these actions have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers. Experts emphasize that the overwhelming majority of those who use these informal networks are doing so for legitimate purposes, and simply choose to use a transaction medium other than state-supported banking systems.
In November 2001, the Bush administration froze the assets of Al-Barakat, a Somali remittance hawala company used primarily by a large amount of Somalian immigrants. Many of its agents in several countries were initially arrested, though later freed after no concrete evidence against them was found. In August 2006 the last Al-Barakat representatives were taken off the U.S. terror list, though some assets remain frozen. In October 2009, the Swedish branch of Al-Barakat was removed from the United Nations' list of terrorist organizations; the company had been on the list for the past eight years, and had had its bank account funds frozen. According to the Swedish Public Radio broadcaster SR, the UN did not explain why it had elected to remove Al-Barakat from its terror list. However, it has been suggested that the recent change in the European Union's position regarding the many organizations "that have been too easily included in the UN terror list" might have influenced the UN's position. Al-Barakat is now able again to access its bank account funds.
The Mass Media has been speculating that pirates from Somalia use the hawala system to move funds internationally, for example into neighboring Kenya, where these transactions are neither taxed nor recorded.
In January 2010, the Kabul office of New Ansari Exchange, Afghanistan's largest hawala money transfer business, was shuttered following a raid by the Sensitive Investigative Unit, the country's national anti-political corruption vetted and trained by the US Drug Enforcement Administration (DEA), allegedly because this company could be involved in laundering profits from the illicit opium trade and moving the cash earned by Taliban through extortion and drug trafficking. Thousands of records were seized to dig into the movement of billions of dollars in and out of Afghanistan. There were links between the money transfers by this company and political and business figures and NGOs in the country, including relatives of President Hamid Karzai. In August 2010, Karzai took control of the taskforce that staged the raid, and another US-advised anti-corruption group, the Major Crimes Task Force. He ordered a commission to review scores of past and current anti-corruption inquests. Senior US officials viewed Karzai's US advised move as an effort to protect those close to Karzai and the NGOs, in the process, to further the investigation into New Ansari.
The hawala system in Afghanistan is also instrumental in providing financial services for the delivery of emergency relief and humanitarian and developmental aid for the majority of international and domestic NGOs, donor organizations, and development aid agencies.
See also 
- Penny stock scam
- Anti-money laundering
- Hawala scandal, 1990s political scandal in India
- Islamic banking
- Money laundering
- Offshore banking
- Organized crime
- Terrorist financing
- US Patriot Act
- White-collar crime
||This article includes a list of references, but its sources remain unclear because it has insufficient inline citations. (October 2009)|
- Badr, Gamal Moursi (Spring, 1978). "Islamic Law: Its Relation to Other Legal Systems". The American Journal of Comparative Law (American Society of Comparative Law) 26 (2 – Proceedings of an International Conference on Comparative Law, Salt Lake City, Utah, February 24–25, 1977): 187–198 [196–8]. doi:10.2307/839667. JSTOR 839667
- Passas, Nikos (2006). "Demystifying Hawala: A Look into its Social Organization and Mechanics". Journal of Scandinavian Studies in Criminology and Crime Prevention 7: 46–62. doi:10.1080/14043850601029083. Unknown parameter
- CBS – Hawaladars
- "Malians Shelter to Black Market to Transfer Cash". Voice Of America. August 29, 2012. Retrieved 2012-09-08.
- Financial Crimes Enforcement Network (FinCEN): The Hawala Alternative Remittance System and its Role in Money Laundering
- Passas, Nikos (11). "Fighting terror with error: the counter-productive regulation of informal value transfers". Crime, Law and Social Change 45 (4-5): 315–336. doi:10.1007/s10611-006-9041-5. Retrieved 2011-06-16.
- "US ends Somali banking blacklist". London: BBC. August 28, 2006. Retrieved 2007-02-24.
- al-Barakaat has been removed from terror list
- "Somali Pirates Take The Money And Run, To Kenya". 2010-05-05. Retrieved 2010-05-18.
- "'Afghan hawala ring tied to Karzai kin'"
- "Corruption Suspected in Airlift of Billions in Cash From Kabul"
- "The money exchange dealers of Kabul – a study of the Hawala system in Afghanistan"
- "Informal Value Transfer Systems", Financial Crimes Enforcement Network, September 1, 2010
Further reading 
- Hawala. An Informal Payment System and Its Use to Finance Terrorism by Sebastian R. Müller (December 2006), ISBN 3-86550-656-9
- Jost, Patrick M. (January 2000). The hawala alternative remittance system and its role in money laundering. Interpol. and U.S. Treasury Department Financial Crimes Enforcement Network (FinCEN) United States – Department of The Treasury
- Ballard, Roger. A collection of academic papers exploring the operation of contemporary hawala networks, and the role they play in the transmission of migrant workers' remittances from Europe to South Asia
- "Fears over US hawala crackdown". London: BBC. February 4, 2004.
- CBC's "Money-transfer systems, hawala style"
- Wilson, John F. et al., Informal Funds Transfer Systems: An Analysis of the Hawala System, International Monetary Fund, October, 2003
- Hawala fraud on BBC News, April 2007
- "The Nexus of Drug Trafficking and Hawala in Afghanistan", Dr. Edwina A. Thompson, for the World Bank and the United Nations Office on Drugs and Crime (UNODC)
- Hawala at everything2.com
- Bowers, Charles. An academic paper concerning the international legal/political consequences of hawala and money laundering at Berkeley Electronic Press
- In Praise of Hawala by J. Orlin Grabbe, The Laissez Faire Electronic Times, Vol 1, No 13, May 13, 2002