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What is Hawala or Hundi?

Hundi and Hawala are informal money transfer systems that have been used for centuries in various parts of the world.

Hundi, also known as Hundi banking, is a traditional financial system that has been used in South Asia for centuries. It is a form of informal banking that allows individuals to transfer money without the need for a formal banking system or financial institution. Transactions are typically conducted in cash and are based on trust and reputation.

Hawala, also known as “Hawala banking” or “underground banking”, is a similar informal money transfer system that has been used in the Middle East and other parts of the world for centuries. It is based on trust and reputation and is often used by immigrants and other individuals who may not have access to formal banking systems.

Both Hundi and Hawala have been used for legitimate purposes, such as sending money to family members in other countries or making business payments. However, they have also been used for illegal activities such as money laundering, terrorist financing, and tax evasion.

One of the key differences between Hundi and Hawala is the way in which transactions are conducted. In Hundi, the money is physically transported from one location to another, while in Hawala, the money is transferred through a network of Hawala brokers who settle the transaction through a system of debts and credits.

Another difference is that Hundi is mostly practiced in South Asian countries such as India, Pakistan and Bangladesh, while Hawala is mostly practiced in Middle Eastern and African countries.

In recent years, governments and financial institutions have been working to crack down on illegal activities associated with Hundi and Hawala. This has included efforts to regulate and formalize these informal systems, as well as efforts to increase oversight and monitoring of transactions.

Hundi and Hawala are informal money transfer systems that have been used for centuries in various parts of the world, both have legitimate and illegitimate use. They differ in the way transactions are conducted and the region they are mostly practiced. Governments and financial institutions have been working to crack down on illegal activities associated with these systems.

Example of a Hundi transaction

John is a businessman based in India and he needs to send $1000 to his supplier in Pakistan. He goes to a Hundi operator, who is a trusted and reputable individual within his community, and gives them the $1000 in cash. The Hundi operator then contacts their counterpart in Pakistan and arranges for the equivalent amount in Pakistani rupees to be given to John’s supplier. The transaction is completed without the need for a formal banking system or any paperwork.

In this example, the Hundi operator acts as a trusted intermediary between John and his supplier, facilitating the transfer of funds in a quick, efficient and confidential manner. The Hundi operator may also charge a small fee for their services, but the overall cost of the transaction is typically lower than what it would be through a formal banking system.

It’s important to note that this example is fictional and it’s intended to illustrate how hundi transactions work. However, it’s not legal in many countries and it’s also risky because of the lack of regulation and oversight.

Example of a Hawala transaction

Samantha is an immigrant living in Canada who wants to send $1000 to her family in Ethiopia. She goes to a Hawala broker, who is a trusted and reputable individual within her community, and gives them the $1000 in cash. The Hawala broker then contacts their counterpart in Ethiopia and arranges for the equivalent amount in Ethiopian Birr to be given to Samantha’s family. The transaction is completed without the need for a formal banking system or any paperwork.

In this example, the Hawala broker acts as a trusted intermediary between Samantha and her family, facilitating the transfer of funds in a quick, efficient and confidential manner. The Hawala broker may also charge a small fee for their services, but the overall cost of the transaction is typically lower than what it would be through a formal banking system.

As I mentioned before, it’s important to note that this example is fictional and it’s intended to illustrate how hawala transactions work. However, it’s not legal in many countries and it’s also risky because of the lack of regulation and oversight.

How much money gets transferred through Hawala or Hundi?

It’s difficult to estimate the exact amount of money that gets transferred through the Hundi and Hawala systems, as these transactions are informal and often take place outside of the formal banking system.

However, some estimates suggest that the amount of money transferred through these systems is significant. For example, it has been reported that billions of dollars are transferred through Hawala networks each year, with a significant portion of these transactions taking place in countries such as India, Pakistan, and Afghanistan.

The Hundi system is mostly used in South Asian countries such as India, Pakistan, and Bangladesh, and is said to be worth billions of dollars annually.

In addition to the illegal activities such as money laundering and terrorist financing that these systems are associated with, the Hundi and Hawala systems are also used for legitimate purposes such as sending money to family members in other countries or making business payments.

It’s worth noting that the estimates of the money transferred through these systems are difficult to confirm as the transactions are informal and mostly done in cash, and it’s hard to track the money flows.

Do Western countries engage in Hawala or Hundi?

With the increase of immigration from these regions to Western countries, Hundi and Hawala systems have also been established in Western countries. For example, there are communities of immigrants from South Asia and the Middle East in the United States, Canada, and Europe who use these systems to send money back to their home countries.

Additionally, with the growth of the internet, the Hawala system has been able to expand its reach and now operates globally. So, it’s not restricted to certain regions, and can be found in Western countries as well.

What is a Hawaladar?

A Hawaladar is a person or an institution that facilitates money transfers through the Hawala system. Hawaladars act as trusted intermediaries between individuals who want to transfer money, and are responsible for arranging for the transfer of funds from one location to another.

Hawaladars typically operate on a network of trust and reputation, and are often part of a larger network of Hawaladars that spans multiple countries and regions. They may charge a small fee for their services, but the overall cost of a Hawala transaction is typically lower than what it would be through a formal banking system.

Hawaladars are typically individuals or small businesses that may not have any formal banking or financial institution affiliations. They can be found in many countries, but are most prevalent in the Middle East, Africa and South Asia, where they often operate in informal markets and communities where access to formal banking services is limited.

It’s worth noting that Hawaladars can also be used to facilitate illegal activities such as money laundering and terrorist financing, due to the lack of oversight and transparency of the Hawala system. Because of this, Hawaladars have been the target of increased scrutiny by law enforcement agencies and financial regulators in recent years.

Does Hawala or Hundi use cryptocurrency?

Traditionally, Hundi and Hawala transactions have been conducted in cash, as they are informal money transfer systems that do not rely on formal banking systems. However, with the rise of cryptocurrency, it’s possible that some Hundi and Hawala operators may begin to use digital currencies in their transactions.

Cryptocurrency, such as Bitcoin, offers a number of advantages over cash, including greater security and the ability to transfer funds across borders quickly and easily. It also offers more anonymity and less traceability which could be attractive to operators of these informal systems.

However, it’s worth noting that the use of cryptocurrency in Hundi and Hawala systems is still relatively rare and most transactions are still conducted in cash. Also, it’s important to note that cryptocurrency is not widely adopted and accepted in some countries, and it’s also subject to regulation and scrutiny in many countries.

It’s also worth noting that using cryptocurrency for illegal activities such as money laundering and terrorist financing could attract more attention from law enforcement agencies and financial regulators, as it’s relatively new and its transactions are recorded on a public ledger

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This page was last updated on January 16, 2023.