In popular parlance, the unofficial economy goes by the

name of black money and the official, of white money.

Black and white are also variously substituted by
number two and number one, unaccounted and
accounted, unreported and reported, unrecorded and
recorded and so on. Prof. J.C. Sandesara

What Are Some Indicators Of Hawala?

The Hawala is actually quite simple; much of the complexity

associated with and ascribed to Hawala money laundering comes
from the nearly infinite number of variations that are encountered in
Hawala transactions.
This complexity of variation makes it nearly impossible to lay out a
straightforward guide to recognizing Hawala money laundering as
part of a criminal undertaking. It is, however, possible to provide a
few indicators that may be useful.

One of the most consistent and valid indicators of Hawala activity in

investigations conducted in the many countries is seen in bank
accounts. A 'Hawala' bank account almost always shows significant
deposit activity, usually in the forms of cash and cheques. These
cheques may be made out to the primary account holder, or some
secondary somehow associated with the account. These cheques also
had some sort of notation, consisting of a name (presumably of the
person to whom the money is remitted to) or something supposedly
indicating what was 'bought' with the money (of course with recent RBI
instructions, these cheques may be rejected) . These accounts will also
almost always show outgoing transfers (usually by wire) to a major
financial centre known to be involved in Hawala. Three of the most
common locations are Great Britain, Switzerland, and Dubai. Given the
flexible and casual nature of the Hawala business, Hawala accounts
will not always be seen to balance.
 Certain businesses are also more likely than others to be
involved in Hawala. Once again, it is not possible to give an
exhaustive list, but the following is a starting point:

Import/Export
Travel and Related Services
Jewelry (gold, precious stones)
Foreign Exchange
Rugs/ Carpets, etc.

Economic implications
Despite its informality, the Hawala system has direct and indirect
macroeconomic implicationsfor financial activity as well as for fiscal
performance. One aspect is its potential impact on the monetary
accounts of countries on either end of the Hawala transaction. Because
these transactions are not reflected in official statistics, the remittance of
funds from one country to another is not recorded as an increase in the
recipient country's foreign assets or in the remitting country's liabilities,
unlike funds transferred through the formal sector. As a consequence,
value changes hands, but broad money is unaltered. However, Hawala
transactions may affect the composition of broad money in a recipient
country. In the remittance business, such transactions are conducted
mainly in cash, even though Hawaladars may use the banking system
for other purposes. Individuals from developing countries who transfer
funds abroad through the Hawala system for investment or other
purposes are usually members of wealthy groups. They supply local
Hawaladars with cash by making withdrawals from their bank accounts.
As a consequence, Hawala-type transactions tend to increase the
amount of cash in circulation. Furthermore, IFT systems have fiscal
implications for both remitting and receiving countries because no direct
or indirect tax is paid on Hawala transactions. The negative impact on
government revenue applies equally to both legitimate and illegitimate
activities that involve the Hawala system.
Hawala transactions cannot be reliably quantified because records
are virtually inaccessible, especially for statistical or balance of
payments purposes. This holds true for both the remitting and,
especially, the receiving sides of the transactions. Hawala transactions
from developing countries are sometimes driven by capital flight
motivations; they may also be driven by a desire to circumvent exchange
control regulations and the like, leaving no traceable records.
Nevertheless, the authorities of some countries have sporadically made
estimates of Hawala activity based on their expatriate populations and
balance of payments data. In any case, all crude estimates should take
into account both Hawala and reverse Hawala transactions as well as
transactions driven by illicit activities. Although it would be impossible to
provide a precise figure, the amounts involved in Hawala transactions
are likely to entail billions of dollars.

Fraudulent Investment Schemes:

The case comprises many companies some of them were
trading companies - and related individuals that were alleged for
asking for funds with the assurance of high returns on investments.

Presume there is an existing BSE-listed company, which is closed

and is not trading at all. Today, there are over 8,000 companies listed on
the BSE, of which more than 50% companies are in the B2 and Z
category and are hardly traded. It can happen that two or three people
form an alliance and take over such a company changing its name to an
infotech company. It is even probable that the existing promoters of the
company simply change the name of their company to a software
company. In actual practice, these companies do not even be having the
necessary infrastructure or the requisite workforce essential to run a
software company. The next step is to form a subsidiary overseas by
renting a place or just even employing a person to carry out the
operations. Most of the exports are made to duty free ports such as
Hong Kong, Singapore or Dubai from where the money can be
remitted back.

After that, the promoters conduct Hawala/ alternate remittance

transactions by paying cash over here and getting dollars from abroad
through the subsidiary. The same dollars transferred from abroad are
shown as software exports in the company's books. In this way the
company is able to report decent sales figures in its balance sheet by
the way of export income. The next step is to grab a flashy share
broker or market operator whose gossips about the company can
be floated in the market. The share broker or the operator then
spreads stories such as the company has got big software development
orders or tie-ups and is going to post superb profit numbers. Obviously,
the fake export income compels the net profit stating strong
Earnings per Share for the company.

Since, the P/E of the company appears to be quite low in

comparison with the industry P/E; the stock appears to be an
excellent buy. The market operators start providing liquidity in the
counter by creating demand for the stock by them. As a result the
volumes in the counter start increasing. The stock price of the company
starts touching upper circuits in sequence. The promoters start taking
advantage of this situation by reducing their own stake and offering it to
the small investors who will be willing to buy. In the end we have the
small investors who are left holding the stock which they have
purchased at the high prices. Thus the promoters are able to take
advantage in two ways. Firstly they are able to get a superior price
for the dead stocks of their company, which were not being traded
at all and secondly are able to exchange their cash into official
export income at a low premium without paying any income tax.
However, the query which authority is accountable to make sure whether
the companies are actually occupied in and whether their exports are
authentic or not? This is necessary so that the investors can be more
cautious about such companies before investing their hard-earned
money into them.

Hawala Functions Outside Of Conventional Banking System.

What discriminates Hawala from other remittance systems are

conviction and the widespread networking. Let us see how Hawala
transfer takes place.

Mr. X is a national of country Y residing in country Z. He entered

the country on a tourist visa, which has long since expired. He wants to
send US$ 10,000 to his family residing in country Y. If he goes by
normal banking channels, he has to open the account with bank which
again involves all documentation formalities.

A Hawala Agent Mr. A offers him the following deal:

 A 5% 'commission' for handling the transaction; higher
conversion rate for dollar (For example if the official rate is 1 US$ =
Rs. 45; Hawala person can offer you at 1 US$ = Rs. 50) and the
currency in which he wants to convert including delivery charges. The
money transfer related with a Hawala transaction is faster and more
reliable than in bank transactions.

Mr. X decides to a deal with a Hawala person Mr. A. The Hawala

transaction proceeds as follows:

Mr. X gives the US$ 10,000 to Mr. A; Mr. A contacts Mr. B in country
Y, and gives him the details; Mr. B arranges to have the money (by
taking into consideration conversion rate described above) delivered to
the family of Mr. X.

Even though this is a simple example, it contains the elements of a

Hawala transaction.

First, there is trust between Mr. X and Mr. A. This money transfer
nearly takes place within a day of the initial payment (a consideration
here is time differences) and the payment is always made in person.
Hawala dealers are almost always honest in their dealings with
customers and fellow Hawaladars. Breaches of trust are extremely rare.
It is worth noting that one of the meanings attached to the word Hawala
is 'TRUST'!

Connections are of equal significance. Hawala networks tend to be

slack, communication usually takes place by phone or fax or email.
These associations allow for the organization of a complex network for
performing the Hawala transactions. Since many Hawala transactions
are conducted in the context of import/ export businesses, the
manipulation of invoices is very common methods of settling accounts
after the transactions have been made. When compared to a 'traditional'
means of remitting money, such as obtaining a check or ordering a wire
transfer, Hawala seems cumbersome and risky.

A few other benefits that Hawala transaction offers are:

1. Cost Efficiency Some of the reasons for this cost efficiency,

namely low overhead, exchange rate manipulation and integration
with existing business activities. In India, for example, the Foreign
Exchange Regulation Act (FERA), 8(2) stated that

'except with the previous general or special percussion of the

Reserve Bank, no person, whether an authorized dealer or a
moneychanger or otherwise, shall enter into any transaction which
provides for the conversion of Indian currency into foreign currency or
foreign currency into Indian currency at rates of exchange other than the
rates for time being authorized by the Reserve Bank'.

Since Hawala dealers do not, in many if not most cases, comply

with such regulations, their transactions may be illegal. Hawala persons
exploit naturally occurring currency fluctuations in the demand for
different currencies. This enables them to turn a profit from Hawala
transactions and they are also able to offer their customers rates that are
better than those offered by banks. In brief, Hawala competes efficiently
with other remittance instruments - because of its cost effectiveness.

2. Speed of the Transaction- A Hawala remittance takes place in, at

most, one or two days. This can be contrasted with the week or so
required for an international wire transfer involving at least one
correspondent bank.

3. Lack of administration Mr. X is living and working in the country Z

on an expired visa. Since Hawala is a remittance system, this question
really addresses jurisdiction governing remittance services. Even
though Hawala is illegal from a regulatory standpoint in some
jurisdictions, Hawaladars advertise their services widely in a variety of
media.

Enforcement of these regulations is complicated with respect to

Hawala. In spite of the existence of these regulations is another reason
Hawala is still used. Many people in these countries have money that
they would like to move to another country.

Hawala provides a means of doing this, and its use as a catalyst of

'capital flight' on both large and small scales is very common.

4. Tax evasion In South Asia, the 'black' or parallel economy was

at one time nearly 30%-50% of the 'white' economy. Money remitted
through official channels may invite scrutiny from tax authorities -Hawala
provided a scrutiny-free remittance channel.

Another aspect of these regulations is the use of the United Arab

Emirates, specifically Dubai, for Hawala transactions. There are two
main reasons for this. The first was the large population of expatriate
workers from India and Pakistan; they used Hawala to send money
home. The second is Dubai's large gold market, which is the source of
much of the gold sent (licitly and illicitly) to India and Pakistan. Dubai,
unlike many other South Asian nations, allows essentially unregulated
financial dealings. Because of this, many South Asian businessmen
maintain offices in Dubai, and money is often wired there to circumvent
regulations elsewhere. In addition, Dubai offers a neutral meeting place
for Indian and Pakistani businessmen, as tension between these
countries makes travel between them difficult if not impossible.

5. Trustworthiness- Intricate overseas transactions, which might

engage the client's local bank, its correspondent bank, the main office of
a foreign bank and a branch office of the recipient's foreign bank, have
the potential to be problematic. However, the Hawala network person
can complete the transaction in less than a day.

Hawala can provide an efficient means of placement. In the

example, Mr. X gave Mr. A US$ 10,000 in cash. Since Mr. A also
operates a business, he will make periodic bank deposits consisting of
cash and checks. He will validate these deposits to bank officials as the
income from his legal business. He may also use some of the cash
received to meet business expenses, reducing his need to deposit that
cash into his bank account.

Hawala transfers leave a mystifying paper track. Even though

invoice manipulation is used, the mixture of legal goods and illegal
money, confusion about `valid' prices and a possibly complex
international shipping network create a trace much more convoluted
than a plain wire transfer.

The same distinctiveness of Hawala that make it a possible means

for the layering of money also make it ideal for the integration of
money. This is when money seems to become legitimate and Hawala
techniques are proficient in transforming money into any form, offering
numerous possibilities for establishing a manifestation of authenticity.

The money transferred through Hawala means can be 'reinvested'

in a legitimate (or legitimate appearing) business. Hawala is actually
quite simple; much of the density associated with Hawala comes from
the immeasurable number of deviations that are seen in Hawala
transactions. This complexity of variation makes it unfeasible to lay out a
clear-cut guide to identify Hawala as part of a criminal undertaking. It is,
however, possible to provide a few pointers that may be useful.

Hawala Cases:

1. Terrorism: The series of bomb blasts in a major Indian city in 1993

was funded through Hawala. The investigation exposed that the funds
behind these bombings were routed through Hawala operators in the
United Kingdom, Dubai and India.

2. Insider Trading: A citizen of a South Asian country, who was an

investment banker in a major financial center, is accused of giving 'tips'
to various friends and relatives. After some illegal trades took place, the
banker resigned and apparently fled the United States for his homeland.
At the same time, several of his associates also traveled to this same
country as well as several European financial centers. An examination of
detained bank records reflects that money was transferred to persons
having the same nationality in at least one of these financial centers. It is
possible that these wire transfers were the first part of Hawala-like
transfers of the profits from the illegal trades to the investment banker's
home country.

3. Narcotics Trafficking: Citizens of some countries supposedly

importing heroin and are alleged of shaking hands with bank officer to
clean the earnings from the sale of the heroin. This bank officer is
understood to open accounts without following proper 'know your
customer' (KYC) norms and also assists the traffickers with the
management of these accounts, which are used for illegitimate money
transfers. In addition, this bank officer may be handling the receipt of
shipments of negotiable instruments from a south Asian country on
behalf of so-called criminals in that country. These shipments may
symbolize part of money laundering scheme as well as probable
infringement of countrys laws regarding the import of currency.

4. Welfare Fraud: Certain immigrants from a particular country are

charged for committing large scale welfare fraud. An employee of a
rental agency deposits large numbers of checks into a personal
checking account, and then wires money to a variety of offshore
locations. It is suspected that Hawala is being used to remit money
(which probably includes proceeds derived from welfare fraud), via
couriers.

5. Gambling: Hawala has been used as a substitute banking system in

a South Asian gambling operation. The gambling operators have
engaged Hawala operators to accept money 'on deposit' from gamblers,
and pay winnings through them as well. This is something of a indication
to the dependability of Hawala. One of the principals in this gambling
operation is that this had been going on for nearly twenty years without
any major difficulties.

6. Customs and Tax Violations: An individual representing himself as

being in the gold business in a large city, especially as a 'gold broker', is
alleged of different customs and tax infringements as well as money
laundering. This individual has made very large cash deposits at several
banks, and at least one bank has closed this individual's account
because of these deposits. This individual's bank account was inspected
in juxtaposition with a tax investigation. This individual asserts to provide
gold shops with gold bullion, and also that he sells gold coins and
jewellery to individuals. It is believed that this individual is acting as a
bank for various individuals and businesses, supplementing them in
escaping the tax payment. In the wake of the recently sensitive concerns
that money launderers and terrorist groups use informal transfer
systems, many countries consider the overlooking of the Hawala
industry as no longer a suitable policy alternative. The probable
ambiguity that portrays these systems is believed to present risks of
money laundering and terrorist financing and therefore it is required to
provide proper attention to these problems.

The emphasis on Hawala is to tag the relationship between Hawala and

the Black Money. Of course, at some point of time the hawala routed
cash enters formal economy. Worried by the burgeoning criminal and
terrorist groups and therefore to plug financial resources available to
such groups, the International community has emphasised the need for: