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Hawala Remittance System: Anti-Money Laundering Compliance Report


Introduction

The existence and operation of money remittance systems is one of the primary features of developing economic relation at all scales from local to the global ones. Their history can be traced back to ancient times and the dawn of human civilization. As such systems evolved, they were usually adapted in response to the needs of particular and specificities of particular trade routes. Moreover, they obtained local variations thus creating the intricate worldwide system for money remittance. However, the promotion of such local peculiarities made it more complicated to monitor and control the development and operation of this sector of economic relations, especially at broader scales.

One of such money remittance systems is hawala. The primary challenge with its existence is its unique flexibility, which makes it especially attractive for financing terrorism and money laundering in line with the lawful economic activities. This paper will focus on studying anti-money laundering compliance of Dubai-based hawala with customers all over the globe. In addition to this central question, the research will provide thorough information about the specificities of hawala as a remittance system and its operation together with its major advantages and disadvantages.

The motivation for paying specific attention to the theoretical background is its contribution to the better apprehension of the subject under investigation and detecting the gaps, which might be deployed for illegal activities, especially money laundering.

The Evolution of Hawala as a Remittance System

Hawala, legally known as alternative remittance systems, is the system for money movement, which is characterized by the possibility to conduct transfer operations without the involvement of financial institutions such as banks. In other words, this remittance system grants the opportunity to foster cash flows both domestically and internationally informally, which means that it is impossible to trace the objectives of similar operations (Rollins 11; Siegel and Nelen 115).

Due to the non-necessity of involving banks in the remittance process, these systems are anonymous, cheap, and fast. In most cases, they are used by overseas workers both legal and illegal to transfer money to their families. However, for the same reason, hawala might be used as a channel for money laundering operations.

The history of hawala can be traced back to the development of active trade relations along the Silk Road. During the twelfth and thirteenth centuries, it operated within a tight family unit. It means that only family members living along the mentioned trade route were involved in money remittance because they could be trusted. The system soon became popular with traders. So, it evolved and adapted to different cultures all over the ancient civilizations becoming known as havala in Persia, padala in the Philippines, hundi in India, and Fei-Chien in China (Al-Khalifa 1; International Monetary Fund 31). The origin of the phenomenon is still Arabic, as hawal stands for “to change” or “to transfer”.

Hawala was one of the most popular money remittance systems in Asia up to the time when banks took control over the financial sector of the economy in the mid-twentieth century. However, as it turned out that this system is cheaper and faster, people turned back to using it. As for now, hawala is usually used by poor people, who cannot afford to pay bank’s commission fees, illegal workers, who do not want to be caught in their illegal activities in the host countries, and those involved in organized crime, who value their anonymity because it is the guarantee of their safety.

It should be highlighted that the existence and operation of hawala systems is not necessarily illegal because, in most cases, they fall within the regulations of domestic law systems. The issue of analyzing the lawfulness of this remittance system is individual and should be studied on a country-by-country basis. Moreover, they are also deployed for conducting legal economic activities such as enhancing the development of trade at the level of both small entities and big and influential international companies. The systems become illegal once they are used for unlawful economic operations.

The Specificities of System Operation

The system is fast and cheap but, at the same time, intricate. It involves several participants. First of all, there is a person, who has chosen to transfer the funds using it. Second, there is a network of hawala dealers and operators, who are referred to as hawaladars (International Monetary Fund 31). The general scheme of money transmission is made up of several steps. The most intricate one is actually finding hawala dealer because they can operate either illegally and specialize only in informal activities or legally but under the guise of other businesses performing in different industries.

They are usually advertised in vernacular languages with the aim of making it difficult to detect their operation. It is a specific challenge in the case of countries considering them illegal. When an individual has found the hawaladar to work with, he or she gives the cash including commission fees to the dealer starting up the whole process. The individuals connected by the hawala dealers are referred to as the remitter (the initial customer) and the recipient (a person in another geographical location, who will work with another hawala operator).

The time for the money transfer varies from several minutes to days or weeks. It depends on the relationships between hawaladars located in the country of origin and the target country as well as the level of development of the system as such. The foundation of hawala’s operation is trust among all parties involved. It is what remained unchanged since the system started developing in ancient times.

Hawala system is especially popular in the United Arab Emirates attracting people from all over the globe with its workplace conditions and high level of economic development. For the better understanding of the whole mechanism, the example will be provided. All workers employed in UAE are paid in dirhams except for the foreigners, who concluded otherwise with their employers. This instance will focus on those, who are rewarded in dirhams.

As individual decides to transfer money to his or her family once receiving the salary, he or she finds a hawaladar and gives the necessary amount of cash in dirhams to the operator indicating the target geographical destination. The remitter is charged with the determined commission fees. The dealer then contacts another hawaladar in the country of destination informing of the sum of transfer and the name of the recipient. As the recipient comes to receive the transfer, he or she receives it in the national currency of the target state, and the process is over (International Monetary Fund 31).

The system is based on trust among hawala operators and constant issuance and renewal of informal credits (Siegel and Nelen 116). To make it as fast as it is, dealers give their money to the recipients of transfers. Later, these debts are paid off by the initial operator. The similar format of the system’s operation and financial relationships becomes a justification for involving only family members and those, who could be trusted, into the business. Because no official contracts are signed, it becomes impossible to trace the status of the money transfer and thus know whether it was paid. So, the only guarantee of successful operation is the dealer’s word.

When speaking of the United Arab Emirates, the operation of hawaladars falls within the domestic regulations. Each hawala dealer is obliged to be certified by the Central Bank being promised confidentiality. Moreover, the operators are required to register all transactions mentioning precise details of remitters and recipients. Still, they are not requested to inform the Central Bank of all operations except for those which are suspected to have reference to money laundering or financing terrorism (International Monetary Fund 33).

Nevertheless, regulating the system is challenging because of the initial guarantee of anonymity, i.e. not requiring official documents, and the fact that not all hawaladars choose to go legal and register to be licensed by the Central Bank. The primary motivation for deciding to operate uncertified is the requirement of the Central Bank to submit returns to the bank, which decreases the profits of hawaladars, as well as registering all transactions, which might shatter the trust in the system and have a negative impact on the number of potential and existing customers.

Advantages and Disadvantages of Hawala System

Hawala remittance system has numerous advantages. They can be viewed from the perspective of customers and operators. As for the customers of the system, it is fast and cheap. Moreover, it is anonymous because hawaladars never request ID numbers or any official documents. In addition to it, their currency rates as well as commission fees are always lower that those of the banks making it the primary advantage and the factor of attractiveness.

In most cases, the system is safe and reliable. Because no official contracts are signed, it leaves no paper trails. At the same time, there are no instances of cheating customers because trust is the key to the further existence of hawala. The issue of safety is especially acute in politically and militarily unstable countries where international banks often seize their operation but hawaladars still conduct their activities. Finally, hawala is culturally friendly. It means that regardless of the geographical location, it easy to understand because its essence has never changes complying with the cultural specificities of most Asian and Arabic people.

The primary disadvantage of the system’s existence can be investigated from the perspective of the states. Because hawala promises anonymity, it is nearly impossible to regulate it. Even though the Central Bank of the United Arab Emirates requests certification of all active hawaladars, there are no tools for detecting whether all of them followed the demand. In addition to it, there are instances when remittance operations are conducted in line with the primary business activities.

For example, travel agencies or other companies might choose to become illegal hawaladars. Another disadvantage can be viewed in the light of the concept of trust. Even though there were no reported instances of cheating the customers, the risk still exists. The same can be said about the hawala operators themselves. There is no guarantee that the dealer in the target geographical destination is honest. So, it could become a significant threat to the further existence of the whole system.

Hawala and Anti-Money Laundering Procedures: The Case of The United Arab Emirates

The primary disadvantage of hawala is still the potential of being used as a tool for money laundering because of the system’s anonymity. Even though in most cases, it is used for conducting lawful operations, the risk of illegal activities is still high. There were instances when the United Arab Emirates Central Bank requested all banks and money exchange houses to freeze the accounts of registered hawaladars due to detecting their involvement in money laundering (Rahman par. 1). Even though all hawala operators are requested to report of all suspicious activities, they have chosen to ignore this requirement leading to significant problems.

Studying the specificities of hawala operation hint that the primary gaps for fostering money laundering are trust between hawaladars and clients and the system’s anonymity. Because operators never demand the information regarding the goal of the money transfer and the level of the systems development all over the globe is high, it becomes a motivation for using hawala as a channel for illegal purposes. In most cases, this money remittance system is more easily acceptable than banking system and it is usually used for money laundering over long distances.

Another motivation for choosing it is the fact that some countries still have poorly developed banking systems making it impossible to choose formal banks for illegal activities (Rollins 11). The primary challenge here is the fact that it is impossible to regulate the issue as these are lawyers, who usually point to the possibility of using hawala for money laundering (Siegel and Nelen 135).

In the United Arab Emirates, the primary compliance of hawala remittance system with the global legal environment is the official requirement to report of suspicious transactions. This demand is usually requested from all banking institutions. Since hawaladars are obliged to operate on a certified basis, they are obliged to follow it (Bowers 393). In addition to the legal requirement, the UAE government supports the further development of anti-money laundering provisions with regard to local hawaladars.

The main tool for making the system safer and maximizing its operation on the legal basis is conducting International Conferences on Hawala. They are usually organized by the Central Bank and the International Monetary Fund. Their primary objective is to attract the hawala operators’ attention to the problem of using their remittance system for illicit purposes and highlighting the fact that the system should be deployed only for conducting lawful operations.

Moreover, the goal of similar conferences is to get familiar with the foreign experience in regulating the operation of hawala system. The focus is made on finding the right balance so that the system is not overregulated or lacks effective regulatory measure. The primary objective is to assure that the rights and interests of retail customers are safe while minimizing the risks of money laundering (International Monetary Fund 33-34).

Speaking of the models of regulating the existence and operation of hawala remittance systems, there are two generally accepted models. The first one implies that the activities of hawaladars are illegal because hawala is the form of speculation. This model is implemented in India and some other Asian countries. Choosing it is a significant drawback, because hawaladars do not seize their activities.

Instead, they go into the black sector of the domestic economies, and it becomes close to impossible to detect them and regulate their activities. Other countries choose to make hawala legal but oblige hawaladars to registration and licensing. This practice is popular in the United Arad Emirates, the United States, Hong Kong, Germany, Switzerland, the United Kingdom, and other developed countries (Levy 2-33).

This model of regulation is more progressive and efficient. The justification for making this statement is the fact that even though it is impossible to make all hawaladars get licensed, most of them will follow this requirement making their business legal. The similar transition makes hawala a constituent of the official financial sector, which makes it possible to impose needed regulations on the operations and activities of hawaladars diminishing the risks of conducting illicit transactions and contributing to solving the problem of money laundering.

Speaking of the United Arab Emirates and Dubai-based hawaladars, most of them are licensed. Of course, sometimes there are instances of arrests because of violating the regulations and not informing the Central Bank of suspicious transactions but, as the whole, the system complies with the global regulations. Still, there is a lot of work to be done to make the operation of the system more productive with regard to anti-money laundering procedures.

For example, it is recommended to establish the maximum limit for the operation with the aim of minimizing the risks of using the system for money laundering. This step might be implemented through following the example of the European Union in fostering anti-money laundering procedures by designing corresponding official and legal documents. The nature of hawala cannot be changed preserving the anonymity because it will inevitably lead to making this industry black but some qualitative restrictions would be beneficial.

Conclusion

To sum up, hawala is a money remittance system, which has its roots deep in history having accompanied the evolution of the civilization and international trade and economic relations. It is based on trust and anonymity of people using it as well as the goals of their transactions. Since recently, the system has become a channel for transferring the earnings from employment in foreign countries as well as some illicit activities such as money laundering.

Because hawala is cheap, fast, and guarantees anonymousness, it becomes even more attractive for illegal purposes. Studying the global experience of regulating the issue as well as the accomplishments of the United Arab Emirates in this sector, it should be said that unless the global regulations framework for preventing anti-laundering through using hawala is established, it is impossible to handle this challenge.

As for now, the Arab system complies with the models of regulation established by most of the developed countries requesting hawaladars to get licensed by the Central Bank. However, as long as there are countries considering it illegal, the conflict of regulations will exist because the central feature of hawala is its international development. So, hawaladars cannot refuse to transfer funds to those countries, where their operation is unlawful. In fact, they are even more interested in such transactions because they are the source of higher profits.

Works Cited

Al-Khalifa, Abdulrahman. The Use of Hawala as a Remittance System. n.d. Web.

Bowers, Charles B. “Hawala, Money Laundering, and Terrorism Finance: Micro-Lending as an End to Illicit Remittance.” Denver Journal of International Law and Policy, 37.3 (2009): 379-419. Print.

International Monetary Fund. Regulatory Frameworks for Hawala and Other Remittance Systems. Washington, District Columbia: IMF Monetary and Financial Systems Department, 2005. Print.

Levy, Steven Mark. Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance. New York, New York: Walters Kluwer, 2016. Print.

Rahman, Saifur. . 2007. Web.

Rollins, John. International Terrorism and Transnational Crime: Security Threats, U.S. Policy, and Considerations for Congress. Washington, District Columbia: Congressional Research Service, 2010. Print.

Siegel, Dina, and Hans Nelen. Organized Crime: Culture, Markets, and Policies. New York, New York: Springer, 2008. Print.

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IvyPanda. (2020, September 29). Hawala Remittance System: Anti-Money Laundering Compliance. Retrieved from https://ivypanda.com/essays/hawala-remittance-system-anti-money-laundering-compliance/

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"Hawala Remittance System: Anti-Money Laundering Compliance." IvyPanda, 29 Sept. 2020, ivypanda.com/essays/hawala-remittance-system-anti-money-laundering-compliance/.

1. IvyPanda. "Hawala Remittance System: Anti-Money Laundering Compliance." September 29, 2020. https://ivypanda.com/essays/hawala-remittance-system-anti-money-laundering-compliance/.


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IvyPanda. "Hawala Remittance System: Anti-Money Laundering Compliance." September 29, 2020. https://ivypanda.com/essays/hawala-remittance-system-anti-money-laundering-compliance/.

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IvyPanda. 2020. "Hawala Remittance System: Anti-Money Laundering Compliance." September 29, 2020. https://ivypanda.com/essays/hawala-remittance-system-anti-money-laundering-compliance/.

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IvyPanda. (2020) 'Hawala Remittance System: Anti-Money Laundering Compliance'. 29 September.

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