Hawala : Working : Demonetisation : Analysis

What is HAWALA ?

• The word hawala originates from the Arabic root which means ‘to transform’.It also known as hundi or - in Somali, xawala or xawilaad. 
• It is told that this system came into existence in the twelfth and thirteenth centuries for facilitating trade along the silk route. 
• Simply speaking, in hawala, the money is transferred from one place to another, without any actual movement of that money. 
• This is unique in nature. It is distinguished from other remittance systems by the trait of trust which prevailed amongst its stakeholders.

Who are the current users of this informal network?

• Migrant workers
• Terrorists (to fund their activities)
• Politicians
• Underworld/drug lords

What is the MECHANICS behind the working of HAWALA ?

To understand the mechanics behind the hawala transfers, consider this example.

• Hawaladar 1in Karachi is approached by a remitter to transfer the money to his friend, the recipient in Delhi. Hawaladar 1 accepts the payment in the local currency.

• He later contacts his counterpart hawaladar 2 in Delhi to pay the recipient. To confirm their identities, both the remitter and the recipient are given a password. Through a phone call, the remitter and the recipient read the alternate digits of the password. If this is done correctly, the identity thus established, will allow the hawaladar 2 in Delhi to pay the recipient in Indian rupee.

In this process, the output money is from hawaladar 2 in Delhi. This means that the hawaladar 1 in Karachi, is creating an informal debt to his counterpart in Delhi. This debt has to be settled. Usually, for better settlement process, the hawaladars are relatives. Sometimes, the debts are covered through reciprocal transfers (in this case: a transfer from Delhi to Karachi). If there are no reciprocal transfers, the settlements are done through courier, postal cards, wired transaction, checks or bank transactions.

When we say bank transactions, this means that both hawaladars in India and Pakistan have their bank accounts in cities such as Dubai, Singapore, London, Hong Kong and other conducive places. This allows them to settle their accounts in a single country and helps to serve their customers efficiently. Cities like Dubai are free trade zones, where there are no regulations on movement of goods or currencies. Having bank accounts in such countries with hard currencies helps them in conversion to other currencies.

There are all sorts of advantages for choosing hawala transfer system, over the formal money transfer system offered by banks or any other global payment companies.

 Advantages of HAWALA ?

• Firstly, the time consumed for a transaction in the hawala system is a matter of few hours. But the transfers through formal remittance agencies typically take days or weeks.

• Second is the minimum fee charged. In the formal system, the fee charged from the remitters revolves around 10-20 per cent of the total amount transferred. Contrastingly, in hawala, it is only around 0.25-1.25 per cent of the amount transferred.

• Third is the risk factor involved. In hawala, the risks exist only at the agent level. Even if the hawala agents are caught, it would be intricate to trace the trail of the money involved.

• Lastly, the most important advantage is the space provided for anonymity. Unlike formal transfer system, there is no requirement for the stakeholders to disclose their identities. This characteristic feature makes terrorists and other criminals to choose hawala over the formal system of remittance.

How Hawala system works in case of KERALA for Migrant workers ?

•  Many in Kerala believe that hawala is not just pure economics; it's also a social system. 
• A hawala agent operating out of Dubai explains the dynamics. 
• "A worker gets just one weekly off on Friday. It is the weekly off for banks and money transfer agencies. 
• The worker just gives us a call and we collect money from his doorstep. In times of need, or family emergency, he can borrow money from us and we deliver money immediately to his home. 
• Which banking or money transfer agency will provide such services and credit? It's all trust, no elaborate paperwork.

 

Is Hawala Illegal?

•  Yes, Hawala has been made illegal in many countries, as it is seen to be a form of money laundering and can be used to move wealth anonymously. 
• As hawala transactions are not routed through banks they cannot be regulated by the government agencies and have thus emerged as a major cause of concern. 
• This network is being used extensively across the globe to circulate black money and to provide funds for terrorism, drug trafficking and other illegal activities. 
• In India, FEMA (Foreign Exchange Management Act) 2000 and PMLA ( Prevention of Money Laundering Act) 2002 are the two major legislations which make such transactions illegal.

White Hawala

• Experts emphasized that the overwhelming majority of those who used these informal networks were doing so for legitimate purposes, and simply chose to use a transaction medium other than state-supported banking systems.Today, the hawala system in Afghanistan is 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.

Black Hawala

• Money used for funding terrorist activities

How did the demonetisation move  impacted the hawala system ?

• The heat of demonetisation has been felt heavily by the hawala users and its operators. 
• As per the reports of Central intelligence agencies, the call traffic by hawala agents in India has dropped by 50 per cent. 
• There have been several reports of busted hawala rackets across India. 
• The people who were running these rackets were involved in illegal conversion of old currency notes. Some RBI officials were also held for facilitating them.

A prominent businessman and a hawala trader, Parasmal Lodha, was arrested for converting demonetised notes worth Rs 25 crore linked to Chennai-based industrialist J Sekhar Reddy, into new currency. 

Similarly, a Thane-based chartered accountant, Rajesh Agarwal and his colleague were arrested by the police. They have been operating a racket for the last two years. The police have found documents that prove Agarwal floated six companies in the names of his office employees. Furthermore, reports on busted hawala rackets in the Indian airports also occurred in several news platforms.

How Hawala worked in case of Kashmir's manufactured unrest post Burhan Wani ?

• The Indian intelligence agencies have dug out the call details of the conversations between Pakistani handlers and the Hurriyat Conference. 
• Post the encounter of BurhanWani, Hafiz Saeed and Syed Salahuddin, the chiefs of Pakistani terror outfits, joined hands to foment violence in the Kashmir valley. 
• The duo collected the donations across different parts of Pakistan, to fund the Hurriyat Conference. Hurriyat leaders run eight trading companies to receive these funds through hawala. The funds received are managed and distributed by them. The annual funds received by them revolves around Rs 1,000 crore. 
• In addition to fake currency notes, the funds transferred through hawala are crucial, as the stone pelters can only be paid by original currency notes, not by fake notes. 
• Post demonetisation, there have been several reports of bank robberies by militants, to overcome the cash crisis.