Monday, May 17, 2010

Informal money transfer networks: "hawala"

The informal money transfer system known as Hawala (or hundi) is in the news with the arrest of three Pakistani men in New England who are believed to have provided funds to the Times Square bomber. The Boston Globe reports Possible ties to murky finance system examined
"An informal money-exchange network known as “hawala’’ — a centuries-old system that operates outside conventional banking networks — is at the center of the investigation into three Pakistanis arrested Thursday in Massachusetts and Maine with alleged ties to the suspect in the failed Times Square bomb plot, law enforcement officials said yesterday."
...
"Hawala, which originates from the Arabic word for change or transform, is a practice that predates modern banking systems and has been around for centuries. There are believed to be thousands of hawala brokers operating in the United States, and they are not necessarily operating outside US laws if they register with the US Department of Treasury. Many don’t, however, operating more like black-market, cash-based versions of Western Union.
Relying on an informal network of brokers who use designated couriers, the networks are used to transfer money in relatively small amounts in and out of developing nations where modern financial systems are scarce, such as in South Asia, the Middle East, and Africa. Transactions often can be completed within 24 hours and at a lower cost than a traditional wire transfer or bank draft that could take as long as a week and require official paperwork.
Hawaladars, as the brokers are known, often operate out of cash-intensive businesses such as restaurants, convenience stores, or gas stations, the officials said."

The informal nature of the transfers, which circumvent banks and regulated record keeping, and the fact that the broker on one end doesn't know the customer on the other end, have made the hawala system a concern for law enforcement involving money laundering. Here's a report from Interpol: The hawala alternative remittance system and its role in money laundering

11 comments:

Rod Carvalho said...

The Interpol report is interesting. The following IMF article is also informative, imho:

Hawala - how does this informal funds transfer system work, and should it be regulated?

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