Money Laundering Techniques : The 'HAWALA'

 HAWALA

Hawala is an informal method of transferring money without any physical money actually moving. It is described as a "money transfer without money movement." Another definition is simply "trust."

Hawala is used today as an alternative remittance channel that exists outside of traditional banking systems. Transactions between hawala brokers are made without promissory notes because the system is heavily based on trust and the balancing of hawala brokers' books.

Migrant workers who frequently send remittances to relatives and friends in their countries of origin find the hawala system advantageous. Hawala facilitates the flow of money between poor countries where formal banking is too expensive or difficult to access.

Hawala originated in South Asia during the 8th century and is used throughout the world today, particularly in the Islamic community, as an alternative means of conducting funds transfers. Unlike the conventional method of transferring money across borders through bank wire transfers, money transfer in hawala is arranged through a network of hawaladars or hawala dealers.

Hawala dealers keep an informal journal to record all credit and debit transactions on their accounts. Debt between hawala dealers can be settled in cash, property, or services. A hawaladar who does not keep their end of the deal in the implied contractual system of hawala will be tagged as one who has lost their honor and will be ex-communicated from the network or region.

Hawala is thought to come from the Arabic word for "assignment" or "bill of exchange" or the Hindi word for "reference."

“Hawala and Other Similar Service Providers” or HOSSPs are used in some jurisdictions by legitimate customers for reasons of geography, culture, and lack of banking access. They are also used by individuals and entities seeking to evade currency controls, tax obligations, and sanctions. HOSSPs generally are cash-in and cash out businesses that primarily send personal remittances of low value. They generally operate in areas with a high percentage of expatriate workers and are visible to members of that community. They often run businesses other than money transfer, particularly currency exchange.

A number of reasons exists for the continued existence of HOSSPs, including their competitive pricing, faster money transmission, cultural preference, lack of banking access, low confidence in the banking system, as well as deliberate transfer or concealment of criminal proceeds and evasion of currency controls, sanctions, and taxes. At the same time, the typology highlights that many of the assumptions on HOSSPs are outdated. For instance, they, in some jurisdictions, offer services well beyond money transmission. More universally, they often have detailed records; are not necessarily based upon trust; often are highly visible to the community they serve; and are not always high risk. Further, they ultimately often settle through banks, meaning that banks that have been provided with high risk indicators by their authorities are positioned to identify suspicious activities and notify their authorities accordingly.

MODERN HAWALA

Recently some articles pointed to jueteng and overseas filipinos workers(OFW) remittance through SMS or text messaging as the new way to launder money. Actually it’s nothing new. It’s only a recent adaptation of an ancient money transfer system which may even predate banks called Hawala or Hundi. It was developed in India, before the introduction of Western banking practices, and is currently a major remittance system used around the world. But it is just one of several such systems.

Another well known example is the ‘chop’, ‘chit’ or ‘flying money’ system indigenous to China, and also, used around the world. These systems are often referred to as ‘underground banking’ although the term is not always correct, as they often operate in the open with complete legitimacy, and these services are often heavily and effectively advertised.

The components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships or regional affiliations.

Unlike traditional banking or even the ‘chop’ system, hawala makes minimal (often none) use of any sort of negotiable instrument.

Transfers of money take place based on communications between members of a network of hawaladars, or hawala dealers. Hawala works by transferring money without actually moving it. In fact ‘money transfer without money movement’ is a definition of hawala that was used, successfully, in a hawala money laundering case.

How is Hawala used for money laundering in the Philippines? The Philippines is the text capital of the world, and OFWs have evangelized SMS as they have gone all over the world.

But instead of calling it Hawala which is an Arabic word, they refer to such money remittance as simply padala. So as not to create any confusion, Smart Padala and Globe’s G-Cash money transfer schemes that also utilize text messages are not considered hawala because these two utilize legitimate and licensed money transfer companies while hawala uses informal and unlicensed channels. An effective way to understand hawala is by examining a single hawala transfer.

In this scenario, Nonoy is a Filipino employed as a factory worker in Taiwan. He entered the country on a tourist visa, which has long since expired. From his job as a factory worker, he has saved NT$157,500 that he wants to send to his mother Inday living in Bacolod. Even though Nonoy is familiar with the padala system, his first stop is a major bank.

At the bank, he learns several things. The bank requires him to open an account before doing business with them and he needs a resident visa to open an account. But as an illegal alien, he is not authorized to remit dollars abroad.

If his employer applies for a bank draft instead, the bank will sell him US$ at NT$32.5 and this will be converted to pesos at P53.75 per US$. The bank will also charge him $25 for a bank draft.

Using a courier service, Nonoy will only be able to send Inday P257,793 including delivery charges since an overnight courier service (Philpost is not always that reliable, especially if it contains something valuable) can cost as much as $25 to Manila and take as much as a week to arrive. Nonoy believes he can get a better deal through padala, and talks to Juanita, the Filipina wife of a Taiwanese farmer who has a money remittance sideline.

Juanita agrees to give Nonoy the rate of NTD31 per US dollar which will be exchanged at P54 per US$.

Her fee is also minimal at one percent and the money will be received the same day. This way, Nonoy can send his mom Inday P271,611 instead.

Nonoy thinks this is a much better deal and he agrees. He pays Juanita the NT$157,500 and texts his mother to verify receipt of the funds.

Juanita sends a text to a local jueteng lord to deposit P271,611 of the day’s collection into the account of Nonoy’s mom Inday in a rural bank.

Inday then informs Nonoy that she has received the money. The jueteng lord then texts Juanita to deposit the NT$ in his bank account in Taiwan less her commission of two percent. He then uses Internet banking to verify her deposit.

He has now successfully laundered his money for only a one percent cost, and Juanita has earned NT$3,150 for the cost of a few text messages.

Neither Nonoy or Inday know who the jueteng lord is, nor his involvement in the transaction. Both just think they got a really good deal on money remittance.

Happy reading