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Hawala series: Tracing hawala money transactions in India

By Super

When a state like Kerala alone has an annual remittance of Rs 23,000 crore in form of hawala money, it just goes on to speak volumes about the problem. [Part 2: How Kerala became India's hawala capital]

[Part 3: ISI controls Indian politicians via hawala]

As Oneindia begins this series on hawala money in India, let us note that this form of a financial transaction is something that is used by politicians, the underworld, terrorists and also the common man. Let us being the first part of this series in which we will explain the basic definition of hawala, how it works and why it continues to remain the most preferred form of money transfer despite it being illegal. [Part 4: Putting an end to hawala is next to impossible']

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Tracing hawala money in India

Definition of hawala:

Hawala is an Arabic word which means transfer. The Wikipedia definition of the word Hawala means an informal value transfer system based on the performance and honour of a huge network of money brokers, primarily located in the Middle East, North Africa, the Horn of Africa, and the Indian subcontinent, operating outside of, or parallel to, traditional banking, financial channels, and remittance systems.

Under garb of farmer protests, SJF collects funds and diverts it for subversive activitiesUnder garb of farmer protests, SJF collects funds and diverts it for subversive activities

Hawala was first developed for trading. Several years back this was a form of remittance that was used as it was considered to be unsafe to travel with gold or money. Over the years, this system of transfer was popularised by the migrant workers especially in the Gulf who sought to send money back home.

Unlike a money transfer through a bank this system avoids tax and also maintains anonymity and requires very less documentation. The problem today is that this form of transfer has caused a headache to security agencies since terrorists and the underworld and even the politician wanting to receive illegal funds at the time of an election has used this method.

While on one hand the illegal funds were transferred to maintain anonymity on the other migrant workers used the system as it was cheaper, quicker when compared to a regular bank transfer.

Government funds diverted into NSCN (IM)’s coffers: NIA Government funds diverted into NSCN (IM)’s coffers: NIA

How it works:

There are a set of hawala brokers who are usually called as hawaladars who collect the money. Once the money is handed over it is the duty of the hawaladar to contact his agent in another country. The money is then moved to the agent who is also given a password which needs to be quoted by the person intended to receive the money.

There are several passwords that are specified and in the recent times when the National Investigation Agency probed this aspect they found code word such as star, pan khaya etc that were used.

Once the password is quoted, then the money is released to the recipient. These hawaladars are found to have operated on a two per cent commission which means for every transaction, they charge a fee of two per cent.

What investigations have found is that these agents earn their money by by-passing the official exchange rates. The exchange rates are by-passed as the money enters the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.

The India scenario:

Security agencies have been screaming over rooftops about the problems attached to hawala transactions. Professor R Vaidyanathan an expert on the subject who is with the Indian Institute of Management, Bangalore says that over the past 6 decades India could have lost 1.5 trillion dollars in the form of tax avoidance and 40 per cent of this amount are all hawala transactions.

Hawala is illegal:

The norms regarding hawala are extremely stringent, but the agencies are unable to curb it because of the sheer magnitude of the transactions. There are several illegal immigrants who chose to transfer money through a hawala transaction since they cannot approach banks due to their illegal immigration status.

Hawala system was popularised by migrant workers, especially in the Gulf

When it was found that this transaction was being used largely to circulate black money, funds raised through drug deals or terrorist transactions, it was declared illegal. In India a hawala transaction is punishable under the FEMA (Foreign Exchange Management Act) 2000 and PMLA ( Prevention of Money Laundering Act) 2002.

However people still use it:

The very fact that despite such a global outrage and India in particular bearing the brunt of the problem it still is a preferred form of transfer and people are still willing to risk it. There are various factors which still makes hawala a preferred channel to transfer funds.

- It suits illegal immigrants who cannot officially transfer money through banks as this transaction does not require identification proof and disclosure of income.

- It is a very reliable source of transfer and till date there has not been a single instance of a hawala agent cheating anyone.

- The commission rate is extremely low when compared to a regular bank transfer.

- Unlike a bank transaction hawala gives the option to remain anonymous.

- It is a sure shot way of ensuring delivery of unaccounted money.

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