Modus operandi
- A customer (A, left-hand side) approaches a hawala broker (X) in one city and gives a sum of money (red arrow) that is to be transferred to a recipient (B, right-hand side) in another, usually foreign, city. Along with the money, he usually specifies something like a password that will lead to the money being paid out (blue arrows).
- The hawa calls another hawala broker M in the recipient’s city, and informs M about the agreed password, or gives other disposition of the funds.
- Then, the intended recipient (B), who also has been informed by A about the password (2a), now approaches M and tells him the agreed password (3a). If the password is correct, then M releases the transferred sum to B (3b), usually minus a small commission. Plus they make money by bypassing the official exchange rates.
- X now basically owes M the money that M had paid out to B; thus M has to trust X’s promise to settle the debt at a later date. Hawaladar networks are often based on membership in the same family, village, clan, or ethnic group, and cheating is punished by effective ex-communication and “loss of honour”—leading to severe economic hardship.
Benefits
- Escapes government taxation.
- Fast and convenient transfer of funds, usually with a far lower commission than that charged by banks.
Risks
- The transaction takes place entirely on the honour system. No legal recourse.