“MONEY WARS: HAWALA AND ITS USE TO FINANCE

TERRORISM.”

A Project submitted to
University of Mumbai for partial completion of the
degree of
Master in Commerce (Advance Accounting)
Under the Faculty of Commerce

By
Mr. Akshay Chandrasing Sawant

Under the Guidance of

Prof. Diya Mukharjee
Nirmala Memorial Foundation College of Commerce
and Science
D.S. Road, Thakur Complex, Kandivali East, Mumbai
400101

December 2020
 “MONEY WARS: HAWALA AND ITS USE TO
FINANCE TERRORISM.”

A Project submitted to
University of Mumbai for partial completion of the
degree of
Master in Commerce (Advance Accounting)
Under the Faculty of Commerce

By
Mr. Akshay Chandrasing Sawant

Under the Guidance of

Prof. Diya Mukharjee
Nirmala Memorial Foundation College of Commerce and
Science
D.S. Road, Thakur Complex, Kandivali East, Mumbai
400101

December 2020
 CERTIFICATE

This is to certify that Mr. Akshay Chandrasing Sawant has worked

and duly completed his Project work for the Degree of Master in
Commerce
under the Faculty of Commerce in the subject of (Advance Accounting)
project work and his report is entitled “Money Wars: Hawala and its Use to
Finance Terrorism”

I further certify that the entire work has been done by the learner under
my guidance and that no part of it has been submitted previously for
any degree or diploma of any university.

It is his own work and facts reported by his findings and

investigations.

(Prof. Diya Mukharjee) (Swiddle D’Cunha)

Project guide Principal

Date of submission :-

External Guide College Seal

 DECLARATION BY LEARNER

I the undersigned Mr Akshay Chandrasing Sawant here by, declare that

the work embodied in this project work titled “Money Wars: Hawala and
its Use to Finance Terrorism”, forms my own contribution to the research
work carried out under the guidance of Prof. Diya Mukharjee is a result of
my own research work and has not been previously submitted to any other
university of any other degree to this or any other university.

Wherever references have been made to previous work of others, it has

been clearly indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.

(Akshay Chandrasing Sawant)

(Name and signature of learner)

Certified by

____________________

(Prof. Diya Mukharjee)

(Name & signature of the guiding teacher)

 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance
to do this project.

I would like to thank my In-charge Principal – Swiddle D’Cunha for providing

the necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator Prof. Vijaya Jacqueline, for
her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof.
Diya Mukharjee whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly
helped me in the completion of the project especially my Parents and Peers
who supported me throughout my project.
 INDEX
SR NOS. TOPIC PAGE
NOS.
EXECUTIVE SUMMARY
1 INTRODUCTION
1.1 Conceptual Introduction Of Hawala
1.2 History Of Hawala
1.3 Origin Of Hawala
1.4 Characteristics Of Hawala
1.5 Types Of Hawala
1.6 How Hawala System Works?
1.7 Is Hawala Legal?
1.8 Indicators of Hawala
1.9 Hawala As Underground Banking
1.10 How Does Hawala Impact India?
1.11 Hawala:The Terrorists Informal Financial Mechanism
1.12 Hawala V/S Bitcoin- The Digital Trust Network Of The 21st
Century
1.13 Hawala Scandal
1.14 Hawala Book-Keeping
1.15 Case Studies On Hawala
2 RESEARCH METHODOLOGY
2.1 Introduction
2.2 Objective of Hawala
2.3 Hypothesis
a)Null Hypothesis
b)Alternate Hypothesis
2.4 Research Methodology
a)Universe of Research
b)Method Of Sampling
c)Sample Size
d)Method Of Data Collection
e)Method Of Primary Data Collection
f)Tools Of Analysis
2.5 Importance Of Study
2.6 Limitation Of Study
3 REVIEW OF LITERATURE
4 ANALYSIS & INTERPRETATION OF DATA
5 FINDINGS & CONCLUSION
SUGGESTIONS AND RECOMMENDATIONS
BIBLIOGRAPHY
ANNEXURE
 LIST OF TABLES
SR NOS. TOPIC PAGE
NOS.
CHAPTER ANALYSIS & INTERPRETATION
4
4.1 Gender
4.2 Age
4.3 Occupation
4.4 Annual Income
4.5 Awareness about Hawala
4.6 Awareness about Hawala legal in India
4.7 Respondents thinking about Hawala money transfer
4.8 Respondents feel Hawala transactions are risky
4.9 Facilitation of business operations by Hawala remittance
systems
4.10 Usage of Hawala as a banking system
4.11 Awareness of respondents about any Central Bank in
exchanging currencies for Hawala transactions
4.12 Comparison between hawala system and normal bank
transaction
4.13 Awareness about Hawala being affected post-
demonetization
4.14 Awareness about Hawala remittance system face security
issues
4.15 Usage of hawala system because it is faster in carrying out
of financial transaction
4.16 Awareness about Hawala facilitating terrorism funding
 LIST OF DIAGRAMS

SR NOS. TOPIC PAGE

NOS.
CHAPTER INTRODUCTION
1
1.6 Hawala Example
CHAPTER ANALYSIS & INTERPRETATION
4
4.1 Gender
4.2 Age
4.3 Occupation
4.4 Annual Income
4.5 Awareness about Hawala
4.6 Awareness about Hawala legal in India
4.7 Respondents thinking about Hawala money transfer
4.8 Respondents feel Hawala transactions are risky
4.9 Facilitation of business operations by Hawala remittance
systems
4.10 Usage of Hawala as a banking system
4.11 Awareness of respondents about any Central Bank in
exchanging currencies for Hawala transactions
4.12 Comparison between hawala system and normal bank
transaction
4.13 Awareness about Hawala being affected post-
demonetization
4.14 Awareness about Hawala remittance system face security
issues
4.15 Usage of hawala system because it is faster in carrying out
of financial transaction
4.16 Awareness about Hawala facilitating terrorism funding
 EXECUTIVE SUMMARY

This paper presents the description of Hawala and its use to finance terrorism.After the
horrible attacks on Sep-tem-ber 11, 2001, an ancient infor-mal money trans-fer system
called hawala came under scrutiny for its possible involvement in the financing.The
work then tries to define the ‘ideal’ characteristics of a transfer system in re­spect to
terrorist financing and ex-plo-res the current and actual use of hawala to fi-nance
terrorism. Being aware of the incentives to the regular customer as well as to the
terrorist organizations to use hawala, the major policies to stop the financing of
terrorism will be evaluated as to their efficiency. Like any other remittance system,
hawala can, and does, play a role in money laundering.In addition to serving as a
“tutorial” on hawala transaction, this paper will also discuss the way in which hawala
is used to facilitate money laundering.
 CHAPTER 1-INTRODUCTION

1.1 CONCEPTUAL INTRODUCTION OF HAWALA

Hawala or hewala (Arabic:ḥawāla, meaning transfer or sometimes trust also known as

havaleh in Persian,or hundi in Hindi ,Somali :xawala or xawilaad—is a popular and
informal value transfer system based not on the movement of cash, or on telegraph or
computer network wire transfers between banks, but instead on the performance and
honour of a huge network of money brokers (known as hawaladars). While hawaladars
are spread throughout the world, they are 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. Hawala follows
Islamic traditions but its use is not limited to Muslims.

Among the methods terrorists worldwide use to move money from regions that finance
them to target countries some hardly leave any traceable trail. As regulators learned
recently, one of the weak points in the payments chain through which illicit funds can
enter is a system of traditional trust-based banking originating in southern Asia which
is known as hawala.

The word hawala is Hindi meaning "trust" or "exchange". Often used in relation with
the word hundi which stands for "bill of exchange" hawala is an unofficial alternative
remittance and money exchange system enabling the transfer of funds without their
actual physical move. Traditional financial institutions may be involved but more often
the system is used to bypass banks. There are an estimated 3000 international hawala
brokers operating in Asia. Allegedly the business is monopolized by migrants from
India who mostly operate from countries in the Gulf and South East Asia. Networks
include trading points in the financial centres of Singapore and Hong Kong, and some
of the biggest family-based money-dealers are based in London.

In principle, hawala works as follows: Individual "brokers" or "operators”, known as

hawaladers, collect funds at one end of the payment chain and others distribute the
funds at the other.

For example, an expatriate working in America or Kuwait who wants to send money
back to his family in Pakistan or Syria turns to a moneylender or trader with contacts
in both countries giving him the money. The trader calls a trusted partner in the home
country who delivers the amount to the family, minus a commission. For identification
and the details of the trade often a code is used. The two traders settle accounts either
through reciprocal remittances, trade invoice manipulations, gold and precious gem
smuggling, the conventional banking system, or by physical movement of currency.
Usually, hawaladers operate independently of each other rather than as part of a larger
organization.

For Asian immigrants the hawala system provides a speedy, reliable and trustworthy
method to remit money home. In principle, it allows cash delivered in one place to be
made available elsewhere in the time it takes to make a telephone call or send a fax.
The system proves superior to any Western banking operation: No identification needs
to be presented, commissions are very low, transmission is very fast, and the system is
in operation 24 hours a day and every day of the year even in regions where no banks
or other financial institutions exist. The latter also explains why the system is not only
used by expatriates, drug barons and terrorists, but in some countries is quite common
in rural areas. For example, in the 1980s, about 70% of total credit outstanding in
Pakistan were estimated to be in the informal sector, and about 80% of all informal
credit were in agriculture.

Hawala has been a traditional method of moving money in south Asia long before
Western banking became established in the region protecting early merchants along the
silk road against robbery. In ancient China it was known as "fei qian" or "flying coins".
The system spread throughout the world – to other Asian regions, the Middle East,
eastern and southern Africa, Europe and North and South America – following
immigration patterns. Based on a man's word there is strong market segmentation in
that, for example, a Pashtun trusts only a Pashtun hawaladar, a Sikh only a Sikh one,
and so on.

These days, although mainly used for legitimate transfers and often operating in
conjunction with Western banking operations, the hawala system is regarded as a key
factor in money laundering, other financial crimes and financing of illegal organizations
committed in and associated with South Asia.

Hawaladars in Dubai, India and Pakistan are said to be forming a "hawala triangle"
responsible for significant international money laundering activities that spread far
beyond the region.
Hawala is illegal in many countries. However, Islamic and Western banks all over the
world, and even central banks, make use of the system. For instance, in May and June
2001 the State Bank of Pakistan was said to have turned to hawala shops in Islamabad
to buy dollars in order to support the own currency. Even top-ranking Western
corporations turn to hawaladers for transactions to regions without a modern western-
style banking system.

1.2 HISTORY OF HAWALA

Hawala predates “traditional” or “western” banking (the first “western bank” in India
was the Bank of Hindostan, established in Calcutta around 1770)15. Prior to this, the
operations of sarafs and potedars (see appendix A), who were primarily moneychangers
(and essentially the predecessors of the hawaladars discussed in this paper) were a
fundamental component of the commercial and financial infrastructures.Contrary to
some accounts, hawala did not begin during the Vietnam War. It was however, during
the Vietnam War that many Americans were exposed to hawala through the operations
of Indian merchants in Saigon. Americans often took advantage of their hawala service
to remit money.

Today, hawala and traditional banking exist as parallel, but intertwined, economic
systems in India and Pakistan.

1.3 ORIGIN OF HAWALA

The hawala system has existed since the 8th century between Arabic and Muslim
traders alongside the Silk Road and beyond as a protection against theft. It is believed
to have arisen in the financing of long-distance trade around the emerging capital trade
centers in the early medieval period. In South Asia, it appears to have developed into a
fully-fledged money market instrument, which was only gradually replaced by the
instruments of the formal banking system in the first half of the 20th century.

"Hawala" itself influenced the development of the agency in common law and in civil
laws, such as the aval in French law and the avallo in Italian law. The words aval and
avallo were themselves derived from hawala. The transfer of debt, which was "not
permissible under Roman law but became widely practiced in medieval Europe,
especially in commercial transactions", was due to the large extent of the "trade
conducted by the Italian cities with the Muslim world in the Middle Ages". The agency
was also "an institution unknown to Roman law" as no "individual could conclude a
binding contract on behalf of another as his agent". In Roman law, the "contractor
himself was considered the party to the contract and it took a second contract between
the person who acted on behalf of a principal and the latter in order to transfer the rights
and the obligations deriving from the contract to him". On the other hand, Islamic law
and the later common law "had no difficulty in accepting agency as one of its
institutions in the field of contracts and of obligations in general".

Today, hawala is probably used mostly for migrant workers' remittances to their
countries of origin.

1.4 CHARACTERISTICS OF HAWALA

1. SPEED
Hawala transactions are usually completed within 24 hours. Remittances
between the main international cities take an average of 6 to 12 hours (El Qorchi
et al., 2003; Maimbo, 2003, 2005), although payments due in remote rural
areas usually require more time, and they may take up to 48 hours (Passas,
2004). Sometimes hawaladars offer “express services” and they are able to
deliver funds within very few hours.

2. COST
The volume of the transaction, the currency of exchange, the destination of the
funds or the relationship between the remitter and the hawaladar are
important features that may influence the cost of a hawala transaction.
However hawala cost are always much lower than the fees charged in the
formal banking system . El Qorchi et al. (2003) state that the cost of a hawala
transaction averages around 2 to 5 percent of the total amount of the funds
involved, although Maimbo (2005) report that these fees averaged 1 to 2
percent in Afghanistan. Passas (1999) offers several examples where
hawaladars offer free services to their compatriots, in the corridor Australia-
Africa.
3. ANONYMITY
This is the feature that has raised more concerns for western financial
authorities, however it is not a specifically designed strategy but rather the
outcome of the principles that rule hawala. The anonymity of the system
is guaranteed by the fact that hawaladars’ records are not accessible to third
parties and there are no standard document requirements for the clients who
use the system. Hawaladars record all their transactions but with an eminently
practical purpose, just to keep track of the state of their finances and their
books are not intended to be opened to external auditors. On the other
hand, the reputation of an individual is considered to be a sufficient
guarantee of his honesty and so requirements such as Know Your Customer
(KYC) are sometimes perceived as a pointless imposition by a foreign power
(Razavy and Haggerty, 2009). Furthermore, in some regions where hawala
operates, personal identification and documentation were never widely used as
it happens in Somalia.

4. CULTURAL CONVENIENCE
Hawala is frequently used as a remittance system for emigrants to send money
to their families in their countries of origin. Many times these workers suffer
cultural barriers language difficulties, low levels of education or even illiteracy
in their host country that difficult their access to formal banks and also often
the family in the home country is located in unbanked remote villages.
Religious considerations are also an important reason why many users choose
hawala over other remittance systems. Hawala is a Shariah-compliant
mechanism in contrast with conventional Western banking and so it is a
widespread practice in countries with Islamic traditions and among their
expatriates.

5. VERSATILITY
Hawaladars have always maintained their operations under extreme
circumstances even when sometimes the formal banking system has not been
able to adapt and ceased to operate. For instance, in Somalia after the
Siad Barre government was deposed in 1991, commercial banks collapsed
and hawala was the only financial system in the country (Houssein, 2005;
 Lindley, 2009). Similarly during the Taliban period in Kabul, the country’s
formal banking system was not operational and hawaladars were the only
active financial operators (Maimbo, 2005). These extreme circumstances
show how in the context of institutional collapse, informal structures such
as hawala may constitute a source of regulatory order.

6. RELIABILITY
The reliability on hawala derives from the trust that governs the system and
the versatility that it exhibits. Hawala practices have always been embedded
in trade activity. Yet this relationship seems to have been disregarded by
outsiders since the system is portrayed as a mere remittance vehicle forgetting
that trade has been its core function rom its medieval origins right until the
present time (Martin, 2009). Hawaladars are not exclusively dedicated to their
remittance activities; rather they are usually entrepreneurs and small
business owners ranging from small ethnic shops, convenient stores,
import/export businesses and even other formal financial activity. Hawala
transactions and settlement operations are usually intermingled with their
business activity (Jost and Sandhu, 2000; Passas, 2006b). This embeddedness
is highly efficient for two main reasons. On the one hand the business activity
provides the pool of cash that hawaladars need for their daily operation out of
which they make the payments due to complete the hawala transactions.
And, on the other hand, the complementary businesses activities bring over
the connections that hawaladars need; the network of partners and it is also the
main source of clients. The organization of hawala has always followed the
organization of commercial activity. Therefore, there is no formal hierarchy so
that each individual is at the center of a particular web of relationships. The
overall informal in the sense of unstructured and personal in nature
organization results from the maze of individual relationships, which could
bond a large number of people. The relations between the different members
are personal and not uniform in intimacy and intensity. A reputation
mechanism enables to uphold cooperation within hawala networks. Every
hawaladar has to put effort to construct a reputation of trustworthiness and
competence in order to develop stable and reciprocal relations with his partners.
1.5 TYPES OF HAWALA

1. Pure traditional (legitimate) hawala and other similar service providers;

2. Hybrid traditional (sometimes unwitting) hawala and other similar service
providers and
3. Criminal (complicit) hawala and other similar service providers

1. PURE TRADITIONAL HAWALA:

In South Asia and Middle East, the word hawala is commonly used to refer to
“Pure Traditional Hawala”, a centuries-old money transmission system which
was often used for trade-finance. These systems have operated for centuries in
an unregulated environment and are still present in some countries for trade-
finance and personal remittances, sometimes under a regulatory umbrella, but
more typically not. Pure Traditional Hawala and other similar service providers
are also extensively used to send low-value remittances on behalf of individuals,
for example, migrant workers –extending outside their historical geographical
area as populations migrate and trade routes develop. For instance, hawala are
a common provider for remittances to migrant workers in the United Arab
Emirates, where a significant portion of the working class population is
composed of expatriates. Pure Traditional Hawala and other similar service
providers tend to be popular among migrants because of familial, regional or
tribal affiliation and inadequate access to regulated financial services for
senders/recipients in origin/ receiver countries. These service providers may
primarily function to provide legitimate and efficient remittance/trade finance
services to customers sending low value transactions. If sufficiently regulated
and supervised these providers ,due to the low value of their average
transactions, may present a low or lower money laundering and terrorist
financing vulnerability. Minimal supervision in certain jurisdictions, however,
may amplify the risk for misuse.

2. HYBRID TRADITIONAL HAWALA

Hybrid Traditional Hawala and other similar service providers or designated
non-financial institutions or designated non-financial businesses and
professions (DNFBPs) in the provision of legitimate services but at the same
 time they may also be used, wittingly or are also used, wittingly or not, for
illegitimate purposes such as transmission of illicit money across the borders.
These networks are not primarily set up to move illicit money but may be
involved in illegal activities such as movement of money generated from tax
evasion, to evade currency controls and to avoid sanctions, etc. These service
providers utilize similar methods as traditional HOSSPs and are not apart of a
criminal network. They develop where there is an un-service demand for
remittances; they may interact with other HOSSPs to complete transactions.

3. CRIMINAL HAWALA
In some countries, there is concern that HOSSPs systems are increasingly being
set up or expanded to service criminals. Providers who set up such systems are
described in this report as “Criminal HOSSPs”. Such systems are driven by
illegitimate money flows and are often controlled by criminals or criminal
groups. They therefore represent a high criminal money laundering and terrorist
financing risk. A third party professional money launderer often runs the
financial network. These criminal networks also enable other offences including
tax fraud, currency offences and corruption.Criminal Hawala and other similar
service providers are often a part of well-developed criminal networks that have
been developed specifically to enable illegitimate activities. Initially these
channels may be developed as networks to satisfy local/personal remittance
needs by Traditional or Hybrid Hawala and other similar service providers. As
the network grows into a strong transfer corridor, it becomes attractive to
criminals and evolves into a criminal transfer corridor. These criminal networks
are characterized by high value transactions between legal and natural persons
that do not necessarily share the same cultural or geographic background. They
are often used to send payments to countries with developed and regulated
banking systems.

1.6 HOW HAWALA SYSTEM WORKS?

In the most basic variant of the hawala system, money is transferred via a network of
hawala brokers, or hawaladars. It is the transfer of money without actually moving it.
In fact, a successful definition of the hawala system that is used is "money transfer
without money movement". According to author Sam Vaknin, while there are large
hawaladar operators with networks of middlemen in cities across many countries, most
hawaladars are small businesses who work at hawala as a sideline or moonlighting
operation.

Hawala example transaction; see text for an explanation

Diagram 1.6 Hawala example

The figure shows how hawala works: (1) 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). (2b) The hawala 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. 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.

The unique feature of the system is that no promissory instruments are exchanged
between the hawala brokers; the transaction takes place entirely on the honour system.
As the system does not depend on the legal enforceability of claims, it can operate even
in the absence of a legal and juridical environment. Trust and extensive use of
connections are the components that distinguish it from other remittance systems.
Hawaladars 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.

Informal records are produced of individual transactions, and a running tally of the
amount owed by one broker to another is kept. Settlements of debts between hawala
brokers can take a variety of forms (such as goods, services, properties, transfers of
employees, etc.), and need not take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing
official exchange rates. Generally, the funds enter 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.

Hawala is attractive to customers because it provides a fast and convenient transfer of

funds, usually with a far lower commission than that charged by banks. Its advantages
are most pronounced when the receiving country applies unprofitable exchange rate
regulations or when the banking system in the receiving country is less complex (e.g.,
due to differences in legal environment in places such as Afghanistan, Yemen,
Somalia). Moreover, in some parts of the world it is the only option for legitimate fund
transfers, and has even been used by aid organizations in areas where it is the best-
functioning institution.

1.7 IS HAWALA LEGAL?

Since hawala is a remittance system, this question really addresses regulations

governing remittance services10 and the circumstances of the remittance. The
assumption here, ofcourse, is that these remittances are like Abdul, and legitimate; the
illicit use of hawala in money laundering is discussed in the next section of this
paper.Even though hawala is illegal from a regulatory standpoint in some U.S.
jurisdictions,hawaladars advertise their services widely in a variety of media (ethnic
newspapers have been the traditional place to find them, now some are using the
Internet). Enforcement of these regulation is difficult with respect to hawala. The
advertisements are often printedin foreign languages, and wording like sweet rupee deal
does not necessarily suggest remittance services. Moreover, businesses like Yasmeendo
not conduct remittances as their primary activity.

In South Asia, the situation is more complicated. Many South Asian nations (such as
India and Pakistan) have laws that prohibit speculation in the local currency, prohibit
foreign exchange transactions at anything other than the official rate of exchange, and
impose strict licensing requirements on money remitters and foreign exchange dealers.
In addition, there are regulations governing inbound and outbound remittances.A
detailed discussion of these regulations is beyond the scope and intent of this paper.It
is, however, possible to state “hawala is illegal in India and Pakistan” with nearly
complete accuracy.The important point for our purposes is that the existence of these
regulations is another reason hawala is still used. Many people in these countries have
money that they would like to move to another country due to concerns about stability,
to pay for education or medical treatment. Hawala provides a ready means of doing
this, and its use as a facilitator of capital flight on both large and small scales is very
common. The existence of these laws also explains, in part, the prevalence of invoice
manipulation as part of hawala schemes.Another aspect of these regulations is the use
of the United Arab Emirates, specifically Dubai, for hawala transactions. There are two
main reasons for this. The first is the large population of expatriate workers from India
and Pakistan; they use hawala to send money home. The second is Dubai’s large gold
market, which is the source of much of the gold sent (licitly and illicitly) to India and
Pakistan. Dubai, unlike many other South Asian nations, allows essentially unregulated
financial dealings. Because of this, many South Asian businessmen maintain offices in
Dubai, and money is often wired there to circumvent regulations elsewhere. In addition,
Dubai offers a neutral meeting place for Indian and Pakistani businessmen, as tension
between these countries makes travel between them difficult if not impossible.This
paper should not, however, be considered a condemnation of the economic policies of
India or Pakistan, both of which have taken concrete steps to combat money
laundering.The efficiency and cost effectiveness of hawala make it an attractive means
of remitting money under almost any regulator regime.

1.8 INDICATORS OF HAWALA

As has been shown in this paper, hawala is actually quite simple; much of the
complexity associated with and ascribed to hawala money laundering comes from the
nearly infinite number of variations that are encountered in hawala transactions.

This complexity of variation makes it nearly impossible to lay out a straightforward

guide to recognizing hawala money laundering as part of a criminal undertaking. It is,
however, possible to provide a few indicators that may be useful.

One of the most consistent and valid indicators of hawala activity in investigations
conducted in the United States is seen in bank accounts. A hawala bank account almost
always shows significant deposit activity, usually in the forms of cash and checks,
which are often from one or more ethnic communities (e.g. Afghan, Bangladeshi,
Indian, Pakistani, Somali) associated with the hawaladar. These checks may be made
out to the primary account holder, or some secondary entity (often outside the United
States) somehow associated with the account. These checks may also have some sort
of notation, consisting of a name (presumably of the person to whom the money is
remitted to) or something supposedly indicating what was bought with the money. In
one case, many checks were seen with the word bangle written on them; this was done
apparently in order to make it appear as though the checks, which were almost all for
even dollar amounts, had been written to purchase jewelry.

These accounts will also almost always show outgoing transfers (usually by wire) to a
major financial center known to be involved in hawala. Three of the most common
locations are Great Britain, Switzerland, and, as discussed previously, Dubai. Given the
flexible and casual nature of the hawala business, hawala accounts will not always be
seen to balance. The following diagram summarizes hawala account behavior:

As has been discussed, certain businesses are also more likely than others to be involved
in hawala. Once again, it is not possible to give an exhaustive list, but the following is
point: Import/Export,Travel and Related Services,Jewelry(gold,precious
stones),Foreign Exchange,Rugs/Carpets,Used Cars,Car Rentals (usually non-chain or
franchise),Telephones/Pagers.

Laws in India, Pakistan and other countries make it difficult to convert foreign currency(or
foreign currency instruments, such as travelers checks). Criminal activities in these countries
may often involve foreign currency (especially dollars), which pose something of a
problem. A solution that has been seen to this problem is the shipment of these
negotiable instruments from South Asia to the United States. Even though such
shipments may violate both courier policies and U.S. law, the money launderers accept
these risks rather than try to attempting to place these instruments into their local
economies.

1.9 HAWALA AS UNDERGROUND BANKING

The very features that make hawala an attractive avenue for legitimate patrons also
make it attractive for illegitimate uses. Thus, hawala is frequently referred to as
underground banking. This is because money launderers and terrorists take advantage
of this system to transfer funds from one location to another. Hawala provides
anonymity in its transactions, as official records are not kept and the source of money
that is transferred cannot be traced. In addition, corrupt politicians and the wealthy who
would prefer to evade taxes use hawala to anonymize their wealth and activities.

Since hawala transfers are not routed through banks and, hence, not regulated by
governmental and financial bodies, many countries have been led to re-examine their
regulatory policies in regard to hawala. Some countries have made hawala illegal due
to the absence of bureaucracy in the system. For example, in India, the Foreign
Exchange Management Act (FEMA) and the Prevention of Money Laundering Act
(PMLA) are the two major legislative systems that deter the use of hawala in the
country.

Some FinTech companies are implementing the hawala system in providing financial
services to the unbanked and under banked populations of the world. Mobile banking
and payment platforms, such as Paga and M-Pesa, are revolutionizing the financial
system in certain African countries by promoting financial inclusion through the hawala
system of providing financial services.

1.10 HOW DOES HAWALA IMPACT INDIA?

Hawala supports illegal activities in India namely:

1. Black Money: As Hawala is an unregulated transaction, it is the most widely used

route black money earned in India offshore.

2. Corruption: Hawala permits routing black money in and out of India and is widely
used to pay bribes.

3. Terror financing: Hawala is mainly used by terrorist organizations to remit money

in and out of India.

HAWALA CASES FOR REFERENCE

Some of the famous Hawala cases of India:

1. Hasan Ali Khan: The Hawala Kingpin

In March 2007, Hasan Ali’s properties were raided by India’s Enforcement Directorate
(ED) and Income Tax officials based on allegations of hawala transactions.

Current status: As of October 2013,[10] Hasan Ali is in jail since his bail petitions have
been rejected several times by various courts[11] including the Bombay High Court[12]
and the Supreme Court of India.

2. Jain Hawala Diary case:

The Hawala scandal, also called the Jain Diaries case or the hawala scam was an Indian
political and financial scandal involving payments allegedly sent by politicians (black
money) through four hawala brokers, namely the Jain brothers.

Current status: More than two decades after it triggered a political landslide, a city court
has discharged SK Jain, his employee JK Jain and others from charges of Foreign
Exchange Regulation Act violations in the infamous Jain hawala case.

3. Mumbai Hawala King arrested for Rs. 2,000 crore laundering:

Mohammad Farooq, one of Mumbai’s biggest Hawala operator was arrested by

enforcement agencies in connection with Rs. 2000 crore money laundering case
involving his Stelkon Infratel Pvt ltd and network of 160 shell companies from a one
room office in Zaveri bazaar.

Current status: In July 2018, ED files charge sheet against Mumbai hawala dealer in
Rs. 2,000-crore scam.

In spite of the government introducing various measures to curb the Hawala

transactions, it is difficult to completely eliminate Hawala transactions. Few reasons
are listed below

1. Indian rupee is not fully convertible. Indian rupee above a certain limited cannot be
easily exchanged to a foreign currency. Individuals / companies who require foreign
currency use Hawala mode in order to buy them

2. Corruption still exists. Kickbacks are normally paid through the medium of Hawala
transactions.
3. Introduction of Bitcoin (cryptocurrency). With the massive changes in the world of
technology, digital currencies are being introduced. As these are not regulated by the
central banks it is another mode which is leading to increase in Hawala transactions.

1.11 HAWALA:THE TERRORISTS INFORMAL FINANCIAL MECHANISM

EXTENT OF THE SYSTEM

Hawala agents work in a range of settings, from curbside stalls and modest offices in
South Asia to back rooms and secret locations in Europe and North America. The only
limits to the size of a transaction are the willingness of the sender to carry cash and the
capacity of the receiving agent to cover the transaction. Exchanges in the tens of
thousands of dollars are frequent.

Although Pakistan, India and the Persian Gulf states are home to the largest
concentration of hawala organizations, Dubai, in the United Arab Emirates, perhaps
handles the largest volume of transactions. The system has global reach. Investigators
believe hawala organizations exist throughout the United States and Europe.

Given its informal nature, there is no precise measure of the size of the system.
Estimates abound, however.2 Pakistani officials estimate that more than $5 billion
enters the country through hawala networks every year, making the system the
country’s largest source of hard currency. One third of that reportedly consists of the
repatriation of funds from expatriate Pakistanis to their families. Pakistani nationals
may hold between $40 billion and $60 billion in overseas financial assets, an amount
roughly equivalent to the country’s gross domestic product.

In the case of India, Interpol places the size of hawala at possibly 40 percent of the
country’s gross domestic product. In 1998 (the latest figures available) estimates place
the amount of money in the country’s system at $680 billion, roughly the size of
Canada’s entire economy.

In summary, the hawala system, especially in South Asia, is extensive, extremely liquid
and a rational choice for poorer segments of the population. While seeming a bit
mysterious to outsiders, the hawala is comparable in mechanics and economic structure
to most other remittance alternatives, including those that run through licensed
channels. The most obvious “legal” problem with hawala in remitting countries is the
lack of any registration or licensing, although the operations themselves are generally
harmless. In receiving countries like India, there is in addition the subtler potential clash
between hawala operation and exchange controls. Hawala transactions often result in
increased black-market transactions and expanded underground activity. The fact is,
though, that hawala is essentially an economic phenomenon. It would remain so even
if there were no terrorist international transfers, drug trade or money laundering.

Although the great bulk of hawala transactions are as harmless as the remittance
example noted above, the system has proved to be extremely useful for money
laundering and masking the intricate financial operations required by terrorists, drug
dealers and other criminal elements. Given its size and semi-legitimate status in South
Asia, it is not hard for terrorists to transfer money using the hawala channel. They are
labyrinths replete with pseudonyms, middlemen and dead ends.

Wealthy Arab patrons in the Middle East likely send funds to al-Qaeda through hawala
organizations, as do myriad Arab charities acting as fund-raising fronts. The smaller
the value of the transfer, the less attention it is likely to attract, but it is still easy to
transfer large amounts of money without raising questions.

THWARTING TERRORISTS

In the war on terrorism, a major challenge will be to infiltrate and monitor hawala
networks in the Middle East. A crackdown by Arab and South Asian governments at
the behest of Western governments is simply not feasible. The vast majority of the
money is from legal, legitimate sources, and the hawala organizations are numerous
and extremely powerful.

Arab and South Asian governments have neither the effective means nor the will to
closely monitor each transaction in these organizations. In any case, methods of this
sort would most likely prove ineffective. As an amorphous collection of independent
operators, hawalas do not depend on a single location or infrastructure. A crackdown
would simply drive them underground. Because many citizens in these countries would
view actions of this sort as caving in to Western demands at the expense of Muslim
tradition, it could also create a backlash against the governments.
Instead, what may need to be done is to see how hawalas can be licensed and/or
registered so that they will continue to serve those who need the service while, at the
same time, not become abused by money launderers and criminals.

Along these lines, participants at a conference in Abu Dhabi held on May 16, 2002,
recommended the setting up of control systems to monitor hawalas with sufficient
documentation about the remitters and recipients, to guard against any diversion of
funds into illegal or criminal activities. They also called for government licensing and
regulation of hawala offices in the same way as insurance offices are regulated.

For its part, Pakistan is establishing a Special Investigation Group (SIG) in the Federal
Investigation Agency (FIA) to counter terrorism. This group could help enforce hawala
regulations. In addition, crime wings of the FIA would help the SIG investigate cash
flows to and from suspected groups and individuals through illegal monetary
transactions such as hawala.

If licensing, registration or normal police work4 is ineffective in stopping the abuse of

the hawala systems by terrorists, an economic approach should be considered. If the
desire of the authorities is to constrain or significantly reduce the importance of hawala
activity, this means reducing the economic incentives to do hawala. There is probably
no better way to accomplish this than to facilitate cheap, fast remittances across
international borders, and to do away with dual and parallel exchange markets, which
are always an incentive to keep transactions underground.

If those countries had reasonably expedient, well-regulated and user-friendly banks,

then the hawala system would not have flourished and would not have been abused by
terrorists and criminal elements. In this regard, there have been some encouraging signs.
Several exchange companies in Egypt, Jordan, Lebanon and the Gulf countries have
now adopted the door-to-door delivery of money in a manner similar to one that the
Philippine banks have successfully introduced and implemented to stave off the
unofficial market operators. The more innovative institutions in India are now using
low-cost couriers to deliver door-to-door service.

This compensates for the lack of presence of banks in different parts of the country.
The smaller and more numerous exchange companies are also competing today with
the hawala system in speed, efficiency of execution, settlement and delivery of money
and services.

These factors may bring down a hawala system that has been prone to errors, fraud and
abuse by unscrupulous groups.

1.12 HAWALA V/S BITCOIN- THE DIGITAL TRUST NETWORK OF 21ST

CENTURY

INTRODUCTION OF BITCOINS

Bitcoins are a kind of cryptocurrency, in the sense of them being conceptual. They are
manufactured using software, by solving complex mathematical problems, and
cryptology having market values. By solving one such problem nearly 12-and-a-half
bitcoins are generated.The purchase process using bitcoin is so secure that it is not
possible to hack the system. Only a money transfer can be seen, but nothing can be
known about the sender and the recipient. This type of anonymity, with its strong
cryptological security, is ensured by those dealing with bitcoins.The details of each
transaction report are available in a ledger called ‘blockchain’. From this open source,
anybody can tell how many bitcoins are traded at some specified public key. But
nobody can know the owner of those bitcoins, as the security of the ledger cannot be
easily broken, making the system’s character of anonymity and privacy also its
drawback.The bitcoin’s popularity in India has grown after demonetization. At the time
of its announcement in November, the price of one bitcoin in India was $757. It was
lingering between $866 and $896 during the early days of demonetization. It reached
$1,020 18 days after Prime Minister Narendra Modi announced demonetization on
November 8, 2016

COMPARING THE TWO FORMS OF MONEY TRANSFERS

Bitcoin and the ancient transfer system utilized throughout the Orient called Hawala
are similar in some basic ways. They are both remittance systems that can potentially
support anonymous transactions as well as cross-border activity on a global scale. The
similarities are limited though, there are significant differences. These two systems
show how Bitcoin represents much more than being a mere digital version of Hawala,
as some have suggested.
BITCOIN AND HAWALA: AN UNLIKELY COUPLE

Even though some argue for a marriage between Bitcoin and Hawala, the two systems
make an unlikely couple. Block chain technology allows regulators to better track
transactions than any other payment system because customers of licensed Bitcoin
businesses in developed economies such as the US and the EU are verified not only by
the digital exchanges operating in these countries but also by the banks Bitcoin-owners
use for deposits and withdrawals in fiat money. Ensuring that proper Know-Your-
Customer policies are followed does represent a substantial challenge for financial
market authorities and compliance officers at financial institutions. However, a narrow
legalistic focus misses the important technological and socioeconomic aspects, and it
must be reiterated that unlike Hawala, Bitcoin transactions are recorded on the block
chain ledger for purposes of tractability and protection from malicious intent.

Bitcoins can be helpful to a lot of people. Since they are an international currency, you
can use them in any country without having to convert between currencies. The
Blockchain is secure and it lets you make sure your money goes to/comes from the right
person. People receiving Bitcoins won’t have to pay anything for the transactions, and
Bitcoins have a lot of support. These will help Bitcoin get more users, and if everyone
uses Bitcoin it could replace official currencies. Sure, it has some disadvantages, but
some of those are because Bitcoin is a new thing, so as time goes on they will be less
of a problem. The others can easily be avoided. Hawala is an efficient and accepted
system of money transfer in the Middle East; eradicating such an entrenched system
overnight is not practicable. Furthermore, the removal of hawala would be
economically damaging to several nations.

1.13 HAWALA SCANDAL

The Hawala scandal, also called the Jain Diaries case or the hawala scam was an Indian
political and financial scandal involving payments allegedly sent by politicians (black
money) through four hawala brokers, namely the Jain brothers.[1] It was a US$18
million bribery scandal that implicated some of the country's leading politicians. It also
led to a fixed tenure of minimum 2 years for CBI Directors, to prevent politicians from
interfering with the Director's duties.
In 1991, an arrest linked to militants in Kashmir led to a raid on hawala brokers,
revealing evidence of large-scale payments to national politicians.[3] On 25 March
1991, as per the court proceedings published by the Supreme court of India, Ashfak
Hussain Lone, a person alleged to be an official of the terrorist organisation Hizbul
Mujahideen, was arrested in Delhi. During his interrogation, the police learnt that his
organisation was funded through hawala, using Surendra Kumar Jain and his family as
a conduit. Based on this and further information received during Lone's interrogation,
the Central Bureau of Investigation (CBI) conducted raids on the premises of Surrender
Kumar Jain, his brothers, relations and businesses. During the raids, the CBI seized
Indian and foreign currency, two diaries and two note books at the premises. These
diaries contained detailed accounts of vast payments made to people identified only by
initials. The initials corresponded to the initials of high ranking politicians, both in
power and out of power, and of high ranking bureaucrats. At this stage, the investigation
stopped at the CBI and neither the Jains, nor the contents of their diaries were
investigated by the CBI. Meanwhile, officers of the CBI involved in the investigation
were transferred out to other places by orders from ruling politicians. However, the case
continued to make headlines in the newspapers media, as it was pursued by a few
journalists.

On 4 October 1993, writ petitions were filed at the Supreme court of India, in the public
interest under Article 32 of the Constitution of the India. These contained allegations
that Government agencies like the CBI and the revenue authorities had failed to perform
their duties and legal obligations as they had "failed to investigate matters arising out
of the seizure of the "Jan diaries"; that the apprehension of terrorists had led to the
discovery of financial support to them by clandestine and illegal means using tainted
funds obtained through `havala' transactions; that this had also disclosed a nexus
between politicians, bureaucrats and criminals, who were recipients of money from
unlawful sources, given for unlawful consideration that the CBI and other Government
agencies had failed to investigate the matter, take it to its logical conclusion and
prosecute all persons who were found to have committed and offence; that this was
done with a view to protect the persons involved, who were very influential and
powerful; that the matter disclosed a nexus between crime and corruption at high places
in public life and it posed a serious threat to the integrity, security and economy of the
nation; that probity in public life, the rule of law and the preservation of democracy
required that the Government agencies the compelled to duly perform their legal
obligations and to proceed in accordance with law against every person involved,
irrespective of where he was placed in the political hierarchy." In India, the Havala
method is an illegal method of transacting in foreign currency. It is illegal and
contentious due to two reasons. Firstly, it is highly secretive as it does not reveal the
identity of people on either side of the transaction, even to the havala operators.
Secondly, it violates the FERA regulations of India as it does not use approved channels
of regular banks for foreign currency transactions. However, it is often used in India for
two reasons. Firstly, to transfer legally earned salaries (example : by ordinary workers
overseas in Saudi Arabia and UAE) to their hometowns, as hawala transaction costs are
a fraction of banks, and havala operators can be found in the smallest villages of India.
Secondly, by politicians, bureaucrats and nefarious elements to transfer corruption
money.

1.14 HAWALA BOOK-KEEPING

Hawala bookkeeping emphasizes keeping track of how much money is owed to

whom.The following sample chart is based on records analyzed by one of the authors
of this paper during a recent investigation16, and is representative of the records that
might be encountered during a hawala investigation (note that these charts are usually
handwritten, and it is not uncommon for English and another language to be used):

16/6/98 Vinod 100000 37.6 2659.57 F-1202

16/6/98 Ashish 250000 39.25 6369.42 F-1203

16/6/98 Nitin Bhai 350000 42.3 8274.23 B-8146

17/6/98 DK 50000 38.75 1290.32 F-1204

17/6/98 Suresh Kumar 300000 39.25 7643.31 B-8147

17/6/98 Anil 200000 40.1 4987.53 S-5428

17/6/98 Vinod 150000 39.75 3773.58 F-1205

18/6/98 Manoj 300000 41.25 7272.72 B-8148

18/6/98 Vinod Bhai 350000 42.2 8293.83 L-2160

18/6/98 Ganesh Trading 200000 38 5263.15 › Ä

19/6/98 Suresh Kumar 175000 39.5 4430.37 B-8149

The first column indicates the date of the transaction. The second column is the name
of the hawala broker to whom the debt is owed; it is very common to use partial names
(e.g. Vinod) or codes (e.g. DK). The third column is the amount of the debt. This chart
reflects a tendency to do business in multiples of 100,000; so it would not be uncommon
to see things like 1.5 for 150,000. The third column indicates the dollar/rupee exchange
rate in effect for the transaction. The fourth column is the value of the transaction in
dollars. The fifth column reflects the way in which the payment was made. Notations
such as F-1202 usually represent a bank (F might be First Bank; B and L would
represent other banks) and the check number. The notation Ä for Ganesh Trading is 52
t in Hindi. This represents 52 tolas17 of gold, possibly paid to a local goldsmith or
jeweler instead of remitting the money via a bank.

1.15 CASE STUDIES ON HAWALA

CASE 1:

10 MORE CARRRIERS INVOLVED IN HAWALA RACKET ARRESTED

(They were arrested while they were returning by a flight from Dubai, based on a Look
out Circular issued against them)

The Sahar police nabbed 10 more carriers who were part of a hawala racket that has
siphoned off crores of rupees since January. The accused would carry credit cards of
international banks and cash to Dubai by flight and hand over the same to an operative
who would use the same to fund smuggling of gold and electronic items in the country.

Till now, 24 people have been arrested in the case and 27 more are wanted. The 10 men
were arrested on Sunday while they were returning by a flight from Dubai, based on a
Look out Circular (LOC) issued against them by Sahar police after the racket was
unearthed earlier this month by immigration officials.

On April 5, immigration officials had detained 11 flyers at the Chhatrapati Shivaji

International Airport, acting on suspicion. The flyers were going to UAE on tourist visa
and claimed they were businessmen. Immigration officials checked their luggage and
each of them were found carrying credit cards and UAE currency worth 10,000 dirham,
which is nearly Rs1.8 lakh. Sahar police also seized 55 credit cards, each having a
balance of 1 lakh dirham each (collectively worth Rs9.7crore). After 11 flyers, another
three people were arrested on April 21.

The carriers were given a commission of Rs13,000 to do the job. They were sent there
posing as employees of a private firm Firstchoice Media and Entertainment Pvt Ltd.
Three directors of this firm, have been made accused in the case.

The accused were supposed to hand over the credit cards and cash to the their handler
who travelled with them. The handler would give the cards and cash to one Romil in
UAE who would then facilitate the smuggling.

The police said the racket has been going on since January and the accused using the
modus operandi has managed to siphon off crores of rupees which were then used in
UAE for sending smuggled goods to India.

CASE 2:

MUMBAI HAWALA KING ARRESTED FOR Rs.2000 CRORE LAUNDERING

Mohammad Farooq alias Farooq Shaikh,one of the city’s biggest hawala operators was
arrested by the Enforcement Directorate(ED) on Tuesday in a Rs.2253 crore money
laundering case involving his Stelkon Infratel Pvt Ltd.

Stelkon was part of Farooq’s network of 160 shell companies and was run from a one-
room office in Zaveri Bazaar.

Farooq was on the radar of various probe agencies since 2014 and is believed to be
associated with underworld elements, said officials.The Directorate of Revenue
Intelligence had investigated the case of inflated remittances abroad and submitted a
report to the ED in 2016 for action under the Prevention of Money Laundering Act.
Last May, the CBI registered a case as it suspected the role of bank officials in the scam
(see box). Subsequently, ED too registered a money laundering case against the same
set of the accused.
He had actually opened over 160 dummy companies. An auto driver was a director in
one of them. These firms were all floated using the Importer Exporter Code registered
at fictitious addresses.

ED officials said Farooq used his accounts with co-operative banks to deposit cash
collected from his clients. After routing the money through several layers of transaction,
he would bring the money into his accounts, mainly in nationalized banks, and then
make the remittances after submitting forged documents.

The CBI FIR says it appears that the banks did not exercise any due diligence in
verifying the genuineness of the importers and the documents submitted during the
request for remittances. “There appears to be no cross-checking regarding the veracity
of the bill of entry before permitting the amount to be remitted,” it added.Sometimes,
against a single bill of entry, the fraudsters remitted money several

times through multiples banks or branches. Or, based on forged documents, the
importers inflated the value of the imports and remitted this inflated amount.
 CHAPTER 2- RESEARCH METHODOLOGY

2.1 INTRODUCTION:
This chapter presents the research methodology followed towards attainment
of the objectives. Specifically, it outlines the research design, population, data
collection, research validity and reliability, and data analysis. Research
methodology is a way to systematically solve the research problem. It may be
understood as a science of studying now research is done systematically. In
that various steps, those are generally adopted by a researcher in studying his
problem along with the logic behind them. It is important for research to know
not only the research method but also know methodology. ” The procedures
by which researcher go about their work of describing, explaining and
predicting phenomenon are called methodology. The research sampling
method that will be used in this study is non probability convenience sampling.
This is the easiest non-probability sampling technique as the sample is selected
randomly until the required sample size has been met. Due to a lack of
information and time constraints other sampling methods such as random
sampling are not feasible for the study. Questionnaires will be given out to
respondents for the statistical representation of the findings in the study.
This study is based on primary as well as secondary data. The population
studied here are is people. The research is analytical and tool used for data
collection is structured questionnaire.

2.2 OBJECTIVES:
 To understand the meaning and importance of Hawala.
 To used to send funds from a developing country to another country.
 To determine the use of Hawala system in terrorism finance.
 To examine the role of Hawala as an Informal Value Transfer System
used for money laundering and terrorist financing activities.
 To identify and describe the challenges that financial regulators face in
regulating Hawala.
2.3 HYPOTHESIS:
H0:Hawala is not based on the movement of cash or on computer network
wire transfers between banks.
H1:Hawala is based on trust and on the performance of a huge network of
money brokers.
H0:Hawala system doesn’t encounter challenges such as government issues,
legal, security and Money laundering issues.
H1:Hawala system does encounter challenges such as government issues,
legal, security and Money laundering issues.

2.4 RESEARCH METHODOLOGY:

a) UNIVERSE OF RESEARCH:
Population is a whole set of universe. It refers to collection of human
beings and group of individuals or items that share one or more
characteristics from which data can be gathered and analysed.
For this study I have taken 100 people from – Mumbai city.

b) METHOD OF SAMPLING:
Simple Random Method of Sampling is used for collection of the data
from 100 respondents and the response of them were recorded and
used.

c) SAMPLE SIZE:
For getting the proper responses 100 respondents were taken into consideration
and questions were asked to them relating to it.

d) METHODS OF DATA COLLECTION:

The study is based on secondary data.However the primary data is also collected
to fill the gap in the information.Research and analysis are subject to 2 months
study period.
 Primary data will be through regular interaction with the people.
 Secondary data collected from the previous research reports and also existing
manuals.
 e) METHODS OF PRIMARY DATA COLLECTION:
The Primary Data is collected through the way of questionnaire and Interview.
 Questionnaire where given to the 100 respondents like college
students,relatives,employees,businessmen etc and there responses were
recorded.
 Interview of the members were taken and information related to topic was
collected.

SOURCE OF DATA
Data used for the research has been collected from two sources namely primary
and secondary sources.
 Primary Data(Primary Source)
Primary data’s are collected through direct personal interview of the personnel
in the society.The primary data collection method.Also,a questionnaire was
prepared and the primary data was collected through questionnaire.
 Secondary Data(Secondary Source)
The data which are not originally collected but rather obtained from the
published or unpublished sources are known as secondary data.The data was
collected through websites and from various books, magazines, journals.

f) TOOLS OF DATA ANALYSIS:

For the purpose of analysis of data various statistical techniques are used.
a. Percentage Method
b. Bar Graphs
c. Pie Chart

2.5 IMPORTANCE OF STUDY:

1. Business people and Organizations –
This research paper is very significant to them as it will help them to have a
clear understanding of the implications of the hawala remittance system and its
role in terrorism financing. With the growing issues of improving financial
transaction all over the world, most organisations and interested business people
or parties like work colleagues and fellow graduate colleagues, are trying to find
 out the impact of the hawala system and its role in business, hence analysing
Hawala as an alternative remittance system that is very fast, convenient, and
reliable is very crucial.

2. Money Senders –
This study will educate the money senders more on the effective and efficient
use of Hawala System, its challenges and how to go about it.

3. Government –
It will enable the government to understand that hawalas are very significant
sources of revenue through taxation if they start assessing it deeply from a
neutral point of view and implement the laws of allowing the hawaladars the
right to register and to work freely just like the banks and forex.

2.6 LIMITATIONS OF THE STUDY:

The limitations of study are those characteristic of design or methodology that impacted
or influenced the interpretations of the findings from research.There were problem to
collecting of accurate secondary data.
1. Time constraints:
It is difficult to manage time for conducting research,evaluate and monitor on timely
basis.

2. Rate of response:

The rate of response is very low.Thus people do not co-operate to answer the
questionnaire.

3. Verification of facts:

Answers to the questionnaire cannot be verified with the respondents and hence
accepted as final one.

4. Smaller respondent size:

Due to time constraints,managing number of respondents was difficult.

 CHAPTER 3- REVIEW OF LITERATURE

INTRODUCTION

The literature review is supposed to meet the two objectives: to widen the knowledge
of this subject and the understanding of the main issues under debate and to
focus on the literature closely related to the research topic. The body of literature on
Hawala and its use to finance terrorism and their mechanisms is diverse and quite
often very descriptive, hence here only some and important contributions are
summarized, of course this selection is subjective, but I think most areas are
covered. This literature review can not be separated from the analyzis of the
finances of the terrorist organization, because they often work closely together.

 Cultural Financial Traditions and Universal Ethics: the Case of Hawala Dulce
RedinReyes Calderón, Ignacio Ferrero.Taking into account the global
expansion that certain traditional financial practices like hawala have
experienced in the last decades, it is undeniable that both cultural diversity and
different moral perceptions have become relevant questions in the international
financial arena. Consequently, hawala, an ancient financial system profoundly
rooted in Islamic moral traditions, offers an extraordinary setting to explore over
a real institution the theoretical debate about the potential universality of ethics.
Moreover, hawala makes us think over the relationship among legality,
formality and morality. This paper discusses the economic, social and ethical
features of hawala, in order to shed some light into the question of whether
diverse economic phenomena may be judged under Western standards or rather
it is necessary to appeal to a superior body of universal values, respectful with
the different cultures and religions. The authors show that the current —
legalistic— approach to hawala results overly partial and biased. Therefore they
conclude that it is essential to bring about a change towards a more ethically,
culturally and economically sensitive approach, which would enable hawala to
develop its full potential and become a vehicle for financial and economic
development. It is necessary to consider the “hyper-norms” and fundamental
principles inherent to humanity, which are common to both “formal” and
“informal”, “Western” and “non-Western” financial practices, when designing
a legal framework for these cultural financial traditions.
  More Than a Criminal Tool: The Hawala System’s Role As A Critical
Remittance Channel for Low-Income Pakistani Migrants in Dubai.This paper
examines how and why migrants remit through unauthorized remittance
channels (namely the hawala or hundi) and investigates the hawala's
developmental roles and effects on migrants’ socioeconomic status. Applying a
qualitative case study of 30 low-income Pakistani migrants in Dubai, we argue
that the thriving yet unauthorized status of the hawala system is a unique product
of global migration process. In contrast to the dominant literature on the nexus
between the hawala and terrorist and criminal-related financing, we assert that
the sustainability of the hawala is the result of an ongoing effort of low-income
migrants to increase their remitting power, providing money that is crucial to
their families’ socioeconomic status within the context of rapidly globalizing
forces. This study provides both important empirical and theoretical insights
into the hawala's complex relevance for low-income migrants, governments,
and international organizations in global migration context
.
 Hawala - A vestige of the past in the service of globalization.
Furthermore, the international community has also placed strong emphasis on
the hawala system's complex relationships with the informal economy,
highlighting the predominant misuse of the hawala systems by criminals and
smugglers ( Bunt, 2008). These underground economies are often inevitable
products of globalization due to complex factors like networks, personal trust,
shared ethnicity, and common backgrounds that sustain the rapid yet
unregulated evolution of the hawala systems (Bunt,2008;Ballard,
2005;Glushchenko, 2005). The international community views the thriving 2
and unregulated presence of the hawala systems not only as a constant "external
threat" to the national security of nation states, but also an urgent imperative
agenda for governments and international organizations.

 Exploring the Ethical Dimension of Hawala.The aim of this paper is to explore

the ethical dimension of hawala, an ancient informal financial practice rooted
in Islamic moral traditions. Widely used in countries with an Islamic
background and their diasporas, hawala is considered an important vehicle for
 the financial and economic development of some less developed countries.
Nevertheless, in Western countries, hawala is regarded with suspicion due its
controversial ethical nature. Unlike other Islamic financial institutions, the
controversial questions are not the legitimacy of profit sources or the interest
charged, but rather the lack of transparency that surrounds hawala transactions.
Yet, the literature on hawala has neglected its ethical perspective. Our study
delves into this dimension with a critical approach, using the Triple Font
Theory, grounded on virtue ethics. We conclude that if hawala transactions are
carried out with honesty, and fairness, this practice deserves a positive ethical
appraisal. However, it is necessary to implement efficient regulatory measures
to guarantee that the system is not abused by money launders and criminals. In
practice, it becomes imperative to bring over a change in the regulatory
approach to hawala toward a more ethically, culturally, and economically
sensitive strategy. Thus, future research should focus on how “hyper-norms” or
fundamental principles inherent to humanity, which are common to both
“formal” and “informal,” “Western” and “non-Western” financial practices,
could run the new AML/CTF regulation agenda.

 According to Fischer (2002,p.17) the annual turnover of the Hawala

banking system in the early 70ties was already 60 billion USD in the
Arabic countries; e.g. six million foreign labourers in Saudi Arabia, who
are sending home 40 billion USD a year home, make substantial use of
the “ethnic” Hawala system. Fletcher and Baldrin (2002, p. 119) estimate
with regard to Pakistan that 2.5 billion USD inherit the country in remittances
via the Hawala system in 2001; the amount of money in India ́s Hindi
system was 50 billion USD in 1971. Despite the growing competition by
formal remittance services, the use of Hawala banking has probably not
declined. According to a recent estimate by the IMF, (especially Asian)
migrants transfer 100 billion dollars per annum to family members and
relations in their country of origin through the official financial system. In
addition, a similar amount of money is transferred in the form of goods, cash,
and through underground bankers (IMF 2005).
 According to Bunt (2007), there are at least two different perspectives on
Hawala banking. From the first point of view, Hawala banking is regarded as a
centuries-old institution which has not yet outlived its usefulness. Low-
income workers and migrant workers in particular Page 15 of 20 supposedly
put more trust in Hawala bankers than in formal banks. This
viewpoint emphasizes the problem associated with subjecting Hawala
banking to the same rules as formal banks. Regulation either through
registration or licensing is seen as ineffective because it will simply push the
system further into the underground, further complicating the already
problematic task of controlling Hawala transactions (Razavy (2005), p.292;
Perkel (2004), p.210-211)). Hence, Hawala banking might be the closest
thing of a free market banking, without government regulation and it
functioned well for centuries. One should clearly emphasize these advantages
of Hawala banking when criticizing it. From the opposite point of view, Bunt
(2007) argues that Hawala banking is described as ‘underground banking’,
a system that flies under the radar of modern supervision of financial
transactions. Underground banking is considered a threat to the effectiveness of
anti-money laundering measures and the fight against terrorist financing. To
prevent underground bankers from becoming a safe haven for criminals and
terrorists, they should be subject to the standard regulations regarding record
keeping, disclosure of unusual transactions and identification of clients.

 Éva Ladányi, Ph.D.,1 István Kobolka, Ph.D.2 The authors in their article review
a well-known money transfer system in Mid-dle-East and Asia.There is an
alternative remittance channel that exists outside of traditional banking
systems.The main focus of the article is why and how does the systems
work in practice? Hawala or hundi is a method of transferring money without
any real movement. Transactions between hawaladars or hawala operators are
done without promissory notes because the system is heavily based on
trust. One definition from Interpol is that Hawala is “money transfer
without money movement.” Hawala originated in Asia during ancient times,
and is used in many regions in the world today, especially in the Islamic
community.
 Khurram Sharif, Habib Mahama and Nauman Farooq -Prior research has
focused on the transactional aspects of the Hawala Networks (i.e. Invisible
Funds Transfer Networks). However, little is known about the structure
of this networked "organisation" especially about its governance and
management control systems. Clan-based Organisations and Actor Network
Theories were utilised to provide the theoretical base on which a research
framework, was built. In total, 20 in depth interviews were conducted with
Hawaldars (Hawala service providers) using a semi-structured
questionnaire. As the study focused on the Gulf Cooperation Council
region, data were collected from Qatar, UAE and Kuwait. The data
indicated that there were no formal governance and management control
systems in place for managing Hawala Networks (HNets); there were no explicit
formal processes and mechanisms for evaluating performance and there
was no formal performance measurement and tracking system in place to
provide the information about network functionality. Results also showed that
trust acted as the most important control mechanism impacting the efficiency,
effectiveness and the relatively lower transaction costs associated with HNets
operations.

 Clan Based Organisations Ouchi (1980, p. 140) defines an organisation as, "any
stable pattern of transactions between individuals or aggregations of
individuals". Ouchi (1980) used the transaction cost approach to look at
intermediation forms and identified three basic mechanisms of mediation or
control; markets, bureaucracies and clans. Ouchi suggested that the
normative requirements for clan-based organizations in the 20th century were
reciprocity, legitimate authority and common values and beliefs. Ouchi
posited that the norm of reciprocity underlies all exchange mechanisms and has
been found to be universal among all societies across time (Gouldner, 1961).
In its absence the cost of the exchange, involving contractual terms,
auditing and performance evaluation tasks, would make the transaction
prohibitively expensive and not worthwhile. Legitimate authority can take
the rational/legal form in the case of a bureaucracy while it can take the
traditional form in clan based organisations. Common values and beliefs
in the clan form eliminate the possibility of opportunistic behaviour among
 clan members as cheating another member would be like cheating oneself. A
value system that is mutually acceptable to the Hawala service provider and the
service user is fundamental in sustaining the system. HNets are largely
driven by the code of honor, reputation (of the Hawaldar), trust and
personal relationships connecting HNet members and Hawala service users
(White, 2003). According to Tilly (2005), a combination of honor,
reputation and personal relationships results in 'noble value'. Within the
HNets clan, noble value creates a belief of trust and individuals (both service
providers and service users) engage in transactions with reduced fear of
opportunism (Tilly, 2005).

 Actor Network Theory (ANT) has been used to look at a variety of

accounting phenomenon involving complex relationships (Briers & Chua,
2001; Chua, 1995; Gendron& Barrett, 2004; Miller, 1991; Preston, Cooper, &
Coombs, 1992; Robson, 1992) such as "interfirm alliances" as well as to study
the social implications of relationships (Callon, Law, & Rip, 1986). Recently,
ANT has been applied to the study of how economic markets are organised
(Caliskan & Callon, 2009; Callon, 1991; 1998). Callon (1991; 1998) argued
that economic markets are networks and to understand how market
transactions are governed and stabilised; we need to examine the "processes of
economizing" that takes place within the economic markets. The processes of
economizing refers to "the processes that constitute the behaviours,
organizations, institutions and, more generally, the objects in a particular
society which are tentatively and often controversially qualified, by scholars as
'economic'" (Caliskan & Callon 2009, p. 370). Given that HNets are engaged
in transnational economic activities, the proposed research draws on the ANT
to investigate the "processes of economising" that leads to their effectiveness
in transfering funds around the globe.

 Rapin, A. (2011). What is terrorism? Behavioral Sciences of Terrorism &

Political Aggression, Terrorism has been an issue for several decades and there
has been plenty of debate over the very contours of the phenomenon. Rapin
 tries to define terrorism, but terrorism could mean different things to different
people. Even with terrorism being as popular in our modern day, terrorism has
been a topic of debate for several years and even today, people still have
different opinions on what is terrorism.Knowing an exact definition of
terrorism, or at least something that we could agree on with, it’s important for
my research, the focus of this research paper is to show how terrorists and
criminal networks are changing their methods of money laundering to finance
their terrorist acts. But I also need to define what is considered a terrorist act,
to be able to understand how their goals aligns with funding their acts.An
example is given with Saint Augustine’s comment about time: “if no one asks
me, I know what it is. If I wish to explain it to him who asks me, I do not know.”
I could say the same about terrorism. I know what it means, but it is hard to
explain what it means to someone else. The word ‘terrorism’ instantaneously
brings ideas of murderous attacks and violence. The more violence involved,
the more ‘terrorist’ they seem to us. By understanding what is considered
terrorism, it’s easier to understand how money plays a role in terrorist attacks,
as well as, how they are financed.

 Sandhu, Harjit S. Jost, Patrick M (2000). Hawala: The Hawala alternative

remittance system and its role in money laundering. Interpol General
Secretariat, Lyon.Some scholars have identified what is hawala and how is the
hawala system used to launder money.The hawala alternative remittance
system is a really ancient system that was originally created in South Asia; In
our modern day, it is used around the world to conduct legitimate remittances.
The scholar stated that the hawala can, is being used as a method to money
laundering. The author main focus is to discuss the way in which this method
is used to facilitate money laundering.The way a hawala transaction works is
by having a minimum of four individuals doing a transaction or wanting to
exchange money. I will refer to the broker, which is a person who buys and
sells goods or assets for others, as a hawaladar, the name used for the broker in
the hawala system. An example will be needed to understand how the system
of underground banking works. Let’s say we have a person in Spain wanting
to send $15,000 to his mother in New York. The mother in New York, doesn’t
have a bank account, or does not want the government or financial institution
 to know that she is receiving money from his son. The son pays $15,000 to a
hawaladar in Spain and is given a code to relay to his mother. Hawaladar in
Spain instructs hawaladar in New York to pay $15,000 upon receipt of the code.
Once the mother gives the code to the hawaladar in New York, she will receive
the $15,000 there, but the money has not physically left New York, which is
why the hawala system is called underground banking. The son in Spain has
successfully transferred money without actually moving the money from the
original country.From a regulatory standpoint in some U.S jurisdictions, the
use of hawala services is illegal. However, hawaladars advertise their services
in several ways, from newspapers to the internet and enforcing the regulations
is difficult with respect to hawala. The author states that the way hawaladars
advertise their services is in foreign languages, and wording that does not
directly suggest remittance services.The Hawala system is used in several cases
of terrorism and narcotics trafficking. One of the cases given by the author is,
“the investigation into the assassination of an important Indian politician
revealed that the assassins were, in fact, terrorist. These terrorists used hawala
to transfer the proceeds of the sale of narcotics to arms dealers for the purchase
of military hardware.

 Financial Action Task Force, (2008). Emerging Terrorist Financing Risks.This

is a research study done by an inter-governmental body into terrorist financing
where the Financial Action Task Force explain how the terrorist organizations
use funds to manage their terrorist acts. FATF states that, “Understanding how
a terrorist organization manages its assets is critical to starving the organization
of funds and disrupting their activities in the long term.” The concept of
following the money is relevant in this scenario in order to understand how
terrorist organization are funding their activity as well as, where are they
getting their funds from By being able to prevent criminal networks from
cleaning their dirty money, and forcing the organizations to starve from their
funds, the terrorist act will decrease. That is why this research paper will be
useful on developing my thesis because by understanding how terrorist
organizations use the funds, we can determine and give example how the
financial crimes are changing. FATF decided to explore the threats and
 vulnerabilities posed by foreign terrorist fighters, fundraising through social
media, new payment products and services, and the exploitation of natural
resources. This research paper will further help me demonstrating the terrorist
financing risks that are occurring in our modern-day society and explore the
different methods of how the criminal networks and terrorist groups are
financing their acts.

 La Huis, Troy M. Mckeown, Thomas E., CFE (2017). Virtual Currency and
Risks for Terrorist Financing. Michigan: Crowe Horwath LLP.Virtual currency
is a recent phenomenon that it’s integrating in our society. The purpose of
virtual currency, especially the most well-known cryptocurrency-Bitcoin, is to
bring a decentralize financial system that every single person could have access
to, as well as, using the funds to do the regular activities that we currently use
the bank for, which is our centralized financial system.Employees of Crowe
Horwath, did several researches where, an overview of virtual currency is
given. The authors are able to show how virtual currency are being used in the
regular market with exchange of products and goods. They begin by stating
that there are a good amount of virtual currencies circulating in the market
today that they certainly fall into convertible/non-convertible and
centralized/decentralized virtual categories. Centralized virtual currency refers
to virtual currency that is administered by a central authority. Noncentralized
virtual currency is not administered by a central authority and uses a peer-to-
peer sharing network. In the past few years, virtual currencies such as bitcoin
have garnered media attention and have become increasingly popular for both
legitimate and atrocious activities. As they increase in popularity, they gain
traction in the general market, terrorist financing risks will also grow, forcing
law enforcement, governments and financial industries to develop methods to
combat the terrorist financing risks associated with virtual currencies. The
research findings bring several examples of how terrorist networks are using
virtual currencies to continue their terrorist acts.

 Financial Action Task Force, (2014). Virtual Currencies: Key Definitions and
Potential Anti-Money Laundering/Counter Terrorist Financing
 Risks.Furthermore, The Financial Action Task Force (FATF), is an inter-
governmental body established in 1989 by the Ministers of its member
Jurisdictions, gave a general definition to virtual currencies, and the potential
that they currently have for money laundering. FATF also established the
methods and the step that our society, and financial sectors have to take to
combat money laundering and terrorist financing.The objective of the FATF
are to set standards and promote effective implementation of legal, regulatory,
and operational measures for combating the topics of money laundering and
terrorist financing. That is the reason why this is a perfect publication to use
towards my thesis, that will further help in creating a universal definition for
virtual currencies and how they are currently used for money laundering as well
as, terroristfinancing. As stated on their website, The FATF conducted research
into the characteristics of virtual currencies to make a preliminary assessment
of the ML/TF risk associated with this payment method. But not only they
conducted research into virtual currencies, FATF also states the stapes to solve
the issue. “An important step in assessing the risks and developing an
appropriate response, is to have a clear understanding of the various types of
virtual currencies and how they are controlled and used”. This report presents
a logical framework of key definitions, which could form the basis for further
policy development.

 Brisson, M. L. (2013). Identifying and monitoring of virtual currency users in

banking institutions. More research is currently being done on virtual currency
and how is becoming a newer payment option for individuals or businesses to
use without the need of a financial institution which most of us are currently
using.This dissertation main focus is on virtual currency being risky and
becoming a new way of criminals financing. Brisson summarizes virtual
currency as a newer payment option for individuals or businesses to utilize for
peer-to-peer transactions without the use of formal banking institutions. He is
referring to this action, as something that we’ve seen before, which is
underground banking, a familiar term when it comes to the hawala system.
Brisson states that virtual currency has been linked to money laundering, fraud,
and terrorist financing. Criminals networking are taking advantage of the new
technology to utilize the new money for illicit activities. Brisson investigated
 virtual currency, crimes, and problems associated with the misuses of the
money. This dissertation will also help my thesis with the investigations on
virtual currencies done by the author. The dissertation is also giving the reader
recommendations in order to protect bank business, and financial institutions
and their customers on how to avoid the risk related to virtual currencies.

 Onderzoeksnotities 1999/4This report presents the findings of a preliminary

study into what is commonly called "underground banking systems". The study
was funded by the Research and Documentation Centre of the Dutch Ministry
of Justice, which acted on the advice of the Advisory Committee for Research
on Organized Crime. As the conventional banking industry is increasingly
being regulated, many fear that criminal organizations may turn to alternatives,
such as "underground banking systems", in order to avoid detection. The main
goals of the study were to provide a policy-useful analysis of the way in which
such systems operate, the extent to which criminals may resort to their services,
and the policies adopted by different governments. This relatively short study
did not start with many ambitions of generating new and original data. Rather,
the objective was to take stock of what is known about the issue, to separate
myths from reality about the problem, and to offer a first assessment of the risks
posed by "underground banking systems". This should give a good indication
as to whether urgent measures need to be taken or more research is necessary
before considering any policy or legislative adjustments. The methods for this
project consisted in a combination of archival, legal and historical analysis with
unstructured interviews with regulators, law enforcement agents and academic
or other experts from the USA, Canada, Britain, France, Australia, Hong Kong,
Germany, South Africa, India and Russia. First of all, an attempt is made at
conceptual clarification. There are many terms to describe the practices in
question e.g., hawala, hundi, fei ch'ien, depending on the ethnic group involved.
These practices do not involve traditional banking transactions or services, like
deposit taking or lending. Instead, these are essentially mechanisms serving the
transfer of value from place to place. Moreover, they are not at all
"underground" in many parts of the world. In many cases, it is, therefore,
suggested that the term "informal value transfer systems" (IVTS) is more
appropriate for our purposes than "underground banking". IVTS is defined as
any system or network of people facilitating, on a full-time or part-time basis,
the transfer of value domestically or internationally outside the conventional,
regulated financial institutional systems. Most contemporary forms of IVTS
have evolved out of two main variations, the South Asian and Chinese methods
of value transfer, both of which originated centuries ago. Following a
presentation of the historical roots and evolution of these two prototypes, a
more contemporary Colombian modus operandi is outlined, which emerged in
the context of the black market for pesos. The mechanics of each of these IVTS
are briefly sketched, while six contemporary variations are both described and
graphically represented. The most basic method is when a client wishes to send
money to a relative in another country. He gives it to a local IVTS agent, who
calls or faxes instructions for payment to his counterpart in the relative's city.
His counterpart makes the payment in a matter of hours and balances his
account with a transfer in the opposite direction. When the transfers are of
unequal value, from time to time the IVTS agents may wire transfer the
difference. More complicated ways of balancing the books involve invoice
manipulation and trade in consumer items, gold or other commodities.
Unfortunately, a lot of the conventional wisdom was found to be misleading or
false. Contrary to widespread beliefs that IVTS sprung from political turmoil
or that they began as ways of violating currency controls and other laws, their
origin was found to be rather benign. They served people well before the
development of modern banking institutions, they facilitated legitimate trade
or other transactions, while protecting against robbery and theft in highways.
They were so widely accepted that they became integral elements of the culture
in Asian countries and communities of immigrants. Other errors in
conventional wisdom include the assumption that IVTS are usually surrounded
by violence and corruption, and that high technology may be used in the near
future for more secrecy and confidentiality. The evidence suggests that typical
IVTS operations are smooth, consensual and require onlylow technology, such
as a telephone or fax machine.
 CHAPTER 4- ANALYSIS AND INTERPRETATION OF
DATA

PROFILE OF RESPONDENTS
1. Gender
Table 4.1 Gender
Male 37%
Female 63%

Diagram 4.1 Gender

GENDER
Male Female

37%

63%

INTERPRETATION:
 According to survey, out of 100 responses there are 37 males and 63
females.
 2. Age
Table 4.2 Age
18 to 30 31 to 45 46 to 60 60 & above
54% 27% 18% 1%

Diagram 4.2 Age

AGE
18 to 30 31 to 45 46 to 60 60 & above

1%

18%

54%
27%

INTERPRETATION:
 According to the survey,the majority of respondents fall into age group
of 18 to 30.
 There are 27% of respondents falls into age group of 31 to 45 and 18%
of respondents falls into age group of 46 to 60.
 The least amount of respondents falls into age group of 60 & above
which is only 1%.
 3. Occupation
Table 4.3 Occupation
Student 43%
Home-maker 13%
Service 25%
Businessmen 9%
Professional 9%
Retired 1%

Diagram 4.3 Occupation

OCCUPATION
Student Home-Maker Service Businessmen Professional Retired

1%

9%

9%

43%

25%

13%

INTERPRETATION:
 Above Pie Chart shows that, majority of respondents are Students
which is 43%.
 25% belongs to Service sector and 13% are Home-Makers.
 9% and 9% of respondents belongs to Business and Professional
Sector respectively.
 The least number of respondents are Retired which is 1% of the total
100.
 4. Annual Income
Table 4.4 Annual Income
Nil 44%
Upto 2 lakhs 17%
2 lakhs to 5 lakhs 22%
5 lakhs to 10 lakhs 15%
10 lakhs & above 2%

Diagram 4.4 Annual Income

ANNUAL INCOME
Nil Upto 2lakhs 2lakhs to 5lakhs 5lakhs to 10lakhs 10lakhs & above

2%

15%

44%

22%

17%

INTERPRETATION:
 According to the survey, the annual income of majority of respondents
is Nil which is 44% of the total 100 respondents.
 22% of respondents are having annual income of 2lakhs to 5lakhs.
 17% of respondents are having annual income Upto 2lakhs. Whereas,
15% are having annual income of about 5lakhs to 10lakhs.
 The least number of respondents are falling under the category of
10lakhs and above which is 2%.
 5. Are you aware about Hawala?
Table 4.5 Awareness about hawala
Yes 49%
No 51%

Diagram 4.5 Awareness about hawala

Yes No

49%
51%

INTERPRETATION:
 As per above data analysis, 49% of the respondents said YES that they
are aware about Hawala.
 Whereas, 51% of respondents said NO that they are not aware of
Hawala.
 6. Do you think Hawala is legal in India?
Table 4.6 Awareness about hawala legal in India
Yes 54%
No 34%
Maybe 12%

Diagram 4.6 Awareness about hawala legal in India

Yes No Maybe

12%

34% 54%

INTERPRETATION:
 The majority of respondents which is 54% think that Hawala is legal
in India.They responded YES.
 34% of respondents did not think that Hawala is legal in India.They
responded NO.
 12% of respondents responded that MAY BE they think Hawala is
legal in India.
 7. What do you think Hawala money transfer is about?

Table 4.7 Respondents thinking about Hawala money transfer

Formal 66%
Informal 34%

Diagram 4.7 Respondents thinking about Hawala money

transfer

Formal Informal

34%

66%

INTERPRETATION:
 The majority of respondents which is 66% think that Hawala money
transfer is INFORMAL.
 Whereas, 34% of respondents think that Hawala money transfer is
FORMAL.
 8. Do you feel Hawala transactions are risky?

Table 4.8 Respondents feel Hawala transactions are risky

Strongly Disagree 3%
Disagree 16%
Neutral 42%
Agree 32%
Strongly Agree 7%

Diagram 4.8 Respondents feel Hawala transactions are risky

Strongly Disagree Disagree Neutral Agree Strongly Agree

3%
7%
16%

32%

42%

INTERPRETATION:
 Total sample size is 100.Here analysis shows that among 32% people
Agreed with this statement.They think that Hawala transactions are
risky.7% Strongly Agreed with this statement.
 Also, majority of respondents were Neutral which is 42%.
 And the rest of the respondents Disagreed which is 16% and Strongly
Disagreed which is 3%.
 9. Do Hawala remittance system facilitates business operations?

Table 4.9 Facilitation of business operations by Hawala remittance

systems
Strongly Disagree 5%
Disagree 15%
Neutral 45%
Agree 32%
Strongly Agree 3%

Diagram 4.9 Facilitation of business operations by Hawala remittance

systems

Strongly Disagree Disagree Neutral Agree Strongly Agree

3%
5%

15%

32%

45%

INTERPRETATION:
 Total sample size is 100.Here analysis shows that among 32% people
Agreed with this statement.They think that Hawala remittance system
facilitates business operations.3% Strongly Agreed with this statement.
 Also, majority of respondents were Neutral which is 45%.
 And the rest of the respondents Disagreed which is 16% and Strongly
Disagreed which is 5%.

10. Do Hawala system is used as a banking system?

 Table 4.10 Usage of Hawala as a banking system
Strongly Disagree 8%
Disagree 18%
Neutral 48%
Agree 25%
Strongly Agree 1%

Diagram 4.10 Usage of Hawala as a banking system

Strongly Disagree Disagree Neutral Agree Strongly Agree

1%

8%

25%
18%

48%

INTERPRETATION:
 Total sample size is 100.Here analysis shows that among 25%
people Agreed with this statement.They think that Hawala
system is used as a banking system.1% Strongly Agreed with
this statement.
 Also, majority of respondents were Neutral which is 48%.
 And the rest of the respondents Disagreed which is 18% and
Strongly Disagreed which is 8%.
11. What do you think is there any involvement of Central Bank in
exchanging currencies for Hawala transactions?

Table 4.11 Awareness of respondents about any Central Bank in

exchanging currencies for Hawala transactions
Yes 12%
No 44%
May be 44%

Diagram 4.11 Awareness of respondents about any Central Bank

in exchanging currencies for Hawala transactions

Yes No Maybe

12%

44%

44%

INTERPRETATION:
 The majority of respondents which is 44% think that there is
not any involvement of Central Bank in exchanging
currencies for Hawala transactions.They responded NO.
 12% of respondents think that there is any involvement of
Central Bank in exchanging currencies for Hawala
transactions.They responded YES.
 44% of respondents responded that MAY BE there is any
involvement of Central Bank in exchanging currencies for
Hawala transactions.
 12. Is Hawala system cheaper as compared to normal bank transactions?

Table 4.12 Comparison between hawala system and normal bank

transaction
Strongly Disagree 5%
Disagree 20%
Neutral 39%
Agree 29%
Strongly Agree 7%

Diagram 4.12 Comparison between hawala system and normal

bank transaction

Strongly Disagree Disagree Neutral Agree Strongly Agree

7% 5%

20%

29%

39%

INTERPRETATION:
 Total sample size is 100.Here analysis shows that among 29% people
Agreed with this statement.They think that Hawala system is cheaper
as compared to normal bank transactions.7% Strongly Agreed with this
statement.
 Also, majority of respondents were Neutral which is 39%.
 And the rest of the respondents Disagreed which is 20% and Strongly
Disagreed which is 5%.
 13. Do you think Hawala has been affected post-demonetization?

Table 4.13 Awareness about Hawala being affected post-

demonetization
Yes 18%
No 32%
Maybe 50%

Diagram 4.13 Awareness about Hawala being affected post-

demonetization
Yes No May be

18%

50%

32%

INTERPRETATION:
 The majority of respondents which is 50% responded MAY BE they
think that Hawala has been affected post-demonetization.
 32% of respondents did not think that Hawala has been affected post-
demonetization.They responded NO.
 18% of respondents think that Hawala has been affected post-
demonetization.They responded YES.
 14. Do Hawala remittance system face security issues like robberies and
theft from outsiders?

Table 4.14 Awareness about Hawala remittance system face

security issues
Strongly Disagree 2%
Disagree 20%
Neutral 43%
Agree 34%
Strongly Agree 1%

Diagram 4.14 Awareness about Hawala remittance system face

security issues

Strongly Disagree Disagree Neutral Agree Strongly Agree

1% 2%

20%

34%

43%

INTERPRETATION:
 Total sample size is 100.Here analysis shows that among 34% people
Agreed with this statement.They think that Hawala remittance system
face security issues like robberies and theft from outsiders.1% Strongly
Agreed with this statement.
 Also, majority of respondents were Neutral which is 43%.
 And the rest of the respondents Disagreed which is 20% and Strongly
Disagreed which is 2%.
 15. Do you use Hawala system because it is faster in carrying out financial
transaction?
Table 4.15 Usage of hawala system because it is faster in carrying
out of financial transaction
Strongly Disagree 8%
Disagree 21%
Neutral 45%
Agree 24%
Strongly Agree 2%

Diagram 4.15 Usage of hawala system because it is faster in

carrying out of financial transaction

Strongly Disagree Disagree Neutral Agree Strongly Agree

2%

8%

24%
21%

45%

INTERPRETATION:
 Total sample size is 100.Here analysis shows that among 24% people
Agreed with this statement.They use Hawala system because it is faster in
carrying out of financial transactions.2% Strongly Agreed with this
statement.
 Also, majority of respondents were Neutral which is 45%.
 And the rest of the respondents Disagreed which is 21% and Strongly
Disagreed which is 8%.
16. Do you think Hawala facilitates terrorism funding?

Table 4.16 Awareness about Hawala facilitating terrorism

funding
Yes 26%
No 14%
May be 60%

Diagram 4.16 Awareness about Hawala facilitating terrorism

funding

Yes No May be

26%

60%
14%

INTERPRETATION:
 The majority of respondents which is 60% responded MAY
BE they think that Hawala facilitates terrorism funding.
 26% of respondents think that Hawala facilitates terrorism
funding.They responded YES.
 14% of respondents did not think that Hawala facilitates
terrorism funding. They responded NO.
 CHAPTER 5-FINDINGS AND CONCLUSION

Hawala system is an informal banking arrangement that allow the transfer offunds both
domestically and internationally without using formal financial institutions.As a cheap,
fast, and reliable money transfer system, they are primarily used by itinerant workers
overseas sending remittance to support their families in their home countries.

Although it is diffcult to quantify accurately the volume of funds transferred every year
to the developing world through such channels, remittances are very important sources
of income for many impoverished households and may play an important role in
promoting growth and development.

Like any other remittance system, hawala can and does, play a role in money
laundering. As they are anonymous and require minimal documentation, they can be
easily misused by criminal organisations, including terrorist groups to conceal the
proceeds of criminal activities or corrupt officials to launder the proceeds of corruption.

Hawala transfers provide a cost effective,speedy,reliable, and trustworthy method for

remittances. The hawala system has survived because of its demonstrated flexibility ina
banking market that is both competitive and efficient. The mechanics behind a typical
hawala transfer, consisting of transactions across international lines involving multiple
currencies and settlement procedures, do not differ from other remittance systems, the
only limitation being hawala's existence in the informal form. Having legitimate
purposes, such as worker remittances, humanitarian relief and personal investment
expenditures, hawala plays an important role in many nations.However, like any other
financial system, hawala's susceptibility to abuse for illegitimate purposes, like
smuggling, money laundering, and terrorist financing has drawn serious criticism from
the international community.

Hawala is an existing parallel illegal exchange market. Hawala mode is used by

exchanging currencies without the involvement of the central bank. Individuals who
require a higher exchange rate, do not have access to bank accounts, receiving
kickbacks (illegal) use Hawala transactions. FEMA act only allows exchange of foreign
currencies by authorized dealers and so Hawala transactions are illegal within the
FEMA Act. It imposes penalties on people involving in Hawala transactions. Hawala
supports the parallel black money market which hampers the growth in the country.
There have been many cases in India involving Hawala transactions. However, in spite
of the Government imposing measures to abolish the Hawala transactions, it is still
existing with huge amounts involved.Some of the challenges faced by Hawala were
government issues, legal issues, security issues and finally money laundering..

Finally, one of the most important movement is trust. Hawala dealers are almost always
honest in their dealings with clients and fellow hawaladars. Breaches of confidenceare
very rare. It can be note that one of the most important meanings attached to this word
hawala is “trust”.Everybody knows that Hawala hurts the national economies of
developing countries desperate for foreign exchange deposits, but every individual in
the chain has the incentive of earning a commission.

Even though it is certainly possible for terrorists and other criminals to move vast
amounts of money into the via hawala with little or no trace,some of this money is
useless unless it can be converted into an acceptable form. This necessitates a
relationship between banks and hawala.

India is facing multiple challenges in the management of its internal security.There is

an increase in the number of insurgent groups and terrorist activities, and an
intensification of cross-border terrorism in different parts of the country. The threat of
money laundering like Hawala, having a close connection with organizedcrime, hits not
only at the root of a country's financial structure but also kills itssocial structure by
financing anti-social activities. The western world has woken upto the fact that
terrorism can best be attacked by hitting at its roots i.e. by cutting off its means of
finance.At the global level, the United Nations has taken steps through the Convention
for the suppression of financing of Terrorism.

Correspondingly, one of the many objectives of FEMA is also to promote the orderly
development and maintenance of foreign exchange market in India. The recent
introduction of the Prevention of MoneyLaundering Act, 2002 in the Indian Statute
books has given another instrument tocounter the economic roots of terrorism. Further,
the RBI has issued guidelines on KYC and AML standards.However, despite the Indian
Government's most restrictive legal provisions, Hawala remains a "routine transaction,"
as people continue to transfer funds out of India at their "sweet will." Indeed, the Indian
regulation of Hawala is a typical example where even the most severe licensing
provisions cannot ensure compliance. 9ne can say that decades of corruption have bred
more corruption,destabilizing efforts to reign in Hawala transactions.
 SUGGESTIONS & RECOMMENDATIONS

Based on the detailed research I have carried out I now make the following
recommendations:
1. India must investigate and publicly announce the results from
investigating the names disclosed by Whistleblowers. However big the
bank is, we must punish the banks that engaged in cleaning the hawala
money.
2. We should develop financial intelligence on hawala funds to pressure
the ordinary workers to send their money through official banking
channels only.
3. We should develop new indicators to curb hawala transactions.
4. The adoption by governments of information standards such as those
recommended by FATF and the Society for Worldwide Interbank
Financial Telecommunication (SWIFT) network. Many more
governments need to cooperate in adopting regulations to help curb the
misuse of electronic transfer and payment mechanisms to launder illicit
funds such as hawala.
 BIBLIOGRAPHY

1) http://en.m..wikipedia.org Hawala
2) http://medium.com Hawala V/S Bitcoin:The digital trust network of the 21 st
century
3) http://www.emeraldinsight.com
4) http://www.imf.org
5) http://www.investopedia.com
6) www.fatf-gafi.org
7) http://blog.ipleaders.in/hawala-parallel-economy/
8) http://www.quora.com/how does the hawala system of transferring money
work#
9) http://www.researchgate.net/publication/23648960
10) http://en.wikipedia.org/wiki/Hawala_scandal
 ANNEXURE

QUESTIONNAIRE:-Money Wars:Hawala and its Use to Finance Terrorism.

1.Name:-

2.Gender :-

o Male
o Female

3.Age :-

o 18 to 30
o 31 to 45
o 46 to 60
o 60 & above

4.Occupation :-

o Student
o Home Maker
o Service
o Businessman
o Professional
o Retired

5.Annual Income :-

o Nil
o Upto 2 lakhs
o 2 lakhs to 5 lakhs
o 5 lakhs to 10 lakhs
o 10 lakhs & above

6.Are you aware about Hawala?

o Yes
o No
7.Do you think Hawala is legal in India?

o Yes
o No
o Maybe

8.What do you think Hawala money transfer is about?

o Formal
o Informal

9.Do you feel Hawala transactions are risky?

o Strongly Disagree
o Disagree
o Neutral
o Agree
o Strongly Agree

10.Do Hawala remittance system facilitates business operations?

o Strongly Disagree
o Disagree
o Neutral
o Agree
o Strongly Agree

11.Do Hawala system is used as a banking system?

o Strongly Disagree
o Disagree
o Neutral
o Agree
o Strongly Agree

12.What do you think is there any involvement of Central Bank in exchanging

currencies for Hawala transactions?

o Yes
 o No
o Maybe

13.Is Hawala system cheaper as compared to normal bank transactions?

o Strongly Disagree
o Disagree
o Neutral
o Agree
o Strongly Agree

14.Do you think Hawala has been affected Post- demonetization?

o Yes
o No
o Maybe

15.Do Hawala remittance system face security issues like robberies and theft from
outsiders?

o Strongly Disagree
o Disagree
o Neutral
o Agree
o Strongly Agree

16.Do you use Hawala system because it is faster in carrying out of financial
transaction?

o Strongly Disagree
o Disagree
o Neutral
o Agree
o Strongly Agree

17.Do you think Hawala facilitates terrorism funding?

o Yes
o No
o Maybe