Hawala: a centuries-old trick for moving money

The hawala principle is another way banks get circumvented. Like the white triangle, hawala puts a trusted middleman between both sides and puts trust at the centre.

Hawala in Arabic means “transfer.” It is an informal system for moving money without moving money, so to speak, and it still functions well in the Middle East, Asia and Africa. It resembles a triangle between a sender, a recipient and a trusted middleman, the hawaladar, although in practice there is usually a hawaladar at each end.

Say a woman named Jasmine who lives in New Delhi wants to send $10,000 to her brother in Tashkent. To do so, she transfers the cash to a local hawaladar, who gives her a code. He contacts his partner in Tashkent with the amount and the code. Her brother turns up, quotes the code, and collects the money in local currency. There is no bank, no bank transfer and no money that crossed the border. Not to mention, little or no due diligence.

The hawaladars settle up later through netting. The Tashkent hawaladar has paid out $10,000 on the New Delhi hawaladar’s behalf, so the New Delhi hawaladar owes him that amount. But money flows both ways. If other customers in Tashkent send $8,000 to India during the same month, the New Delhi hawaladar pays out that sum and the Tashkent hawaladar owes him $8,000. The two debts cancel out, the siblings get their cash, and only the $2,000 difference needs settling. Netting covers all funds sent in a set period, say a week or a month. This is normally done in cash, gold, goods, invoiced trade, or a bank transfer.

The system is held together by four elements: trust instead of contracts, speed, low cost, and little formal paper trail.

How hawala works alongside crypto

Crypto did not replace hawala, but it made it faster. The logic remains the same, involving a trust network, netting, and a route around the banks. A few ways this works:

• Stablecoins: Operators hold digital cash as USDT in wallets, often on the TRON network, instead of holding cash in various locations. Settlement is instant and cheap, and, unlike old hawala, it leaves a permanent record on the blockchain.
• Over-the-counter (OTC) desks and P2P markets: In jurisdictions that restricted informal currency exchange, trading has moved to Telegram, WhatsApp and WeChat. A group admin posts rates, a trusted intermediary holds funds during the deal, and settlement happens in USDT.
• Netting across borders: Large OTC operators net their flows across countries and only settle the difference. This allows for rates that differ from those of the banks, and a profit from price gaps between jurisdictions.

The Financial Action Task Force (FATF) has warned about operators who mix traditional hawala with modern systems. A client pays for crypto on a peer-to-peer platform, and a local network pays out the matching cash outside the banking system. It can also work the other way round.

The two payments cancel each other out. Crypto settles the debt between the two ends, much as a promissory note did in old-style trade.

Criminals use this method too. In the United States, Anurag Pramod Murarka, an Indian national, was sentenced to just over 10 years in prison for laundering more than $20 million of criminal proceeds, including drug money, through a hawala network originating in India and crypto.

Regulators are watching. FATF extended its Travel Rule to crypto in 2019, and countries have since implemented it, requiring operators to pass on details of the parties to a transfer. FATF’s threshold is USD/EUR 1,000. In the UK, the rule has applied since September 2023 and covers transfers between crypto businesses, with extra information required above €1,000. The aim is to close the transparency gap between banks and crypto.

Transferring an obligation instead of money is a perfectly normal idea, and has worked for centuries. It is especially useful in areas where banks are scarce or too expensive. But in many jurisdictions unregistered or unlicensed informal exchange is illegal. Since there is no contract behind the trust networks, users carry a legal risk and can lose the entire sum.