Category: Money Laundering Typologies

Hawala

Also known as: Hundi, Hewala, Hawala and other similar service providers (HOSSPs)

Simply put

Hawala is an informal way of moving money from one place to another through a network of brokers, without the funds physically travelling between locations. Instead of transferring cash directly, brokers rely on trust and later settle what they owe each other through methods such as trade, cash, or offsetting balances. It operates outside the formal banking system and is not regulated in many countries.

Formal definition

Hawala (also known as hundi or hewala) is an informal value transfer system in which service providers, commonly called hawaladars or hawala brokers, arrange for the transfer and receipt of funds or equivalent value across locations, typically without the corresponding physical movement of money. Settlement between brokers generally occurs through mechanisms such as trade, cash, or netting of positions rather than through formal interbank channels, and the system relies substantially on trust within a network of operators. In FATF terminology, hawala falls within the broader category of 'hawalas and other similar service providers' (HOSSPs). Hawala and comparable arrangements remain unregulated in many jurisdictions, though where they operate they may be subject to money or value transfer service (MVTS) obligations depending on the applicable regime; exact regulatory treatment and licensing requirements should be confirmed against the relevant national framework.

Why it matters

Hawala matters to financial crime professionals because it operates largely outside the formal banking system and remains unregulated in many jurisdictions, which limits the visibility that traditional AML controls, such as transaction monitoring, wire transfer recordkeeping, and correspondent banking oversight, can provide. Because value moves through a network of brokers who settle their obligations later through trade, cash, or netting rather than through interbank channels, the trail that investigators typically rely on may be fragmented or absent. This creates a supervisory gap that is relevant to how obliged entities assess exposure to informal value transfer risk.

At the same time, it is important to distinguish the system itself from criminal misuse of it. Hawala and comparable arrangements are used legitimately in many communities, particularly for remittances where formal financial infrastructure is limited or costly. The characteristics that make hawala efficient and trusted, reliance on personal relationships, deferred settlement, and minimal documentation, are the same features that can be exploited for money laundering or terrorist financing. The presence of a hawala arrangement is therefore not, in itself, evidence of wrongdoing, and professionals should treat it as a risk factor to be assessed rather than a conclusion to be drawn.

FATF addresses these arrangements under the broader category of 'hawalas and other similar service providers' (HOSSPs), recognizing that where such providers operate they may fall within money or value transfer service (MVTS) obligations depending on the applicable national framework. Because regulatory treatment and licensing requirements diverge significantly across jurisdictions, compliance teams should confirm the specific status of these providers against the relevant local regime rather than assuming a uniform global approach.

Who it's relevant to

AML compliance officers at obliged entities

Compliance officers need to understand hawala as an informal value transfer system that operates outside formal banking channels, so they can assess and document exposure where customers or transactions may connect to such networks. Because regulatory treatment varies, they should confirm whether relevant providers fall within MVTS obligations under the applicable national framework rather than assuming a single rule applies.

Financial intelligence analysts and investigators

Analysts and investigators encounter hawala where the deferred and network-based nature of settlement, through trade, cash, or netting, means the usual transaction trail may be fragmented or absent. Recognizing these features helps in evaluating value flows, while keeping in mind that the presence of a hawala arrangement is a risk indicator, not proof of criminality.

Regulators and supervisory bodies

Supervisors are relevant to hawala because these arrangements remain unregulated in many countries, creating potential oversight gaps. FATF's HOSSP framing informs how authorities may bring such providers within money or value transfer service requirements, though the exact scope and licensing approach depend on each jurisdiction's national regime.

Remittance and MVTS providers

Formal money or value transfer service providers may operate alongside or interact with informal hawala networks, and they should understand where such arrangements sit relative to their own regulatory obligations. This supports appropriate risk assessment without treating legitimate informal transfer activity as inherently illicit.

Inside Hawala

Informal Value Transfer System (IVTS)

Hawala is a form of informal value transfer system that enables the movement of value between parties, often across borders, without the physical or electronic movement of funds through the formal banking system. It is one of several IVTS models recognized in AML literature and by bodies such as the FATF.

Hawaladars (Brokers)

The operators or brokers who facilitate transfers, typically relying on a network of trusted counterparts. A customer pays value to one hawaladar, who instructs a corresponding hawaladar in another location to pay the recipient, generally on the basis of trust and ongoing relationships rather than formal contracts.

Settlement Mechanism

Because value is credited to a beneficiary before any funds move between hawaladars, obligations between brokers accumulate and are settled later. Settlement may occur through reciprocal transfers, netting of balances, trade-based arrangements, or other means. The absence of contemporaneous fund movement is a defining operational feature.

Regulatory Status

In many jurisdictions, hawala and similar money or value transfer services (MVTS) are subject to registration or licensing and to AML/CFT obligations. Under the FATF Recommendations, MVTS providers are generally expected to be licensed or registered and supervised; specific requirements are set by national law, so status and obligations vary by jurisdiction. Operating outside applicable registration requirements may itself be an offence in some regimes.

Legitimate and Illicit Uses

Hawala is used for lawful purposes such as remittances, particularly where formal banking access is limited, as well as for its speed and lower cost. Separately, its characteristics may be exploited for money laundering or terrorist financing. The system's use does not by itself indicate criminality; money laundering and terrorist financing are distinct risks that should not be conflated.

Common questions

Answers to the questions practitioners most commonly ask about Hawala.

Is hawala illegal or inherently a money laundering method?

No. Hawala is an informal value transfer system used legitimately by many people, particularly for remittances to regions with limited access to formal banking. It is not inherently unlawful. However, because it can operate outside formal financial channels and may leave a limited transaction trail, it can be misused for money laundering or terrorist financing. Its legal status depends on jurisdiction: in many countries, hawala-type money or value transfer services are permitted only where the operator is registered or licensed as a money services business or equivalent, and operating without required registration may itself be an offence. The use of hawala alone does not establish wrongdoing.

Does money moved through hawala physically cross borders with each transaction?

Generally not. In a typical hawala arrangement, value is transferred without the corresponding funds necessarily moving physically between locations for each individual transaction. Hawaladars (operators) commonly settle obligations among themselves over time through netting, reciprocal transfers, trade-based methods, or other settlement mechanisms rather than moving cash for every transfer. This settlement characteristic is part of what can make transaction tracing more difficult, but it does not by itself indicate illicit activity.

How is hawala treated under AML frameworks for obliged entities?

Hawala and similar informal value transfer systems generally fall within the broader category of money or value transfer services (MVTS) as described in the FATF Recommendations, which call for such providers to be licensed or registered and subject to AML/CFT obligations and monitoring. How this is implemented varies by jurisdiction, for example through money services business registration under US FinCEN rules, or registration requirements under national regimes such as the UK Money Laundering Regulations. Obliged entities should confirm the specific registration, supervision, and reporting requirements that apply under their applicable regulation.

What red flags might indicate hawala-related activity in transaction monitoring?

Potential indicators discussed in typologies may include transactions inconsistent with a customer's known profile, patterns suggestive of settlement or netting between accounts, funds flows to or from higher-risk corridors without an apparent economic rationale, or activity linking multiple unrelated parties. These indicators are not exhaustive and are not proof of criminality; many may have legitimate explanations. They are best used to prompt further review or enquiry rather than to reach conclusions, and should be assessed within a risk-based framework alongside other information.

What customer due diligence considerations apply when a customer is or uses an informal value transfer operator?

Where an obliged entity has an MVTS provider as a customer, or identifies that a customer may be transmitting value on behalf of others, this may warrant closer scrutiny consistent with a risk-based approach. Measures may include establishing whether the operator is registered or licensed as required in the relevant jurisdiction, understanding the nature and purpose of the activity, and considering whether enhanced due diligence is appropriate. The specific CDD or EDD expectations depend on the applicable regime and the entity's own risk assessment.

How should suspicious activity involving suspected hawala use be reported?

If activity gives rise to knowledge or suspicion meeting the applicable reporting threshold, the obliged entity should file the relevant report through the required channel, for example a SAR to FinCEN in the US, or a suspicious activity or transaction report to the national financial intelligence unit in other jurisdictions. Terminology and thresholds differ by regime, and a report reflects a suspicion to be assessed by authorities; it does not itself establish that an offence has occurred. Firms should follow their internal escalation procedures and the requirements of the applicable regulation.

Common misconceptions

Hawala is inherently illegal.

Hawala is not inherently unlawful. In many jurisdictions it is a recognized form of money or value transfer service that may operate lawfully where it complies with applicable registration, licensing, and AML/CFT obligations. Its legal status and the conditions attached vary by jurisdiction, and exact requirements should be confirmed against the applicable regulation. Where operators fail to meet registration or supervision requirements, that non-compliance may constitute an offence in some regimes.

Hawala is used only for money laundering or terrorist financing.

Hawala is widely used for legitimate purposes, including remittances, especially where access to formal banking is limited or where speed and cost are factors. While its features can be exploited for illicit purposes, the presence of a hawala transaction is not proof of wrongdoing, and money laundering and terrorist financing remain distinct risks that should be assessed separately.

Funds physically move between countries in a hawala transfer.

A defining characteristic of hawala is that value is transferred without contemporaneous movement of funds through the banking system. Obligations between hawaladars accumulate and are settled later through netting, reciprocal transfers, trade-based arrangements, or other means, rather than through a direct transfer matching each individual transaction.

Best practices

Confirm the registration, licensing, and supervisory status of hawala and other MVTS providers against the specific requirements of the applicable jurisdiction, recognizing that obligations under the FATF Recommendations are implemented differently in national law.

Treat hawala activity as a risk factor to be assessed within a risk-based approach rather than as evidence of criminality, and apply customer due diligence and, where warranted, enhanced due diligence proportionate to the assessed risk.

Assess money laundering and terrorist financing risks separately when reviewing hawala-related activity, as these are distinct risks requiring different indicators and considerations.

Where an obliged entity encounters unregistered or unlicensed MVTS activity, document the basis for concern and follow applicable reporting procedures, filing suspicious activity or transaction reports as required by the relevant regime without treating a filing as a determination of wrongdoing.

Understand the settlement mechanics of hawala, including the delayed and often netted settlement between brokers, so that transaction monitoring is calibrated to the absence of contemporaneous fund flows rather than expecting one-to-one fund movement.

Verify specific thresholds, registration criteria, and penalty provisions against the current applicable regulation and supervisory guidance, as these vary by jurisdiction and change over time.