Debunking the Presumption of Illegitimacy: Hawala, the £11 Million Trial, and Financial Inclusion

Successful Defence in £11 Million International Money Laundering Trial

Narita Bahra KC and John Carl Townsend successfully defended in a complex, international £11 million money laundering trial. The central defence advanced was the use of Hawala Banking. It was asserted that the client had no knowledge or suspicion that money laundering was taking place and that the transactions bore the appearance of genuine hawala transfers.

Understanding Hawala Money Transfer Systems

Modern financial markets are not usually associated with non-existent audit trails, minimised documentation and transactions undertaken on the basis of trust alone. In fact, just the opposite is the case as extensive contractual documentation, money laundering regulations and auditing characterise the highly regulated nature of modern financial practices.

It may come as a big surprise then that hawala, an ancient transaction used to finance trade worldwide, reflects these informal or unregulated characteristics. It is the unregulated nature of hawala (depending on the jurisdiction), however, which has led to an unfortunate presumption that the practice is primarily used to transfer or camouflage illegitimate funds.

While hawala in some jurisdictions has been susceptible to money laundering and terrorist financing, the financial practice is also a vital means of poverty alleviation and financial inclusion in those countries in which remittances are the lifeblood of the economy. Furthermore, there is no evidence that hawala is used more often for illegitimate purposes. Incidences of money laundering and criminal financing regularly surface in multinational financial institutions, despite the vast array of regulatory requirements and disclosures to which they are subject.

What is Hawala?

Hawala is an age-old financial practice that most likely originated in the Near and Middle East over a thousand years ago. It has also flourished throughout:

• East Asia (fei-ch’ien or ‘flying money’)

• South Asia (hundi)

• Afghanistan (hundi or havaladar)

• Africa (hawala)

Hawala’s varied nomenclature belies some common characteristics that typify why it remains attractive to migrant workers and other unbanked populations who wish to send home remittances and prefer to deal with trusted persons from their own ethnic or tribal community.

Why People Use Hawala

• Cost-effective: Hawala outperforms formal money transfer businesses by around 25 to 50 percent, while the global cost of sending $200 averages 7 percent.

• Fast: Funds can be remitted across the globe in hours. Banks may take up to a week.

• Trust-based: Hawaladars often belong to the same ethnic or tribal community. Breach of trust could mean economic or social exclusion.

• Avoids formal systems: Many users may fear formal ID checks due to immigration status or past trauma with public authorities.

• Access in underserved areas: In many remittance-receiving countries, formal financial institutions are either absent or hard to access.

Misconceptions and Cultural Biases

It is often assumed that hawala is prima facie unlawful. This perspective arguably reflects a narrow, Western-derived legal orientation that sees unregulated transactions as suspicious.

Even in advanced economies, legal disputes are often settled without reference to potential or actual sanctions. Many, if not most, business exchanges involve minimal or no legal planning. Hawala may be a culturally and socially determined method of commerce, not fundamentally different from conventional practices.

Categorisation by the Financial Action Taskforce

The Financial Action Taskforce (FATF), an inter-governmental body, categorises hawala into:

• Legitimate

• Hybrid

• Criminal

These categories refer to the legality of the transaction's purpose, but the mechanism remains largely the same across types. This heuristic fails to reflect that:

• Most hawala transactions are small (in the hundreds) and below reportable thresholds.

• Prosecutors may see small transactions as evasive, without considering legitimate origins.

• Larger transactions are also seen as suspicious, despite being common in formal channels.

Consolidating hawaladars may remit up to $100,000 daily via regulated financial institutions. This is often more efficient than dealing with fragmented smaller remittances.

Toward Better Regulation

Despite hawala’s benefits, its vulnerability to abuse requires regulation. This should be done in a way that:

• Promotes financial inclusion

• Encourages formalisation of the remittance market

This involves:

• Customer due diligence

• Identity verification

• Suspicious transaction reporting

• Recordkeeping

• Training

• Appointing compliance officers

• Internal controls

Further research is required to assess whether this regulatory burden is suitable for formalising informal systems or if alternative approaches would be more effective.

The Role of International Cooperation

International cooperation is essential, as hawala thrives in environments where:

• Formal institutions function poorly

• Macroeconomic conditions are unstable

• There are large gaps between official and black-market exchange rates

In such settings, hawala:

• Enables financial inclusion

• Offers the only viable alternative to costly or inaccessible banking systems

Conclusion

Hawala is likely to remain in use until the structural conditions that support it are addressed. While regulation is necessary, hawala should not be stereotyped as a criminal financing mechanism. Instead, a light-touch regulatory framework for low-value remittances should be developed to support poverty alleviation and financial empowerment for vulnerable populations.