What is this Hawala Scandal ?

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First of all – at present, there does not exist a baseline (globally accepted) understanding, as to what an informal channel is, which is what Hawala is considered.

Hawala in its simplest form, is an informal (undocumented) money transfer (cross-border) mechanism. However, this is a very simplstic definition of it.

What maybe informal in one country, can be deemed formal in another. Since the regulatory frameworks worldwide differ and do not adhere to a single document and/or standard, this difference between informal and formal remains.

Even within the Hawala framework, you can have transitionary effect, i.e. what starts out as informal, becomes formal during the transaction process down the channel, and vice versa.

Hawala is a distributed banking network that is not regulated. It is often used either to avoid transaction fees or to avoid questions being raised about the money transferred.

When I was young, I saw a relative of mine needing to send a huge amount to Australia. That was his earned money, but the government didn’t allow him to get the Australian dollars to send to his new home. Thus, he called up a local guy who came with a gunny bag of US dollars and took his rupees instead. It was crazy, as that guy came in a rusted cycle and looked rag-tag, but still was handling an amount in his bag that could have bought a big bungalow in a major city.

How did he get US dollars? Let’s see a simple network.

Mike wants to get 1 million rupees for his new business in India. The transaction is set at 50 rupees to dollar and he gives 20,000 dollars to the NYC hawala guy Mohammad. Mohammad calls his buddy Monu in Delhi and asks him to pay 1 million rupees when Mike gets to Delhi. Ok bro, no problem he says.

In turn, Monu was given 1.20 million by Mahesh who wants to get dollars for his studies in NYC. Mahesh wants $15000 for his studies and pays 1.20 million to Monu at a rate of 80 rupees to a dollar. When Mahesh gets to NYC, he will be paid $15000 by Mohammad.

At the end of it, Mike gets 1 million rupees for his business and Mahesh gets $15000 for his studies. Mohammad got $20000 from Mike and paid $15000 to Mahesh. He has $5000 in profit. His buddy Monu got 1.2 million from Mahesh and paid 1 million to Mike. He has 200,000 rupees as profit. Everyone is happy and no questions was asked.

They pretty much works like a bank but with no proof or paper trail.

Why is this a problem? If no questions are asked you could send any amount for any purpose. Mike might want that 1 million rupees to pay a corrupt NGO for bribing an Indian government official. Mahesh might want the $15000 for taking illicit money out of the country.

source – Quora

Writer – Balaji Viswanathan

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