19/04/2018 11:27 SAST | Updated 19/04/2018 14:31 SAST

What Is The Hawala System? And Why Can It Be Dangerous?

The hawala system originated in South Asia during the 8th century CE – and is still used as a means of transferring money throughout the world today. 

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The fatal shooting near the M1 Glenhove offramp in Johannesburg on Wednesday has been linked to a "hawala" money exchange network operating out of the Oriental Plaza in Fordsburg, according to reports.

A man was shot eight times on Wednesday just after 5pm, and a second person is believed to be in intensive care.

However, many are not aware of what the remittance system is, what it actually entails – and what its dangers are.

The hawala system originated in South Asia during the 8th century CE, and is still used as a means of transferring money throughout the world today.

According to Investopedia, Migrant workers who frequently send money to relatives and friends in their countries of origin find hawala beneficial. This is because it facilitates the flow of money between poor countries, where formal banking is often too expensive or difficult to access.

To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees. The system is also simple, as one only needs to find a trusted hawaladar (hawala dealer) to transfer money.

The dark side

The system can be problematic and give rise to corruption, because it operates under the radar of international financial regulation. Money launderers and terrorists take advantage of this system to transfer funds from one location to another.

Because of the anonymity of its transactions, it is possible for corrupt politicians and the wealthy trying to evade taxes to use hawala to anonymise their activities.

This has led to some countries declaring the system illegal, due to the absence of bureaucracy and verifiable, audited records.

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.

Practical example of the system

Let's say John wants to send money to his mother in Angola. He meets with a hawala dealer, who will be given the money John wants to send, including the details of the transaction — name of recipient, city, and password. The money will be passed to many other handlers, until it reaches the right destination.

Dealers keep an informal journal to record all credit and debit transactions on their accounts. Debts between hawala dealers can be settled in cash, property or services.

A hawaladar who does not keep his end of the deal in the implied contractual system of hawala will be excommunicated from the network or region.

However, if allegations that the Glenhove shooting on Wednesday was related to the hawala network are proven true, it would appear excommunication is not the only regulatory method the informal financial transfer system uses.