In India, Hawala is illegal under the Prevention of Money Laundering Act (PMLA) and Foreign Exchange Management Act (FEMA). Danish connects with his counterpart in the recipient’s country and asks him to provide Rs.10 lakh to Ahaan on one condition—The receiver states the correct password along with all the details. The Hawaladar in the receiver’s country provides Ahaan with the amount after deducting his commission. Another point that experts have often pointed out is that even the most successful Hawaladar would have to approach a financial institution at some point to store physical cash. Huge deposits of cash without any apparent reason can become a major red flag for compliance professionals.

Because money laundering aims to hide the source of cash that is generated from illegal activities, hawala is often used as a system for money laundering. The investigation of debit transactions made through various online banking channels from these accounts revealed that majority of the money was transferred to 21 sole proprietary concerns. Analysis of the statements of 21 accounts, where the amounts were transferred, revealed that hundreds of crores were credited which were further transferred to the accounts of various firms.

Exploiting Anonymity and Lack of Documentation

The Apex Court ordered the setting-up of SIT on black money in for curbing and investigating the cases of black money that are being circulated in the economy. Upon the failure of any person towards the payment of full penalty money as mentioned in section 13 within 90 days from the issue of notice for payment of the penalty, the person shall be liable for civil imprisonment as per this section. The Hawala transactions are illegal as per the below-mentioned legislation. CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax.

1. The first raid was conducted in one such group in the Naya Bazar area, they found around crores worth of fake bills and fake entities through which they used to transfer money from one country to another.
2. These factors make the hawala system less expensive, swifter, more reliable, and more convenient than the formal financial sector, as highlighted by the IMF.
3. Hawala operates outside traditional banking and financial systems, making it challenging to track and regulate.
4. The recipient, who may live in a remote area or need the cash urgently, can receive the cash quickly.

Identifying Risks and Vulnerabilities

Terrorist groups utilize hawala networks to transfer funds between different individuals and locations, often across international borders. The decentralized nature of hawala systems and the involvement of hawala brokers enable terrorists to bypass traditional banking channels, making it harder for law enforcement agencies to detect and disrupt their financial activities. Unlike traditional banking transactions, hawala transactions do not rely on formal records or identification.

FEMA Act makes hawala transaction illegal by allowing only RBI authorised persons to transact with the exchange of foreign currencies. It imposes penalties on the persons who are involved in these transactions. And probe agencies like ED, CBI are very active in recent days and it is breaking down all the hawala networks. However, with a lot of effort by the government and enforcement agencies hawala is still existing with a huge amount of transactions taking place on a daily basis.

Hawala Transaction as a branch of money laundering

Clear can also help you in getting your business registered for Goods & Services Tax Law. It was Shubham who had initiated the transaction, which was concluded only after Ahaan received the amount. Let’s use an example to better understand how the Hawala system works. Suppose Shubham needs to send Rs.10 lakh to Ahaan, who lives in a different country. He provides Danish with the money he wants to send Ahaan along with every transaction detail. Many experts think that Artificial Intelligence (AI) would greatly help people collect data for the movement of money in the country.

Improving Formal Banking Sector and Service Quality

These transactions are made through the intermediaries called hawaladars. This transaction works purely on the basis of trust that the person holds on the hawaladar. There is no promissory note present in these kinds of transactions, this is completely based on the trust and journal balances of both the hawaladars. FEMA Act considers hawala transactions as illegal by only allowing only RBI-authorised persons to transact with the exchange of foreign currencies and by imposing penalties on the persons involved in these transactions.

To effectively regulate hawala systems and combat money laundering, it is crucial to strengthen legal frameworks at both domestic and international levels. Countries should enact comprehensive legislation that criminalizes money laundering, terrorism financing, and other illicit activities hawala agents in india facilitated through hawala networks. The legislation should also establish clear regulatory requirements for hawala brokers and other intermediaries involved in informal value transfer systems.

A common use of hawala is in real estate tran-sactions in India as it allows both vendors and sellers to circumvent currency controls and taxes. An influx of low-paid migrant workers to the UAE to meet the accelerating needs of the construction and service industries has boosted the flows of cash sent through this system, which predates the modern banking system. The International Monetary Fund has pegged unrecorded remittances – which include hawala – at 50 per cent more than recorded international cash flow.