Phoenix Compliance Essentials #5
Today’s Focus: The Hawala System, when money crosses borders without going through a Bank
A major challenge for AML/CFT-P-C frameworks.
Originating in India and China long before modern banking systems, hawala remains a discreet and effective channel for transferring funds without leaving a trace in official channels.
How does it work?
- A person hands over a sum of money to a hawaladar (trusted intermediary).
- Another hawaladar, at the destination, hands over the equivalent amount to the recipient upon presentation of a secret code.
- The hawaladars then settle their accounts informally.
No transfers, no accounts, no documents: everything relies on trust.
While this system is sometimes used to avoid fees or compensate for a lack of banking infrastructure, it is also exploited for criminal purposes.
Why does the hawala system concern authorities?
- It is completely untraceable;
- It bypasses KYC requirements;
- It is often disguised as legitimate commercial activities.
The FATF regularly issues warnings about this parallel system, which is difficult to control and regulate and poses major risks to AML/CFT-P-C.
Concrete examples:
- Al-Qaeda, prior to September 11, 2001:
The organization mobilized 12 hawaladars to transfer a significant portion of its funds, bypassing formal banking channels, between Pakistan, the United Arab Emirates (Dubai), Germany (Hamburg), and the United States
- Times Square, 2010 – Faisal Shahzad:
The perpetrator of the attempted bombing received funds from Pakistan via a U.S.-based hawala operator. No conventional bank transactions were detected.
- Hezbollah, 2022:
Funds were raised in West Africa and then transferred to Lebanon via informal networks and money exchange companies, outside of any banking oversight.
- Polisario Front, in connection with Hezbollah, 2022:
The movement used hawala structures to channel financial flows from Europe, notably Spain, Ireland, and the United Kingdom, to its networks of influence.
