In large segments of the world, particularly Asia, money transactions often take place outside of the sphere of the regulated banking system. The word “hawala” means trust and encompasses a method of transferring money both within and between countries. This system of money transfer was developed in India before Western banking practices were introduced.
While many people use hawala transactions to transfer money back to family members or for things like medical treatments, other individuals use this system for more nefarious purposes. The unregulated nature of hawalas makes them attractive to drug dealers seeking to launder their proceeds.
Hawala makes minimal or even no use of any sort of negotiable instrument. Money transfers take place between members of a network of hawala dealers. In the US, this system is often attractive to immigrants that don’t have the appropriate legal documents to open a bank account. Another attraction is that the exchange rates are a fraction of that of banking systems. Plus, transactions take place within one or two days as compared to the time it takes to do an international wire transfer.
Dubai is a common place for hawala transactions. The large numbers of Indian and Pakistani expatriates in the country frequently use the system to send money home. Dubai’s financial systems “allow essentially unregulated financial dealings” according to a joint report on hawala transactions by the US Department of the Treasury and INTERPOL/FOPAC.
It is extremely difficult to trace hawala transactions. Often the only record of them is a notation made on a notepad ledger. It is not uncommon for small import/export businesses in the US to transmit hawala transactions in conjunction with their legitimate business dealings—often the sale of jewelry.
The Israeli drug kingpin, Matsri, used hawala transactions to launder drug proceeds in the US, transferring money instantaneously from New York to Los Angeles and from Vancouver to Los Angeles. The fact that Matsri was under close surveillance made it easier for federal authorities to trace his financial dealings.