A PROJECT REPORT

ON

“TO STUDY THE HAWALA TRANSACTIONS AND ITS SOCIAL

SIGNIFICANCE AND IMPACT ON NATIONAL ECONOMY”

FOR

MASTERS OF MANAGEMENT STUDIES

[FINANCE]

SUBMITTED BY :

[VINAYKUMAR DINESH MISHRA]

ROLL NO. MS1718054

SUBMITTED TO :

PROJECT GUIDE

Prof. / Dr. VARSHA P

INSTITUTE OF MANAGEMENT & COMPUTER STUDIES

THANE (W)

Batch 2017-19
 CERTIFICATE

This is to certify that VINAYKUMAR DINESH MISHRA of MMS

(Masters of Management Studies) Semester 4, Batch (2017-2019) has
successfully completed the project on “TO STUDY THE HAWALA
TRANSACTIONS AND ITS SOCIAL SIGNIFICANCE AND IMPACT
ON NATIONAL ECONOMY” under the guidance of Prof. / Dr. VARSHA P

Date:-
Place:-

Director

Project Guide / Internal Examiner External Examiner

 DECLARATION

I, VINAYKUMAR DINESH MISHRA the student of MMS Semester 4, Batch

(2017-19) hereby declare that I have completed the project on “TO STUDY THE
HAWALA TRANSACTIONS AND ITS SOCIAL SIGNIFICANCE
AND IMPACT ON NATIONAL ECONOMY” successfully.

The information submitted is true and original to the best of my knowledge.

Date:-
Place:-

Yours faithfully,

VINAYKUMAR DINESH MISHRA

 ACKNOWLEDGEMENT

I take this opportunity to express my gratitude and extend my thanks to all those
who helped and guided me to make this endeavor successful.
I express my sincere thanks to Director Sir for giving us the facilities and resources
in bringing project successfully.
I would also like to thank our project guide (Prof. / Dr. Varsha P) who helped me
in the completion of project.
I cannot end this page without thanking my family and friends for their support and
encouragement while undertaking this project.

VINAYKUMAR DINESH MISHRA

 ABSTRACT

This project entitled" aimed at studying the HAWALA TRANSACTIONS

AND ITS IMPACT ON NATIONAL The hawala system can exist outside of
the traditional legal system it based on long term trust in mutul fund.it have
negative effect on the development of the economy as its transfer of money
with out any legal channels such as banks post offices and EC’s etc.This project
was undertaken as a part of the curriculum of BCOM course, which is
compulsory for each student to learn the ways of the informal transactions taken
place in an individual country and its social significance and impact on national
economy.
Chpt.No INDEX Pg no

1.0.Introduction
1.1. Objective of study 7-13
1 1.2. Scope of study
1.3. Research Methodology
1.4. Limitation of Study
14-28
2 Why Hawala Developed

3 Hawala Cases 29-34

3 3.1. Macro-economic effects on economy 35-41

3.2. Laundering case study

4 Data analysis and Finding 42-52

5 Conclusion and suggestions 53-56
Bibliography 57-58

Annexure 59-61
 CHAPTER-1
INTRODUCTION
 INTRODUCTION
Hawala is a method of transferring money without any money actually moving. Interpol's
definition of hawala is "money transfer without money movement."

Another definition is simply "trust." Hawala is an alternative remittance channel that exists
outside of traditional banking systems.

Transactions between hawala brokers are made without promissory notes because the system is
heavily based on trust and the balancing of hawala brokers' books. Hawala originated in South
Asia during the 8th century and is used throughout the world today, particularly in the Islamic
community, as an alternative means of conducting funds transfers.

Unlike the conventional method of transferring money across borders through bank wire
transfers, money transfer in hawala is arranged through a network of hawaladars or hawala
dealers.

Hawala dealers keep an informal journal to record all credit and debit transactions on their
accounts.

Debt 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 tagged as one
who has lost his honor and will be ex-communicated from the network or region.

Migrant workers who frequently send remittances to relatives and friends in their countries of
origin find the hawala system advantageous. Hawala facilitates the flow of money between poor
countries where formal banking is too expensive or difficult to access.
Definition of Hawala Transactions

An informal system for transferring money, especially across borders, in which

local agents disperse or collect moneyor goods on behalf of friends, relatives, or
other agents without legal protection or supervision, trusting that allremaining
obligations will be settled through future transactions.

The hawala system has existed since the 8th century between Arabic and
Muslim traders alongside the Silk Road and beyond as a protection against
theft.
It is believed to have arisen in the financing of long-distance trade around the
emerging capital trade centers in the early medieval period. In South Asia, it
appears to have developed into a fully-fledged money market instrument, which
was only gradually replaced by the instruments of the formal banking system in
the first half of the 20th century.

1.1 OBJECTIVES OF STUDY

1. PRIMARYOBJECTIVE:
It is less expensive, swifter, more reliable, more convenient, and less
bureaucratic than the formal financial sector.
Hawala type informal transfers are often faster, more reliable, reach more destinations,
sometimes benefit from a better exchange rate, can be much cheaper than transfers
through established, licensed financial institutions
To increase the business of the bank.

2. SECONDARY OBJECTIVES:

The economic attractions of hawala to the remitter usually is the speed, low cost and
reliability of the system compared to use often established financial institutions.

Hawala type transactions are also provide special advantage in situation where the
remitting country has the convertible currency and no capital control.

1.2 SCOPE OF THE STUDY

In earlier times, IFT systems were used for trade financing. They were created
because of the dangers of traveling with gold and other forms of payment on
routes beset with bandits.

Local systems were widely used in China and other parts of East Asia and
continue to be in use there. They go under various names—Fei-Ch'ien (China),
Padala (Philippines), Hundi (India), Hui Kuan (Hong Kong), and Phei Kwan
(Thailand).

The hawala (or hundi) system now enjoys widespread use but is historically
associated with South Asia and the Middle East.

At present, its primary users are members of expatriate communities who

migrated to Europe, the Persian Gulf region, and North America and send
remittances to their relatives on the Indian subcontinent, East Asia, Africa,
Eastern Europe, and elsewhere.

These emigrant workers have reinvigorated the system's role and importance.
While hawala is used for the legitimate transfer of funds, its anonymity and
minimal documentation have also made it vulnerable to abuse by individuals and
groups transferring funds to finance illegal activities.

1.3 RESEARCH METHODOLOGY

 RESEARCH DESIGN:

Economic and cultural factors explain the attractiveness of the hawala system. It is less
expensive, swifter, more reliable, more convenient, and less bureaucratic than the formal
financial sector. Hawaldars charge fees or sometimes use the exchange rate spread to generate
income.

The fees charged by hawaladars on the transfer of funds are lower than those charged by banks
and other remitting companies, thanks mainly to minimal overhead expenses and the absence of
regulatory costs to the hawaladars, who often operate other small businesses.

To encourage foreign exchange transfers through their system, hawaladars sometimes exempt
expatriates from paying fees. In contrast, they reportedly charge higher fees to those who use the
system to avoid exchange, capital, or administrative controls. These higher fees often cover all
the expenses of the hawaladars.

The system is swifter than formal financial transfer systems partly because of the lack of
bureaucracy and the simplicity of its operating mechanism; instructions are given to
correspondents by phone, facsimile, or e-mail; and funds are often delivered door to door within
24 hours by a correspondent who has quick access to villages even in remote areas.

COLLECTION OF DATA:

1: Secondary Data: It was collected from internal sources. The secondary data
was collected on the basis of organizational file, official records, news papers,
magazines, management books, preserved information in the company’s
database and website of the company.

2: Primary data: All the people from different profession were personally
visited and interviewed. They were the main source of Primary data. The
method of collection of primary data was direct personal interview through a
structured questionnaire.

SAMPLING PLAN:

Since it is not possible to study whole universe, it becomes necessary to take

sample from the universe to know about its characteristics.
 RESEARCH LIMITATIONS:

It was not possible to understand thoroughly about the different marketing

aspects of the Financial Consultant within 60 days.
As stipend, money was not given it was difficult to continue the project work.
All the work was limited in some limited areas of so the findings should not be
generalized.
The area of research was and it was too vast an area to cover within 60 days.

1.4 LIMITATIONS

Every work has its own limitation. Limitations are extent to which the process should not
exceed. Limitations of this project are:-

 The project was constrained by time limit of two months.

 Mindset of people may vary depending upon their age, gender, income etc.
 Getting appointment from the concern person was very difficult.
 People mind set about the survey was an obstacle in acquiring complete
information & positive interaction.
 Respondents were very busy in their schedule. So it was very time consuming for
them to answer all the questions properly.
 Chapter-2
About Hawala Transactions
 Why Hawala Developed

Economic and cultural factors explain the attractiveness of the hawala system. It is less
expensive, swifter, more reliable, more convenient, and less bureaucratic than the formal
financial sector. Hawaldars charge fees or sometimes use the exchange rate spread to generate
income. The fees charged by hawaladars on the transfer of funds are lower than those charged by
banks and other remitting companies, thanks mainly to minimal overhead expenses and the
absence of regulatory costs to the hawaladars, who often operate other small businesses. To
encourage foreign exchange transfers through their system, hawaladars sometimes exempt
expatriates from paying fees. In contrast, they reportedly charge higher fees to those who use the
system to avoid exchange, capital, or administrative controls. These higher fees often cover all
the expenses of the hawaladars.

The system is swifter than formal financial transfer systems partly because of the lack of
bureaucracy and the simplicity of its operating mechanism; instructions are given to
correspondents by phone, facsimile, or e-mail; and funds are often delivered door to door within
24 hours by a correspondent who has quick access to villages even in remote areas. The minimal
documentation and accounting requirements, the simple management, and the lack of
bureaucratic procedures help reduce the time needed for transfer operations.

In addition to economic factors, kinship, ethnic ties, and personal relations between hawaladars
and expatriate workers make this system convenient and easy to use. The flexible hours and
proximity of hawaladars are appreciated by expatriate communities. To accommodate their
clients, hawaladars may instruct their counterparts to deliver funds to beneficiaries before
expatriate workers make payments. Moreover, cultural considerations encourage expatriate
workers to remit funds through the hawala system, and such considerations also apply to family
members in the home country. Many expatriate communities are exclusively male, because
wives and other family members remain in the home country, where family traditions prevail.
How Does The System Work?
An initial transaction can be a remittance from a customer (CA) from country
A, or a payment arising from some prior obligation, to another customer (CB)
in country B. A hawaladar from country A (HA) receives funds in one currency
from CA and, in return, gives CA a code for authentication purposes.
He then instructs his country B correspondent (HB) to deliver an equivalent
amount in the local currency to a designated beneficiary (CB), who needs to
disclose the code to receive the funds. HA can be remunerated by charging a fee
or through an exchange rate spread. After the remittance, HA has a liability to
HB, and the settlement of their positions is made by various means, either
financial or goods and services.
Their positions can also be transferred to other intermediaries, who can assume
and consolidate the initial positions and settle at wholesale or multilateral
levels.
The settlement of the liability position of HA vis-・vis HB that was created by
the initial transaction can be done through imports of goods or "reverse
hawala." A reverse hawala transaction is often used for investment purposes or
to cover travel, medical, or education expenses from a developing country.
In a country subject to foreign exchange and capital controls, a customer (XB)
interested in transferring funds abroad for, in this case, university tuition fees,
provides local currency to HB and requests that the equivalent amount be made
available to the customer's son (XA) in another country (A). Customers are not
aware if the transaction they initiate is a hawala or a reverse hawala transaction.
HB may use HA directly if funds are needed by XB in country A or indirectly
by asking him to use another correspondent in another country, where funds are
expected to be delivered.
A reverse hawala transaction does not necessarily imply that the settlement
transaction has to involve the same hawaladars; it could involve other
hawaladars and be tied to a different transaction. Therefore, it can be simple or
complex. Furthermore, the settlement can also take place through import
transactions. For instance, HA would settle his debt by financing exports to
country B, where HB could be the importer or an intermediary.

Economic implications
Despite its informality, the hawala system has direct and indirect macroeconomic implications—
for financial activity as well as for fiscal performance. One aspect is its potential impact on the
monetary accounts of countries on either end of the hawala transaction. Because these
transactions are not reflected in official statistics, the remittance of funds from one country to
another is not recorded as an increase in the recipient country's foreign assets or in the remitting
country's liabilities, unlike funds transferred through the formal sector.

As a consequence, value changes hands, but broad money is unaltered. However, hawala
transactions may affect the composition of broad money in a recipient country. In the remittance
business, such transactions are conducted mainly in cash, even though hawaladars may use the
banking system for other purposes. Individuals from developing countries who transfer funds
abroad through the hawala system for investment or other purposes are usually members of
wealthy groups.

They supply local hawaladars with cash by making withdrawals from their bank accounts. As a
consequence, hawala-type transactions tend to increase the amount of cash in circulation.
Furthermore, IFT systems have fiscal implications for both remitting and receiving countries
because no direct or indirect tax is paid on hawala transactions. The negative impact on
government revenue applies equally to both legitimate and illegitimate activities that involve the
hawala system.

Hawala transactions cannot be reliably quantified because records are virtually inaccessible,
especially for statistical or balance of payments purposes. This holds true for both the remitting
and, especially, the receiving sides of the transactions. Hawala transactions from developing
countries are sometimes driven by capital flight motivations; they may also be driven by a desire
to circumvent exchange control regulations and the like, leaving no traceable records.

Nevertheless, the authorities of some countries have sporadically made estimates of hawala
activity based on their expatriate populations and balance of payments data. In any case, all
crude estimates should take into account both hawala and reverse hawala transactions (see box)
as well as transactions driven by illicit activities. Although it would be impossible to provide a
precise figure, the amounts involved in hawala transactions are likely to entail billions of dollars.
 Difficulties For Regulators

There is also a consensus that, in the wake of heightened international efforts to combat money
laundering and terrorist financing, more should be done to keep an eye on IFT systems to avoid
their misuse by illicit groups. Policymakers believe that the potential anonymity afforded by
these systems presents risks of money laundering and terrorist financing that need to be
addressed. Yet selecting the appropriate regulatory and supervisory response requires a realistic
and practical assessment and an understanding of the specific country environment in which the
IFT dealers operate.

Regulation of IFT systems in various jurisdictions will be a complex endeavor. The variety of
legal systems and economic circumstances across countries make a uniform approach technically
and legally impractical. In a number of countries, the hawala system is prohibited. Any attempt
to regulate this system in these countries would, therefore, be at odds with existing laws and
regulations and would be seen as legitimizing parallel foreign exchange operations and capital
flight.

Where IFT regulations are conceivable, there is agreement that overregulation and coercive
measures will not be effective because they might push IFT businesses, including legitimate
ones, further underground. The purpose of any approach is not to eliminate these systems but to
avoid their misuse. Against this background, policymakers tend to favor two options, which are
already in force in some countries: registration or licensing of IFT systems.

While these measures could deter illegal activities, they will not, in isolation, succeed in
reducing the attractiveness of the hawala system. As a matter of fact, as long as there are reasons
for people to prefer such systems, they will continue to exist and even expand. If the formal
banking sector intends to compete with the informal remittance business, it should focus on
improving the quality of its service and reducing the fees charged. Therefore, a longer-term and
sustained effort should be aimed at modernizing and liberalizing the formal financial sector, with
a view to addressing its inefficiencies and weaknesses.

MONEY LAUNDERING

Money Laundering is a highly sophisticated act to cover up or camouflage the identity origin of
illegally obtained earnings so that they appear to have derived from lawful sources. It is the
process by which illegal funds and assets are converted into legitimate funds and assets. In other
words, it is the process used by criminals to wash their “tainted” money to make it “clean.”
The term money laundering is generally believed to have derived from mafia ownership of
Laundromats in the United States (US). Gangsters in the US had been earning huge cash through
extortion, prostitution, gambling, bootlegging liquor, etc. In the past, the term "money
laundering" was referred only to financial transactions related to organized crime. Today its
definition is often expanded by Government regulators (such as the United States Office of the
Comptroller of the Currency) to encompass any financial transaction which generates an asset or
a value as the result of an illegal act.

PROCESS OF MONEY LAUNDERING

Money laundering is the masquerading the funds derived from illicit activity so that the funds
may be utilize without revealing of their illegal origin. Money laundering is a well-thought out
process accomplished but not restricted to the following two stages:

1. Placement:

In this process, the launder injects illegal funds or assets into the financial system. It requires
physically placing the funds into legitimate financial institutions. Depositing structured amounts
of cash into the banks, and smuggling currency across international borders for further deposit,
are common methods for placement.

2. Layering:

Once the illegitimate funds have entered the financial system, multiple and complex financial
transactions are conducted to further conceal their illegal nature. Layering usually involves use
of multiple accounts, banks, intermediaries, corporations, trusts, countries to disguise the origin.

METHODS OF MONEY LAUNDERING

Criminals frequently use business enterprises to launder money. These business enterprises can
be sole proprietorships or business trusts and partnerships or close corporations and companies.
Shell companies are normally used to open and operate bank accounts. These entities will not
actually be trading and their main function would be to provide the criminal with a corporate veil
under which he could conceal his identity.
The shareholders, directors or members of these shell corporations are often family members.
The income of crime is simply blended with the legal proceeds of the business and deposited into
the bank account as the earnings of the business. Another example is, an information technology
company which had many call centers placed all over the country. The company would call
residents of a foreign country and propose access to credit facility for a fee. The money collected
as fees were then moved companies have no corporeal existence in the jurisdiction where they
are incorporated and can be used as an instrument for moving and masking the sources of funds.

A few of these shell companies, which have the same postal address, appear to be crucial in the
money laundering scheme. On receiving money from the information technology company in the
form of electronic funds transfers, the shell companies then transfer the funds to an offshore bank
account. According to the International Monetary Fund, ‘major offshore centers’ include the
Bahamas, Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore.

HAWALA TRANSACTIONS
 Example of hawala transaction

Mr. X decides to a deal with a hawala person Mr. A. The hawala transaction proceeds as follows:
Mr. X gives the US$ 10,000 to Mr. A; Mr. A contacts Mr. B in country Y, and gives him the
details; Mr. B arranges to have the money (by taking into consideration conversion rate
described above) delivered to the family of Mr. X.

Even though this is a simple example, it contains the elements of a hawala transaction. First,
there is trust between Mr. X and Mr. A. This money transfer nearly takes place within a day of
the initial payment (a consideration here is time differences) and the payment is always made in
person. Hawala dealers are almost always honest in their dealings with customers and fellow
hawaladars. Breaches of trust are extremely rare.

It is worth noting that one of the meanings attached to the word hawala is 'trust'! Connections
are of equal significance.

Hawala networks tend to be slack, communication usually takes place by phone or fax or email.
These associations allow for the organization of a complex network for performing the hawala
transactions. Since many hawala transactions are conducted in the context of import/ export
businesses, the manipulation of invoices is very common methods of settling accounts after the
transactions have been made.

When compared to a 'traditional' means of remitting money, such as obtaining a check or

ordering a wire transfer, hawala seems cumbersome and risk.

Methods of money laundering

1.Use of Business entities:

Criminals frequently use business enterprises to launder money. These business enterprises can be sole
proprietorships or business trusts and partnerships or close corporations and companies. Shell companies
are normally used to open and operate bank accounts.

These entities will not actually be trading and their main function would be to provide the criminal with a
corporate veil under which he could conceal his identity. The shareholders, directors or members of these
shell corporations are often family members.

The income of crime is simply blended with the legal proceeds of the business and deposited into the
bank account as the earnings of the business. Another example is, an information technology company
which had many call centers placed all over the country. The company would call residents of a foreign
country and propose access to credit facility for a fee.

The money collected as fees were then moved companies have no corporeal existence in the jurisdiction
where they are incorporated and can be used as an instrument for moving and masking the sources of
funds.

A few of these shell companies, which have the same postal address, appear to be crucial in the money
laundering scheme. On receiving money from the information technology company in the form of
electronic funds transfers, the shell companies then transfer the funds to an offshore bank account.
According to the International Monetary Fund, ‘major offshore centers’ include the Bahamas, Bahrain,
the Cayman Islands, HongKong, Antilles, Panama and Singapore.

2. Residential Real Estate:

Residential real estate-related money laundering is usually linked with mortgage loan fraud as money
launderers may engage in mortgage loan scam to facilitate laundering through residential real estate. This
scam involves a fraudster and a launderer. Once a fraudulent mortgage loan is funded, the actions of the
fraudster and those of the launderer deviate.

The fraudster, who has appointed a deceitful appraiser to increase the worth of the property and thus the
face amount of the loan sanctioned by the housing finance institution, takes the loan amount and run
away.

In this case, the launderer will strive to project an image of normalcy by continuing to make regular and
timely payments on the mortgage loan, thereby integrating his illicit funds. Eventually, the launderer may
re-sell the property, allowing for a trade-up to a more costly property affording greater laundering and
investment prospective.

Mortgage loan fraud by using money laundering includes the purchase and rehabilitation of distressed
property, which is then resold at a price greater than the original price, inflation of the fair market value of
property by appointing a spurious evaluator.
3. Insurance Policies:

A director of a Company A, set up a money laundering scheme concerning two companies, each one
incorporated under two different jurisdictions. Both the companies used to provide financial services and
providing financial guarantees for which he would act as director. These companies wired the sum of US$
5 million to the accounts of the company director in Country M.

It is likely that the funds derived from some kind of criminal activity and had already been injected into
the financial system. The company director also received transfers from Country N. Funds were moved
from one account to another by making use of several bank accounts. Through one of these transfers, the
funds were transferred to Country P from a current account in order to make payments on life insurance
policies.

The investment in these policies was the main device in the money laundering scheme. The premiums
paid for the life insurance policies in Country P amounted to some US$ 5.5 million and signified the final
step in the money laundering. An effort was made to buy life insurance policies for several foreign
nationals. The underwriter was asked to offer life coverage with an indemnity value equal to the premium.
There were also signals that if the policies were to be withdrawn, the return premiums were to be paid
into a bank account in a different jurisdiction to the assured.

The funds were deposited into several bank accounts and then transferred to an account in another
jurisdiction. The money launderer then entered into a US$ 1 million life insurance policy. Payment for the
policy was made by two separate wire transfers from the overseas accounts. It was purported that the
funds used for payment were the proceeds of overseas investments.
Measuring the Impact of Hawala Transactions

CHAPTER-3
 3.1 HAWALA CASES
1. Terrorism:

The series of bomb blasts in a major Indian city in 1993 was funded through hawala. The
investigation exposed that the funds behind these bombings were routed through hawala
operators in the United Kingdom, Dubai and India.
2. Insider Trading:

A citizen of a South Asian country, who was an investment banker in a major financial center, is
accused of giving 'tips' to various friends and relatives. After some illegal trades took place, the
banker resigned and apparently fled the United States for his homeland. At the same time,
several of his associates also traveled to this same country as well as several European financial
centers. An examination of detained bank records reflects that money was transferred to persons
having the same nationality in at least one of these financial centers. It is possible that these wire
transfers were the first part of hawala-like transfers of the profits from the illegal trades to the
investment banker's home country.

3.Narcotics Trafficking:

Citizens of some countries supposedly importing heroin and are alleged of shaking hands with
bank officer to clean the earnings from the sale of the heroin. This bank officer is understood to
open accounts without following proper 'know your customer' (KYC) norms and also assists the
traffickers with the management of these accounts, which are used for illegitimate money
transfers.

In addition, this bank officer may be handling the receipt of shipments of negotiable instruments
from a south Asian country on behalf of so-called criminals in that country. These shipments
may symbolize part of money laundering scheme as well as probable infringement of country’s
laws regarding the import of currency.

3.2 MACROECONOMIC EFFECTS ON THE ECONOMY OF THE

COUNTRY
Because crime, underground activity, and money laundering take place on a large scale,
macroeconomic policymakers must take them into account. But, as these monetary transactions
are tough to determine, they deform economic data and make problems in Governments' efforts
to administer economic policy. In addition, the capability to recognize the country and currency
of issuance and the citizenship of deposit holders is solution in understanding monetary behavior.

Money laundering can have a range of severe macroeconomic consequences on countries. Some
of these consequences are as follows:

• It can cause unpredictable changes in money demand - To the extent that money demand
appears to shift from one country to another because of money laundering - resulting in
ambiguous monetary data.

• It increases the volatility of international capital flows and exchange rates due to unanticipated
cross-border transfers - It will have adverse consequences for interest and exchange rate
volatility, particularly in dollar denominated economies, as the tracking of monetary aggregates
becomes more uncertain.

• It can cause troubles to the reliability of financial institutional framework of the country and
thus taints legal financial transactions. The income allocation effects of money laundering must
also be considered. For example, there is indication that funds to evade taxes in India tend to be
channeled into riskier but higher-yielding investments in the small business. Money laundering
also has macroeconomic consequences in an indirect manner. Illegitimate transactions can
discourage legal ones by contamination. For example, some transactions concerning foreign
participants, although completely legal, are reported to have become less attractive because of a
relationship with money laundering. Money that is laundered for reasons other than tax evasion
also tends to dodge taxes, compounding economic distortions. Accumulated balances of
laundered assets are likely to be larger than annual flows, causing impending destabilization and
executing cost-effectively inefficient movements, either cross borders or domestically. These
balances could be used to crook markets or small economies.

3.3 LAUNDERING CASE-STUDY – HAWALA

The Economic Times (March 16, 2005) reported a case of money laundering in the year 1999-
2000 when about Rs. 700 crore made its way from the Gulf, through the hawala route to
accounts in bank branches in Mumbai; the money was then diverted to Kerala for large
investments in real estate.

In earlier times, informal fund transfer systems were used for trade financing. They were created
because of the dangers of traveling with gold and other forms of payment on routes beleaguered
with robbers. Local systems were widely used in China and other parts of East Asia and continue
to be in use there.

They go under various names - Fei-Ch'ien (China), Padala (Philippines), Hundi (India), Hui
Kuan (Hong Kong), and Phei Kwan (Thailand). The hawala (or hundi) system now enjoys
widespread use but is historically associated with South Asia and the Middle East.

At present, its primary users are members of expatriate communities who migrated to Europe,
the Persian Gulf region, and North America and send remittances to their relatives on the Indian
subcontinent, East Asia, Africa, Eastern Europe, and elsewhere.

These emigrant workers have reinvigorated the system's role and importance. While hawala is
used for the legitimate transfer of funds, its anonymity and minimal documentation have also
made it vulnerable to abuse by individuals and groups transferring funds to finance illegal
activities.

At present, many of these so-called software companies were known to be exercising the Hawala
route in order to illustrate income from software exports. Hawala (also referred to as hundi)
substitute remittance scheme. In other words, it is money transfer without movement. Hawala is
old systems began in South Asia; today it is used around the world to carry out lawful
remittances. Let us see how hawala can, and does, play a role in money laundering. Hawala
functions outside of conventional banking system. What discriminates Hawala from other
remittance systems are conviction and the widespread networking. Let us see how hawala
transfer takes place.

Mr. X is a national of country Y residing in country Z. He entered the country on a tourist visa,
which has long since expired. He wants to send US$ 10,000 to his family residing in country Y.
If he goes by normal banking channels, he has to open the account with bank which again
involves all documentation formalities. A hawala person – Mr. A offers him the following deal:
A 5% 'commission' for handling the transaction; higher conversion rate for dollar (For example if

the official rate is 1 US$ = Rs. 45; Hawala person can offer you at 1 US$ = Rs. 50) and the
currency in which he wants to convert including delivery charges. The money transfer related
with a hawala transaction is faster and more reliable than in bank transactions.

Mr. X decides to a deal with a hawala person Mr. A. The hawala transaction proceeds as
follows: Mr. X gives the US$ 10,000 to Mr. A; Mr. A contacts Mr. B in country Y, and gives
him the details; Mr. B arranges to have the money (by taking into consideration conversion rate
described above) delivered to the family of Mr. X.Even though this is a simple example, it
contains the elements of a hawala transaction. First, there is trust between Mr. X and Mr. A. This
money transfer nearly takes place within a day of the initial payment (a consideration here is
time differences) and the payment is always made in person.

Hawala dealers are almost always honest in their dealings with customers and fellow hawaladars.
Breaches of trust are extremely rare. It is worth noting that one of the meanings attached to the
word hawala is 'trust'! Connections are of equal significance. Hawala networks tend to be slack,
communication usually takes place by phone or fax or email.

These associations allow for the organization of a complex network for performing the hawala
transactions. Since many hawala transactions are conducted in the context of import/ export
businesses, the manipulation of invoices is very common methods of settling accounts after the
transactions have been made.

When compared to a 'traditional' means of remitting money, such as obtaining a check or

ordering a wire transfer, hawala seems cumbersome and risky.
DATA INTERPRETATION AND
ANALYSIS
Q1.Does the hawala system of transferring money work?

a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree

e)Not Applicable

Analysis:

Q1
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 0% 0%

32%

68%

68% of the sample agreed to the fact while 32% are strongly disagree on this fact.
Q2 Does the hawala money helps in creating black money?
a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e)Not Applicable

Analysis:

Q2
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 0%

29% 18%

53%

Majority (53%) of the samapleagree on the fact while 28% of them disagreed on this and 18% of
them strongly agreed.
Q3 Are there any dealers in the US for the hawala system of transferring money?
a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e)Not Applicable

Analysis:

Q3
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 0%

5% 11%

84%

84% of the samples agreed on the fact while 11% of the sample strongly agree the fact and 5%
of them disagree.
Q4 Is hawala widely used across countries?
a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e) Not Applicable

Analysis:

Q4
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 0%

8% 8%

84%

84% of the samples agreed on this fact while 8% have strongly agreed and the other 8%
disagreed.
Q5 Is the most obvious legal problem with hawala in remitting countries is because of lack of
registration ?
a) Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e)Not Applicable

Analysis:

Q5
Strongly Agree Agree Disagree Strongly Disagree Not Applicable
3% 0% 0%

10%

87%

87% of the samples have agreed 10% strongly agreed to this and only 3% have disagreed.
Q6 Is hawala type transactions often faster and more reliable ?
a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e) Not Applicable

Analysis:

Q6
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0%

11% 5% 5%

79%

79% of the sample agree to the fact while 11% have disagreed on this fact. 5% of them have
chosen strongly on this and the other 5% has given no comments on this.
Q7 Is hawala type transactions more popular in countries with large ethnic and expatriate
worker?
a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e)Not Applicable

Analysis:

Q7
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

5% 0%
8% 21%

66%

66% have agreed to the fact while 21% of them have strongly agreed on it. 8% of the employee
have not given any reply and 5% were disagree.
Q8 Is hawala type transaction provide special advantage in situations where remitting country
has no capital controls?
a)Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e) Not Applicable

Analysis:

Q8
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 3%

16%
39%

42%

42% of the sample is satisfied the fact while 32% are highly satisfied with it. 16% disagree
on the fact.
Q9 Does the hawala rates are far better than the official rate?
a) Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e) Not Applicable

Analysis:

Q9
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

3% 3%

13% 31%

50%

Half the percentage (50%) of the samples believe the fact, 31% strongly agree to the fairness of
the same while 13% doubt the fairness.
Q10. Does the hawala transactions always works through informal channels?
a) Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e) Not Applicable

Analysis:

Q10
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 0%

11%
42%

47%

47% of the sample has agreed to the fact. A good proportion of 42% strongly agreed on the
clarity while only 11% reported ambiguity on the case.
Q11. Does the payment in hawala transactions always made at the end after receiving the
balance?
a) Strongly Agree b) Agree c) Disagree d) Strongly Disagree
e) Not Applicable

Analysis:

Q11
Strongly Agree Agree Disagree Strongly Disagree Not Applicable

0% 0%

26% 24%

50%

A majority of 50% has agreed to the fact whereas a stricking 26% of the samples are those who
disagree on the fact.
 FINDINGS
Quantification effort will not be undertaken today. However, rumor, hearsay, the
literature, and conversations on our recent mission do suggest that some countries
fall into certain categories in this regard.

There is remarkable consensus that the “degree of Hawala” for inward remittances
to Pakistan is very high, and likely is also high for several other South Asian
countries.

At the other end of the spectrum, discussions and evidence for the Philippines
(which has millions of well-tracked expatriate workers and migrants) suggests
informal channels for that country are now of low significance.

This is mainly as a result of improvements and cost reductions for banking

channels, and also unification of the exchange rate some time ago.

However our estimates develop, it will need to be kept in mind that all such
quantifications of elusive phenomenon will be, at best, educated guesses. In an
area such as Hawala.

We hope at least that educated guesses find more credibility than the kinds of
blue sky numbers that circulate in press accounts.
CONCLUSION
 CONCLUSIONS

In summary, an economic approach to Hawala shows it to be a rational choice

for transfer and remittance services in many countries, and that Hawala is
comparable in mechanics and economic structure to most other remittance
alternatives, including those that run through licensed channels.

Considering the sheer scale of measured international transfers, it is possible

that the amount of unmeasured hawala is also substantial.

The most obvious “legal” problems with Hawala in remitting countries appear
to be lack of registration or licensing, although the operations themselves are
inoffensive. In receiving countries there is, in addition, a potential clash
between Hawala operations and exchange control regimes which, at the outer
edge, can segue into other considerations about the black market and the
underground economy.

Reliable quantification of Hawala is not possible, but we will give it a try

nonetheless in our forthcoming paper. Finally, I have tried to emphasize that
hawala is an economic phenomenon, and would remain so even if there were no
drugs trade or money laundering on the international scene.

From an economic view, if the desire of the authorities is to stamp out Hawala,
this means reducing the economic incentives to do Hawala, and there is
probably no better way to accomplish this than to facilitate cheap, fast
remittances across international borders.

And to do away with dual and parallel exchange markets, which are always an
incentive to keep transactions underground.
SUGGESTIONS
 SUGGESTIONS

In an electronic world in which the banking system operates through linked

computers 24 hours a day, there must be increased global emphasis upon
thorough vetting of personal, company and financial institution accounts at the
bank of origin.

There is no substitute for a systematically applied know-your customer policy,

especially as applied to those placing currency into the system and converting it
to an account susceptible to immediate transfer outside the jurisdiction.

Considerable attention also must be focused by anti-money laundering

authorities on establishing international standards, obtaining agreements to
exchange information, establishing linkages for cooperative investigations, and
overcoming political resistance in various key countries to ensure such
cooperation.

Governments need laws and regulations that: establish corporate criminal

liability for bank and non-bank financial institutions for money laundering
violations; apply to all financial transactions, not just to cash transactions at the
teller's window; apply reporting and anti-money laundering measures to serious
crimes, not just drug trafficking; criminalize investments in legitimate industry.

If the investment proceeds were derived from illegal acts; and enable the
sharing of financial and corporate ownership information with law enforcement
agencies and judicial authorities.

Governments also need strategies that focus on changes in both the operations
of financial systems and the methods criminals develop to exploit them
strategies which look at specific governments and specific financial systems.
BIBLIOGRAPHY
 BIBLIOGRAPHY

1.BOOKS AUTHORS

Financial Management Philip

(10th Edition) Kotler

Fianancial Management V.S.

(3rd Edition) Ramaswamy

Research Methodology C.R.Kothary

(2nd Edition)
Research Methodology S.P.
Kasande

2. NEWS PAPERS

Times of India
Financial Express

3. ARTICLE

Basics of Anti-Money Laundering & Know Your Customer - M.RAVINDRAN

ANNEXURES
 QUESTIONNAIRE

Place…………………

Name…………………………

Date …………………

Designation…………………

1. Does the hawala system of transferring money work?

a)Strongly Agree b) Agree c) Disagree
d) Strongly Disagree e) Not Applicable

2. Does the hawala money helps in creating black money?

a)Strongly Agree b) Agree c) Disagree
d) Strongly Disagree e) Not Applicable

3. Are there any dealers in the US for the hawala system of transferring money?
a)Strongly Agree b) Agree c) Disagree
d) Strongly Disagree e) Not Applicable

4. Is hawala widely used across countries?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable

5. Is the most obvious legal problem with hawala in remitting countries ?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable
 6. Is hawala type transactions often faster and more reliable ?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable

7. Is hawala type transactions more popular in countries with large worker?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable

8. Is hawala type transaction provide special advantage in situations where remitting ?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable

9. Does the hawala rates are far better than the official rate?
a)Strongly Agree b) Agree c) Disagree
d) Strongly Disagree e) Not Applicable

10. Does the hawala transactions always works through informal channels?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable

11. Does the payment in hawala transactions always made at the end after receiving the balance?

a)Strongly Agree b) Agree c) Disagree

d) Strongly Disagree e) Not Applicable

Yours Faithfully,

( Signature)
“THANK YOU”