The FATF defines hawala providers (and other similar service providers) as money transmitters, particularly with ties to specific geographic regions or ethnic communities, that arrange for transfer and receipt of funds or equivalent value and settle through trade, cash, and net settlement over a long period of time. While hawala providers-also known as hawaladars-often use banking channels to settle between them, what makes them distinct from other money transmitters is their use of other settlement methods, including trade, cash, and long-term net settlement.² Hawala is an activity based on trust and was established to avoid high charges by people who cannot afford them, the ability to reach beneficiaries in remote places quickly where banks do not operate, and the existence of strict currency controls in some countries. Because communication is often by text message and there is no need for funds to clear, hawala transfers may also be available faster than the ones made using the formal financial system. Although hawala providers generally specialize in transferring money between certain jurisdictions, they are also part of larger networks that can arrange transfers to almost any part of the world. Such transfers are likely to be slower and more expensive than transfers within the corridors in which the provider specializes. Although the hawala system minimizes use of the formal financial system, including use of international wires, it is important to note that almost all hawaladars will ultimately seek to conduct transfers, particularly international transfers through LFIs, and possibly to use other financial services. In doing so, they could expose the LFI with which they do business with to the risks of their own business activities and customers.

Sample Hawala Transaction:³

² See also the FATF report The Role of Hawala and Other Similar Service Providers in ML/TF (fatf-gafi.org)
³ Source: IMF III Features of the Informal Hawala System : Informal Funds Transfer Systems : An Analysis of the Informal Hawala System: (imf.org)

Hawaladars' business model is built around satisfying customers' needs to move money rapidly across borders, a service that may also be misused by criminals as is to individuals seeking to conduct legitimate personal remittances. In recent years hawala providers have been repeatedly abused to transfer illicit funds, including funds involved in terrorist financing. Certain providers have been found to be fully complicit in these schemes, and even to operate as professional money launderers. In addition, hawala providers generally have the greatest competitive advantage in areas where more formal MVTS providers do not operate or have limited infrastructure, often because these jurisdictions are remote or classified as very high risk. Although this certainly does not mean that every transaction to those areas is illicit, it does suggest that the institutional risk profile of the average hawala provider is likely to be higher than that of other MVTS providers. In many jurisdictions, hawala providers operate underground, because they are providing an illegal service or because they and their customers don't want to be required to comply with rules related to taxes, currency controls, and AML/CFT compliance. This is especially common among hawala providers operating in jurisdictions where hawala is prohibited, unregulated, or illegal.

The inherent risk of hawala providers is influenced primarily by the regulatory environment and illicit finance risks in the jurisdictions in which they do business, the products and services they provide, and their customer base:

The regulatory environment for hawala providers clearly varies across jurisdictions. In some jurisdictions, they are not able to maintain a license or registration and therefore operate entirely underground. While operating underground is generally prohibited under the laws of the country where the hawala provider operates, it does not necessarily mean that a provider is a money launderer. Still, underground providers will seek to conceal their activities from financial institutions, and are extremely unlikely to comply with any AML/CFT obligations. Such entities may present themselves to LFIs as ``general trading companies'' or describe other business types that can justify regular international transfers, including dealing in precious metals or stones, trading in used cars, or in high value carpets.

Even in jurisdictions where hawala is legal and regulated such as the UAE, hawala providers may have only a basic understanding of their financial crime risks and obligations, and may not use systems and technologies that support compliance with those obligations. Furthermore, because hawaladars may lack strong AML/CFT preventive measures, they may be sought out by customers specifically hoping to take advantage of this possible weakness. As a result, hawala providers are almost always found to be classified as very high-risk customers by banks. A hawala provider can strive to manage this risk by applying strong, targeted controls and maintaining an effective AML/CFT program that meets or exceeds UAE requirements and global standards (see Part II section 3 below).

Hawala providers, like all financial institutions, are heavily exposed to the risks prevalent in the geographies where they operate. The risk of a hawala provider, therefore, will depend in part on the illicit finance risks--including ML/TF and sanctions evasion--in the jurisdictions where it is established or has subsidiaries. In addition, a provider's risk will also be impacted by the jurisdictions with which it most frequently does business. For example, the risk of a hawaladar operating in the UAE and primarily executing transfers to and from Country X should be assessed based on the illicit finance risk in both the UAE and Country X.

Hawala providers, by definition, all provide money or value transfer services using hawala networks, which is subject to higher risks. The risk of hawala transactions may be increased or decreased by the size and purpose of the transaction. Some hawaladars only carry out low-value personal remittances, while others service businesses by supporting commercial operations, which may involve relatively high-value transactions. Low-value personal remittances may be considered lower-risk, although low-value remittances to jurisdictions at high-risk for terrorist financing should be treated as equally high risk. RHP in the UAE may perform only limited services (listed in section 4.1 below), but hawala providers established elsewhere may not have such restrictions on their activity.

The risk involved in providing the hawala service is further impacted by the delivery channels through which it is offered. Channels that promote anonymity (accepting transaction orders by text or telephone; accepting cash; allowing agents or third parties to order transactions on behalf of the originator) increase the risk of the service. Some international law enforcement agencies have reported cases of hawala providers operating in virtual currencies; although still rare, such a delivery channel would be extremely high risk, as it would combine the general risks of hawala providers with those of virtual currencies, which offer illicit actors anonymity and access to a practically unregulated financial sector.

In addition, hawala services may not be the only financial product hawala providers offer. In many jurisdictions providers also offer small loans (often with pawned items as security) and sell stored value cards, or provide safekeeping services for cash. They may also engage in non-financial lines of business such as selling calling cards, mobile phones and SIM cards. All of these lines of business are cash intensive⁴ and high-risk, and are generally not subject to AML/CFT controls. Even in a jurisdiction where hawala providers are regulated, they may commingle cash proceeds of these other services with hawala funds. This means that a hawala provider with an account at an LFI could use that account to support all aspects of its business, not simply provision of hawala services.

Most hawala providers are likely to serve a customer base made up of lower-income individuals seeking to conduct or receive fairly low-value transfers. Such a customer base is not necessarily low-risk, especially when customers have ties to jurisdictions that are at high risk for terrorist financing. The risk of the provider's customer base, however, will be further increased if the provider conducts larger transfers on behalf of business entities (e.g. trade-based transactions), if it has a high proportion of legal person customers, or if its customers include politically exposed persons.

⁴ The CBUAE will issue Guidance for LFIs providing services to Cash Intensive Businesses.

RHP are supervised by the CBUAE, who has the right to examine the business of RHP and their agents and customers whenever it deems appropriate to ensure proper compliance with their statutory obligations under the legal and regulatory framework in the UAE, or impose supervisory action or administrative and financial sanctions for violations. Similar to its all LFIs, the CBUAE applies the principle of proportionality in its supervision and enforcement process, whereby small RHP may demonstrate to the CBUAE that the objectives are met without necessarily addressing all of the specifics cited in the legal and regulatory framework in the UAE.