What is Hawala? How Informal Money Transfers Pose AML Risks

Emma Shilling, Head of Compliance

Hawala is a centuries‑old informal value transfer mechanism based on trust-based relationships among agents known as hawaladars. In recent years, this parallel remittance system has attracted scrutiny. While it serves practical needs in underbanked populations, its opaque structure poses significant anti‑money‑laundering (AML) and counter‑terrorist financing (CTF) challenges.

What Is Hawala?

Originating in South Asia, hawala functions outside formal banking systems. A customer deposits cash with a local hawaladar and receives a unique reference code. A corresponding agent in the recipient’s country disburses equivalent value to the beneficiary once the code is presented. No cross-border movement of funds occurs; settlement between hawaladars happens via netting over time, barter, or formal banking channels.

For migrant workers, remote communities, and recipients in jurisdictions lacking reliable banking services, hawala offers cost-effective, rapid, and convenient remittance services. Transfers often clear within 24 hours and bypass the delays and fees inherent in formal channels. In some fragile or crisis‑affected regions, governments and NGOs also rely on hawala to distribute aid where traditional infrastructure is absent.

Why Hawala Matters to Compliance Professionals

While hawala remains a legitimate and culturally entrenched method of value transfer in many communities, it also presents complex challenges for legal and compliance professionals tasked with detecting and preventing financial crime. The very qualities that make hawala attractive; its speed, informality, and global reach, are the same features that enable its exploitation by illicit actors. Below, we explore why hawala warrants close attention from lawyers, compliance officers, and investigators.

Financial Crime Vulnerabilities

 

At the core of hawala’s appeal is its informality. Hawala transactions often rely on verbal codes, personal trust, and longstanding reputational networks rather than written contracts or digital records. There is typically no customer onboarding, no identification verification, and no transaction logs. For regulators and investigators, this means minimal paper trails making forensic accounting and legal attribution extremely difficult.

The system’s opacity has attracted a wide range of bad actors. Terrorist organizations, human traffickers, narcotics networks, and even tax evaders have all leveraged hawala to move funds discreetly across borders. Its capacity to operate outside the formal financial system allows such groups to sidestep AML controls, KYC requirements, and international financial monitoring frameworks.

Even when law enforcement becomes aware of a hawala network, proving criminal intent and tracing the flow of funds can be prohibitively difficult. Obligations between hawaladars are often settled off the books, with no electronic transaction history or formal remittance mechanisms. Authorities are left without the digital or paper pathways that modern financial investigations typically rely on.

Jurisdictional and Regulatory Gaps

One of the most significant challenges in regulating hawala is its uneven legal treatment across jurisdictions. In some countries, hawaladars can operate freely without the need for licensing or compliance with AML/CTF frameworks. This creates major blind spots in global financial oversight.

In contrast, other jurisdictions have taken a far more stringent approach. In the United States, for example, unlicensed money transmission is a federal offense. Several prosecutions have targeted hawala brokers who facilitated the laundering of criminal proceeds. Similarly, parts of South Asia have tightened regulatory controls, particularly in response to concerns about terrorist financing and drug trafficking.

This regulatory fragmentation creates opportunity for abuse. Bad actors often operate across multiple jurisdictions, exploiting legal loopholes and the lack of cross-border cooperation. As a result, legitimate compliance professionals face the dual burden of managing local regulatory obligations while staying vigilant to transnational financial risks.

Recent Enforcement and Case Law Examples

The global spotlight on hawala has intensified in recent years, especially as authorities have uncovered complex criminal enterprises that rely on informal value transfer systems.

In a notable investigation, UK authorities disrupted a trafficking ring that utilized hawala networks to settle payments between smugglers. The scheme operated like a "criminal escrow," with hawaladars holding funds until a successful trafficking operation was completed. Investigators faced significant barriers due to the lack of formal money flows and the absence of transaction records.

In another case, a series of European enforcement actions exposed how high-level drug trafficking syndicate, dubbed ‘super cartels’, used hawala brokers to move tens of millions of euros in illicit profits. These networks also included terrorist affiliates, illustrating the wide-reaching and cross-functional appeal of hawala to sophisticated criminal entities.

These cases highlight hawala’s adaptability, resilience and its attraction to organized crime networks seeking discretion and deniability.

Practical Recommendations

 

Effectively managing the risk posed by hawala networks requires a proactive, multi-layered approach. Compliance professionals must work collaboratively to address the structural vulnerabilities hawala presents. Here are key strategies:

1. Know Your Customer (KYC) and Transaction Monitoring

   
   

   Even when formal records are lacking, institutions should apply enhanced due diligence where hawala involvement is suspected. This includes monitoring for unusual transaction patterns such as high-volume remittances, activity along known high-risk corridors, or “round-tripping” behaviour where funds circulate without a clear economic rationale.

   
   

2. Geographic Risk Scoring

   
   

   Certain jurisdictions are more closely associated with hawala practices. Apply elevated risk ratings to customers or transactions linked to these areas. Enhanced due diligence measures should include increased documentation, source-of-funds verification, and post-transaction reviews.

   
   

3. Staff Training and Awareness

   
   

   Compliance staff and frontline personnel should be trained to recognize red flags associated with hawala transactions. These may include inconsistent customer behaviour, vague explanations for remittances, or transactions that do not align with a client’s profile or stated occupation.

   
   

4. Regulatory Engagement

   
   

   Legal and compliance teams should actively participate in the policy discussion around hawala. This includes advocating for the regulation, licensing, and oversight of hawaladars, as well as promoting regional and international coordination among regulators and law enforcement agencies.

   
   

5. Layered Internal Controls

   
   

   Where hawala brokers seek integration into the formal financial system, institutions should impose conditions—such as mandatory record-keeping, transaction thresholds, periodic audits, and mandatory registration under national AML/CTF laws. These requirements can reduce the system’s opacity while allowing legitimate operators to coexist with broader financial regulation.

Conclusion

Hawala systems reflect deep cultural, historical, and economic roots but they also represent a pressing concern for financial crime professionals. The legal ambiguities, operational secrecy, and global reach of hawala make it both a valuable tool for communities and a target of misuse by criminals. Compliance professionals must therefore strike a careful balance; respecting cultural practices while rigorously mitigating the risks that arise when informal systems intersect with criminal enterprise.

By adopting a comprehensive risk management framework and staying informed on evolving enforcement trends, compliance teams can play a central role in closing regulatory gaps and protecting the integrity of the global financial system.