Synopsis: Hawala is an ancient, trust-based system that moves money across borders without banks, paperwork, or digital trails. Still widely used for speed and access, it lives in a legal grey zone, helping families get by while also enabling tax evasion, crime, and shadow finance in a rapidly digitising world that still runs on human trust.
Long before banking apps, SWIFT codes, and instant alerts became part of everyday life, people were already moving money across borders in a far simpler way. No forms to fill, no offices to visit, and often no paper trail at all. This system has no headquarters, no balance sheets, and no helpline to call, yet it quietly supports families, traders, and entire informal economies across countries.
For some, it is a lifeline that gets money home when nothing else works. For others, it is a loophole that slips past the rules. How this invisible network moves billions on trust alone, and why it still survives in a world of modern banking, is a story that is far more complex than it first appears.
What Is Hawala?
The term ‘Hawala’ comes from Arabic, originally meaning ‘trust’ or ‘transfer’. Also referred to as hundi, it represents a traditional, informal method of moving money that operates largely outside formal regulation in many countries.
The system depends on a network of brokers known as hawaladars, who handle transactions on behalf of clients without involving conventional financial institutions. Hawala is believed to have its roots in ancient India, later spreading to the Middle East, South Asia, and regions such as the Horn of Africa.
At its core, hawala functions on trust. Hawaladars in different locations are linked through networks of relationships, using methods ranging from couriers to digital channels to move funds. Historically, hawala has been a preferred way to send money across borders, particularly in countries with strict capital controls or underdeveloped banking systems. It has also long served migrant workers who rely on it to send money home to support their families.
Hawala first emerged in India around the 8th century and has remained in use ever since, especially in Islamic countries. It offered people an alternative way to move money across borders without relying on conventional bank wire transfers.
Over the centuries, the system grew increasingly sophisticated, playing a key role in trade along the Silk Road and eventually evolving into a fully developed money market instrument in South Asia. In many ways, hawala continued to thrive until the mid-20th century, when formal banking systems, common in Western countries, began to take over.
A hawala transaction begins when a sender approaches a hawaladar with a request to transfer money to someone in a different location. The sender and the hawaladar agree on a secret code or password to identify the transaction. The sender then hands over the amount to be transferred, along with a service fee, which is usually calculated as a percentage of the total sum.
The hawaladar communicates the transaction details, including the code, to a counterpart in the recipient’s location. Once the recipient’s hawaladar receives the code, the funds are released to the intended recipient. Finally, the hawaladars settle their accounts with one another at a later date, either by transferring money directly or by offsetting the transaction against other dealings.
Let us understand better with an example: Meet Arjun, an Indian expatriate working in Singapore. Arjun wishes to send SGD 3,500 to his brother Ravi, who resides in Chennai. Preferring the speed and convenience of the Hawala system, Arjun contacts a Hawaladar named Farid in Singapore. Arjun provides Farid with the transaction details, including Ravi’s name and a confidential code word.
At the same time, Arjun shares the code word with Ravi. Farid, operating in Singapore, communicates with Meera, a Hawaladar in Chennai, through his trusted network. Farid instructs Meera to meet Ravi and hand over SGD 3,500 upon verification of the correct code word. Ravi and Meera meet, and the money is successfully delivered once Ravi correctly states the code word.
Why People Use Hawala?
While traditional banks are generally considered a safer option, many people still turn to the hawala system for sending money across borders. For immigrants needing to send funds home quickly or for those receiving money urgently, hawala offers a faster and often more affordable alternative. A study by the Financial Action Task Force (FATF) in December 2013, which surveyed individuals from 22 countries, highlighted several reasons for this preference.
People are drawn to hawala because it allows quicker money transfers, is less expensive, and sometimes aligns with cultural practices. In regions where banking infrastructure is limited, hawala is often more accessible and trusted than formal banks. Other motivating factors include a desire to avoid law enforcement scrutiny or currency controls, opportunities for tax evasion, and in some cases, the ability to move money in ways that conceal criminal activity.
The Dark Side: Crime, Terror, and Tax Evasion
While hawala serves many legitimate purposes, it is also susceptible to misuse by organised crime and other illicit actors, according to a report from the United Nations Office on Drugs and Crime. Over a third of hawaladars interviewed for the study considered the system more vulnerable to illegal activity than formal banks, while others saw equal risk in both. Factors contributing to this vulnerability include minimal oversight by authorities, lack of reporting, absence of regulatory guidelines, unlicensed operators, and the closed, trust-based nature of the system.
Exact figures on how often hawala is knowingly or unknowingly used for criminal purposes are unavailable. Some hawaladars reported that colleagues were involved in transferring funds connected to illegal activities, and in certain cases, criminal groups employ hawaladars, often relatives, specifically for moving illicit money.
Many hawaladars do not ask clients about the purpose of transactions, meaning that smaller transfers, common and less suspicious, can easily involve illicit proceeds without their knowledge. However, some hawaladars admitted they could not refuse transactions from clients tied to organised crime due to potential personal or business risks. Investigating and tracing such transactions remains challenging for law enforcement, as the system’s closed networks and, at times, familial ties make it difficult to distinguish legitimate flows from illegal ones or to establish concrete financial links to criminal activities.
Is Hawala Illegal?
The legality of hawala varies widely across countries, placing it in a complex regulatory grey zone. In some places, the system operates largely unchecked, while in others, authorities have either prohibited or strictly regulated it. Much of the controversy comes from the anonymity hawala provides, which can be exploited for illegal purposes such as money laundering or funding terrorism. This association with illicit activities has prompted governments to close down on unregistered hawala operations.
In India, for instance, hawala transactions are explicitly illegal under the Prevention of Money Laundering Act (PMLA) and the Foreign Exchange Management Act (FEMA). The Reserve Bank of India, the country’s central bank, does not recognize transactions handled by hawaladars because they are carried out by unauthorised individuals. Any attempt to transfer money through hawala in India is therefore considered unlawful, highlighting the legal risks of using such informal channels. While hawala remains an informal, trust-based network, using it in violation of the law carries significant penalties and risks.
Hawala In Digital Age
Technology didn’t end hawala, it just changed how it operates. What once depended on in-person meetings and trusted messengers now often runs through mobile phones and apps like WhatsApp. A short call or a coded message is enough to trigger a transfer. The system still runs on trust, but technology has made it faster, quieter, and easier to coordinate across borders without leaving much of a physical footprint.
Hawala is sometimes compared to cryptocurrencies, largely because both exist outside the traditional banking system and have been linked to illicit activities such as illegal trade or money laundering. But the comparison only goes so far.
Cryptocurrencies rely on digital networks and software, while hawala is built on human relationships and reputation. Technology has strengthened both sides of the equation, it has given authorities better tools to track suspicious activity, while also giving informal systems new ways to stay ahead. In the end, hawala didn’t disappear with the rise of technology; it adapted, much like every other shadow system that finds ways to survive in a connected world.
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