Money that moves off the grid: ‘hawala’

Allegations of crooked politicians taking money from questionable sources seem like everyday news now. For example, in recent days developments have arisen in regards to whether or not the Clinton Foundation took money via a complex scheme involving Russia’s Rosatom and Vadim Mikerin. Terrorist and criminal organizations move money around in huge amounts, and they have come up with all sorts of creative systems to keep it from the watchful eyes of the authorities, just like the allegations we’ve heard toward politicians. But how is all of that possible? How can you move money in such large quantities without getting caught? There are almost an infinite amount of ways to do it.

A lot of times, groups like the cartels have to come up with new and innovative ways to move their cash around.  The authorities will figure out how their system works, shut it down and they are back at square one. However, there are systems that, by definition, cannot be shut down so easily. While governments can arrest certain players and confiscate certain funds, the system is integrated into a culture and therefore cannot be fully terminated.

“Hawala” is one such system. Depending on where you are in the world, it is also known as hewalla, hundi, xawala, or xawilaad. Ingrained into the fabric of many Muslim societies, this is a way of managing finances that is based on an adherence to a strict honor code. It’s so common that it’s not even necessarily exclusive to criminal or terrorist organizations-an aid worker from northern Pakistan recently told me about a local movie-store owner that would use this to buy movies for his store from the larger vendors down south. In fact, hawala originated on the ancient Silk Road, which passes through that area of the world. It is most popular in Dubai, India, the horn of Africa and West Africa. If a financial system breaks down due to a country’s internal conflict, you can expect the hawala system to arise in its place.

How does hawala transfer money from one pocket to the next? Well, it doesn’t-not in the way you think, anyway. The recipient of the cash never sees the original cash, but he does get paid.  Here’s how it works:

• Jeremy wants to pay Linda $10,000. They agree to use the hawala system to do so.
• Jeremy calls up Linda and tells her that the password is: strawberries. She confirms.
• Jeremy takes $10,100 and pays it to his local hawala broker, Craig. He also gives Craig the password.
• Craig knows another hawala broker (Geraldine) in Linda’s hometown, so he gives her a call. He shares the amount to be given to Linda, and the password.
• Geraldine and Craig have a long history together. They trust one another, and this trust is the foundation of hawala. Both of them have some serious money in the bank.
• Geraldine meets with Linda and asks her the password. She says, “strawberries.” Someone posing as Linda would not know the password, and therefore not get the funds.
• Geraldine pays Linda the $10,000 out of her own pocket.
• Up to the point, Geraldine is just going by Craig’s word that he’ll pay her back. After all, he’s still got the initial $10,100 in his possession.
• They meet up and he hands over the cash, keeping $50 for himself.  She now has her $10,000 back and an extra $50 commission fee.

Commission fees are going to vary depending on the organizations/individuals involved, level of legality, and the amount of scrutiny from officials. While some ordinary people would rather trust their personal brokers over the local bank, many shady organizations also use this as an effective method of money transfer.

Featured image courtesy of AP Images.