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Emily Leiby asked: What is meant by hawala transaction? How does it work, especially in reference to terrorist organisations?

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  • Vivek Chadha replies: The hawala system has been functioning for centuries. It has been mentioned by the Egyptian scholar Sarakshi referring to its roots in the 11th century. The system even then merely involved "transfer of debt" and not physical movement of money. Since it is based on trust, traditionally it functioned between close associates and relatives. The promissory notes kept for record keeping are called hundi.

    The system is popular even today because in most cases it is cheaper, faster, and more convenient, to transfer funds. It has a larger network and is even considered more reliable by some. However, it needs to be noted that despite its large scale use, the system is illegal in India. Given the fact that transfer of money in the hawala leaves no traces, it is misused by criminals and terrorists to transfer money. However, in most cases, the usage is limited to immigrants working in foreign countries who want to remit their earnings to their villages in the country.

    A hawala transaction involves giving a certain amount to a hawaladar in place A. He calls his counterpart in place B and asks him to deliver the said amount to the recipient. A small charge is taken for facilitating this transaction. This transaction does not involve physical transfer of money. At the end of the month, books at both ends are tallied and adjusted to cater to the mutual business.

    Terrorists use this for transferring money from various destinations and not necessarily obvious locations like Pakistan. In fact, it is more difficult to trace money being sent from Europe and this has been exploited for some time.

    The system of book keeping is also unique and is often only understood by the hawaladars.