1	The principles and Practice of contemporary Hawala: informal value transmission on a global scale Roger Ballard M.A., Ph.D., F.R.A.I., Director Centre for Applied South Asian Studies, University of Manchester R.Ballard@man.ac.uk http://www.casas.org.uk
2	Hawala in urban Britain Members of individual Indian and Pakistani families are planning visits back home to get one of their sons or daughters married to attend the marriage of someone belonging to another closely related family to build a new house back home or simply for a holiday So they go to the travel agent to buy tickets and arrange to have their spending money turned into rupees
3	Getting a good deal Long-distance airline tickets are notoriously expensive so are bank charges for buying foreign currencies So anyone with any sense goes to a specialist travel agency which offers a good deal Especially since such agencies now operate in the Asian areas of most British cities almost of which offer money transmission services as well as cut-rate tickets with Air Emirates, PIA, Air India, Bangladesh Biman etc
4	Retail Hawala Sending money by hawala makes a great deal of sense the rate of exchange is better – and often much better – than that in the bank no commission is apparently charged the service is quick, efficient and reliable All one has to do is to tell the agent how many rupees are needed who will collect the rupees, and where they are based and hand over the relevant sum in cash Then the agent will tell the customer at which office the cash will be available – either the next day or the day after it is as simple as that!
5	How does the system actually operate? Most people haven’t got the first clue any more than most people no what goes on behind a ‘hole in the wall’ cashpoint all they know is that it works – and does so reliably so why bother to ask any more questions? In this case, however, we need to find out just what does happen and as you might expect it all turns out to be pretty complicated So lets look at it step by step
6	"Over the counter retail hawala..." Over the counter retail hawala is only the first step in a long chain, In which families living in Britain Take the money they want to send home to their local operator who takes all the relevant details from his customers sorts all the money they have deposited out And then passes it on as a bulk payment to a wholesale hawaladar
7	"Much the same thing happens..." Much the same thing happens at the next stage Where the wholesale hawala operator receives bulk cash consignments from his local agents as well direct payments from his own retail customers Then the hawaladar bulks up all the money he has received Changes it into dollars And sends the whole lot off overseas
8	"Then the next day a..." Then the next day a local Hawaladar in Pakistan receives the cash in Rupees so when the designated recipients visit their local hawala office They can pick up their cash directly
9	It is all highly effective Not least because the money arrives much more quickly and with much less fuss than sending it through a bank But how does it all work? given that the hawala operators in Britain send very little money to Pakistan instead it is almost all sent to New York In response to orders coming from Dubai It all sounds most suspicious! at least until we begin to understand hawala’s historical roots as a ‘system for the transmission of debts’ So in preparation for making sense of the dynamics of contemporary Hawala, let’s begin by looking at how the system originally emerged
10	Hawala originatedseveral thousand years ago to support trade between India and the Persian Gulf Traders were constantly moving back and forth both by land and by sea
11	For safety’s sake a proper banking system was vital So traders could pick up the funds they needed to buy goods wherever required
12	But how did the financial aspects of the hawala system actually operate? The one thing bankers certainly didn’t even attempt to do was to send masses of bullion back and forth between each other – that would have been far too dangerous Instead customers were given a hundi (promissory note) which their partner at the other distant centre would honour this was a system for the long-distance transmission of funds or in other words a true banking system in the modern sense
13	These bankers were busy people There has been extensive trade all around the Indian ocean for thousands of years Bankers in each port were therefore engaged in many transactions every day receiving cash on deposit from and writing hundis of behalf of customers who had sold goods in the local market and honouring hundis written by their partners overseas as customers took out cash to purchase goods in the market
14	This meant that each banker operated a kind of money-go-round As in any other banking system, the funds each banker received each day more or less balanced the amount he paid out so whist a trader may have felt that he had moved his money from Surat (where he deposited it) to Basra (where he picked it up) Nothing of the sort actually happened! The banker who issued the hundi in Surat promptly handed the money out again to customers presenting hundis from elsewhere And the money the trader received in Basra would have been deposited by one of the banker’s other customers only a few hours before
15	There were two vital prerequisites if the hawala system was to work reliably Those who wrote the hundis had to have total trust in one another otherwise either could easily rip the other off They also had to have some means of settling up with each other for there was bound to be an imbalance between them in the long run So how was all this achieved?
16	Let’s begin with the issue of Trust One of the most effective ways of organising trust is through kinship So the two traders might well cement their relationship by marrying each other’s sisters and later on further reinforce the tie by arranging marriages between each other’s children So much so that banking literally became a family business
17	Trust When the transactions began to include merchants operating in a multiplicity of centres right round the Indian ocean Many separate sets of merchants began to establish such networks of kinship between themselves These ties of kinship were frequently reinforced in religious terms when all members of the network also became joined one or other of Islam’s many sects of tariqa or their Hindu and Buddhist equivalents And in so doing gave rise to a series of tightly but informally organised transnational banking networks
18	A legal framework was also constructed to support these arrangements In its simplest version a trader deposits money with a banker in Surat and receives a hundi in acknowledgement Then the trader sets sail for Basra and when he arrive he hands in the hundi, which he promptly redeems for cash this is what hawala is all about: a trans-local exchange of debt
19	In a further development, two sets of merchants may also make a hawala agreement In Basra a member of the Browns gives the Greens 100 gold dinars Whilst in Surat one of the Greens gives one of the Browns an identical sum Once such back-to-back hawala deals could be done all around the Indian ocean a system for settling all kinds of debts over long distances was in place
20	Much changed with the arrival of Europeans They were well armed, and often preferred to enforce their contracts down the barrel of a gun When steam replaced sail, European commercial methods further undermined hawala Although it continued to be used, largely as a means of financing local trade
21	Hawala in the contemporary World
22	Hawala and labour migration
23	Remittances
24	The renaissance of hawala
25	But just how did the money get there?
26	‘Hard’ and ‘soft’ money
27	Making a swap
28	Making a swap
29	How is this to be organised? Let’s come back to a hawaladars again and focus on two hawaladars working cooperatively together one in Dubai and the other in Karachi
30	Exchanging information The Dubai hawaladar informs his partner in Karachi that he has US$100,000 in Dirhams looking for rupees The Karachi hawaladar responds with a message that he has a rupees customer looking for US$100,000 They agree on a rate of exchange in which the migrant workers usually get a better rate for their Dinars than they would have done through the bank
31	Making the a swap
32	Dubai as a hub
33	South Asia as a market
34	However the South Asian link is only for starters! during the past thirty years millions of migrant workers have been drawn into the gulf from all over South and East Asia As well as from North Africa And, of course, from UK and USA
35	And even more migrants have moved from Asia, Africa and Latin America To settle in the USA, Canada, Britain, France, Germany, Spain, Italy, Australia etc. Perhaps as many as 150 million people in all in the past few decades
36	Remittances are the flip-side of migration And produce huge financial flows from Europe, North America, Japan and the Middle East To North Africa, South and South East Asia, China, and Latin America
37	Just how much money gets remitted in this way is extremely difficult to estimate According to recent World Bank estimates, the current worldwide flow of remittances through the formal banking system is around US$ 80 billion per annum With at least as much again being transmitted through informal Hawala-style transactions
38	British developments in a global context So although Britain’s population now includes nearly 3 million people of South Asian descent it is worth remembering that in global terms that is only a drop in the ocean and that hawala in Britain is a local arm of what has now become a global system of informal value transfers And that local processes cannot be understood without reference to the global whole
39	Migration from South Asia to Britain also has a long history It began when men from Mirpur and Sylhet Districts began to work as stokers in British steamships in the 1880s Ex-seamen began to establish bridgeheads in British ports in the 1940’s and when chronic labour shortages developed during the 1960s and 70s South Asian settlements in Britain began grew rapidly in size
40	South Asian settlements in Britain
41	Remittances
42	Crystallisation
43	Growth and Development
44	As this occurred, the Hawala system became increasingly well organised
45	So just how does the UK dimension of Hawala fit into the global system? We can best begin by identifying the basic elements and then see how the whole thing fits together in systematic way Once again the system turns out to be quite complicated although its underlying logic is really quite straightforward
46	Let’s go back to the retail hawaladar He’s the chap who takes in money from customers who walk in off the street Tells the customer how much Rs. 10,000 (for example) to be delivered in Pakistan would cost in £ sterling And if the customer agrees, the hawaladar takes the details of the person to whom the money is to be sent gives his customer a receipt And makes a note of the transaction
47	This is what a retail Hawaladar’s records look like
48	The spreadsheet records the town or village in which the money is to be delivered
49	The name of the recipient
50	The rate of exchange (in this case Indian rupees for US$)
51	The amount to be paid in rupees in India
52	And finally the phone number of the UK customer
53	Retail hawala We can easily tell that this refers to retail hawala The sums of money are relatively small £ 1,000 - £20,000, and mostly at the lower end of the scale The name and address of the recipient in India is recorded And the UK depositor is also identified However the mode of transmission is not indicated: all this money will be grossed up and sent to a wholesale hawaladar or transferred from the retail to the wholesale account by a Hawaladar who is performing both these operations Ready to be transferred overseas
54	Why is there a need for wholesale as well as retail hawala? Regardless of whether money is moved around the world by a Bank or a Hawala operator, it processed in the same way it is converted into US$ a bank sends an electronic message to one of the global banks in New York (Citibank, Bank of America, Marine Midland etc) saying Please credit my account with $xx million, send $y million on to Hong Kong, $z million on to Dubai etc But the smaller amount sent, the larger the % commission as everyone who goes on holiday abroad is very well aware Sending money wholesale is very much cheaper and more speedy than doing so retail
55	One of the central objectives of hawala is to minimize these charges The only way foreign exchange deals can be done through major New York banks Hence modern hawala does not seek to avoid the formal banking system that’s impossible! But rather to squeeze value through it in such a way as to minimize commission charges There are two main ways of achieving this Always transmit funds in the large because the % charge is much lower Do as much of the Banks’ homework for them yourself That’s exactly what hawala is about, and why the wholesaler is just as important as the retailer
56	Wholesale hawala Wholesale hawaladars perform three crucial functions They gather in the money which has been paid into a large number of retail hawaladars ready for transmission in a bulk payment overseas They have access to a US$ denominated bank account through which to transmit money overseas They process the information at to just whose account overseas to which the money is to be sent
57	Categories of Customer Wholesale hawaladars have several different kinds of customer Themselves! Since most wholesalers also do retail hawala, they will have their own walk-in customers Their junior agents: this is the entry route into the business – inexperienced people who take money and client’s details on the retailer’s behalf, which they hand over to the retailer for a small percentage Senior agents Who prepare their own list of recipients, send their own faxes detailing who the rupees should be delivered to in South Asia, but use the wholesale hawaladar’s services to identify and deliver US$ payees Junior wholesalers Who have their own network of agents and overseas contacts, and simply use the major wholesaler’s money transmission facilities Commercial hawala Where the money transmitter runs an import business (for example), and uses the hawaladar’s facilities to settle accounts with overseas suppliers
58	The charges in this case The prosecution accepts that the first two categories of hawala listed on the previous page are legitimate Since they involve ‘walk-in’ customers sending relatively small sums, and whom the hawladar meets face to face However it regards the last three form of hawala as deeply suspicious, because The money arrives in bulk, and is either brought in by couriers or fetched by the hawaladar himself The hawaladar usually does not know exactly who the UK customer is The money is either dispatched straight to New York, or to all sorts of commercial bank accounts all over the world – and certainly doesn’t go anywhere near Pakistan ‘Sensibly’ the prosecution alleges, wholesale hawala of this kind only makes sense as some form of money-laundering exercise Or are there in fact some other even more sensible explanations of what is going on here?
59	New York and Dubai Once again we are going to have to do some homework before we can address that question Not least almost all the hawala money collected in UK is sent to New York and Dubai regardless of whether the transaction is classified as ‘retail’ or ‘wholesale’ Why should that be so?
60	Let’s begin by looking at the evidence A flow diagram of transactions processed by a UK based wholesale Hawaladar In which banking records showed that very large and repeated US$ payments had been made to accounts belonging to ‘World Link Exchange’, ‘Multinet Trust Exchange’, ‘Wall Street Exchange/Banking’, and ‘National Bank of Pakistan, Bahrain’
61	Let’s begin by looking at the evidence From where the money is passed on to numerous other banks and corporate bank accounts and after that there is no further trace of just where the money went – at least in the hawaladar’s records
62	To get to the bottom of all this, let us turn to the other end of the chain To see how rupees are delivered to customers in India and Pakistan The payment is almost always made in cash And the rupee notes certainly don’t arrive from New York or Dubai! Rather if one could trace the origins of the notes, they would turn out to come from big one the subcontinent’s big cities perhaps Delhi, but more Bombay, Karachi or Dhaka and if traced yet further back, would invariably turn out to have belonged to a rich merchant in urgent need of US dollars to close a business deal, but which his Bank can’t supply because of strict local controls on access to foreign exchange So in Bombay, Karachi and Dhaka the ‘hawala market’ is simply a convenient place to sell Rupees and buy US dollars Although for convenience sake the dollars would, of course, be credited to a bank account in Dubai, New York or wherever
63	The other end of hawala The delivery arm of hawala in South Asia is a mirror image of the collection arm in Britain with a similar series of agents and sub-agents The agent is usually based in a major city Bombay in India, Karachi or Islamabad in Pakistan each agent has a series of sub-agents out in smaller towns some of whom may also have sub-sub-agents out in the villages where the money is eventually to be delivered And all of whom also take a tiny percentage of the cash passing through their hands as a commission
64	The organisation of delivery Whilst the Hawaladar in the UK sends information about the customers to whom rupees are to be delivered by fax to India and Pakistan) whilst the pounds sterling deposited are turned into US$ and sent to New York The two arms of the transaction are brought back together again in India and Pakistan the recipient hawaladar receives a lump sum in rupees from his partner in Karachi or Bombay Which he matches up with the list of addresses to which the money is to be delivered locally Whose existence we can also trace out in UK hawaladar’s records
65	This is a small part of spreadsheet records the transactions on behalf of named senders – all of whom are Hawaladars in the UK
66	who transferred substantial sums of money from GB£ to US$ to Indian rupees
67	Which were sent to named hawaladars in Delhi
68	Sending substantial sums of money
69	However this list is just a summary: we can also find spreadsheets telling individual recipient hawaladars just how the money sent was to be divided up
70	In this case the name of the recipient and his village or town is identified
71	As is the sum due in rupees
72	And the commission due to the hawaladar
73	However these lists only cover the information given to delivery hawaladars in Delhi What about the money? How does it actually get from Birmingham to Delhi? Here we have to introduce the keystone of the operation of global hawala: the ‘Exchanges’ of Dubai Which lie at centre of the whole system of reciprocal exchange
74	Let us begin by thinking about things diagrammatically And also assume we’ve got two sets of money transmission in operation a large number of Sikh settlers in the UK want to send money back to their relatives in Punjab a businessman in Bombay has an invoice to settle for a consignment of electronic goods he is importing from China Both of which are of approximately the same size – say US$ 200,000 it is a situation ripe for a hawala exchange Let us see how
75	"A Hawaladar approaches his partner..." A Hawaladar approaches his partner in Delhi to tell him that he has orders to deliver a total of $200,000 worth of rupees to customers in India Just as a businessmen in Bombay tells his own local Hawaladar that he needs to settle a $200,000 invoice for goods he is buying from China so the two hawaladars in India agree on a back to back deal
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81	"Easy!" Easy! the pounds and dollars go to Japan, And the books are finally balanced when the Hawaladar uses the manufacturer’s Yuan to pay British restaurant worker’s relatives in Fujien
82	However these games of monetary leapfrog soon get exceedingly complicated Lots of these transactions take place all the time They run in and out of each other all around the globe in the way we have just seen And it is often very difficult to find two parties wanting to do a swap of precisely similar amounts of money at just the same time To make it all work on a global scale, there is a need for a clearing house that is where Dubai comes into the picture
83	The Exchange Houses of Dubai Dubai plays host to series of Exchanges whose principal role is to facilitate ‘swap’ transactions between different countries and currencies on a global scale
84	"So the majority of the..." So the majority of the swap deals between hawaladars in all these countries are arranged and sorted out in the major Exchanges either in Dubai or Hong Kong
85	"Yet however graphic this vision..." Yet however graphic this vision of dollar bills flying around the world may be it is completely illusory: dollar bills don’t fly
86	"All that really happens is..." All that really happens is that hundreds of messages from all around the world Pass through information exchanges in Dubai and Hong Kong
87	Whilst Dubai processes information, all dollar transactions take place in New York New York is currently the hub of all major financial deals all around the globe all transanational financial deals are denominated in US$ whatever the local currencies concerned may be but although denominated in dollars, there is no global paper chase in dollar bills But merely a rearrangement of debits and credits on computers located in a small number of very large New York banks hence there is a basic prerequisite for participation in global money markets Direct access to a dollar-denominated account in New York
88	So just what is Dubai’s role in global hawala? Whilst Dubai is undoubtedly a centre at which information is processed All concrete financial transactions actually take place in the virtual reality of New York banks’ computers It follows that we must revise our graphic representation of what goes on it is not US$ which swirl around the world but only information about such transactions And it is that information which drives – and is driven by – those computer processors in the Big Apple
89	"Whilst hawaladars and banks send..." Whilst hawaladars and banks send each other TTs, all the $$$ stay in New York!
90	"But just because all the..." But just because all the dollars stay in New York, it doesn’t mean that nothing happens elsewhere
91	The hard currency consolidation process: 1^st level consolidators (retail hawaladars) take in hard currency deposits from migrant workers for delivery as rupees deliveries in Pakistan
92	"2^nd level consolidators (wholesale..." 2^nd level consolidators (wholesale hawaladars) combine funds from their own personal customers, from commercial customers and from 1^st level consolidators and convert local currency into $US for wholesale onward transmission
93	"3^rd level consolidators (global..." 3^rd level consolidators (global hawaladars) bring together in tranches of funds on a mega-wholesale basis ($100,000 minimum unit of account) in readiness for bringing buyers and sellers of $US together to facilitate global hawala settlements
94	Meanwhile on the other side of the world … Whilst hawaladars in hard-currency regions where migrant workers have established themselves in other words in Western Europe, North America and the gulf consolidate funds and assemble them into mega-tranches of US$ on a daily basis A parallel set of operators in regions where access to foreign currency is tightly controlled in such places as Iran, Pakistan, India, China, Indonesia etc are busy taking purchase orders for US$ from local customers most (although by no means all) of whom are businessmen engaged in commercial transactions of one kind or another
95	The collection of ‘buy’ orders for US$
96	Now the settlement Hawaladars can begin to do business Matching up ‘buy’ and ‘sell’ orders on a global scale but although they are dealing in very large tranches of $US they don’t need large offices or rows of clerks Nor do there appear to be very many of them operating at each hub perhaps twenty or thirty they do need to be in sufficiently close contact with their fellow hawaladars to sew up their deals and to have secure communication facilities with their bank accounts in New York since it is in New York that the switches of US$ between bank accounts actually take place Nor are the locations where these deals are done in any way hidden they have a very public presence in the money souk in Dubai
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98	Just as do wholesale hawaladars in Karachi
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100	Or hawaladars in Bradford