Many Zimbabweans may be forced to choose an alternative method of banking their money and making payments due to shifting governmental rules and restrictions, ineffective local banking systems, and other factors. Already, a large number of Zimbabweans have chosen not to use banks, which has caused a drop in bank deposits throughout the industry. The most covert banking method, known as Hawala, will be examined in this article, along with its benefits and drawbacks, as many Zimbabweans may be considering using it to get over stringent government regulations that have been put in place for the industry.

A raid in southern Spain resulted in the arrest of one of Europe's greatest money launderers, according to police, who claim the British-Irish suspect is suspected of having moved more than 200 million euros ($200 million) in illicit currency. This is intriguing because it demonstrates the sheer number of people who have chosen to access their money rapidly by using laundering services provided by the shadow economy.

Such money launderers are causing law enforcement officials considerable headaches all over the world since they are frequently connected to known organized crime organizations that charge a lower percentage than banks. The recently detained suspects are thought to have used the so-called hawala underground banking system, which relies on in-person transactions, to launder almost 200 million euros.

Hawala Underground Banking: Legal or Illegal – How to Identify the Risks?

 

 

 

 

 

untitled image

 

 

Informal Value Transfer Systems, sometimes known as underground banking, are the preferred method of moving money, not only for terrorist financiers and money launderers but also for immigrants who must provide for their families back home. The Arabic word hawala, which refers to a particular form of informal banking, means "to change" or "to modify." Hawala is "money transfer without money movement," to put it simply.

Process & operation

The fundamental idea behind hawala is the transfer of value rather than the actual movement of money. The basic procedure is shown in the image below. The value may be moved between the two jurisdictions. Hawaladars must be paid for their services in either scenario: either they operate openly and in plain view, or they offer additional services as part of otherwise lawful enterprises like jewellers, car rentals, grocery and deli stores, travel agencies, and money exchange houses. These companies frequently act as a front for the financial services being offered, while also serving as hawaladars in the background.

The Risks with Hawala

The biggest issue with illicit or unlicensed/unregistered Hawala operators is the absence of a paper trail and Know Your Customer (KYC) verification. It is challenging to estimate the volume of funds, which are frequently illegal, that are transferred through this type of remittance system due to the difficulties faced by jurisdictions, law enforcement, and financial institutions in detecting unlicensed Hawala service providers as well as the lack of knowledge on the concept. Financers of terrorism are increasingly linked to the misuse of Hawala. It is more challenging to find the money used to fund terrorism and financial crime since hawala gets beyond AML/CTF regulations to facilitate both legal and illegal funds.

Reason for Existence

Some Hawala operators and money transmitters are now subject to Money Service Bureau (MSB) regulation and are required to follow reporting guidelines, register and obtain a license in the states where they conduct business, and submit suspicious activity reports (SAR) when possible illegal activity is discovered. However, unlicensed and/or unregistered service providers are the ones most likely to be used to transfer money for terrorist financing and other illegal activities.

People who live and work abroad often prefer this approach to using western banking for a variety of reasons. These include the absence of widely accessible formal financial institutions in some countries distant regions; Better exchange rates than banks or the formal system; a lower conversation rate than a financial institution's fee; faster; and purported anonymity. and a lack of bureaucracy and paper trails. These benefits appeal to both immigrants and criminals looking to launder the proceeds of their illicit activities. It is challenging to distinguish between cash intended for families and funds for terrorist financing.

Growing Concern

Before 9/11, Hawala was more frequently used to refer to "underground banking" and was more closely related to money laundering. Hawala was linked to funding terrorism after 9/11. Credit cards and wire transfers were used to pay for the 9/11 attacks, but according to the 9/11 Commission's findings, Bin Laden may have relied on a reliable Hawala network to move his money around the regions where he operated. Hawala is one of the main conduits for the financing of terrorism and money laundering, according to law enforcement in various nations.

Since a link between the rise in crime rates and the usage of Hawala illegally has been found in several regions, there is growing worried about it. Developing nations have also expressed alarm over the loss of tax revenue and foreign cash, which they fear could destabilize their economies and lead to an increase in bribery and fraud.

Hawala- Legal or Illegal?

It might be challenging to discover or identify underground bankers. Even if they could be identified, it would be challenging to control their transactions due to their variety and secrecy. It is important to highlight that not all Hawala users are using this remittance method for shady activities. As a result, Hawala continues to be illegal in many countries around the world, where it is not registered and/or licensed. However, if these operators are somehow identified, registered and/or licensed, and required to abide by local laws & regulations, then the likelihood of money laundering and terrorist activities globally will decrease.

To control the flow of illegal money, it is crucial to strike a balance between regulating the underground banking industry and allowing it to continue functioning as a legal alternative remittance system.

How to Protect Against Hawala’s

Financial institutions dealing with MSBs that might be a ruse for a Hawala must have strict standards and processes in place. This requires conducting increased due diligence on identified MSBs as well as other commercial endeavours that are known to function as Hawala's. It is crucial to carefully monitor the transactions made by these companies to spot, prevent, and report any potentially illegal or suspect activities.

In conclusion, it won't be shocking to see Zimbabwean economic agents choose shadowy financial systems like Hawala as a manner of maximizing their worth given all the issues mentioned above that the country is experiencing.