This article is written by Karunashankar K.N. a 2nd-year law student from School of Law Christ University, Bengaluru. This article explains the concept of hawala transaction, the legislations which deals with hawala and the adverse effects of it.

What is Hawala transaction?

The International Criminal Police Organization – INTERPOL’s definition of hawala is ‘money transfer without money movement’.

‘HAWALA’ is an informal, unregulated mode of transferring foreign currencies to and fro in a country. This system works and operates in a similar fashion to the formal banks without any paperwork, questioning and accountability. 

Hawala transactions are those transactions which are not regulated by the Central Bank that is, Reserve Bank of India (RBI). In this, no actual money transfer happens between the persons. These transactions are made through the intermediaries called hawaladars. This transaction works purely on the basis of trust that the person holds on the hawaladar. There is no promissory note present in these kinds of transactions, this is completely based on the trust and journal balances of both the hawaladars. Hawaladar is the person who is not authorised by the financial regulatory bodies (RBI-Reserve Bank of India, FEDAI-Foreign Exchange Dealers’ Association of India) in India, but still deals with the movement or transfer of money from part of the country to another and also from one country to another. 

These transactions are usually made when a person from one country wants to send money to another person in the other country they use this hawala transaction because in hawala transactions there is no limit set for a transaction made by the person, one can send how much money they want, which will not be regulated by any authority.

Most of the businessmen who made huge amount of black money by not paying appropriate taxes to the government wants to hide their money somewhere safe and politicians who made good amount of black money by taking bribes and by doing scams through government projects, use this way to transfer money because they want to convert their kickback black money into white or want to keep their money safe in some other country without paying the required tax in the home country.

Background

Hawala or hewala is an Arabic origin word which means transfer or sometimes as trust. In India, it is also famously known as hundi. The system started in South Asian countries, particularly in the Islamic community during the 8th century, and now it is very popular and used in every part of the world. It was used as one of the modes of transferring money from one person to another who lives in different places. It is one of the traditional banking system, where it is connected with the set of hawaladars. These kinds of traditional banking system induced a major impact on the formation of the present-day banking system.

The hawala system became very important in the society because of mainly two reasons:

1. Lack of efficient banking system.
2. Many people prefer doing cash transaction as it was the traditional mode of transaction.

Is hawala Legal in India?

It is definitely not legal in India as it has been declared as an illegal way of transferring money by The Foreign Exchange Management Act, 1999. Prior to that, it was made illegal under The Foreign Exchange Regulation Act (FERA) Act, 1973. 

The Foreign Exchange Management Act, 1999

“Section 3. Dealing in foreign exchange, etc.

Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall-

• deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;

• make any payment to or for the credit of any person resident outside India in any manner;

• receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
• enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.”

This section essentially defines the persons who can deal with the Foreign exchange and with foreign securities, the persons who are not authorised by the central bank are not allowed to involve in any kind of transfer of money outside India or receive the money from outside India. There should be no third party involved in the money transfer other than the parties and the official foreign exchange banks. 

There should be no credit for any person who is transacting with foreign exchange, there should be a two-way transfer of money made during the exchange of currencies between countries. A third person can not be represented on behalf of the persons who want to transfer the money, the parties themselves have to transfer the money which they want to, there should be corresponding money transfer made for the transaction made.

Penalties imposed

Section 13 Penalties

According to FEMA states the penalties awarded for any violation committed under this Act; or any contravention of any rule, regulation, direction or order which are issued under this Act, or contravenes any condition subject to which the authorisation of RBI should be taken. The penalties issued as follows:

• If the amount involved in the violation is quantifiable in nature then, the penalty for that offence would be “THRICE” the sum.
• When the amount involved in the offence is non-quantifiable then the penalty may be imposed up till two lakh rupees.
• And if such contravention is continuing even after imposing the penalty, then such offences will be further penalised with five thousand rupees per day.
• Adjudicating Authorities have the power to confiscate any currency, security or any other money or property which is found during the search.

Section 14: Enforcement of the orders of the Adjudicating Authority

If any person fails to pay the full penalty money which is mentioned in section 13 within ninety days from the issue of notice for payment of the penalty, then he will be liable to civil imprisonment under this section.

The term of civil imprisonment varies from person to person. The term depends upon the amount involved in the transaction, if the amount of transaction is exceeding one crore rupees then the imprisonment term may go up to three years. If the amount is less than one crore then it is six months compulsory and it will increase till the person makes full payment of his penalty.

Hawala transaction in India

India has made hawala transactions as illegal in the country, as it is transacted through the unauthorised persons who are not recognised under the Reserve Bank of India and also due to the lack of bureaucracy in the system. Hawala transactions are made illegal by The Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA).

Demonetisation has had a significant impact on hawala transactions in India. On November 8th 2016, Prime Minister Narendra Modi announced the demonetisation, banning 500 rs and 1000 rs denomination notes which completely paralysed the hawala network in the state of Kerala.

Hawala Transaction Act

Every year around fourteen billion dollars foreign currency comes to India out of which only four billion dollars come through authorised banks and financial institutions and the remaining ten billion will enter India through hawala system. In order to regulate this Government of India as formulated certain rules and regulations.

There is no specific act called Hawala Transaction Act in India. It is governed by various other legislations which are mentioned below. 

Financial Exchange Regulation Act (FERA), 1973

This Act has explicitly prohibited “hawala-type” transaction. The objective of introducing this Act was to regulate the entry of foreign capital into the Indian economy. That was one of the peak time where international trading started. 

FERA provides detailed legal prohibitions on the hawala market. Section 8 it created some restrictions on the individuals who deal with the foreign currency and also states some restrictions on the conversion of Indian currency into foreign currency. It mandates the person to possess the authorised license by the RBI to deal with the foreign currencies that may be selling and borrowing or transferring the foreign exchange. Section 9 covers the domestic hawala transactions, by prohibiting the payments or providing credit to the person outside India. FERA was revised and made several amendments as the process of globalisation, liberalisation, and privation was implemented in India. In the year 1999, this Act was replaced by FEMA.

Foreign Exchange Management Act of 1999

Section 2 prohibits the person from entering into any financial transaction India where the associated consideration of money or an asset outside India. 

Section 6 highlights the importance of the RBI and it states by consulting central government, the central bank may specify the class or classes of capital transactions which is permissible and also sets the limit for the foreign exchange transactions.

Section 10 of FEMA – “The Reserve Bank may, on an application made to it in this behalf, authorise any person to be known as authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit.”

This simply means that when a person wants to deal with the foreign exchanges, he/she should register themselves with the RBI. Where hawaladars are not registered under RBI.

Prevention of Money Laundering Act, 2002

According to Section 2(da) of PMLA – An authorised person is one who deals with the exchange of foreign currency and one who deals with off-shore banking unit with the prior permission from the RBI.

Hawala transaction charges

Generally, in hawala transactions, the commission rates are not fixed. It will vary from one transaction to another, the basis for this commission is the amount which has been transacted and the location to which the money has been sent. Hawala is very attractive to the customers because of their commission rates it ranges from, they charge a very nominal rate of interest as commission. Which is very lesser compared to the bank transfer, as the person has to pay a huge amount of tax to the Government of India. And sometimes to promote hawala transaction, hawaladars exempt expatriates from paying fees to them.

Hawala Transaction as a branch of money laundering

Hawala system comes under one of the branches of the money laundering, ‘money laundering’ means hiding the origins of illegally obtained money which are acquired by not paying appropriate tax, which will be transferred to another country through foreign banks or legitimate businesses.

For example, Mohammad Farooq alias Farooq Shaikh was known as Mumbai’s hawala ‘King’. He was arrested by the Enforcement Directorate (ED) on 24th April 2018, as he was involved in an Rs. 2253 crore money laundering case. In that 2253 crores, 680 crores were transacted by involving his own company Stelkon Infratel Pvt Ltd. and remaining 1572cr was remitted by 12 other dummy companies having fake addresses and directors. He had opened around 160 shell companies to do money laundering.

In the hawala system, there is no such official channel of transferring money through bank transaction or by establishing fake companies. The transfer of money happens through hawaladars which is completely based on trust. Here there is no actual transfer of money. The person who intends to hide their unrecorded money will give that money to the local hawaladar and he sends a message to another hawaladar who is present in the place where money has been sent, and the hawaladar there gives the money to the person to hide it or use it as an investment.

Hawala commission rates

Hawala system charges its customers’ very low amount as commission rates as there is no expense of international bank transfer fee and it is an informal agreement made so there will be less probability of hawaladars to charging more commission is very less. Usually, in the hawala system, they charge 0.2% to 0.5% which is very less compared to the bank transfer rates through international banks ranges from 12% to 15%.

One of the attractive features of the hawala system is that there is no limit set for the transaction amount, this makes customers free to send how much money one wants to transfer. In contrast to this, international banks set up the limit of $250000 which is equal to Rs. 17663694.

In order to encourage this system sometimes hawaladars wave off their commission and hand over the entire money to the receiver, by this they build their trust in the minds of the customer and also goodwill for their future transaction. 

How do Hawala Transactions work?

As mentioned earlier this transaction takes place between two persons through the help of intermediary hawaladars who connect with each other in order to transfer money to the intended person.

For example, Moosa is a businessman in Saudi and his entire family stays in Kerala, India. When he wants to send money to his wife Mary he uses hawala.

• He contacts the local hawaladar Mr A and gives 5205 dirhams which he wants to send it to his wife.
• Mr A gives him the passcode which is highly confidential.
• Moosa sends the passcode to Mary by stating how much money has been handed over.
• On the other side in India Mary will get connected to the local hawaladar Mr B who deals with Saudi transactions.
• Mary gives him the passcode which was given to her by her husband and the amount which has been sent to her.
• Mr B will charge 0.5% as a commission that is equal to Rs. 500 and gives only Rs. 100000 to Mary. 
• Now Mr A owes that amount to Mr B.

Hawala money

Hawala money meaning

Hawala is also known as hundi in many places. Hawala literally means transfer or remittance of money. Hawala money is referred to that money which is being transacted through the hawala system. The money which is sent through the system is black money of certain people who want to transfer it from one country to another without paying any tax. Here there is no actual transfer of money from one country to another. It works on the trust principle.

It is one of the alternative means of transferring funds unlike the conventional method of transferring through banks. Money transfer in hawala is arranged through the network of hawaladars across the places.

Hawala money transfer

Hawala acts as the parallel money transfer system to the formal banking system. Here the businessmen and the politicians who want to evade taxes uses this system. Hawala money is transferred by Hawaladars who acts as an intermediary by collecting the money which is to be sent and connects with the counterpart in the other country and sends information about money transfer and he gives said money to the specific person. And after the transfer money, hawaladars settle each other on a later day. Hawaladars maintains an informal journal where they record all the debt which are to be cleared and the credit which needs to be received. Debt money can be settled between hawaladars in cash, property or providing an equivalent service.

Hawala Cases

1. Jain Hawala Diary Case

Jain hawala diary case is said to be the biggest hawala scam in the history of independent India, nearly 115 top politicians, businessmen, film industry people and bureaucrats of Kashmir were involved in this scandal. This all started with the search for the funding of the terrorist money which was sent to Hizbul Mujahideen organisation of Kashmiri militants. 

The money involved was about 18 million US dollars that is equal to Rs. 650 million. The hawala agents involved were S.K. Jain, N.K. Jain, B.R. Jain, and J.K. Jain and they were famously known as Jain Brothers. Some of the top politicians namely L.K. Advani, V.C. Shukla, P.Shiv Shankar, Sharad Yadav, Balram Jakhar, and Madam Lal Khurana and many others.

This was exposed by Vineet Narain through Kalchakra video, news cassette in August 1993.

2. Hassan Ali Khan-The Biggest Tax-Evasion Scam

Hassan Ali Khan is an Indian businessman, in 2007 his Pune and Mumbai residence was raided by Income Tax (IT) and Enforcement Directorate (ED) officials and found laptop containing all the details of the Swiss bank account where it had 10 banks accounts details with having deposits of Rs. 20000 crore, they also found the 85 lakh hard cash in his residence. He had connections with the international arms market. Ali got introduced about the Swiss bank by Adnan Khashoggi in the year 1982. From there on he started depositing the arms dealing money in a Swiss bank account as money in there is untraceable.

And most importantly IT department officials found 4 crores of unaccounted money and they dig deep into it and found that Ali was one of the biggest hawala operators in India, who used to ship the money of the big politicians and businessmen to the countries like Mauritius and Madagascar where the tax rates are really low and again bring that money back to India as an investment to the companies like Autumn Holding and Payson which are shell companies where there will be no actual company existing in that name.

SC invoked terror charges under Anti-Terror law, Unlawful Activities Prevention Act and also under the provisions of Indian Penal Code against Ali for his relationship with various arms and ammunition dealers and with the people who are involved in terror-related activities, by threatening the national security.

3. IT sleuths dig up Rs. 20000-cr hawala Racket in National Capital 

On 11th Feb 2019, the Income Tax Department cracked down one of the big hawala operators in the National Capital Delhi. The Estimated amount which involved in this scam was around Rs. 20000 crores. There was a series of raids conducted by sleuths of Delhi investigation unit of IT in different areas of old Delhi. It was an operation conducted to dig-in the illegal financial activities done by three groups of operators.

The first raid was conducted in one such group in the Naya Bazar area, they found around 18000 crores worth of fake bills and fake entities through which they used to transfer money from one country to another. But the IT department did not disclose the identities of the accused.

The second case was a highly organised money laundering where unaccounted money was fraudulently shown as the sales of the old shares which is being held for years. They tried to show fake long-term capital gains. And the IT estimates the amount involved here in this scam would be around 1000 crores.

Lastly, sleuths conducted a similar kind of search where they found the persons having undisclosed foreign bank accounts and a well-established racket of claiming bogus duty drawbacks of GST through invoicing of exports. The estimated fake exports are more than Rs. 1500 crores, and during this search, they also seized many signed, unsigned papers, agreements, MoUs, cash settlement of disputed immovable properties around Rs. 100 crores.

4. Rs. 3,300 crore Hawala Racket Involving Infrastructure Firms

On 1st week of November 2019, IT Department raided on the major Infrastructure firms in India, it was one of the biggest tax evasion made by the corporate firms. This raid was conducted in 42 premises that include major cities of the country which are Delhi, Mumbai, Hyderabad, Erode, Pune, Agra and Goa on the group of people who were indulging in hawala transaction by producing fake bills.

Here, the IT department successfully opened up the incriminating evidence and also established the connection of big corporates, hawala operators and identification of the entire chain of the process of money laundering. Officials found that Rs. 3300 crore amount of fund was being transferred illegally by making fake contractual obligations. And also they found unexplained cash of Rs. 4.19 Crore and unaccounted jewellery of worth Rs. 3.2 crore.

This funds which are meant public infrastructure projects was emptied by entry operators, lobbyists and hawala dealers. The companies involved in these kinds of deals are situated in NRC and Mumbai. The companies claimed in billing fake invoices. The projects which were involved in this were major public infrastructure and Economically Weaker Section projects mainly located in Southern India.

The evidence of cash payment of Rs. 150 crores to a prominent person in Andhra Pradesh during the search of this hawala transaction.

5. The target of Enforcement Directorate on Rs. 700 crore Hawala Racket

The interrogation started with the Kashmiri businessman named Zahoor Watali, who was a co-accused in this case. The ED had conducted searches at 11 locations in Delhi and Mumbai which is linked with the international hawala racket which involves around 700 crores. Pankaj Kapur and his associates are the main accused in this case. The ED filed a case of Forex violation against them under the Foreign Management Act (FEMA), 1999. During the search, the ED has seized cash of Rs. 29.19 lakhs and also some of the important documents, electronic gadgets, diaries and the stamps of more than 150 shell companies which are related to the whole hawala transaction of 700 crores.

According to the inquiries conducted by the ED, it is said that hawala transactions is being carried out by one of the Indian Company named M/s Radhika Gems Pvt Ltd, where this company collects the money in cash and transfer that money to abroad as against the payment of diamonds. These overseas companies are also owned and controlled by Pankaj Kapur himself.

Why does the Hawala transaction exist?

1. Hawala gives an easy way for the conversion of Indian currency to Foreign currency.
2. In hawala, there is no set cap for the amount which is being transacted. It allows the whole amount which needs to be sent.
3. Hawala system charges a very minimal amount of money as commission whereas foreign exchange banks will drain money through commission.
4. Hawala gives an opportunity for the black money diggers to convert their black money into white by transferring the black money to a foreign country without any knowledge of the regulators like RBI, Income tax etc.
5. This is the only way through which terror organisations will receive money and transfer money as they don’t have the opportunity to use official banks due to their illegal business transaction.
6. This system maintains a high level of confidentiality where the sender and the receiver will not be disclosed anywhere.
7. The transaction made cannot be traced easily.
8. Hawala system is not regulated by any of the governmental organisation as it is made illegal under the law.

How does Hawala impact India?

1. Increase of informal fund transfer: Informal fund transfer domestically and internationally harms the formal line money transfer, which in turn affects the entire economic system of the country.
2. Increases Corruption: Politicians who make kickback black money by receiving the bribes can easily convert that black money into white through hawala. And most importantly politicians anonymity will be maintained here.
3. Increase of Black Money flow in the economy: As the hawala system is an unregulated transaction. So it is widely used in India and other countries to transfer that money to another country.
4. Conversion of Black money into white money: This system helps the black money holders to convert their black money into white easily by:

(i) Transferring their money to foreign country’s bank where there will be no tax or minimal amount of tax imposed, 

(ii) Transfer black money as a loan to individuals residing in the same country or in foreign.

(iii) Transferring the black money abroad as an investment in a foreign company.

5. Terror Financing: Usually terror organisations receive funds from other countries, those funds cannot be transferred easily through formal banks, so terrorists use hawala transaction for receiving and sending all the funds. 

Measures to curb

Government of India has introduced many measures in order to control the Hawala transaction.

• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: The main aim of this Act is to curb black money, bring light out of undisclosed foreign assets and income which is being circulated freely in the economy.
• Multi-Agency Group: This was set-up in 2016, as per the order of the Delhi High Court by Finance Ministry after knowing the involvement of Indian Nationals in Panama leaks.
• Special Investigating Team on Black Money: Supreme Court ordered for the setting-up SIT on black money in 2014 to curb and investigate cases of black money that is circulated in the economy.
• The crackdown of Shell Companies: Government of India is trying its best to close all the shell companies which is being run to convert all the black money to white. According to government officials out of 17.79 lakh registered companies in India 5.43 lakhs are shell companies and these companies were closed by the government in the year 2018.
• Demonetisation: On November 8, 2016, Government of India announced a ban on usage of 500 and 1000 rupee currency note and issued new currency notes of 500 and 2000. This helped the economy to cut down the liquidation of cash which leads to the creation of black money, hawala and all the illegal transaction.
• Introduction of a new section in Income Tax Act, 1961: In the year 2017 a new section of 139AA was included in Income Tax Act, which mandates Aadhar no. while applying for the new Permanent Account Number(PAN) card and while filing Income Tax Returns.
• Liberalising Foreign Transaction: RBI has reduced the restrictions and blockages for the foreign transaction and made it faster and customer friendly.
• Notification rules of Prevention of Money Laundering (Amendment) Act, 2005: Government made mandatory to provide Aadhar details while opening a new bank account in any bank and also to provide PAN and Aadhar details while transacting amount is more than 50000.
• Ban on cash transaction: According to section 269ST states that no person shall receive an amount 2 lakh and above in liquid cash in a single day, single transaction and which is related to the same event or occasion.

TransferWise

Transferwise is a British online money transfer service established by Estonians Kristo Kaarmann and Taavet Hinrikus in the year 2011 in London.

This online money transfer service allows the customer of 750 different currencies for transacting across the world. Some of them are GBP, USD, EUR, AUD, and CAD. The net profit of transferwise reached 8 million dollars. And deals with the transfer of more than 4 billion dollars in a month. 

The aim focus of transferwise is to provide a platform for people who want to transfer money from one country to another with the cheaper commission rates unlike traditional banks charging a very high amount of commission. And as of now, this is being in functioning in seven different languages and the profile is created with the help of connecting person’s social media account like Facebook.

TransferWise in India

Transferwise considers the tax regulations of all the countries where it operates. They comply with all Indian laws which are present and operate according to those laws. 

The partner banks to transferwise in India are HDFC bank and Yes bank. Through these banks, it has also registered with the Indian tax authorities. Transferwise also provides all the necessary certificate for the transfer of money from one country to another through these banks.

TransferWise to India

As mentioned earlier all the transactions of transferwise are done with the collaboration of HDFC and Yes bank. There is a minimum amount of 50000 set for receiving foreign currency in India. Compared to all the other competing banks transferwise charges less and transactions takes place in a faster mode.

TransferWise from India

Same as mentioned above there is a minimum amount of 50000 set for transferring money from India to other countries. As many branches all over India, it helps the customers to access it easily and the funds can be transferred faster.

Exchange Rates Involved 

The amount of exchange rates charged by the transferwise is very low compared to all the foreign exchange banks. The commission rate charged by them varies from one country. It takes into consideration the country from where the money is sent and to where that money is being sent.

For example,

The dollar rate as of today is Rs. 71.9, consider you are sending 1000$ to your friend from the US to India, the whole amount without any foreign exchange taxes will be Rs. 71920, transferwise charges 1.92% as commission and your friend in India will be receiving only Rs. 7055 after deducting Rs. 1865 rupees going as commission.

A British Pound rate as of today is Rs. 92, consider you are sending 1000£ to your friend from London to India, the whole amount without any foreign exchange taxes will be Rs. 92000, transferwise charges 0.83% as commission and your friend in India will be receiving only Rs. 91881 after deducting Rs. 119 as commission.

Conclusion

Hawala is one of the economic evils present in our country, which helps the kickback moneymakers to convert their illegal, unaccounted money into white money. This hampers the overall development of a Nation. This is also a parallel illegal exchange market which drives the customers out from the official foreign exchange banks. FEMA Act makes hawala transaction illegal by allowing only RBI authorised persons to transact with the exchange of foreign currencies. It imposes penalties on the persons who are involved in these transactions. And probe agencies like ED, CBI are very active in recent days and it is breaking down all the hawala networks. However, with a lot of effort by the government and enforcement agencies hawala is still existing with a huge amount of transactions taking place on a daily basis.

References

1. Hawala: A Parallel Economy
2. https://www.investopedia.com/terms/h/hawala.asp
3. The Foreign Exchange Management Act (FEMA) Act.1999
4. https://mckinneylaw.iu.edu/iiclr/pdf/vol15p619.pd
5. https://economictimes.indiatimes.com/news/politics-and-nation/i-t-sleuths-unearth-rs-20000-cr-hawala-money-laundering-racket-in-delhi/articleshow/67946158.cms?from=mdr
6. https://www.financialexpress.com/industry/crackdown-on-shell-companies-only-66-registered-firms-active-5-43-lakh-closed/1262062/

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.