Remittances save lives or money laundering tools? Hawala and the fuzzy zone of cryptocurrencies

Germany is cracking down on hawala (Hawala) funds, saying they have been misused by money launderers and Islamic terrorist financiers. What is Hawala? How is it different from cryptocurrency?

What is Hawala (Hawala)?

Hawala is a distributed money transfer network that operates especially in areas where the banking system is underdeveloped or capital flows are restricted. It relies primarily on trust and relationships, and informal financial institutions are well-known in many informal value transfer systems.

As an example, a man living in Berlin (A) wants to send €10,000 to his father (B) in Pakistan. Through word of mouth, he found a middleman in a German city — such as (Hawaladar A), the owner of a mobile phone store — and handed him the cash. The middleman, the so-called hawarada (Hawaladar), would provide the father in Pakistan with the password and instruct his Pakistani counterpart (Hawaladar B) to pay the money after the father presented the password.

This type of transfer is inexpensive, fast, and usually doesn't involve too many issues. The Hawala Chamber of Commerce collects upfront fees or earns money through exchange rates. They balance their accounts when money is transferred back to Germany, or by sending goods and cash or through other transactions. Customers have no access to justice, which means the system is largely built on reputation and the fear of retaliation from criminal customers.

Is Hawala regulated?

Certain countries, such as the United Arab Emirates, the United Kingdom and the United States, have been seeking ways to bring them under regulatory control, with mixed results. Hawala is still illegal in Germany, but even the government admits to sometimes turning a blind eye.

Because Hawala can be used both legally to send money ( such as migrant workers sending money home ) it can also be abused by criminal organizations, such as money laundering or illegal transactions.

According to 2019 estimates by German authorities, about $200 billion flows annually through the global informal financial transfer system, Bloomberg reported. By comparison, according to the World Bank, remittances to low- and middle-income countries were officially recorded at $548 billion that year.

Birgit Rodolphe, an official of the German Federal Financial Supervisory Authority, said that the amount of Hawala transfers to and from Germany is very high!

In the United States, operators must register with a department of the Department of the Treasury to comply with regulatory rules as well as state laws. Germany has thousands of agents for Western Union, MoneyGram, and other payment companies, but Hawala money transfers are not allowed in Germany because its users cannot be identified.

But the influx of refugees has fueled demand for informal payment services, as some of the families come from countries under Western sanctions. Most of their home countries have difficulty accessing the official financial system, making remittances more expensive or even nowhere to be found. Even the German government says it allows recipients of Afghan aid to use hawala when it is the only way to save lives or implement particularly important programs.

Germany has recently cracked down Hawala criminals

In an ideal world, Rodolphe says, aid agencies or the United Nations would consider how to set up their own aid payment providers. She said hawala remittances were used by perpetrators, who often profited at the expense of refugees.

In a recent example, Bavarian state police last year arrested several members of a gang that provided hawala funds and made tens of thousands of euros by smuggling Syrians into Germany in connection with two kidnappings.

In 2021, a court in Düsseldorf sentenced five men to up to four years and two months in prison. Court documents show they processed more than 150 million euros for large clients as well as Syrian refugees. The gang mastermind is a jeweler who earns at least 1.44 million euros in commission.

The cryptocurrency is the digital version of Hawala

War, terrorism, and the drug trade are prevalent and are the reasons why banks and payment companies have withdrawn from these areas. There are problems with most payments out there.

Cryptocurrencies, like Hawala, offer alternative remittance methods in many regions with weak or restricted financial systems. With the development of blockchain technology, cryptocurrencies such as Bitcoin and USDT have begun to play the role of modern digital versions of "Hawala", especially in countries facing inflation, capital controls or financial sanctions. For example, people in countries such as Venezuela or Lebanon receive international remittances from relatives and friends through cryptocurrencies, which are then converted into local currencies.

Similar to traditional Hawala, cryptocurrency transfers can bypass traditional financial institutions and are fast and low fees across borders. However, unlike Hawala, the cryptocurrency system requires no middlemen and is highly transparent, and the blockchain can track the flow of funds, although the user's identity can remain anonymous. This has also led governments to gradually tighten the regulation of cryptocurrencies to avoid them becoming a tool for money laundering. Nevertheless, both Hawala and cryptocurrencies reflect the real global demand and challenges for decentralized remittance tools.

This article Money Transfer Saves Life or Money Laundering Tool? The blurred zone between Hawala and cryptocurrencies first appeared in Chain News ABMedia.