Hawala Money Laundering: How an Informal Value Transfer System Moves Money without Moving Money

In 2013, the Financial Action Task Force (FATF) published a typology report with a rather uncomfortable conclusion. Its study, The role of Hawala and other similar service providers in money laundering and terrorist financing, documented how a centuries-old remittance system routinely moved criminal proceeds across borders while leaving almost no footprint in the banking system. Hawala money laundering exploits a simple mechanism. 

Value would reach the recipient almost instantly, but no money crosses the border, so there is no wire to monitor, no correspondent bank to flag, and no obvious paper trail to follow. For compliance teams, the gap that exists between value transfer and money movement constitutes the whole problem. This guide explains what hawala is, how the system works, why it attracts launderers, and how regulators and compliance teams try to detect it.

What is hawala and how does it work?

Hawala is an informal money transfer system that settles debts between trusted brokers rather than moving funds through banks. A customer hands cash to a local broker, who instructs a counterpart broker in the destination country to pay the recipient. No money travels between the two brokers at the moment of transfer. They settle up later, which is what makes the hawala system fast, cheap, and hard to trace.

What hawala means

The word hawala comes from an Arabic root meaning to transfer or to change. In practice, the hawala meaning is closer to a transfer of trust than a transfer of cash. The same model appears under different names worldwide, including hundi in South Asia, fei ch’ien in China, and phoe kuan in Thailand. Each version relies on a network of brokers, called hawaladars, whose reputation inside a family, village, or ethnic community is the security that keeps the system honest. A broker who fails to pay out loses standing, and in a close-knit hawala network that loss of honour ends the business.

How a hawala money transfer settles between brokers

A hawala money transfer separates the payout from the settlement. Suppose a worker in London wants to send money to their family in Karachi. She pays a London hawaladar in cash plus a small commission. The London broker contacts a Karachi broker, who pays the family in local currency, often within hours. At that moment the London broker owes the Karachi broker. That debt is settled later through netting, where opposing transfers cancel each other out, or through trade invoices, property, or cash carried by couriers. Because settlement happens separately and in bulk, individual transfers stay invisible to the systems banks use to spot suspicious wires.

What is an informal value transfer system (IVTS)?

An informal value transfer system (IVTS) is any network that moves value outside regulated banking channels, and hawala is the best-known example. The US Financial Crimes Enforcement Network (FinCEN) uses the IVTS label to group hawala with similar systems such as hundi, fei ch’ien, and the black market peso exchange, in its advisory on informal value transfer systems.

The category matters because it sets the regulatory expectation. FinCEN treats IVTS operators as money transmitters, which means the same registration, record-keeping, and suspicious activity reporting duties that apply to a licensed remittance business apply to a hawaladar. An operator who moves value for others and skips those obligations is running an unlicensed money services business, whether or not any single transfer was itself criminal.

How is hawala used for money laundering?

Hawala is used for money laundering because it breaks the link between a person and the movement of their money. The same features that make it useful for legitimate remittances- speed, low cost, and minimal records- also make it ideal for hiding the origin of illicit funds. FATF flags the system repeatedly for both money laundering and terrorist financing, particularly where brokers operate without AML controls.

The AML risks concentrate in a few specific features:

• Weak or absent customer due diligence. Many hawaladars record little more than a name and a phone number, so there is no verified identity behind a transfer.
• Broken audit trails. Settlement through netting and trade means the value that reaches a recipient rarely maps back to the value that entered the system.
• Layering across borders. Criminals can place cash with a broker in one country and collect clean value in another, skipping the correspondent banks that would otherwise screen the flow.
• Co-mingling with genuine remittances. Illicit transfers sit inside a large volume of legitimate family remittances, which makes pattern detection hard.
• Terrorist financing overlap. The 2013 FATF report notes that terrorist groups exploit hawala where it is a normal, trusted channel that sits outside AML supervision.

Mapped to the three stages of laundering, hawala is strongest at the layering stage, where the whole point is to distance dirty money from its source.

Is hawala legal in the UK?

Hawala is legal in the UK only when the operator is registered and supervised. Under the Money Laundering Regulations 2017, a hawala operator must register with HM Revenue and Customs (HMRC) as a money services business, or hold authorisation from the Financial Conduct Authority (FCA) as a payment institution.

An unregistered operator is running an illegal money transmission business, which can bring criminal prosecution, financial penalties, or closure. Registration also carries duties. A UK hawaladar must perform customer due diligence, keep records, and file suspicious activity reports, the same obligations a bank carries. The legal line is not the system itself. It is whether the operator sits inside the supervised perimeter or outside it.

How do regulators and compliance teams detect hawala-related activity?

Regulators and compliance teams detect hawala mainly through red flags and network analysis, because the transfers themselves leave little direct evidence. FATF recommends red-flag indicators as the primary method for spotting brokers and their clients, since a single transaction rarely looks suspicious on its own.

Common indicators a compliance team watches for include:

• Structured cash deposits just under reporting thresholds, with no matching outbound wire.
• Third-party cash inflows to a small business account that are unrelated to its stated trade.
• Ledger-style references or coded tokens in payment notes that hint at an offsetting arrangement.
• Income-to-turnover mismatch, especially for import-export or currency-exchange businesses.
• Trade invoices with values that do not match the goods, a signature of trade-based settlement.

For regulators, detection leans on the registration perimeter and information sharing. Supervisors cross-check who is licensed against intelligence on active brokers, and unregistered operators surface through cash-intensive banking patterns, informant reports, and law enforcement referrals. The practical challenge is the same for both sides. Hawala hides inside legitimate cash economies, so identifying it depends on connecting weak signals across many accounts rather than catching one obvious transaction.

How Shufti helps compliance teams surface hawala-linked risk

If you run compliance at a bank or payment firm, hawala is frustrating because the risk rarely sits in one transaction. It shows up as a pattern across an unverified customer, a cash-heavy business account, and settlement flows that never quite reconcile. When onboarding is thin, you have nothing to anchor the pattern to.

Shufti’s AML screening covers risk from onboarding through continuous transaction monitoring and watchlist screening in one decisioning layer, so a customer cleared at signup keeps being checked as their behaviour changes. Match thresholds are tunable, which lets teams dial in the cash-structuring and third-party-payment signals that point to informal value transfer without flooding analysts with false positives. Decisions stay explainable because the models are Shufti’s own.

See how Shufti’s AML screening flags informal value transfer patterns on your real transaction data. Book a demo.