Logo
Book a Demo
Table of Contents

Solutions

Customer Onboarding Software

Name Screening Software
Customer Risk Assessment Software
Case Management Software
Contact Us

Understanding Hawala in Nutshell

  • Hawala is an informal value transfer system used to transfer funds without any physical cash movement across borders based on a trust relationship through brokers and their networks.
  • It lacks transparency due to its anonymous nature and is highly prone to ML/TF or PF-based risks.
  • Regulatory authorities globally require businesses to conduct EDD for Hawala-based operations, perform transaction pattern analysis, ongoing monitoring, and robust recordkeeping to remain compliant.

What is Hawala, and how does it work?

Hawala is a traditional fund transfer system that is operated by brokers (commonly called hawaladars) across multiple jurisdictions. Value transfers take place between parties based on trust without any physical cash transfer from one place to another. Although Hawala practice is practised as a legitimate cultural remittance method due to its easy accessibility and has been used for centuries, it poses severe Money Laundering (ML), Terrorist Financing (TF) and Proliferation Financing (PF) based risks. Due to its informal nature of operations, lack of proper regulatory oversight, and reliance solely on the trust factor, it creates significant challenges for organisations seeking to prevent financial crimes.

AML/CFT Risks Associated with Hawala

The informal nature of Hawala networks creates anonymity, which makes it difficult to trace the transactions and allows criminals to exploit these operational gaps. Limited documentation leads to a lack of records, which increases the anonymity risk.


Cash-based settlements are common in the Hawala system, making it challenging for organisations to trace the transaction trails. Sanctioned individuals or entities are commonly found to be involved in Hawala-based transactions to bypass AML controls and evade the sanctions regimes through an unregulated channel.


Hawala networks can be easily exploited by criminals through the placement of proceeds of crime by fragmenting a lump sum amount into smaller amounts.


Afterwards, through the complex chain of hawaladars, criminals attempt to layer transactions to obfuscate the origin of funds and then introduce them to the financial market as clean money. This process makes the business prone to ML/TF or PF-based risks.

Hawala Typologies and Misuse Patterns

Criminals attempt to exploit the informal Hawala system through various means. A common method involves using the Hawala system to move funds across borders outside regulated financial systems, transferring their illegal proceeds without leaving any audit trail. Criminals avoid physical cash and prefer trade-based settlement and offset the transactions to balance Hawala accounts. To settle the trades, criminals use several means, such as over-invoicing, false classification of goods to manipulate prices, showing the involvement of import-export-based business to justify cross-border transactions and laundering the money. Hawala operations rely on the use of intermediaries such as hawaladars, through which it becomes easy for criminals to disguise the funds. Front businesses are also commonly used as a cover to integrate the proceeds of crime into the economy.

Regulatory Expectations and Legal Treatment of Hawala

Regulatory authorities globally classify Hawala under Money Service Business or Informal Value Transfer System (IVTS) regulations, subjecting it to stringent regulatory requirements. Entities providing Hawala-based services are required to obtain a mandatory license and implement adequate risk mitigation strategies, register with their Financial Intelligence Units (FIUs) and maintain records. These requirements make the Hawala services provider accountable for AML compliance and keep them regulated. Unregistered Hawala operators and institutions that facilitate their activities are subject to enforcement actions, including administrative penalties and prosecution for violating AML/CFT regulations.

Detecting Hawala-Related Risk with Citadel365

Citadel365 helps the compliance team by identifying red flags related to Hawala-based operations. Inbuilt customer onboarding controls help in assessing the customer profiles, their occupation and remittance behaviours to check if the client is linked to hawala use.
Citadel365 supports organisations to detect Hawala-related transaction risks through its advanced transaction monitoring, which identifies unusual transaction patterns or any trade-based offsets that deviate from normal banking behaviour.
The dedicated Case Management tool assists the entities in effective documentation by organising the customer database alongside all due diligence records. This ensures audit readiness and helps businesses demonstrate compliance during regulatory inspections.

Risk Mitigation and Monitoring Strategies

Risk mitigation strategies help the entities to remain compliant. Enhanced Due Diligence (EDD) is a critical regulatory requirement which is applicable to all such customers dealing through the informal remittance system. Through EDD, businesses can verify that the Source of Funds and Source of Wealth of their clients are legitimate. Behavioural monitoring analyses overall customer conduct beyond just transaction patterns, which helps entities assess the magnitude of risks involved. This includes verifying funds’ origin and assessing geographic risks as part of a risk-based approach. Proactive AML controls include efficient screening against the sanctions list, implementing ongoing monitoring, performing EDD, and maintaining records of overall compliance activities. These measures help the organisations to remain compliant and avoid enforcement actions.

Hawala FAQs for AML Professionals

Hawala is an informal value transfer system in which funds are transferred without any physical movement of cash across jurisdictions through brokers operating on a trust-based relationship.

It poses high AML/CFT risks due to its anonymous nature, complex transaction patterns that leave no audit trail, and involvement of multiple jurisdictions without regulatory oversight.

The legal status of Hawala primarily depends upon jurisdiction. If the country’s domestic laws permit it, then only a registered entity meeting all AML/CFT requirements can operate its Hawala business.

Common red flags include unusual transaction patterns, rapid movement of funds, suspicious customer behaviour, trade-based activities linked to informal value transfer, high-risk jurisdictions, and the involvement of multiple intermediaries without any commercial rationale.

Financial Institutions (FIs) can detect use of Hawala operations through monitoring transactions, conducting effective CDD to identify involvement of customers in Hawala operations, analysing customer behaviour, etc.

Hawala-related risks must be documented through detailed compliance records, including observed red flags, analysis of transaction patterns, and proper documentation of overall AML compliance records.

Escalation protocols should have immediate reporting of suspicious activities or transactions, with an internal review process and effective risk assessment.