What is the Hawala system, and what happened in the Hawala scandal?

First of all - at present, there does not exist a baseline (globally accepted) understanding, as to what an informal channel is, which is what Hawala is considered.

Hawala in its simplest form, is an informal (undocumented) money transfer (cross-border) mechanism. However, this is a very simplstic definition of it.

What maybe informal in one country, can be deemed formal in another. Since the regulatory frameworks worldwide differ and do not adhere to a single document and/or standard, this difference between informal and formal remains.

Even within the Hawala framework, you can have transitionary effect, i.e. what starts out as informal, becomes formal during the transaction process down the channel, and vice versa.

The IMF paper has cited four basic reasons for using the term “informal funds transfer systems”. First, in some jurisdictions, these systems are the dominant means by which financial transfers are conducted and therefore cannot be referred to as “alternative remittance systems”. Second, in some communities, informal funds transfer service providers operate openly with or without government recognition; thus, this system cannot be referred to as “underground”. Third, the use of these mechanisms is often cross-cultural and multiethnic; thus the term “ethnic banking” is overly restrictive. Fourth, IFT better captures the sense and nature of financial transfers akin to conventional banking that are of primary interest to this discussion. Whatever nomenclature used, the “Informal value transfer systems are a heterogeneous collection of mechanisms for transferring outside the conventional, regulated financial institutional systems.

Source: Informal Funds Transfer Systems An Analysis of the Informal Hawala System - A Joint IMF–World Bank Paper, Mohammed El Qorchi, Samuel Munzele Maimbo, and John F.Wilson, International Monetary Fund, August 18, 2003.

The above extraction was from an unsourced paper titled "Understanding Hawala" - not much information is available on the Author.

Some of the contributing factors associated with Hawala are:

• Under invoicing of the value of the amount being transmitted
• Fake exports
• over-invoicing of imports for the purposes of obtaining rebates and/or government subsidies
• Money for overseas travelling (not documented or more informal money allocation, over and above the government's legally allowed Quota)
• Overseas migration
• Flight of Capital
• Tax Evasion
• Extraditing wealth and/or illegal gains, usually drug money or money gained from say human smuggling, etc.
• Immediate transfer of money when regular legal banking and/or financial payment channels may not be applicable.