The question an examiner asks is why a grocery store's account takes cash from many people every day and sends round sums to a trading company in Dubai. The Financial Action Task Force (FATF), in its 2013 report on hawala and similar service providers, found that over 90 percent of New York filings on possible unregistered money services businesses "involved convenience/grocery stores and the Middle East" (p. 57). Hawala sits among the money laundering methods supervisors track, and the broker can be an ordinary shop.
What does hawala mean, and who is a hawaladar?
Hawala means a transfer of money through a network of brokers rather than through banks, though FATF found in 2013 that the term has "no common definition" across countries (p. 12). In South Asia and the Middle East it names a centuries old system often used to finance trade. A hawaladar is the broker: FATF defines it as "a money transmitter that provides hawala services" (p. 16). FinCEN's advisories use a wider term, informal value transfer systems (IVTS) (p. 57).
FATF groups these brokers with similar providers, "described using a variety of specific terms, including hawala, hundi, and underground banking", which "settle through trade, cash, and net settlement over a long period of time" (p. 9). They are not, FATF adds, the "global money transfer networks" of large multinational transmitters. FATF sorts them into three types, each with its own risks: pure traditional (legitimate), hybrid traditional (often unwitting) and criminal (complicit). In practice, they "often have detailed records" and "are not necessarily based upon trust" (p. 10).
How does a hawala payment work?
Table 1. One hawala transfer, step by step (illustrative: 1,000 pounds from London to Lahore).
| Step | What happens | What money moves | Record left |
|---|---|---|---|
| 1. Pay in | The sender hands hawaladar A in London 1,000 pounds and a fee, and gets a code | Cash stays in London | A's ledger line |
| 2. Instruction | A tells hawaladar B in Lahore the amount, the recipient and the code | None | A call or a chat message |
| 3. Payout | The recipient quotes the code; B pays the rupee amount from its own cash | B's local cash | B's ledger line |
| 4. Settlement | Weeks later, A and B settle what they owe each other | A net transfer, goods, cash or a third party payment | Bank or trade records, if any |
No money crosses the border at step 1 or step 3. In net settlement, the brokers pay from their local cash pools and, after a set period such as a month, settle only the net amount owed; about 80 percent of the countries FATF surveyed called this the most common method (p. 16). Debts are also cleared through reverse transfers, triangular settlement through a third broker, settlement through goods, which can shade into trade based money laundering, and cash couriers.
A bank transfer is different. It travels as a payment message, for example over SWIFT, carrying who sent the money and who receives it, data the travel rule requires on licensed transfers. A hawala payout carries no such message.
Is hawala legal or illegal around the world?
Table 2. Hawala rules by jurisdiction (as of October 2026).
| Jurisdiction | Rule | What an operator needs | If it operates without |
|---|---|---|---|
| FATF standard | Recommendation 14 (updated June 2026) | A license or registration; agents licensed or listed | Countries should "apply appropriate sanctions" |
| United States | 31 CFR 1022.380; 18 U.S.C. 1960 | FinCEN registration as a money services business (MSB) within 180 days, renewed every two calendar years, plus any state license | A fine, up to 5 years in prison, or both, under 1960 |
| United Kingdom | MLR 2017 reg 56 and reg 54 | Inclusion in the register of money service businesses, kept by HMRC or, for authorized firms, the FCA | It "must not act" as a money service business |
| European Union | PSD2 Article 37 | Authorization as a payment service provider; money remittance is a payment service | Member states "shall prohibit" it |
| United Arab Emirates | CBUAE Registered Hawala Providers Regulation (in force since 14 June 2019) | A Hawala Provider Certificate and a UAE bank account for settlement | Article 2 bars the activity |
Across this global regulatory response, the offense is running the service without a license or registration, whatever the method. A bank that already holds a license to transfer money needs no second one (FATF's note to Recommendation 14).
In the US, the line between a lawful hawaladar and a criminal one is the license and the registration: one with its state license and a FinCEN registration as a money services business is a regulated money transmitter, while one missing either commits a federal crime under 18 U.S.C. 1960, even if it did not know a state license was required and every customer is a worker sending wages home.
Why is hawala a financial crime and sanctions evasion risk?
What changed in 2026: on 25 October, India's Directorate of Enforcement (ED) reported searches in Mizoram and Manipur against a narco hawala network that settled drug money with suppliers in Myanmar. It froze 1,424 bank accounts, secured over Rs 26 crore in assets and arrested six people under the PMLA. One mini ATM counter had made 2,947 transfers worth Rs 175.03 crore between 2024 and June 2026, and the money ended with unlicensed rupee to kyat exchangers.
The risks follow from how the system is built:
- Hidden proceeds. FATF's survey found people choose hawala for price, speed, cultural preference, a lack of bank access and low confidence in banks, and also for the "deliberate transfer or concealment of criminal proceeds" (p. 10).
- Sanctions evasion. Criminal providers "mask the identity of the ultimate originator" from the banks that wire the funds (p. 39); FATF's US cases include transfers to Iran in breach of OFAC sanctions (p. 66).
- Little regulatory oversight. Most countries FATF surveyed had sanctions for unlicensed transmitters, yet few appeared to have used them (p. 55).
- No message to screen. A payout without a payment message gives screening and monitoring nothing to read.
- Criminal networks. One set of accounts can serve many groups: the ED found the same accounts settling drug money from Manipur, Mizoram, Assam and Tripura.
How can compliance teams detect hawala activity?
Hawala reaches a bank through the broker's accounts, so detection looks for an unlicensed money business inside an ordinary account. FATF's indicators (pp. 57 to 58) and the ED case give a checklist:
- Collective accounts. Many small deposits from different people, then one large transfer abroad: the cash pool of step 1.
- Round transfers at regular intervals to a hub such as Dubai: the settlement of step 4.
- A temporary repository. Money in and straight out again, with no business reason.
- Third party accounts with no business link to the hawaladar or the sender.
- Rented accounts. In the ED case, Rs 11.98 crore went into seven accounts and only Rs 17 lakh came out in cash, the pattern of a money mule account.
- Turnover far above income. A homemaker's account took Rs 15.48 crore against a family income of about Rs 27,000 a month.
- Amounts kept under customer identification or transaction reporting thresholds, a form of structuring.
Mitigation starts at onboarding: an AML program's know your customer (KYC) and customer due diligence (CDD) checks on any business that sends money for others include its license or registration. After that, transaction monitoring in complead, formerly Sanction Scanner, runs payment scenarios such as corridor volume and rapid pass through, close to indicators 2 and 3 above, and each alert opens as a case with the customer's rating, screening and ownership attached. An analyst decides whether it goes to a report.
Back at the grocery account, the analyst asks for two things: the money services registration and the trade behind the transfers to Dubai. With neither on file, the account goes to a suspicious activity report decision.
Related terms
- Structuring. Breaking deposits or transfers into amounts below a reporting threshold.
- Money mule. A person whose account moves criminal money for someone else.
- Travel rule. The duty to send sender and recipient data with a transfer.
- Trade based money laundering. Moving value through false invoices and shipments.
- Black market peso exchange. Brokers swapping drug dollars in the US for pesos paid out in Colombia.
- Front company. A real business used to hide criminal money inside its turnover.
How this entry was checked. Checked on 26 October 2026 against FATF Recommendation 14 and its note (June 2026 text), FATF's report on the role of hawala and other similar service providers (October 2013), 31 CFR 1022.380, 18 U.S.C. 1960, the UK Money Laundering Regulations 2017 (regulations 54 and 56), PSD2 Article 37, the CBUAE Registered Hawala Providers Regulation and India's Directorate of Enforcement release of 25 October 2026. The definition follows FATF's description of hawala and other similar service providers. Barbaros Sercan (Customer Success Specialist, complead) drafted the entry; the review is by Dilara Diker, Head of Compliance at complead. Last reviewed: 26 October 2026.
