In our latest blog, Eddie Vaughan, VP of Banking and Financial Services, explores the challenges Hawaladars pose, their implications for financial institutions, and the steps necessary to ensure compliance with legislation while supporting legitimate operations.
The financial landscape in the UK has long been a melting pot of traditional and alternative banking systems, with Hawala banking standing out as a unique, informal network valued by many for its efficiency and accessibility. However, recent warnings by the National Crime Agency (NCA) highlight the growing threats linked to Hawaladars (Hawala brokers), particularly regarding organised crime and financial non-compliance.
What is Hawala Banking?
Hawala banking is an informal value transfer system based on trust that allows the movement of money without the actual transfer of funds. Widely used in South Asia, the Middle East, and increasingly in the UK, it operates outside conventional banking systems, bypassing formal documentation and regulatory oversight.
How it works:
- A customer approaches a Hawaladar to remit funds to a recipient in another location.
- The Hawaladar assigns a counterpart in the recipient’s location to make the payment.
- Leveraging personal trust networks, these transactions happen swiftly, relying more on honour systems than paper trails.
Legitimate Use and Criminal Exploitation
Hawala banking serves a vital purpose for underserved populations, particularly in migrant communities where trust in conventional banks may be limited, or access is inadequate. Despite these legitimate uses, Hawala systems are increasingly exploited for illegal activities, including:
- Money laundering: Criminal networks use Hawala operations to move illicit funds without regulatory scrutiny.
- Terrorist financing: Funds are obscured from conventional anti-money laundering (AML) checks.
Organised immigration crime: A growing concern, as flagged by the NCA, involves Hawaladars being implicated in facilitating illegal immigration networks. A notable UK case involved Asghar Gheshlaghian, who operated an unregulated money transfer service used by criminal gangs to smuggle migrants into the UK. In 2024, he was sentenced to eight years in prison for money laundering and immigration-related offences, underscoring the importance of registration and compliance for money transfer providers.[1]
Recent Actions by UK Authorities
To curtail these risks, the National Crime Agency initiated a high-profile operation over two days (25-26 February), inspecting 44 businesses suspected of acting as Hawaladars across the UK. Supported by HM Revenue & Customs and nine local police forces, this operation sought to warn participants about the severe consequences of non-compliance. Key outcomes included:
- A direct emphasis on vigilance and compliance.
- Signposting of reporting mechanisms for unlawful activities.
- Highlighting consequences of failure to comply with legislation.
This proactive approach is part of an ongoing effort, with the NCA currently involved in 70 active investigations into people smuggling operations. Such measures underline the authorities’ intent to dismantle networks benefiting from the misuse of Hawala systems.
The Role of Financial Institutions
Many banks unknowingly provide services to Hawaladars operating under varying guises, often due to insufficient understanding of Hawala networks. This presents a dual challenge for financial institutions:
- Access vs. risk: Hawaladars require access to traditional banking systems to facilitate their operations. While some operate legally, others actively undermine AML and counter-terrorist financing (CTF) frameworks.
- Transparency and due diligence: Institutions must differentiate legitimate clients from those misusing the banking system for unlawful purposes.
Key Questions for Compliance Teams
- Do you know your Hawaladar clients?
Many financial institutions may not even recognise they are banking Hawaladars, as customer risk assessments may not adequately account for this segment.
- Are you conducting enhanced due diligence (EDD)?
Even if identified, Hawaladar accounts might not be scrutinised for potential links to organised crime or terrorism financing. Proper EDD measures, particularly for high-risk entities, should be standard.
- How are you leveraging data and resources?
With growing demands for collaboration between financial institutions and law enforcement, are you effectively sharing intelligence to mitigate risks?
Prevalence and Regulatory Challenges in the UK
Hawala is significant in the UK, especially among immigrant communities. While it is not inherently illegal, the Financial Conduct Authority (FCA) provides oversight for formal money service businesses (MSBs). However, the lack of formal documentation and technological adoption makes Hawala difficult to regulate effectively.
Integration with Formal Banking
While Hawaladars often require formal bank accounts, financial institutions frequently struggle to identify them due to fragmented systems and insufficient training on Hawala banking risks. Criminal networks exploit this gap, making education and vigilance essential.
How Financial Institutions Can Strengthen Compliance
To balance the legitimate needs of Hawaladars while mitigating risks, financial institutions must take a proactive approach, which includes:
1. Enhanced Due Diligence (EDD) Frameworks
– Implement specialised risk assessments designed to identify Hawaladars.
– Focus on transaction monitoring to detect potential misuse.
– Examine customers’ operational profiles for consistency with declared business activities.
2. Collaboration with Law Enforcement
Leverage existing mechanisms like the Suspicious Activity Reports (SARs) system and partnerships such as the Joint Money Laundering Intelligence Taskforce (JMLIT) to share intelligence about suspect transactions.
For more information on how to achieve better collaboration with law enforcement agencies view our latest blog here
3. Training and Education
Strengthen internal compliance teams with focused training on Hawala banking, its risks, and its regulatory implications. Programmes should include:
– Identifying red flags associated with informal banking systems.
– Understanding the cultural and economic drivers behind Hawala banking.
4. Advanced Analytical Tools
Adopt AI-driven tools to:
– Cleanse data and identify anomalies indicative of unlawful activity.
– Generate actionable intelligence from transaction data.
– Enhance monitoring and reporting efficiency, particularly for high-risk clients.
5. Public-Private Partnerships
Participate in initiatives like JMLIT to achieve a unified approach for tackling financial crime. Such collaboration ensures wider intelligence-sharing and more comprehensive risk mitigation.
Looking Ahead
Hawala banking continues to play a dual role within the UK’s financial ecosystem—providing legitimate services to certain communities while being susceptible to criminal exploitation. The recent efforts of the NCA serve as both a warning and a reminder of the importance of vigilance in combating financial crime.
For financial institutions, the key lies in striking the right balance between enabling access for legitimate Hawaladars and addressing the challenges posed by those who misuse the system. Through enhanced compliance frameworks, stronger collaboration with law enforcement, and improved education, banks can protect themselves from reputational and operational risks while fostering safer financial ecosystems.
Are your compliance frameworks and due diligence initiatives robust enough to identify and mitigate Hawala banking risks? Now is the time to strengthen your approach and contribute to a more secure financial future. For more information on how to achieve this, visit: https://chorusintel.com/product/financial-services/
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[1] https://financialaccountant.co.uk/news/eight-years-prison-for-operator-of-illegal-money-transfer-service/?
