PMLA

All You Need to Know About Hawala Transactions

Hewala or Hawala is an Arabic origin word referring to the transfer of money. In India, it is also commonly known as hundi. The system commenced in South Asian countries, the Islamic community in particular, during the 8th century and has become very popular since then, along with being in every part of the world as one of the modes of money transfer from one person to another residing in different places. It is one of the traditional banking systems connected with the set of hawaladars. These kinds of traditional banking systems induced a major impact on the formation of the current banking system.

Hawala Transactions are illegal in India as per the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA^[1]) due to it being transacted through unauthorised persons that aren’t recognised under the RBI and also due to the lack of bureaucracy in the system.

Hawala Transactions: Meaning

‘HAWALA’ is an informal and unregulated mode for the transfer of foreign currencies across the country. Such a system works and operates in a similar manner as the formal banks, without any paperwork, questioning, or accountability. 

Hawala transactions are those transactions which aren’t regulated by the RBI. The actual transfer of money doesn’t take place between the persons under this system, as the transactions are made through intermediaries called hawaladars. This transaction works purely on trust between the sender and the hawaladar. There isn’t any promissory note present in these kinds of transactions. Hawaladar is a person who doesn’t have authorisation from financial regulatory bodies such as the RBI FEDAI-, but still deals with the movement or transfer of money across countries.

The Legality of Hawala Transactions in India

The Hawala transactions are illegal as per the below-mentioned legislation.

Foreign Exchange Management Act of 1999

Section 2

This section prohibits the person from entering into any financial transaction in India where there exists the associated money consideration or an asset outside this country.

Section 6

The importance of RBI is highlighted in this section, as it states that, after due consultation with the central government, RBI  can specify the class or classes of capital transactions being permissible, along with setting the limit for foreign exchange transactions.

Section 10

It mandates that the person dealing with a foreign exchange be registered with the RBI. Where hawaladars aren’t registered for this purpose.

Penalties Imposed for Hawala Transactions under FEMA

The penalties for such transactions are prescribed under the below-mentioned sections of the FEMA:

Section 13

This section of FEMA provides for the penalties imposed for any violation committed under this Act, any contravention pertaining to any rule, regulation, direction, or order issued under this Act, or contravention of any condition regarding which RBI’s authorization should have been taken. The penalties issued are as discussed below.

• If the nature of the amount involved in the violation is quantifiable, the penalty imposed for the offence would be “Three times”, the total.
•  If the nature of the amount is non-quantifiable, then the penalty may be imposed up to 2  lakh rupees.
• In the event of continuation of the contravention even post the imposition of the penalty, then such offences will be further penalised with Rs 5000/ day.
• Adjudicating Authorities have been empowered for the confiscation of any security, currency, or any other money or property that the authorities find while conducting the search of the premises. 

Section 14

Upon the failure of any person towards the payment of full penalty money as mentioned in section 13 within 90 days from the issue of notice for payment of the penalty, the person shall be liable for civil imprisonment as per this section.

The term of civil imprisonment can vary from person to person, depending upon the amount involved in the transaction. If the amount of the transaction exceeds Rs 1 crore rupees, the imprisonment term may extend to 3  years. If the amount is less than Rs 1 crore, then it is 6 months compulsory, which shall increase till the person makes full payment of his penalty.

Prevention of Money Laundering Act, 2002

As per Section 2(da) of PMLA – An authorised person is one dealing with the exchange of foreign currency and with an off-shore banking unit with prior permission from the RBI.

Reasons for the Existence of Hawala Transactions

The reasons for the existence of such transactions are discussed below :

• It provides an easy way to conversion of Indian currency to foreign currency.
• Absence of any set cap for the transacted amount allowing the whole transfer amount as needed
• Levy of minimum charge as commission contrary to the foreign exchange banks that drain money through commission.
• Such transactions provide an opportunity for the black money diggers to conversion of black money into white by the transfer of black money to a foreign country without the knowledge of the regulators like RBI, Income tax etc.
• These Transactions are the only way for the transfer and receipt of money to terror organisations.
• Maintenance of a high level of confidentiality owing to the non-disclosure of the parties to the transaction, i.e. sender and receiver, makes the traceability of such transactions extremely difficult.
• This system isn’t regulated by any of the governmental organisations as it is made illegal under the law.

Working Mechanism of Hawala Transactions

The hawala transactions take place between two persons through intermediary hawaladars who connect with each other to facilitate the transfer of money to the intended person.

The working mechanism of Hawala can be better understood through the following example:

• A is a businessman in Saudi with his entire family residing in Kerala, India, and he opts for the  Hawala system to transfer the money to his wife in India by contacting the local hawaladar Mr B  and giving  5205 dirhams for transferring the same to A’s wife.
• The hawaldar, i.e., Mr B, gives Mr A  a highly confidential passcode, which he sends to his wife by stating the amount of money which has been transferred.
• On the other side, in India, Mr A’s wife will connect with Mr B, dealing with Saudi transactions.
• Mr A’s wife shall provide the passcode which was given to her by Mr.  A  and the amt, which has been sent to her.
• Mr B will be charging  0.5% as a commission, i.e. Rs. 500 and gives only Rs. 100000 to A’s wife. Now Mr A owes that amt to Mr B.

Impact of Hawala Transactions on India

The Hawala Transactions impact India in the following manner:

Increased Transfer of Informal Fund

Transfer of informal funds domestically and internationally harms the formal line of money transfer, eventually affecting the entire economic system of the country.

Increased Corruption

Hawala Transactions lead to the easy conversion of black money into white money, earned by the politicians by receiving bribes. And most importantly, the politician’s anonymity is maintained here.

Increased Black Money flow into the economy

Due to  Hawala Transactions being unregulated, they are  widely used in this country and other countries for transferring  money to another country Conversion of Black money into white money

This system helps the black money holders towards the conversion of black money into white easily by:

• Transferring their money to a foreign country’s bank  with no or minimal amount of tax imposed, 
• Transferring black money as a loan to individuals residing in the same country or in a foreign.
• Transfer of the black money abroad as an investment in a foreign company

Terror Financing

Usually, terror organisations receive those funds from other countries, which cannot be easily transferred through formal banks, so terrorists use hawala transactions for the transactions of such funds.

Measures Taken by India to Curb Hawala Transactions

The government of India has introduced various measures for controlling the Hawala transaction, such as :

Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: 

The objective for the implementation of this Act is curbing black money,  disclosure of undisclosed foreign assets and income being circulated freely in the economy.

Multi-Agency Group:

This group was set up in 2016, pursuant to the order of the Delhi High Court, by the Finance Ministry, after getting to know about the involvement of Indian nationals in the Panama leaks.

Special Investigating Team on Black Money:

The Apex Court ordered the setting-up of SIT on black money in 2014  for curbing and investigating the cases of black money that are being circulated in the economy.

The Crackdown of Shell Companies

The government of India is trying its best to close all the shell companies which are being operated for the conversion of all the black money into white.

Demonetisation

On November 8, 2016, the Government of India announced a ban on the usage of 500 and 1000 rupee currency notes and issued new notes of Rs 500 and Rs 2000, which helped the economy by cutting down the liquidation of cash, which led to the halt in the creation of hawala, black money and all the illegal transaction.

Introduction of a new section in the Income Tax Act, 1961:

 In the year 2017, there was the insertion of a new section of 139AA in the ITA 1961 mandates the Aadhar number at the time of applying for the new PAN card and while filing Income Tax Returns.

Liberalising Foreign Transaction

 There has been a reduction in the restrictions and blockages for the foreign transaction and making it faster and customer friendly.

Notification rules of PML (Amendment) Act, 2005:

 The mandate introduced by the Govt for providing  Aadhar details during the new bank account opening in any bank and along with providing PAN and Aadhar details while transacting amounts is more than 50000.

Ban on Cash Transaction:

According to section 269ST, no one must receive an amount of 2 lakhs and above in liquid cash in a single day, a single transaction related to the same event or occasion.

Conclusion

Hawala can be considered the economic evil present in this country, which helps the kickback money-makers for the conversion of their illegal, unaccounted money into white money, which ultimately obstructs the overall development of a country. Hawala is also a parallel, illegal exchange market that drives customers out of the official foreign exchange banks.

FEMA Act considers hawala transactions as illegal by only allowing only RBI-authorised persons to transact with the exchange of foreign currencies and by imposing penalties on the persons involved in these transactions. The probe agencies like ED and CBI actively work to break down all the Hawala networks.

Also, Read:
Global Initiatives to Prevent Money Laundering
Tracing the Developments in the Prevention of Money Laundering Act, 2002