This is an informal, traditional method of money transfer which started in India and is common in Africa and the Middle East.
In its simplest form, a Hawala network operates as a set of promises: “Can your friend Bob give my friend Ted some money?”
There are four parties to a Hawala transaction:
- Person 1 (P1) visits Broker 1 (B2) wanting to send money to Person 2 (P2) who is in another physical location
- P1 gives B1 a sum of money and some way of identifying P2
- B1 contacts Broker 2 (B2), who is in physical proximity to P2, gives him the password or method of identification, and tells them the amount
- P2 visits B2, gives the password or otherwise identifies themselves, and B2 gives P2 the money, minus a commission
- B1 now owes B2 that amount of money
Reduced even more:
- P1 gives money to B1
- B1 tells B2 (the money transfer between these two is recorded and settled sometime later)
- B2 gives money to P2
It’s very simple – basically, it’s you calling your friend Bob and saying, give Ted $100, and I’ll pay you back later. How you “pay them back later” is up for debate and negotiation at a later time. Maybe in the future, Bob will have you give Alice $100, and then you’re even. So long as it all works out at some later date, everyone is happy.
It’s informal – there are no laws and no rules. It operates on trust and honor. Anyone violating the trust of the network would be expelled from their community which is a serious punishment in the cultures in which Hawala operates.
Due to its informal nature, Hawala money is very hard to track.
“Hawala” is Arabic for “transfer” or “trust.”