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Hawala Banking And Currency Controls Part I

by Bill Rounds, J.D. on November 17, 2009 · 8 comments

Reading time: 6 – 9 minutes

On HowToVanish many people have been asking questions in response to an article I posted about hawala banking. It is a great topic and one that I enjoy talking about so I thought I would respond by fleshing out what kinds of transactions take place in a hawala system and then answer the biggest question by far; how do I find a hawaladar?

HAWALA BANKING TRANSACTIONS

There are a few archetypical transactions that most hawala transactions will resemble. The first is the most common; remittances. For example: a person from very poor country X is working in country Y. He sends home $100 USD of purchasing power to his family twice a month. The cost to bank wire this amount is $10 USD or more and costs him a large percentage of his minimal remittance amount. It is difficult to save up and send larger sums on a less frequent basis because banking is unreliable at best in country X and large amounts of cash are not safe to store with his elderly parents, wife and children who are living alone. An exchange through two hawaladars will efficiently facilitate such a transaction on a regular basis at a much lower cost.

The second situation is that of the transactional broker. For example, I want to buy options on a certain stock but I do not have enough money in my trading account to meet the margin or liquidity requirements. My good friend is planning on purchasing options on the same stock so I give him some money and he buys a few extra options which he will pay me for when I want to cash out. My friend has acted like a hawaladar for the exchange.

A third situation is that of the repatriation or expatriation of wealth. Real estate is a good example because, regardless of legal restrictions, you cannot take real estate away from or add it to a country, with the exception of Iraq, California which is going to fall into the ocean and Dubai whose palm tree shaped coastline is not a natural phenomenon. If you own real estate in country A but live in country B you cannot simply tuck it into your pocket like a gold coin and repatriate that wealth. You will need to find a buyer of that property to convert the wealth into mobile wealth that can be taken out of country A and brought into country B. Once the wealth is more liquid then it can be transferred to someone acting like a hawaladar for the transaction.

HOW ACCOUNTS ARE SETTLED

The main characteristic of a hawala transaction is that they are informal exchanges made relying on the trust of the parties and generally outside of a structured banking system. In each of these scenarios there must be some settlement made for the transactions. The remitting and receiving hawaladars will maintain a tally of the total amount owed between them and settle their account at a later date. Almost all hawaladars destroy the records of the individual transactions once they are completed.  They can then wire the money all at once, or they may simply offset the balance against another account between the two.

What if the debtor on the tally sheet does not have cash to pay the debt? Because this is a private transaction, they may settle the debt using any value they wish. The hawaladars remitting and receiving money might both have sufficient wealth in both countries and will be able to settle their debts with each other through the intra-national exchange of the amount in cash. In addition they might choose not to settle in cash.  The hawaladar in poor country X may accept payment in chickens or vampire squids rather than in cash. The friend who bought the option for you might settle what he owes by buying gold for you or a nice steak dinner. The real estate purchaser may not have the cash for the property but gives you his sailboat which is at a slip near your home.

HOW DO I FIND A HAWALADAR?

These situations and a combination of them are representative of most hawala transactions. Now remains the biggest question that I recieve about hawala banking:  how do I find a hawaladar?

For a person who is not already part of the culture where hawala banking takes place, finding hawala services is not easy but here are a few suggestions.

BECOME A PART OF THE RIGHT COMMUNITY

The main use of hawala is to remit money to the home country of an immigrant worker.  Thus you can find where these people are, befriend them and ask to be connected to a hawaladar.

Remember that hawala is the formal name given to an informal system so they might not even know what the word hawala means.  Simply look for someone offering the kinds of services you want.  Some good communities to look for would be people from Mexico, which receives more money in remittances from the United States than any other country. Middle Eastern countries, East African countries, and South and South Central Asian countries have a long history of hawala practices.

I have had rather good discussions with one person in particular about the cultural barriers to interacting with these kinds of communities.  If direct interaction is out of the question, you may need to hire a private courier or messenger to be the intermediary for your search for a hawaladar.  My new friend came up with a great idea of hiring a bellhop or a taxi driver because they can move easily in and out of the complex social structures.  Another suggestion for those living in a foreign country would be to find a westerner who has a local spouse.  The local spouse will likely have more access to these kinds of communities than westerners.

SEARCH ADVERTISEMENTS

Sometimes hawaladars will advertise their services in the local ethnic newspaper.    Of course if you do not speak the language of the paper, you may want to hire a translator.  A website like Craigslist or other discussion forums might even list some of these kinds of services.  It is probably a good idea to look for the exact services you want rather than the word hawala or hawaladar.

UTILIZE YOUR NETWORK

Ask people you know.  Given the financial incentives that may come with the transaction, many people are willing to use their network of friends to engage in these kinds of transactions, especially if it is to help another friend or family member.   I have used this method numerous times for all kinds of transactions.  A good person to ask might be a friend with a liquid cash position such as a pawn shop owner or a rich uncle.

CONCLUSION

There are significant benefits to hawala banking in many kinds of transactions. Although for many westerners finding hawala services from hawladars on demand may be difficult, the need may become more acute because of the exacerbation of current currency controls and it is likely that these kinds of hawala services will become much more commonplace. In the meantime, it is good to be prepared and have access to those services.

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8 comments

ABOUT THE AUTHOR: Bill Rounds, J.D. holds a degree in Accounting from the University of Utah and a law degree from California Western School of Law. He practices civil litigation, criminal defense and privacy law. He is a strong advocate of personal and financial freedom. This is merely one article of 4 by .
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{ 5 comments… read them below or add one }

1 Roger H. November 18, 2009 at 9:13 am

What is the difference or similarity between “hawaladar” and “handpayments Switzerland?” The latter was used extensively in the U.S. before it was made legal to buy gold coin and bars in the United States. The cost of handpayments usually ran about 1% to 5% depending the amount to be transferred, and other factors. Historically the handpayments system was used during WWll to save assets from the German government. In the U.S. this method was used to buy buillion, and I guess by organized crime.

2 Henry November 18, 2009 at 3:57 pm

Trace,
Have you seen the article about tungsten/gold bars?

http://news.goldseek.com/GoldSeek/1258049769.php

I was curious as to your take on this news. Also, would a reputable firm be taken in by these bars or just GLD and the federal government? i.e. Do you think these fake bars are now circulating throughout the gold market?

3 Brad January 7, 2010 at 8:34 pm

Hey Trace, why can’t I say go on holidays to belize, start a expat bank account or something similar and then just do electronic transfers from my home country Canada. The only thing I’m not sure of is will I be able to open an account without a belize address.

4 Trace Mayer, J.D. January 7, 2010 at 8:44 pm

Yes, that would work for getting currency from Canada to Belize. However, the transfer fee may be expensive, there is an electronic record and if currency controls were implemented then the bank transfer would most likely not work.

5 Robert Kline January 27, 2010 at 1:13 am

Hi When I was in Vietnam, (67 to 71)I used “Hawala banking”
The two methods , was to advise a firm based in Hong Kong you wish to purchase
10K copies of their publication. An agent would call on you & take your money out
of the country , $, MPC ( Military payment script) or Vietnamese Dong.
The other, was a small group of Indians in Saigon, you handed over cash ,less fee,
& the money would be lodged in your bank. In my case that was the Broadway Nat bank in San Antonio. The largest amount I sent was $25K , which was a reasonably
large sum back in 71. Most of friends & Associates thought I was mad…but, never lost a beat !!
Cheers

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