What is a hawala transaction ?

Hawala means transfer in arabic language. Hawala is an informal alternative foreign remittances transfer system based on the trust of a huge network of money brokers.

It is not a legal method of money transfer, because it evades foreign exchange rate regulations, tax, currency control, immigration, and other concerns. The hawala brokers charge less commission than the banks, which makes it attractive to the common people.

Hawala is also used to circulate black money and to terrorism funds, drug trafficking and other illegal activities. The Governmentt of India made, FEMA (Foreign Exchange Management Act) 2000 and PMLA ( Prevention of Money Laundering) Act 2002 to curb these activities.

Hawala brokers transfer money without moving it physically.

Steps involved in Money Transfer in a Hawala Transaction:

1. A customer approaches a hawala broker in one city and gives a sum of money that is to be transferred to a recipient in a foreign country.
2. The hawala broker calls another hawala broker in the recipient's city, and gives instructions about the funds.
3. The recipient collects the money from the hawala broker in his city. 
4. Settlements of debts between hawala brokers can take a variety of forms, such as goods, services, properties, transfers of employees, etc. and need not take the form of direct cash transactions.