Following a recent success in a case involving a police investigation into a High Net Worth Individual’s use of the Hawala Banking system, Quentin Hunt from 2 BR Chambers and Lisa McKinnon Lower from Spencer-West Solicitors look to examine the Hawala Banking system and the risks entailed in its use.

Introduction

Hawala banking is an informal value transfer system that has existed for centuries, originating in South Asia and the Middle East. While widely used for legitimate purposes, , it also presents legal risks due to its lack of formal regulation. While there are registered hawala agents in the UK who operate legally,, the use of Hawala can lead to potential criminal offences, exposing individuals to serious consequences.

This article provides an overview of Hawala banking, its risks, and its legal implications under the law of England and Wales. Understanding these issues is crucial for anyone using the Hawala banking system, whether for personal or business transactions, to ensure compliance with the law and avoid criminal liability.

What Is Hawala Banking?

Hawala is a trust-based system of money transfer that operates outside conventional banking channels. It relies on a network of intermediaries, known as Hawaladars, who facilitate the transfer of funds between different locations without physically moving money.

How Does Hawala Banking Work?

The first step in a Hawala Banking transfer is the initiation of the transfer – a sender gives monies to a Hawaladar in one country. This will amount to the funds to be transferred plus a fee for the use of the service.

There is then communication Between Hawaladars – the sending Hawaladar contacts a counterpart in the recipient’s country, instructing them to deliver the equivalent amount to the recipient.

The transaction is then undertaken by way of the payment to the recipient- the counterpart Hawaladar will give the funds to be transferred to the recipient in the other country, often the transfer or will be provided with a passcode to give to the recipient so that they can correctly identify themselves and the transaction to the counterpart Hawaladar.

Finally, there will be settlement of accounts between the Hawaladars, often the debts will be settled later, often through trade, cash, or other transactions.

Hawala transfers are often favoured for speed, low cost, and ability to reach regions with limited banking infrastructure. However, its informal nature makes it difficult to trace and its use has historically favoured by criminals for this very reason. As such, the use of the system can create a significant risk of investigation and prosecution by British authorities.

Legal and Regulatory Risks of Hawala Banking

In the UK, money service businesses must be registered with the Financial Conduct Authority and comply with anti-money laundering regulations. A Hawala transaction will be classed as a money remittance service under paragraph 1(f) of schedule 1 to the Payment Service Regulations 2017, as such transactions conducted without registration will be unregulated. Such unregulated transactions constitute a criminal offence under s139(1) of the Payment Service Regulations 2017.

Because Hawala transactions are undocumented and operate on trust, they are vulnerable to misuse by criminals. UK authorities, including the National Crime Agency, actively investigate and prosecute individuals suspected of using Hawala for illicit purposes. Even if an individual is unaware of wrongdoing, they may still face legal scrutiny.

Funds moved through Hawala may by subject to taxation in certain circumstances, if it is not declared to HM Revenue & Customs it may lead tax evasion issues. There are stringent laws and regulations on undeclared income or failure to declare taxable gains, and individuals in breach can face severe penalties, including potential prosecution, fines and imprisonment.

Users of Hawala banking may unknowingly facilitate criminal activity. Under Section 327 of POCA, a person commits an offence if they become involved in transferring criminal property. The offence does not require full knowledge that the money is criminal property, suspicion will be enough (see R v Pace [2014] EWCA 186), even if they did not know the money was illicit. The legal threshold for prosecution is low, placing individuals at significant risk. It is therefore important that if an informal banking system is used then meticulous records are kept to prevent allegations that the users are involved in money laundering.

An example of this is a case that we recently conducted. The defendants were legitimate and wealthy individuals who chose to use the hawala banking system in order to purchase high value items within the UK. Although legitimate funds were used to transfer monies from Pakistan, the funds that were used to settle the UK end of the Hawala transaction appear to have been the proceeds of fraudulent activity. The senders had no idea that the Hawaladar in the UK had utilised criminal funds to settle their end of the account. However, the UK authorities and the Police required some convincing of that fact. The use of the Hawala banking system exposed Quentin and Lisa’s clients to a protracted and unwanted investigation. However, efficient legal representation ensured that no criminal charges were brought.

How Individuals Can Protect Themselves

To avoid legal repercussions, individuals should preferably use official banking facilities or licensed money transfer services that comply with UK regulations. These services provide records of transactions, offering legal protection if authorities scrutinise a transaction.

If informal methods such as the Hawala system are used, then individuals would be wise to maintain records of all transactions, including:

• Names and contact details of the sending Hawaladar
• Amounts sent and received
• The purpose of the transfer
• Details of the recipient and the recipient Hawaladar
• Documentation showing the legitimate source of the funds remitted

Such documentation can serve as evidence of legitimate financial activity in the event of an investigation.

If accused of involvement in unlawful Hawala transactions, immediate legal representation is crucial. A solicitor or barrister specialising in financial crime can provide guidance and, if necessary, defence in legal proceedings.

Conclusion

While Hawala banking is an established financial practice with cultural significance, its use in the UK carries substantial legal risks. The lack of formal oversight means that users may inadvertently breach financial crime laws, exposing them to prosecution. By understanding these risks and taking preventative measures, individuals can protect themselves from severe legal consequences.

If you require expert legal advice regarding financial transactions or potential allegations related to Hawala banking, our team of barristers is available to assist. Contact Quentin or Lisa for a no obligation discussion over how to safeguard your legal interests.