Introduction
The hawala system, one of the oldest informal value transfer mechanisms in the world, predates modern banking by centuries. Originating in the Indian subcontinent and the Arab world as a mechanism for merchants to settle debts across distances without the physical movement of money, hawala has proved extraordinarily resilient. It survived colonial-era regulation, post-independence foreign exchange controls, and successive generations of financial law enforcement. In the twenty-first century, it has adapted again, migrating from the physical networks of hawaladars operating through currency exchanges and commodity traders to digital platforms that exploit the scale and opacity of India’s mobile payment ecosystem. This article examines the traditional mechanics and legal treatment of hawala, the interaction between PMLA and FEMA in prosecuting hawala networks, the digital evolution of these networks through mobile wallets and cryptocurrency channels, and the regulatory and investigative challenges this evolution poses.
Legal Framework
The hawala transaction, in its traditional form, involves a client depositing funds with a hawaladar in one location, who communicates an instruction to a counterpart hawaladar in the destination location to pay an equivalent sum (less commission) to the designated recipient. No formal banking channel is used; settlement between hawaladars occurs periodically through trade invoices, gold, commodity shipments, or, in some cases, netting of reciprocal transactions over time. The system functions on trust networks between hawaladars and requires no formal documentation.
The primary regulatory framework governing hawala in India is the Foreign Exchange Management Act, 1999. Section 8 of FEMA requires persons resident in India to take all reasonable steps to realise and repatriate foreign exchange due to them, and Section 10 restricts dealing in foreign exchange to authorised persons. An unauthorised hawala transaction, which involves receiving or paying foreign currency outside the authorised banking system, constitutes a FEMA violation. The penalty structure under FEMA is civil rather than criminal: contraventions are punishable with a monetary penalty under Section 13, and only in cases of wilful default does criminal liability arise.
The connection to PMLA operates through the Schedule: FEMA offences are not themselves in the Schedule as such, but hawala transactions frequently involve the proceeds of crime in India being transferred abroad, or foreign criminal proceeds being received in India, constituting a money laundering offence under Section 3 of PMLA. Separately, the Enforcement Directorate investigates hawala networks both under FEMA (as violations of the foreign exchange regulations) and under PMLA (where the funds involved are proceeds of a scheduled offence).
The Foreign Contribution (Regulation) Act, 2010 (FCRA) provides an additional regulatory layer for transactions involving foreign funds received by Indian organisations, particularly non-governmental organisations. FCRA violations are included in the PMLA Schedule, creating a further basis for PMLA proceedings in cases where hawala networks are used to route foreign contributions in violation of FCRA.
Judicial Developments
The Supreme Court’s treatment of hawala cases under FEMA has generally maintained the distinction between civil regulatory violations under FEMA and money laundering under PMLA. In cases where hawala transactions involve funds that are genuinely domestic and do not relate to any predicate offence, courts have held that FEMA proceedings are the appropriate forum and that PMLA jurisdiction does not arise merely from the fact of an unauthorised foreign exchange transaction.
However, where hawala networks are demonstrably connected to the movement of proceeds of crime, whether from corruption, drug trafficking, terrorism financing, or organised crime, courts have affirmed that PMLA jurisdiction applies fully. The Delhi High Court in a series of cases involving the Hundi networks in Rajasthan and Gujarat has held that Hundi operators who knowingly receive and transmit proceeds of crime through hawala mechanisms are engaged in money laundering under Section 3 of PMLA, and that the “layering” element of money laundering is satisfied by the use of the hawala system itself as a concealment mechanism.
The Supreme Court’s observations in Union of India v. Hassan Ali Khan (2011), a large hawala case predating the post-2014 PMLA amendments, established that the ED has jurisdiction to investigate hawala transactions regardless of whether the recipient of the funds is identifiable, provided that the funds can be traced to a scheduled offence. This early precedent has been consistently followed in post-2020 cases.
The FIU-IND’s identification of STR patterns in hawala-related transactions, and the sharing of financial intelligence with the ED, has been discussed in several High Court proceedings. The Bombay High Court in 2022, in proceedings related to a textile-sector hawala network, upheld the FIU’s analytical methodology and held that STRs from multiple reporting entities pointing to the same network of transactions constitute adequate material for the ED to form a reason to believe under Section 5 PMLA.
Contemporary Issues and Analysis
The digital migration of hawala networks has taken two principal forms in the period from 2020 to 2025. The first is mobile wallet-based hawala, which exploits the volume and velocity of India’s Unified Payments Interface ecosystem. In a typical mobile wallet hawala scheme, a sender in India makes multiple small payments through PhonePe, Paytm, or Google Pay to a network of “mule accounts,” which are ordinary bank accounts controlled by operators. Each individual payment is below the threshold that triggers enhanced KYC scrutiny. The aggregate of these payments is then moved through further layers of transfers to accounts from which the equivalent value is paid out in the destination jurisdiction in local currency. The hawaladar’s counterpart in the foreign jurisdiction operates a parallel network of mule accounts. The digital audit trail exists but is fragmented across dozens of accounts and multiple payment service providers, making reconstruction of the full transaction network analytically intensive.
The second form is cryptocurrency-based hawala. A sender in India purchases a cryptocurrency (typically USDT, a stablecoin, or Bitcoin) on an Indian exchange, transfers it to an external wallet, which then transfers it to the destination country’s counterpart, who sells it on a local exchange for the destination currency and pays the recipient in cash or via local bank transfer. Prior to FIU’s December 2023 enforcement action against offshore exchanges, the absence of PMLA reporting obligations on crypto platforms meant that these transactions generated no STRs, making them effectively invisible to financial intelligence systems.
The World Bank’s annual remittance data consistently shows India as the world’s largest recipient of formal remittances, receiving over USD 120 billion annually in recent years. However, estimates of informal remittances through hawala and similar systems are necessarily uncertain; various studies have suggested that informal channels account for between 20% and 40% of total remittance flows to India. Distinguishing legitimate informal remittances, which are a response to the higher cost of formal channels, from hawala transactions carrying proceeds of crime or enabling capital flight, is a core analytical challenge for FIU-IND.
The Middle East-India corridor is of particular significance. A large Indian diaspora in the Gulf Cooperation Council countries sends remittances to India; the same corridor is used for hawala transactions related to gold smuggling, labour-related fraud, and, in some documented cases, terrorist financing. The ED’s investigations in Kerala, which has the most intensive hawala activity related to the Gulf corridor, have identified networks involving exchange houses in Dubai and Sharjah that maintain settlement accounts with Indian hawaladars through invoice manipulation in the gold and textile trades.
Comparative and International Perspective
The UAE’s approach to hawala regulation offers an instructive contrast. Rather than attempting to prohibit hawala networks, the UAE Central Bank has implemented a licensed hawala registration system under which hawaladars must register, maintain records of their transactions, comply with AML reporting requirements, and submit to regular inspection. This approach recognises the economic legitimacy of informal remittance services for migrant workers who cannot access formal banking, while bringing the networks within a regulatory oversight framework. The UAE’s registered hawala system is assessed by FATF as a generally effective mechanism for managing the money laundering risks associated with informal value transfer.
India’s approach remains essentially prohibitionist: unauthorised foreign exchange dealing is a FEMA violation, and hawala networks operating without authorization are subject to enforcement action. This approach has not succeeded in eliminating hawala activity; it has instead driven the networks into less visible forms. The FATF guidance on informal value transfer systems recommends a licensing rather than prohibitionist approach, noting that prohibition without effective enforcement simply moves the activity underground where it becomes harder to monitor.
FATF’s methodology for detecting hawala through financial intelligence focuses on identifying the settlement mechanisms between hawaladars, which typically involve over- or under-invoiced trade transactions, rather than individual customer transactions. FIU-IND’s analytical capacity to detect trade-based settlement of hawala transactions is limited by the fragmentation of trade data across customs, banking, and GST databases that are not fully interoperable.
Practical and Policy Implications
For banks and payment service providers, the mobile wallet hawala phenomenon creates a compliance challenge: the individual transactions are below reporting thresholds and appear superficially legitimate (person-to-person payments between individuals), but the pattern across a network of accounts reveals the hawala structure. The detection depends on network analytics, which requires sharing of transaction data across institutions, a practice currently constrained by data privacy and commercial confidentiality considerations.
The RBI’s guidelines on Payment Aggregators and Payment Gateways, last updated in 2020 and subsequently supplemented, require these entities to implement transaction monitoring and STR filing. However, the analytical sophistication required to identify mobile wallet-based hawala from a population of billions of UPI transactions is beyond the current capabilities of most smaller payment service providers.
For FIU-IND, the key institutional challenge is integrating data from multiple sources: banking STRs, UPI transaction pattern alerts, crypto exchange transaction reports (after the 2023 PMLA extension), customs data on trade invoices, and GST return data, into a coherent analytical picture that can identify hawala networks before individual transactions are individually too small to detect.
Suggestions and Reforms
A licensed informal value transfer framework, analogous to the UAE model, should be seriously considered for India’s diaspora remittance context. Hawaladars operating within a licensed framework would be required to register with FIU-IND, maintain transaction records, file STRs above a threshold, and submit to periodic inspection. This approach would bring a significant portion of current informal remittance activity within the regulatory perimeter without criminalising the underlying economic need.
FIU-IND should be granted direct read access to customs import-export data and GST return filing data (currently held by CBIC) for analytical purposes, subject to appropriate data governance safeguards, to enable detection of trade-based hawala settlement. A joint FIU-CBIC analytical unit, staffed by analysts with expertise in both financial intelligence and trade data, would significantly enhance detection capability.
Payment service providers above a specified transaction volume threshold should be required to implement network analytics tools capable of identifying structuring patterns consistent with hawala activity, and to share flagged account cluster data with FIU-IND through a designated secure channel.
Conclusion
Hawala’s digital transformation from physical networks of trusted intermediaries to algorithmically structured mobile payment flows and crypto channels represents a significant challenge to India’s financial intelligence architecture. The legal framework, anchored in FEMA’s prohibition on unauthorised foreign exchange dealing and PMLA’s money laundering provisions, was designed for a world in which informal value transfer required visible physical infrastructure. Digital hawala requires no physical infrastructure and leaves transaction traces that are individually meaningless but collectively revealing, if only the analytical capacity exists to read them. India’s regulatory response, focused primarily on prohibition and enforcement rather than licensing and intelligence integration, is likely to remain one step behind the networks it seeks to disrupt until structural reforms in financial intelligence architecture are made.
