Hawala is one of the oldest value transfer systems in the world predating modern banking by centuries and still moving billions of dollars annually across South Asia, the Middle East, East Africa and beyond. For millions of migrant workers, it is a fast, affordable and familiar way to send money home. For compliance teams and financial intelligence units, it is one of the most persistent and difficult to detect money laundering typologies in existence.
In the UAE – home to one of the largest expatriate populations on earth, with significant remittance flows to South Asia, East Africa and the Levant, hawala occupies a unique and sensitive position. The system is not illegal per se, but unregulated hawala is a criminal offence, and hawala-related indicators are among the most commonly cited red flags in UAE suspicious transaction reports.
This guide explains how hawala works, what UAE law says about it, why it is a financial crime risk, and how AML programmes detect it.
1. What Is Hawala? Definition & Historical Context
The word hawala derives from the Arabic root meaning “transfer” or “trust.” In its simplest form, hawala is an informal value transfer system that allows money to move between two locations without any physical movement of cash across borders. It operates entirely on trust – the trust between the sender, the recipient, and the network of brokers (hawaladars) who facilitate the transfer.
The system has roots in medieval Islamic commerce and was used across the Silk Road trade routes to enable merchants to travel without carrying cash. It remains deeply embedded in the financial cultures of South Asia (where it is also called hundi), the Middle East and East Africa, and it has migrated with diaspora communities to every major financial centre in the world.
Hawala is not inherently criminal. For decades, it served populations that had no access to formal banking and even today, it often offers faster transfer times, lower fees and better exchange rates than regulated remittance channels, particularly for transfers to rural or underbanked areas. This is precisely what makes it useful to both legitimate users and to those with criminal intent.
A 2023 World Bank report estimated that informal remittance channels, including hawala, account for a significant share of total remittance flows to South Asia and Sub-Saharan Africa, in some corridors exceeding the volume processed through formal banking channels. |
2. How Hawala Works
The mechanics of hawala are simple. A transaction typically involves four parties: a sender, a recipient, and two hawaladars – one in the sending country and one in the receiving country.
The diagram below illustrates a standard hawala transaction:
SENDER Country A | → | HAWALADAR A Broker — Country A | → | HAWALADAR B Broker — Country B | → | RECIPIENT Country B |
Hands over cash + code | Calls Hawaladar B with amount & code | Verifies code; pays recipient | Receives funds (less fee) | |||
⇄ Hawaladars settle later: cash, gold, goods or reverse transaction | ||||||
Step-by-Step
The sender approaches Hawaladar A in their country and hands over cash (or in some cases makes a bank transfer), along with a code word or number.
Hawaladar A contacts Hawaladar B in the destination country by phone, messaging app or encrypted channel and instructs them to pay the equivalent amount (less a commission) to whoever presents the code.
The recipient, in the destination country, approaches Hawaladar B, presents the code, and receives the funds in local currency.
No money has crossed a border. No bank has been involved. The transaction is complete in hours, sometimes minutes.
The two hawaladars settle their debt later through a separate mechanism: a reverse flow of transactions, a physical transfer of cash, gold or trade goods, or through offsetting transactions in the other direction.
The critical features of hawala from an AML perspective are the absence of a formal paper trail, the use of codes rather than account numbers, the reliance on broker-to-broker trust rather than institutional verification, and the separation of the value transfer from any movement of funds through the regulated financial system.
3. Hawala in the UAE: Legal Status
The UAE has one of the clearest regulatory stances on hawala of any jurisdiction globally. Hawala is not prohibited but it is regulated. Operating as a hawala provider without registration is a criminal offence.
The Registered Hawala Provider Scheme
The Central Bank of the UAE (CBUAE) operates a Registered Hawala Provider (RHP) scheme, established under Federal Decree-Law No. 14 of 2018 on the Central Bank and the Organisation of Financial Institutions and Activities. All individuals and businesses operating as hawaladars in the UAE must register with the CBUAE’s Hawala Registration Division.
Registered hawala providers must comply with a range of AML and CFT obligations including:
Customer identification and verification for all transactions above AED 3,500
Record-keeping for a minimum of five years
Filing of suspicious transaction reports (STRs) with the UAEFIU via goAML
Compliance with CBUAE AML/CFT guidelines for hawala providers
Maintaining a designated AML compliance officer
Operating as an unregistered hawala provider in the UAE carries significant criminal penalties, including imprisonment and fines. The CBUAE conducts regular inspections and enforcement actions against unregistered operators, and the sector has been a focus of UAE AML reform since the FATF mutual evaluation in 2019.
As of 2024, the CBUAE’s registered hawala provider list includes hundreds of operators across the UAE, primarily concentrated in Dubai, Sharjah and Abu Dhabi. Registration is public and verifiable, financial institutions and DNFBPs are expected to check whether a hawala counterparty is registered before processing related transactions. |
4. Why Hawala Is a Money Laundering Red Flag
Hawala’s features that make it useful for legitimate remittances – speed, informality, minimal documentation and no reliance on regulated channels are the same features that make it attractive to money launderers, sanctions evaders and terrorist financers.
The Core AML Risks
No formal audit trail: hawala transactions leave no trace in the regulated financial system. There are no SWIFT messages, no bank records and no cross-border wire transfer reports for investigators to follow.
Identity concealment: the use of codes, trusted intermediaries and informal networks makes it straightforward to conceal the true identity of the sender or recipient.
Layering: hawala networks can be used to move funds across multiple jurisdictions and through multiple brokers, achieving in hours what would take days through conventional banking and without triggering transaction monitoring systems.
Placement bypass: criminal cash can be handed to a hawaladar without ever entering the banking system, bypassing the most heavily monitored point in the laundering cycle.
Sanctions evasion: hawala has been used to move funds on behalf of sanctioned individuals and entities, circumventing the screening controls applied to regulated financial transactions.
Terrorist financing: the Financial Action Task Force has documented the use of hawala and similar informal value transfer systems (IVTS) to move funds for terrorist organisations, including cases in which funds were transferred under the cover of charitable donations or trade transactions.
⚠️ Documented UAE-Linked Hawala Risk Scenarios • Criminal proceeds from drug trafficking or fraud converted to cash and handed to an unregistered hawaladar in Dubai for transfer to South Asia or East Africa, avoiding any banking record • Sanctions-designated individuals using hawala networks to access funds or move value despite asset freezes on their formal accounts • Trade-based value settlement between hawaladars using over- or under-invoiced gold, commodities or consumer goods exports, creating an apparent commercial rationale for cross-border value flows • Corporate accounts used as pass-through vehicles to settle hawaladar balances, with funds appearing in bank statements as legitimate trade or service payments |
5. FATF Recommendations on Informal Value Transfer Systems
FATF Recommendation 14 specifically addresses money or value transfer services (MVTS), including hawala and other informal value transfer systems. The recommendation requires that:
All MVTS providers, including hawaladars, must be licensed or registered
Unlicensed or unregistered MVTS providers must be subject to criminal, civil or administrative sanctions
MVTS providers must comply with all applicable FATF recommendations, including CDD, record-keeping and STR filing
Regulators must maintain a current list of licensed or registered MVTS providers and make it accessible
FATF’s Guidance on the Risk-Based Approach for Money or Value Transfer Services (updated 2016) provides detailed typologies of hawala misuse and guidance for both regulators and financial institutions on how to identify and manage hawala-related risk.
The UAE’s Registered Hawala Provider scheme is widely regarded as one of the most developed regulatory frameworks for hawala globally and was cited positively in the FATF’s 2023 follow-up report on the UAE’s progress following grey-listing. However, FATF has continued to note that unregistered hawala activity remains a challenge in the UAE and regionally, and that financial institutions’ ability to identify and report hawala-related transactions needs to be strengthened.
6. How AML Programmes Detect Hawala-Related Transactions
Detecting hawala in a regulated financial institution or DNFBP requires a combination of transaction monitoring, customer behaviour analysis and enhanced due diligence. Because hawala itself does not flow through regulated channels, what compliance teams are typically looking for are the “bookend” transactions, the cash or bank transfer that feeds the hawala network on one side, and the settlement or withdrawal on the other.
Transaction Monitoring Red Flags
Round-number cash deposits or withdrawals with no evident business purpose, particularly where the amounts are consistent across multiple transactions
Frequent transfers to exchange houses, money service businesses or known hawaladar accounts, particularly to accounts in South Asia, East Africa or the Levant
Multiple individuals making deposits to the same account, followed by a single outgoing transfer; a pattern consistent with a hawaladar aggregating client funds
Use of structured deposits just below reporting thresholds (AED 55,000 for CTR purposes) across multiple branches or institutions
Customer accounts showing high volumes of inbound cash followed by immediate outward transfers, with no intervening business activity
Customer Behaviour Red Flags
Customer operates a business that is not typically cash-intensive but regularly handles large cash volumes
Customer or connected parties are identified as hawaladars but are not on the CBUAE’s registered provider list
Customer is unable or unwilling to explain the purpose of frequent international transfers or cash deposits
Customer receives funds from multiple unrelated third parties before making outward transfers, consistent with acting as an undisclosed money transmitter
Counterparties to transactions are exchange houses, trading companies or import/export businesses in high-risk jurisdictions with no evident commercial relationship to the customer
Enhanced Due Diligence Triggers
Any customer identified as operating in the money services or exchange business sector, whether registered or not
Correspondent relationships or payment flows involving jurisdictions identified as high-risk for informal value transfer (Afghanistan, Somalia, Yemen, parts of South Asia)
Customers whose stated business activities are inconsistent with their transaction volumes or geographic footprint
✓ Hawala Detection: Compliance Team Actions ✔ Screen all money service business customers against the CBUAE Registered Hawala Provider list ✔ Apply enhanced due diligence to customers in sectors with known hawala exposure (gold, trade, informal retail) ✔ Configure transaction monitoring rules to flag patterns consistent with hawaladar aggregation behaviour ✔ Train front-line staff to recognise behavioural indicators of informal value transfer ✔ File STRs promptly where hawala-related activity is suspected, do not delay pending confirmation ✔ Review and update hawala-related typologies in your AML programme at least annually |
Hawala-related risk is present in almost every sector of the UAE economy where cash or informal payment practices exist. B-AML helps regulated businesses and DNFBPs build transaction monitoring frameworks, staff training programmes and STR processes that are calibrated to detect hawala typologies specific to their sector and client base. |
