Context:

• Investigators believe the money raised in Kerala was sent to Dubai via an informal hawala banking system headquartered in Hyderabad.

About Hawala:

• The word "Hawala" means trust, which works outside the circle of banks and formal financial systems.
• It is an underground, cheap and instant medium to transfer huge amount of money.
• It is cheaper and less cumbersome than formal remittance channels such as banks, Western Union or Money Gram.
• It is also sometimes referred to as “Underground Banking”. "Hawala" consists of transferring money (usually across borders and in order to avoid taxes or the need to bribe officials) without physical or electronic transfer of funds.

• Used by Criminals, Businessmen and Non-residents to remit money.
• Back bone of underworld, drugs/arms mafias, terrorists and smugglers.
• Leads to evasion of tax.

Reasons behind its use:

• Cost-effective
• Reliable
• Efficient
• Flexible
• Anonymous

Illegality of it:

• Capital Flight
• Tax Fraud
• Payment in Informal Economy
• Leads to terror financing

Major Hawala Cases:

• Hasan Ali Khan: The Hawala Kingpin: In March 2007, Hasan Ali’s properties were raided by India’s Enforcement Directorate (ED) and Income Tax officials based on allegations of hawala transactions.
• Jain Hawala Diary case: The Hawala scandal, also called the Jain Diaries case or the hawala scam was an Indian political and financial scandal involving payments allegedly sent by politicians (black money) through four hawala brokers, namely the Jain brothers.

Measures to curb Hawala:

• Constitution of the Special Investigating Team on Black money: Setup in 2014 to suggest methods to curb & investigate cases of black money in the economy
• Introduction of Black money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015: It aims to curb black money, or undisclosed foreign assets and income and imposes tax and penalty on such income
• Multi Agency group: Setup by Ministry of Finance in 2016 to probe the Panama leaks involving Indian nationals
• Crackdown by closing shell companies:43 lakh companies were closed for not carrying out normal business activities & submitting their statutory filing
• Revising the treaties with Mauritius
• Under FEMA act, Hawala is a civil offense.

Reference: https://www.thehindu.com/news/national/kerala/customs-unravels-hawala-trial-in-smuggling-case/article32117425.ece#:~:text=Investigators%20believe%20the%20money%20raised,business%20to%20dodge%20banking%20regulators.&text=Hawala%20channels%20were%20also%20active%20conduits%20for%20laundering%20proceedings%20from%20illegal%20activities%20.

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