New Orleans Given all of the trials and tribulations connected to the tales of the migrants streaming north from the Middle East to escape war and violence, it is good to see the hawala system for safely and inexpensively transferring money getting some attention. One of the ironies of the predatory remittance or money transfer system skimming billions of dollars from families and workers being transmitted back to their home countries and families left behind at huge costs is the age old, traditional hawala transfer of money based on trust. Trust, only costs about one-half of a percent to one-percent, while modern, superfast computerized systems can suck 20% or more out of the remittance for their so-called trouble.
A fascinating story accompanied by graphics in the Wall Street Journal by Giovanni Legorano and Joe Parkinson did about the best job of explaining how the system works that I have ever seen. They noted that “90% of the transactions in a people-smuggling trade valued at around $2.5 billion a year in Europe, according to European security officials and researchers” utilizes the hawala system. Furthermore hawala is the method of choice “for a further $390 billion a year that migrants send back home as part of an informal but widely accepted financial system used across the developing world.” This is no small potatoes operation!
Security officials hate it because records of the transactions often disappear after the money is safely with the intended parties. Banks and others hate it because they don’t want to lower their fees to compete with the system, so they malign it, yet the system thrives in the Middle East, Africa, and south Asia.
The graphic description is so accurate and precise that I can’t help but share it while wishing we could all go forth and do likewise! You have to note a first time ever graphic attribution in the Journal which identifies the source for the graphic as “people familiar with the transaction.” Gotta, love that!
Anyway, here’s how a financial system works based on low cost and trust, thanks to the Journal of all places.
Step 1: Sender of the money gives hawala broker, we’ll call Broker A, money to be transferred to a beneficiary.
Step 2: Hawala Broker A contacts hawala Broker B by phone, WhatsApp, Skype or email and tells him the amount to pay the beneficiary. They also establish a passcode associated with the transaction.
Step 3: Broker A gives the passcode to the original sender and tells him where Broker B is located in the country or location where the money can be received.
Step 4: Sender gives the passcode to the beneficiary and tells him where to pick up the money.
Step 5: Beneficiary gives the passcode to Broker B and picks up the money. Bam, all good, smoother than silk, and faster than UPS or Federal Express. The brokers at a later stage settle any imbalances on the transaction.
Hawala is legal in some areas. Legal or illegal, migrants use the system to keep from being robbed along the way.
If banks and money transfer organizations won’t reduce their fees to the real level of their costs and eliminate the predatory profits they extract, we have to hope that the hawala system continues to thrive and grow so that beleaguered families have a chance to make new and better lives. If governments are concerned about security all they have to do is force MTOs and banks to stop fleecing migrant and immigrant families, but as long as they are in the pockets of the predators, the hawala system that has worked for centuries on trust will continue to find a place in the modern global financial system.