Digital Hawala – Technology’s New Frontier in Money Laundering and Terror Financing

Digital Hawala Latest News

• The centuries-old hawala and other underground banking systems are undergoing rapid technological transformation, dubbed as digital hawala. 
• This is highlighted in the latest report of the Financial Action Task Force (FATF), titled “Investigating Professional Money Laundering, Underground Banking, and the Use of Hawala and Other Similar Service Providers”.
• It identifies the fusion of traditional hawala with virtual assets, fintech platforms, encrypted communication and artificial intelligence (AI) as a major emerging threat.
• Nearly 90% of surveyed jurisdictions reported hawala networks operating within their territories, while nearly 70% observed the incorporation of new technologies into such networks.

From Traditional Hawala to ‘Digital Hawala’

• Hawala is an informal value-transfer mechanism in which money or value can be transferred across borders without conventional banking channels, often relying on trust, brokers and settlement through cash, trade or other transactions.
• Digital hawala refers to the technology-enabled evolution of informal value-transfer networks using encrypted communication, fintech platforms, virtual assets, AI and digital infrastructure.
• The FATF identifies six broad forms of digital hawala –
  • Digital coordination, traditional settlement – Encrypted messaging apps, online platforms and shared digital ledgers are used to communicate instructions, recruit couriers and maintain records, while settlement continues through traditional means.
  • Digital customer interface – Mobile wallets and fintech applications provide the customer-facing interface, but operators may still settle balances through cash or trade.
  • Virtual-asset settlement – Stablecoins and other virtual assets can be used to settle balances directly.
  • Integration with formal digital infrastructure – Payment service providers, fintech platforms and virtual IBANs can facilitate movement of funds.
  • AI-enabled operations – AI can support automated transaction structuring, dynamic routing through mule accounts, and rapid fiat-to-cryptocurrency conversion.
  • Hawala applications/ecosystems – Integrated platforms may combine messaging, cloud storage, social media, Virtual Asset Service Providers (VASPs), lending applications and gaming platforms.

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Why Digitisation Matters

• Digitisation is not necessarily replacing traditional hawala; rather, it is acting as a catalyst for existing settlement mechanisms. Cash remains important at collection and exit points.
• Technology makes underground financial networks –
  • Faster and more geographically extensive;
  • More opaque and difficult to trace;
  • More resilient against disruption;
  • Less dependent on identifiable interpersonal relationships; and
  • Capable of combining informal finance with formal digital infrastructure.
• This illustrates the broader Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) challenge created by the convergence of fintech, crypto-assets and informal finance.
  • In this way, legitimate financial innovations can simultaneously create new avenues for illicit finance.

Turkiye Case – Digital Hawala and Terror Financing

• Turkiye provides a significant example of the security implications of digital hawala. 
• In 2023, raids targeting an ISIL administrative officer uncovered approximately $57,250 in cash, followed by a further $554,000, along with hawala notebooks and digital transfer receipts.
• A jeweller and two mobile-phone shops allegedly functioned as fronts, while transactions were disguised as charitable donations. 
• The network reportedly used VASPs; Over-the-Counter (OTC) brokers; mule accounts; jewellers and precious-metals dealers; and digital transfer mechanisms.
• The case demonstrates how virtual assets, conventional businesses and informal settlement systems can operate together, complicating the detection of terrorist financing.

Professionalisation of Underground Banking

• The FATF observes that underground banking is becoming increasingly professionalised and business-like. 
• Networks are developing hierarchical structures; formal management practices; digitised record-keeping; international broker networks; and specialised logistical arrangements.
• Professional intermediaries such as lawyers, accountants, auditors, notaries and real-estate agents are increasingly being drawn into laundering chains.
• The Netherlands’ Operation Klaver exposed an underground banking operation that processed around €500 million in criminal proceeds in only eight months, using couriers, counting warehouses, coded ledgers and international brokers.

Challenges

• Structural weaknesses:
  • Lack of reliable data on the scale of underground banking;
  • Inconsistent terminology, particularly the varied use of the term “hawala”;
  • Difficulty in cross-border information sharing;
  • Increasing use of virtual assets and digital platforms; and
  • Fragmented enforcement across jurisdictions.
• For law enforcement:
  • Digitalisation has weakened traditional investigative methods based on tracing personal relationships and physical cash movements. 
  • Access-controlled digital platforms can conceal participants and compartmentalise networks.
• The policy paradox:
  • The FATF also highlights an important unintended consequence: aggressive AML/CFT enforcement and bank de-risking can push legitimate customers away from formal channels and towards informal systems.
  • Therefore, excessively punitive approaches may inadvertently strengthen the very underground networks that authorities seek to dismantle.

Way Forward – FATF Recommendations

• Greater use of technology-enabled financial investigation. 
  • For example, Indonesia’s Financial Intelligence Unit uses blockchain analytics to trace virtual-asset flows where unlicensed transfer services intersect with crypto-assets.
• Balancing law-enforcement: 
  • The policymakers must avoid excessive de-risking that drives legitimate financial activity into informal channels.
  • The objective should be to expand legitimate access to regulated financial channels while maintaining strong risk-based AML/CFT controls.
• A comprehensive response: Risk-based regulation, stronger FIU capabilities, blockchain and digital-forensics expertise, cross-border intelligence sharing, regulation of VASPs, improved data collection, etc. 

Source: FP | TH