Hawala and money laundering: a Malaysian perspective
| Published date | 01 January 2005 |
| Date | 01 January 2005 |
| DOI | https://doi.org/10.1108/13685200510621181 |
| Pages | 37-47 |
| Author | Bala Shanmugam |
| Subject Matter | Accounting & finance |
Hawala and Money Laundering:
A Malaysian Perspective
Bala Shanmugam
INTRODUCTION
Money may be one of man's greatest and most
important inventions. Without this instrument a
civilised society may face diculty in functioning
smoothly. In short, money is a tool used to oil the
economic wheels of society. This important inven-
tion, however, is often misused. A perfect example
of such a phenomenon is money laundering. Money
laundering is becoming a very attractive business in
many developed as well as developing countries.
This is an economic crime that has been devised inge-
niously, to legitimise ill-gotten pro®ts. In fact, accord-
ing to LogicaCMG,
1
®nancial institutions in the UK
cited money laundering as the biggest fear and threat
to their industry.
This exploratory study seeks to report on the
operations of hawala in Malaysia and how money
laundering is intertwined with this process. The ®nd-
ings mentioned in the study are based on informal
interviews undertaken in the Klang Valley region of
Malaysia. The interviewees were authorised money
changers who operate within this region. It must be
noted that this is only an exploratory study which
considered a small sample of intermediaries who
assisted in the money laundering process. Also it
must be reiterated that while all these interviewees
were involved in hawala, how much of the funds
remitted through hawala are `dirty' money remains
an unanswered question.
MONEY LAUNDERING
The term `money laundering' became common in the
early 1980s when newspapers in the USA started
reporting on the Watergate scandal where large
amounts of funds changed hands illegally. Since then
money laundering has became a common expression
to describe the conversion of illegal (dirty) funds to
legal (clean) money.
Money laundering started to receive much atten-
tion in the post 11th September climate, in view of
eorts to starve terrorist funding. But money launder-
ing is not con®ned to terrorist activity alone. Drug
tracking, prostitution, corruption, fraud, smuggling
and tax evasion are some of the other activities related
to money laundering.
There are three basic stages to money laundering
(Figure 1). In the initial or placement stage, the laun-
derer introduces the illegal funds into the ®nancial
system. In the next phase, known as layering, the laun-
derer moves the funds to distance it from its source. In
the ®nal stage known as integration the funds re-enter
the launderer's portfolio as legitimate money (see
Shanmugam et al.
2
for details of this systematic pro-
cedure). Although this process is well known, to ident-
ify its occurrence is no easy task. Money laundering
tends to occur more so in areas where there is a low
risk of detection but a stable ®nancial system is in oper-
ation.
Money laundering is not exactly a small `one-o'
phenomenon, neither is it a passing fad. It is big
business and by all counts the amount is growing.
The IMF estimated that the amount of money
laundered globally is between US$500 and
US$1.5trn annually.
3
The IMF also assumes that 2
per cent of the GDP of any country is a reasonable esti-
mate for the amount of money being laundered.
THE HAWALA SYSTEM
The word `hawala' has an Arabic origin meaning
`change' or `transform'. In the Indian languages of
Hindi and Urdu it means `trust', underlying the prin-
ciple of the hawala system. The terms hawala and
hundi are used interchangeably in the countries of
the Indian sub-continent with a slight preference for
the term hundi in northern Pakistan.
4
The hawala system of remittance can be traced back
to India as early as the 11th century.
5
As the ®rst Wes-
tern-style bank in India (the Bank of Hindustan) was
established in Calcutta only around 1770, commercial
and ®nancial transactions were carried out with the
help of sarafs (anglicised to shro ), who were primarily
money changers.
6
Thus, calling hawala an `under-
ground system' of banking as it is commonly men-
tioned in Western literature is not correct, as the
system has been operating in the open with complete
legitimacy for centuries. Even in recent times such
Page 37
Journal of Money Laundering Control Ð Vol. 8 No. 1
Journalof Money Laundering Control
Vol.8, No. 1, 2004, pp. 37± 47
#HenryStewart Publications
ISSN1368-5201
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