The Global Paradox of Financial Inclusion versus Money Laundering and Terrorist Financing: The Case of Hawala

Digitalization of the financial sector in the era of globalization has made it highly vulnerable to misuse for money laundering and terrorist financing. At the same time, the financial innovations due to digitalization have led to higher financial inclusion, especially in areas where there is no or limited access to regular banking facilities. To tackle the increased risk of money laundering and terrorist financing, the European Union, among other jurisdictions, has significantly increased regulation and supervision while balancing the security of financial inclusion. One of the issues with intensifying regulation in one sector or jurisdiction is that actors that need to operate in a less regulated and surveilled economy will tend to switch their sector, jurisdiction, or method of getting financial services. One available alternative, which has gathered much attention in recent years, is the hawala remittance system. Especially within the area of anti-money laundering and terrorist financing, the hawala system has been of great interest, as it gives criminals alternative ways of moving wealth outside of the regulated financial sector. This chapter seeks to understand the hawala system in its essence, considering the problems and regulatory dilemmas that this financial alternative creates in a modern financial system.