UAE Central Bank helps improve hawala operators’ compliance

The term hawala is used in a number of jurisdictions and is associated with a money transfer mechanism that operated extensively in South Asia many centuries ago, and which still exists there, as well in the Middle East, and in Africa.

What are Hawala providers and why do they exist?

Hawala providers are essentially money transmitters, particularly with ties to specific geographic regions or ethnic communities, which arrange for funds or equivalent value to be transferred and settled through trade, cash, and net settlement over a long period of time. While they often use banking channels to settle between receiving and pay-out agents, what makes them distinct from other money transmitters is their use of informal settlement methods such as cash and trade, as well as longer settlement times. Essentially, Hawala providers conduct their settlement transactions out of the scope of formal banking channels.

The reason why Hawala providers continue to exist despite operating outside formal channels is that many countries and communities, as well as development agencies, view them as vital providers of financial services to the unbanked in countries with limited financial access.

What are the money laundering risks posed by hawala providers?

Equally, in a significant numbers of jurisdictions, law enforcement agencies view hawala providers as one of the leading channels for terrorist financing and money laundering, with increased vulnerability to financial crimes for various reasons. These include: Settlement across multiple jurisdictions through value or cash; the use of businesses that are not regulated financial institutions; the use of net settlement mechanisms and the mixing of legal and illicit proceeds.

How the UAE Central Bank is setting best practices in regulating Hawala providers

In the UAE, the Central Bank has recognised the role of hawala providers as essential to financial inclusion while acknowledging that such players continue to pose greater money laundering and terrorist financing vulnerability. As such, hawala is regulated by the Registered Hawala providers (RHP) Regulation issued by the CBUAE in 2019 and all providers undertaking hawala activity in the UAE must hold a Hawala Provider certificate issued by the Central Bank.

RHP are required to comply fully with UAE AML/CFT laws, rules and regulations relating to targeted financial sanctions and suspicious transaction reporting. In addition, RHP are also required to establish and maintain an effective AML/CFT Compliance Programme designed to prevent misuse of its activity to facilitate money-laundering or terrorist financing. This should include appointing a competent compliance officer and money laundering reporting officer.

Finally, and most importantly, RHPs must arrange for a regular, independent audit of their compliance programme by hiring an independent, external compliance auditor. In terms of frequency, small RHPs need to get an independent audit conducted once every 2-3 years while large RHPs must get it done every year.

Abler, an independent compliance advisory and consulting firm with presence in Mauritius and the UAE, offers independent compliance audits that allows its clients to test the comprehensiveness and effectiveness of their compliance frameworks and programmes. It supports hawala providers in the UAE to meet the requirement of independent compliance audit mandated by the Central Bank with a view to create a stronger enforcement structure and pave the way for a more robust jurisdiction. This regulation translates into a safer environment for financial and banking institutions to operate in, making the UAE an attractive hub for investors while making it a less attractive target for financial criminals.

Shahannah Abdoolakhan is the CEO of Abler Consulting.

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