Global watchdog says rise of ‘digital hawala’ is aiding money laundering, terror financing

Why in the News

The latest report of the Financial Action Task Force (FATF), the inter-governmental body that sets the global standards against money laundering and terrorist financing, identifies the fusion of virtual assets with the traditional hawala system as one of the most significant developments in underground banking. The report is titled “Investigating Professional Money Laundering, Underground Banking, and the Use of Hawala and Other Similar Service Providers”. Nearly 70 per cent of surveyed jurisdictions have reported the integration of new technologies into such networks. The uses run from routine money laundering to the financing of terrorist organisations. The difficulty this creates is that a system built on trust between operators has acquired the speed and reach of digital finance without acquiring any of its supervision.

What is “digital hawala”?

1. The underlying system: Hawala is a centuries-old value transfer arrangement in which an operator in one country pays out to a recipient on the instruction of an operator in another, and the two settle their standing balance later between themselves.
2. What makes it digital: “Digital hawala” covers the spectrum of technologies that facilitate the coordination, execution, settlement or concealment of these transactions.
3. What has changed: Virtual assets now supply a settlement layer to a network that previously balanced its books through cash and trade alone.

What are the six configurations the report identifies?

1. Digital coordination with traditional settlement: Operators use encrypted messaging applications, shared ledgers and online platforms to communicate instructions, recruit clients and couriers, and maintain records, and settlement between them still moves through cash or trade.
2. Digital customer interface: The client faces a mobile wallet or a fintech application, and settlement between operators again happens via cash or trade.
3. Virtual asset-based settlement: Stablecoins are used to settle balances between operators directly, replacing the cash leg of the arrangement.
4. Integration with formal digital infrastructure: Funds are moved through payment service providers, fintech platforms and virtual International Bank Account Numbers (IBANs), which are account identifiers issued without a physical branch relationship behind them.
5. Artificial intelligence based tools: These automate transaction structuring, route value dynamically through mule accounts, and convert between currency and cryptocurrency at high speed.
6. “Hawala” apps: These are bundled digital ecosystems combining messaging, cloud storage, social media, Virtual Asset Service Providers (VASPs), lending applications and gaming platforms in one product.

Why do these configurations make detection harder?

1. Speed and opacity rise together: The configurations make transactions faster, more opaque and more complex than the courier and ledger version they build on.
2. The network gets larger and more durable: Digitisation expands both the reach of a network and its resilience, so removing one operator no longer breaks the chain.
3. Digitisation is a catalyst and not a replacement: Traditional settlement mechanisms persist alongside the new layers rather than disappearing under them.
4. Cash remains the pressure point: Cash stays critical at the collection and exit points, which is where an investigation still has a physical trail to find.

What does the Turkiye case show about terror financing?

1. The network’s purpose: Turkiye uncovered a “digital hawala” network financing the Islamic State of Iraq and the Levant (ISIL).
2. The seizures: Raids in 2023 on a self-described ISIL “administrative officer” produced about $57,250 in cash, followed by a further $554,000.
3. The evidence trail: Investigators recovered “hawala” notebooks alongside digital transfer receipts, so the paper ledger and the digital layer were running in parallel.
4. The cover used: A jeweller and two mobile phone shops operated as fronts, and the transfers themselves were disguised as charity donations.

Challenges to countering digital hawala

1. Token settlement clears outside supervised payment rails: Balances settled in stablecoins move on public blockchains that no single national payments regulator oversees. Eg. FATF’s periodic reviews have found most assessed jurisdictions only partly compliant with its Travel Rule for virtual asset transfers.
   The Fix: Enforce originator and beneficiary information requirements on every registered Virtual Asset Service Provider, which in India are reporting entities under the Prevention of Money Laundering Act, 2002.
2. Mule accounts scatter the trail across thousands of holders: Automated routing splits a single transfer across accounts opened in other people’s names, so no account shows an abnormal balance. Eg. The Indian Cyber Crime Coordination Centre has identified mule accounts as the standard cash-out layer in online fraud networks.
   The Fix: Require banks to share mule account indicators in near real time through a common registry rather than case by case after a complaint.
3. Cooperation moves slower than the transaction: Formal evidence requests between countries take months while a chain of transfers completes in minutes. Eg. FATF’s 2024 mutual evaluation of India recorded delays in concluding money laundering prosecutions despite a broadly compliant legal framework.
   The Fix: Use the Egmont Group channel between financial intelligence units for immediate operational exchange, reserving formal treaty requests for trial-admissible evidence.
4. The fronts are ordinary licensed businesses: Jewellers, phone dealers and travel agents handle high cash turnover legitimately, so the anomaly is invisible in the trading pattern itself. Eg. Dealers in precious metals and stones are treated as designated non-financial businesses under the FATF standards precisely because of this exposure.
   The Fix: Extend beneficial ownership disclosure and threshold reporting to these trades, and audit compliance rather than relying on registration alone.
5. The regulated perimeter lags the product: Bundled applications combining messaging, lending and gaming fit no single licensing category, so no regulator holds clear jurisdiction over them. Eg. Application stores continue to host unregistered lending and wallet products that operate across borders.
   The Fix: Adopt an activity-based test that applies value transfer obligations to any product that moves value, whatever licence category it claims.

Conclusion

Underground banking has not been displaced by digital finance, it has absorbed it. Enforcement is left holding a mandate built for couriers and ledgers against a network that settles in tokens and routes itself automatically. Two things decide whether that gap closes. The first is whether virtual asset supervision reaches operators who never register, and the second is whether financial intelligence units can exchange information at the speed a transfer actually moves. The next marker is India’s follow-up reporting under the FATF mutual evaluation process, where the treatment of virtual asset service providers is the specific item under assessment.

Back2Basics

1. What it is: FATF is the inter-governmental standard setter on money laundering, terrorist financing and proliferation financing, established in 1989 at the G7 summit in Paris.
2. How it works: Its Secretariat is housed at the Organisation for Economic Co-operation and Development in Paris, and its standards are the 40 Recommendations that member states are assessed against.
3. Its enforcement tool: It maintains two public lists, jurisdictions under increased monitoring and high-risk jurisdictions subject to a call for action, which affect a listed country’s access to international finance.
4. India’s position: India has been a full member since 2010, and is also a member of the Asia/Pacific Group on Money Laundering.

Matching Previous Year Question

“[2026, GS3, 15 marks] Discuss counterfeit currency and money laundering as major sources of terror funding in India. State the actions being taken at International level to check these menaces. Highlight the role of Financial Action Task Force (FATF) and methods of compliance by its member states in preventing terror funding.”