How It Works, Why It Is Illegal & How Government Traces It
In February 2026, enforcement agencies across India are aggressively dismantling illegal hawala networks using artificial intelligence, financial intelligence data, and strict legal action.
But many business owners still ask:
- What is hawala?
- How does hawala money transfer work?
- Is hawala illegal in India?
- How does the government trace hawala transactions?
This comprehensive guide explains everything clearly.
What is Hawala? (Hawala Meaning Explained)
Hawala is an informal, unregulated money transfer system that operates outside the banking channel.
The word “Hawala” comes from Arabic, meaning transfer or trust.
Unlike official remittance systems:
- No money officially crosses borders
- No SWIFT message is generated
- No RBI-regulated banking channel is used
- No formal transaction record exists
Instead, money is transferred based purely on trust between brokers known as “Hawaladars.”
In India, hawala transactions are illegal under:
- Foreign Exchange Management Act, 1999
- Prevention of Money Laundering Act, 2002
How Does Hawala Money Transfer Work?
Let’s understand hawala transaction in India with a simple example.
Suppose:
A person in India wants to send ₹50 lakh to Dubai.
Instead of a bank transfer:
- The sender gives ₹50 lakh cash to a hawala operator in India.
- The Indian operator contacts his counterpart in Dubai.
- The Dubai operator pays the equivalent amount to the recipient there.
No money physically moves across borders.
The two operators later settle their accounts privately.
This makes hawala appear invisible — but it leaves indirect financial footprints.
Why is Hawala Illegal in India?
Hawala bypasses India’s regulated financial system and violates foreign exchange laws.
Under the Foreign Exchange Management Act, 1999:
- Unauthorized foreign exchange dealings are punishable.
- Penalty may be up to 3 times the amount involved.
Under the Prevention of Money Laundering Act, 2002:
- Assets can be attached.
- Bank accounts can be frozen.
- Properties can be confiscated.
- Rigorous imprisonment (3–7 years) may apply.
Hawala is commonly linked to:
- Tax evasion
- Black money movement
- Trade mis-invoicing
- Terror funding
- Shell company networks
How Do Hawala Operators Settle Accounts?
Since money doesn’t officially move across borders, operators settle balances through:
- Over-invoicing or under-invoicing imports and exports
- Shell companies
- Benami property transactions
- Gold adjustments
- Cryptocurrency layering
- Mule bank accounts
This settlement system creates complex financial webs that agencies now decode using technology.
Recent ED Action on Hawala (February 2026)
In a recent high-profile case, the Enforcement Directorate filed a prosecution complaint in a Gurugram-based money laundering case.
- Approximately ₹120 crore allegedly routed through hawala
- Assets worth ₹90+ crore attached
- Luxury properties and vehicles seized
In another operation in Jammu and Kashmir, agencies froze more than 8,000 mule accounts linked to digital hawala channels.
These cases highlight how hawala networks are being dismantled systematically.
How Government Traces Hawala Transactions in 2026
Many believe hawala is impossible to trace because there is no bank trail.
That assumption is outdated.
Today, agencies use:
1. AI-Driven Monitoring
Banks deploy machine learning models to detect:
- Sudden spikes in dormant accounts
- Structuring of deposits (smurfing)
- Circular transactions
- Abnormal transaction velocity
2. Suspicious Transaction Reports (STR)
Banks generate STRs and report them to:
- Financial Intelligence Unit – India
These reports trigger deeper investigations.
3. Network Analysis
AI tools map:
- Hub-and-spoke mule account networks
- Shell company clusters
- Invoice manipulation chains
- Cross-border transaction correlations
4. GST & Trade Data Matching
Authorities compare:
- Import-export invoices
- GST returns
- E-way bills
- Customs data
Trade mis-invoicing patterns often expose hawala settlements.
What Are Mule Accounts?
A mule account is a bank account used to move illegal funds on behalf of someone else.
Often:
- Individuals “rent” their bank accounts for commission.
- They unknowingly become part of money laundering networks.
- Their accounts get frozen.
- Legal consequences follow.
In 2026, mule detection is one of the biggest AI-driven enforcement strategies in India.
Risk for Businesses
Even legitimate businesses can get implicated if they:
- Accept large unaccounted cash
- Engage in bogus billing
- Use accommodation entries
- Work with suspicious intermediaries
One hawala-linked transaction can result in:
- Income Tax search under Section 132 of Income Tax Act, 1961
- GST investigation
- ED inquiry under PMLA
- Asset attachment
- Bank account freezing
Compliance failures can trigger multi-agency scrutiny.
The 2026 Reality: Digital Footprints Are Permanent
Hawala may operate without paperwork,
but modern enforcement operates with:
- PAN–Aadhaar integration
- High-value transaction reporting
- Real-time STR alerts
- AI risk scoring
- Network graph intelligence
Financial anonymity is shrinking.
Regulatory intelligence is expanding.
Final Take: Is Hawala Worth the Risk?
Short answer: No.
The cost of non-compliance today includes:
- Criminal prosecution
- Frozen business operations
- Reputational damage
- Multi-agency investigation
- Long-term financial scrutiny
Compliance is cheaper than litigation.
Documentation is safer than shortcuts.
Disclaimer
This article is published for educational and awareness purposes only.
It does not endorse or promote hawala, tax evasion, money laundering, or any unlawful financial activity.
Readers should comply with applicable laws and consult qualified professionals for case-specific advice.