Hawala networks increasingly use virtual assets, fintech to conceal illicit wealth: FATF, OECD

ISLAMABAD: Traditional underground financial networks, including hawala and other similar service providers (HOSSPs), have become increasingly professionalised and are making greater use of virtual assets and fintech platforms to conceal billions of dollars in illicit wealth, according to a new joint report by the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development (OECD).

The report was jointly prepared by the two Paris-based organisations, which specialise in financial and economic matters.

Based on feedback from around 45 jurisdictions and organisations, including India and Pakistan, the report highlighted cases involving illicit money transfers through such HOSSPs. In both India and Pakistan, it noted the growing role of underground banking and financial networks in facilitating illicit finance.

The report highlighted the vulnerability of these systems to money laundering and terrorist financing, with some cases involving more than €500 million being laundered through underground banking and hawala-based schemes within just a few months.

It found that the criminal misuse of underground banking and HOSSPs was a widespread global phenomenon, with more than 80pc of reporting jurisdictions identifying these systems as among the principal channels or techniques used for professional money laundering.

Referring to an episode involving a hawala network that used social media and mobile money transfers to facilitate transactions with Pakistan, the report said the Central Bank of Oman (CBO) received intelligence through its whistleblower channel about individuals suspected of operating an unlicensed cross-border remittance business to Pakistan.

The reporting entity detected the activity after observing a sudden reduction in customer remittances through specific corridors, the report said.

The CBO conducted further enquiries, including engaging with customers, joining the relevant WhatsApp group and collecting supporting evidence before reporting the case. Its follow-up enquiries, including social media monitoring and off-site analysis, identified a WhatsApp group named “XX Money Exchange”, which was operated by foreign nationals to advertise foreign exchange and remittance services to expatriate communities in Oman.

The hawaladars offered rates below the formal market rate, with minimal or no fees, and encouraged customers to share the group with others seeking to remit funds. Customers transferred money to the suspected hawaladars either in cash or through mobile-linked transfers. The hawaladars then sent screenshots showing proof of payment through an e-wallet to a corresponding e-wallet maintained with a payment service provider in the destination jurisdiction.

“The scheme exploited lower-cost remittance channels in destination countries, including fee-free transfers to Pakistan through channels such as Raast, as well as exchange rate differentials offered by some digital wallet or payment providers,” the report said.

This allowed the hawaladars to generate margins while offering cheaper remittance services. Omani authorities identified six suspected individuals believed to form a connected network of hawaladars, with transaction flows of approximately $72,293 recorded over a one-year period.

Likewise, illegal online gambling proceeds were being laundered through HOSSP-based networks in India. The report said Indian authorities had identified a professional money laundering (PML) scheme linked to an illegal online gambling platform that generated proceeds from sports betting, card games and other forms of online wagering.

The platform relied on a decentralised network of “panel operators” to manage customer deposits and withdrawals. These operators used UPI, online banking, digital wallets, mule accounts and accounts opened using stolen identities to receive and transfer funds.

The structure enabled the organisers to separate the gambling platform from the financial flows supporting it. A portion of the proceeds was converted into cash and moved abroad through hawala and other underground banking channels. The funds were then reintroduced into India as purported foreign investment from the UAE, disguising their criminal origin, the report said.

The report was prepared with input from experts from 32 jurisdictions, including Pakistan, as well as 22 FATF members and three observers — Europol, Interpol and UNODC.

It said that while HOSSPs could serve legitimate purposes, the provision of underground banking or unregistered HOSSP services was generally a criminal offence in most countries and contravened FATF standards. The standards recommend that countries require such entities to be licensed or registered to provide these services.

The report emphasised how underground banking and hawala networks had evolved into increasingly organised, business-like structures. It said these networks had become highly sophisticated, scalable and commercially operated, contributing to the emergence of “money laundering as a service” — the systematic outsourcing of money laundering functions to specialists — and professional money laundering as a commercialised business model.

Such networks offer lower commission rates and can move large volumes of value rapidly across borders, making them attractive to organised crime groups, the report said.

The FATF also warned of the increasing involvement of lawyers, accountants, auditors, notaries, corporate formation agents, financial consultants, real estate agents, casinos and junket operators in facilitating such schemes.

It also highlighted the growing integration of these networks with the formal financial sector, saying professional money launderers were increasingly using bank accounts, fintech platforms, payment service providers, virtual IBANs, prepaid cards and virtual asset wallets as entry and exit points in money laundering cycles, exploiting regulatory blind spots.

Discussing the rise of “digital hawala”, the report said nearly 70pc of respondents had identified the integration of new technologies and a growing shift towards digital hawala. These included operators using encrypted messaging applications such as WhatsApp, Telegram and Signal, as well as digital tools to coordinate transactions; customers initiating transfers through bank accounts, mobile wallets, fintech applications or instant payment systems; and operators using virtual assets, including stablecoins, to settle balances among themselves.

The report also identified the use of AI-based tools and the development of purpose-built “hawala apps”.

These developments can improve the efficiency of PML services, make illicit funds easier to conceal, and expand the geographic reach and resilience of underground banking- and HOSSP-based professional money laundering schemes.

The report’s findings demonstrated that the criminal use of these systems was no longer limited to cash-based crimes such as drug trafficking or smuggling. “Today, criminals are using these systems to launder proceeds from a broader spectrum of criminal economies including fraud, cyber-enabled crime, terrorist financing, illegal gaming and gambling and transnational organised crime,” it noted.

Through a series of operational case studies, the report shows how professional money laundering networks increasingly rely on underground banking systems, for example, to move proceeds from large-scale cross-border drug trafficking, or use digital hawala networks to finance members of terrorist organisations.

Drawing on evidence from more than 50 jurisdictions across the FATF Global Network and partner organisations, the report provides a global picture of how these systems operate and identifies good practices to help jurisdictions and the private sector strengthen their ability to detect, investigate, prosecute and disrupt the professional money laundering infrastructure that enables serious and organised crime, corruption, fraud and terrorist financing.

The findings highlight the importance of combining targeted prevention and enforcement measures with proportionate financial inclusion efforts, supported by legal clarity, enhanced detection capabilities, public-private feedback loops, domestic co-ordination and international co-operation.