How do hawala and Somali money transfer operators legally move remittances and how are they regulated?

1. How the mechanism works: trust, IOUs and parallel settlement

Hawala operates on personal trust between a network of brokers (hawaladars); a sender pays a local hawaladar, who instructs a partner in the recipient’s location to pay out—no formal promissory instrument is exchanged and settlement between brokers happens later through trade, cash couriers, or account balancing across corridors ^{[1] [4]}. This reliance on relationships rather than bank rails makes transactions fast and inexpensive, and explains hawala’s prevalence where banking services are weak or costly ^{[1] [5]}.

2. Somalia’s special case: informal dominance, pockets of licensing, and central‑bank oversight attempts

Somalia’s formal banking collapsed in the civil conflict era and hawala/Xawilaad filled the void; estimates put diaspora remittances at roughly $1.3–$2 billion annually routed through these firms, which historically operated mostly outside state control ^{[1] [6] [3] [7]}. Recent moves include Somaliland registering exchange dealers and Somalia’s Central Bank asserting AML/CFT oversight over new payment systems, and several Somali banks and licensed hawalas now operate inside the country—yet regulatory coverage remains uneven across territories ^{[2] [6]}.

3. How remitting countries regulate hawala: licensing, MSB rules and FATF guidance

In many remitting jurisdictions hawala operators must register as money service businesses (MSBs) and comply with AML/CFT rules, customer‑due‑diligence (CDD) and reporting requirements under frameworks shaped by the Financial Action Task Force; failure to license can make operations illegal ^{[4] [8] [9]}. The result is regulatory heterogeneity: some states enforce strict licensing and BSA‑style controls while others struggle with supervision, leaving vulnerabilities in major corridors ^{[10] [11]}.

4. Compliance in practice: self‑regulation, software screening and documentation pressures

Because Somali remitters often rely on diaspora networks and cross‑border business relationships, many Somali MTOs have adopted commercial compliance tools—sanctions screening, transaction logs and KYC practices—largely to maintain correspondent banking relationships abroad, but enforcement of those standards inside Somalia has been incomplete and often self‑imposed by firms that must “do business elsewhere” ^{[3] [6] [12]}. In some countries shop operators were later required to record sender information in response to AML concerns ^[13].

5. Enforcement, de‑risking and unintended consequences

Post‑9/11 AML/CFT pressure pushed banks to cut ties with Somali remitters, producing “de‑risking” episodes such as UK banks closing Somali accounts and legal fights over access; that constricted formal corridors and forced greater reliance on informal methods, complicating regulators’ efforts to trace flows while also raising security agencies’ suspicions about illicit misuse ^{[7] [3] [12]}. International reports note that weak supervision and fragmented regulatory objectives—security agencies, central banks, community integration goals—produce blind spots regulators find difficult to reconcile ^{[12] [11]}.

6. Balancing legality and risk: the current equilibrium

Legally moving remittances via hawala today means registering where required, implementing AML/CFT controls and sanctions screening in remitting countries while operating in a receiving environment where oversight is often partial and market practices (trust, community enforcement) remain central; global standards (FATF recommendations) push formalisation but uneven supervision, commercial de‑risking and the economic importance of remittances sustain informal dynamics ^{[4] [10] [6]}. Independent observers warn that treating all hawala as illicit risks cutting off vital flows to fragile economies, while failure to regulate leaves real ML/TF vulnerabilities—an unresolved policy tension documented by IMF/World Bank and watchdog reports ^{[10] [7] [12]}.