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The Financial Action Task Force (FATF), in its recent report “Investigating Professional Money Laundering, Underground Banking, and the Use of Hawala and Other Similar Service Providers”, has highlighted the technological transformation of traditional hawala networks. The report, based on evidence from more than 50 jurisdictions, finds that underground banking and hawala are increasingly being integrated with fintech, virtual assets, encrypted communication and other digital technologies.

What is Hawala?

Hawala is an informal value-transfer mechanism in which value is transferred across borders through networks of brokers rather than conventional banking channels. Settlement may occur through cash, trade, netting of obligations or other forms of value. Importantly, hawala can serve legitimate remittance needs, particularly where access to formal financial services is limited, but it can also be exploited for money laundering and terrorist financing.

Emergence of ‘Digital Hawala’

Technology is not necessarily replacing traditional hawala; rather, it is amplifying its reach, speed and complexity. FATF reports that nearly 70% of respondents identified integration of new technologies into such networks.

Digital hawala can involve:

• Encrypted communication: Digital platforms are used to coordinate transactions and participants.
• Fintech and mobile wallets: Customers may initiate transfers through digital payment platforms.
• Virtual assets: Cryptocurrencies and stablecoins can facilitate settlement between operators.
• Formal financial infrastructure: Bank accounts, payment service providers, virtual IBANs and prepaid cards can become entry or exit points.
• AI-enabled operations: Emerging networks can exploit automated tools to structure transactions and route funds.
• Integrated ecosystems: Messaging services, social media, virtual-asset platforms and other digital applications may operate together.

Why It Matters for AML/CFT

The digitisation of underground banking creates several challenges:

• Greater speed and scale: Funds and value can move rapidly across jurisdictions.
• Reduced traceability: Encrypted communications, virtual assets and complex transaction chains can obscure the identity of participants.
• Convergence with the formal economy: Criminal networks increasingly exploit legitimate banks, fintech platforms and businesses as components of laundering chains.
• Professionalisation: FATF identifies increasingly business-like networks involving specialised brokers and, in some cases, professional intermediaries such as accountants, lawyers, real-estate agents and corporate service providers. More than 80% of reporting jurisdictions identified underground banking/HOSSPs among significant professional money-laundering channels or techniques.

Policy Challenge: Avoiding Over-Regulation

A major policy paradox is that excessive de-risking by banks can push legitimate customers towards informal channels. FATF therefore advocates a risk-based approach, rather than indiscriminate exclusion of customers or entire categories of financial activity.

Way Forward

India and other jurisdictions need to strengthen:

• Financial Intelligence Unit (FIU) capabilities and digital-forensics expertise.
• Blockchain analytics for tracing virtual-asset transactions.
• Regulation and supervision of Virtual Asset Service Providers (VASPs).
• Cross-border intelligence sharing and public-private cooperation.
• Beneficial-ownership and customer-due-diligence mechanisms.
• Data collection on underground banking networks.
• Financial inclusion so that legitimate remittance users have accessible formal channels.

This needs to be integrated with the FATF's evolving framework for virtual assets. Its 2026 update identifies continuing gaps in VASP licensing, supervision, enforcement and risks involving stablecoins and peer-to-peer transactions.

Conclusion

The emergence of digital hawala illustrates how financial innovation can simultaneously expand financial access and create new avenues for illicit finance. The challenge for governments is therefore not simply to eliminate informal financial systems, but to distinguish legitimate financial activity from criminal networks while developing technology-enabled, proportionate and internationally coordinated AML/CFT mechanisms.