FATF warns that hawala networks are going digital, using stablecoins and AI
An old, trust-based way of moving money now runs on encrypted apps and stablecoins. Can regulators keep up?
Published 8 September 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
The Financial Action Task Force (FATF), the inter-governmental body that sets global standards against money laundering and terrorist financing, has released a report on professional money laundering, underground banking and the use of hawala and other similar service providers (HOSSPs). Its central warning is the rise of 'digital hawala'. Nearly 70% of the jurisdictions surveyed said they had detected new technologies being built into underground banking networks. Hawala is an informal way of transferring value. A customer hands money to an operator in one place, a partner operator pays the same value to a recipient elsewhere, and the two operators settle their balance later, often without any money physically crossing a border.
The report describes several ways in which technology has entered this old system. Operators coordinate through encrypted messaging and online platforms while still settling in cash. Customers deal with operators through mobile wallets and fintech apps. Balances between operators are settled in virtual assets, increasingly in stablecoins, which are crypto-tokens pegged to a currency such as the US dollar. Funds pass through the formal system via payment service providers and virtual IBANs (bank account numbers issued for routing payments). Artificial intelligence tools automate the splitting of transactions, their routing through mule accounts and the rapid conversion of cash into crypto-assets. Some apps bundle messaging, cloud storage, social media and virtual asset services in one place. Cash still dominates at the points where money is collected and paid out. Together, these changes make cross-border flows faster and harder for anti-money laundering and counter-terrorist financing (AML/CFT) authorities to trace.
In India, hawala dealings violate the Foreign Exchange Management Act (FEMA), 1999, which allows only authorised persons to deal in foreign exchange, and laundering of the proceeds of crime is an offence under the Prevention of Money Laundering Act (PMLA), 2002. Both laws are enforced by the Enforcement Directorate. Since March 2023, businesses dealing in virtual digital assets have been reporting entities under the PMLA and must report suspicious transactions to the Financial Intelligence Unit-India (FIU-IND). India has been a member of the FATF since 2010, and in June 2024 the FATF plenary adopted India's mutual evaluation, placing it in 'regular follow-up', the best outcome. Experts caution that enforcement alone will not end hawala: cheaper and faster formal remittance channels reduce the demand for it, while over-cautious 'de-risking' by banks, which cut off whole categories of customers, can push legitimate users into informal channels.
Prelims facts
- A FATF report says nearly 70% of surveyed jurisdictions have detected new technologies being used in underground banking networks, which it calls digital hawala.
- Stablecoins are increasingly used to settle balances between hawala operators, while cash still dominates at collection and payout.
- HOSSPs stands for hawala and other similar service providers; FATF Recommendation 14 requires money or value transfer services to be licensed or registered.
- The FATF was set up in 1989 on the initiative of the G7; India became a member in 2010 and was placed in regular follow-up after its mutual evaluation in June 2024.
- Virtual digital asset service providers have been reporting entities under the PMLA, 2002 since March 2023.
Quick recall
- What share of jurisdictions surveyed by the FATF detected new technologies in underground banking?
- Nearly 70%.
- What does HOSSPs stand for?
- Hawala and other similar service providers.
- What is a stablecoin?
- A crypto-token designed to hold a steady value by being pegged to a currency such as the US dollar.
- When and on whose initiative was the FATF set up?
- 1989, on the initiative of the G7.
- When did India become a FATF member?
- 2010.
- What was the outcome of India's FATF mutual evaluation in June 2024?
- India was placed in regular follow-up, the best category.
- Which FATF Recommendation covers money or value transfer services such as hawala?
- Recommendation 14.
- Since when are virtual digital asset service providers reporting entities under the PMLA?
- March 2023.
Prelims practice question
In the context of the Financial Action Task Force's work on underground banking, the term 'HOSSPs' refers to:
- High-risk offshore shell companies used for smuggling
- Hawala and other similar service providers
- Harmonised online settlement systems for payments
- Holding companies subject to special supervision
Show answer
Answer: (b) Hawala and other similar service providers. The FATF uses HOSSPs for hawala and other similar service providers: informal operators who transfer value and settle balances among themselves, often without funds physically crossing borders. Its new report on underground banking examines how HOSSPs are adopting digital tools. The other expansions are invented.
Use this in UPSC Mains: previous-year questions
Recurring theme: Money laundering, hawala and the use of new technologies to move illicit funds
- How to use this
Use the FATF digital hawala report to show how encrypted apps, stablecoins and AI speed up laundering, then list India's legal tools and international measures.
- A FATF report finds nearly 70% of surveyed jurisdictions have detected new technologies in underground banking; balances between hawala operators are increasingly settled in stablecoins.
- AI tools automate splitting transactions, routing them through mule accounts and converting cash into crypto, while virtual IBANs and payment service providers move funds through the formal system.
- India's response: FEMA, 1999 and PMLA, 2002 enforced by the ED; virtual digital asset businesses are PMLA reporting entities since March 2023; FATF placed India in 'regular follow-up' in June 2024.
- How to use this
Use hawala as the financial channel that links drug trafficking to other illicit activities, and digital hawala as the reason these links are now harder to trace.
- Hawala moves value without money physically crossing borders; its links to terror financing, narcotics and cyber fraud make it an internal security threat.
- The FATF report says encrypted messaging, mobile wallets, stablecoins and AI-driven mule account routing make cross-border flows faster and harder for AML/CFT authorities to trace.
- Countermeasures: enforce FATF Recommendation 14 to license or register value transfer services, use blockchain analytics at FIU-IND, and make formal remittances cheaper to cut demand for hawala.
Mains practice question
Digital technologies are transforming traditional hawala networks. Discuss the challenges this poses for India's anti-money laundering framework and suggest measures to address them. (250 words)
Model answer
Hawala moves value informally through trusted operators who settle balances among themselves. A new Financial Action Task Force (FATF) report finds that nearly 70% of surveyed jurisdictions now see new technologies in such networks, which it calls digital hawala.
How hawala has changed
- Encrypted messaging and online platforms replace phone calls and ledgers.
- Mobile wallets and fintech apps serve as customer interfaces.
- Stablecoins settle balances between operators across borders.
- AI tools split transactions, route them through mule accounts and convert cash to crypto quickly.
Challenges for India
- Speed and encryption leave little time or trail for the Enforcement Directorate and FIU-IND.
- Virtual assets move across borders outside the banking system; enforcement against offshore platforms is hard.
- Mule accounts exploit easy digital onboarding, and cash still dominates at the ends of the chain.
- Hawala links to terror financing, narcotics and cyber fraud make it an internal security threat.
Measures
- Enforce FATF Recommendation 14: register or license all money or value transfer services.
- Use blockchain analytics and AI-based monitoring at FIU-IND; build on the March 2023 inclusion of virtual digital asset providers under the PMLA.
- Tighten KYC on wallets and crack down on mule accounts through bank-telecom data sharing.
- Make formal remittances cheaper and faster so that legitimate users do not need hawala; avoid indiscriminate de-risking.
- Deepen cross-border cooperation through the FATF and bilateral agreements.
India's regular follow-up rating in 2024 is an asset; keeping it will require regulation that moves as fast as the networks it targets.
The basics
Why this matters
Money laundering is where economics meets internal security. Terror groups, drug traffickers and fraudsters all need to move money without being traced. The FATF's new report shows that one of the oldest channels for doing so, hawala, has gone digital. UPSC asked in 2021 how emerging technologies contribute to money laundering; this report is a ready answer.
How hawala works
Hawala is a system of trust. No money needs to cross a border for value to move across it.
- 1Customer paysA sender hands cash to a hawala operator in city A
- 2Operator passes a codeThe operator tells a partner in city B, usually abroad, to pay
- 3Recipient collectsThe partner pays the recipient in local currency on a password or code
- 4Operators settleThe two operators balance accounts later, through cash, trade invoices or other transfers
What digital hawala changes
The basic structure stays the same, but every link in the chain can now be digital.
- Instructions by phone or in person
- Settlement by cash or mis-invoiced trade
- Records in private ledgers
- Instructions over encrypted apps and online platforms
- Settlement in virtual assets, increasingly stablecoins
- AI tools split and route transactions through mule accounts
Why stablecoins matter
Stablecoins combine the speed of crypto-assets with the steady value of a currency such as the US dollar. That makes them useful to hawala operators who need to settle balances across borders without the price swings of other crypto-assets.
Who polices this
Globally, standards are set by the Financial Action Task Force. In India, the main laws are FEMA, 1999 and the Prevention of Money Laundering Act, 2002.
- 1FEMA, 1999Only authorised persons may deal in foreign exchange; hawala is a violation
- 2PMLA, 2002Makes laundering of proceeds of crime an offence; allows attachment of property
- 3Enforcement DirectorateInvestigates offences under both PMLA and FEMA
- 4FIU-INDReceives and analyses suspicious transaction reports from reporting entities
Go deeper
In one line: The FATF has warned that hawala networks are adopting encrypted apps, fintech, stablecoins and AI, with nearly 70% of surveyed jurisdictions detecting such technologies in underground banking.
Why it matters for UPSC
The GS3 syllabus names money laundering and its prevention, and the links between organised crime and terrorism. UPSC asked in 2021 how emerging technologies contribute to money laundering and in 2018 about links between drug trafficking and money laundering. Prelims can test the FATF, its lists and India's laws.
The core idea
Hawala moves value through trust between operators who settle among themselves. Digital tools now touch every step, and Stablecoins have become a favoured way to settle across borders. The standards against this are set by the Financial Action Task Force. In India, the main criminal law is the Prevention of Money Laundering Act, 2002, alongside FEMA, 1999.
Numbers and dates to remember
- Nearly 70% of surveyed jurisdictions detected new technologies in underground banking
- FATF set up in 1989; India a member since 2010
- India's mutual evaluation adopted in June 2024: regular follow-up
- FATF Recommendation 14: money or value transfer services must be licensed or registered
- PMLA enacted in 2002; virtual digital asset providers covered since March 2023
Where to go next
- Financial Action Task Force: the global standard-setter
- Hawala: how the informal system works
- Stablecoins: the new settlement tool
- Prevention of Money Laundering Act, 2002: India's main anti-laundering law
Go deeper: can regulation catch up with digital hawala?
The report's finding is that technology has not replaced hawala but upgraded it. Encrypted apps make coordination faster and harder to intercept. Stablecoins let operators settle balances across borders in minutes. AI tools can split payments into small amounts and route them through mule accounts, the bank accounts of people who lend or sell them to criminals. Yet cash still dominates where money enters and leaves the system, which gives enforcement agencies a point of attack.
There are two broad responses. The first is tighter enforcement: registering or licensing every money or value transfer service as FATF Recommendation 14 requires, using blockchain analytics to trace virtual assets, and sharing data between banks, telecom companies and investigators. India has moved in this direction by bringing virtual digital asset providers under the Prevention of Money Laundering Act, 2002 in March 2023.
The second response targets demand. Hawala survives because it is cheap, fast and works where banks do not. If formal remittance channels are costly or slow, migrants and small traders will keep using informal ones. The FATF has warned before that de-risking, where banks cut off whole categories of customers rather than managing risk, can push legitimate users into the shadows. India's low-cost digital payments are an advantage here, though the same ease of onboarding can be abused to open mule accounts.
India's standing matters. The Financial Action Task Force placed India in regular follow-up in June 2024, the best category. Staying there depends on showing that laws keep pace with new methods. For Mains, the balanced conclusion is to combine enforcement, technology and cheaper formal channels, while protecting privacy and avoiding blanket exclusion.
Financial Action Task Force
The global standard-setter
In one line: The Financial Action Task Force (FATF) is an inter-governmental body that sets global standards against money laundering, terrorist financing and proliferation financing.
Origin and structure
The FATF was set up in 1989 on the initiative of the G7. Its secretariat is in Paris, hosted by the OECD. Its standards are the FATF Recommendations, first issued in 1990 and revised several times. India became a member in 2010.
How it works
Members are assessed in peer reviews called mutual evaluations. Countries with serious weaknesses are placed on two public lists: jurisdictions under increased monitoring (the grey list) and high-risk jurisdictions subject to a call for action (the black list). In June 2024, India's evaluation placed it in regular follow-up, the best category.
Why it is in the news
Its new report on underground banking warns of digital hawala.
Where to go next
Hawala
How the informal system works
In one line: Hawala is an informal system for transferring value through a network of trusted operators who settle balances among themselves.
How it works
A sender pays an operator in one place, and a partner operator pays the recipient elsewhere on the strength of a code or password. The operators settle later, through cash, mis-invoiced trade or other transfers. Money often never crosses the border directly.
Why it is used and misused
Hawala is cheap, fast and works where banks do not reach, so migrants and traders use it. The same features make it attractive for tax evasion, laundering, terror financing and drug money. In India, hawala violates FEMA, 1999, which allows only authorised persons to deal in foreign exchange.
Why it is in the news
The FATF says hawala is adopting encrypted apps, fintech, virtual assets and AI.
Where to go next
Stablecoins
The new settlement tool
In one line: Stablecoins are crypto-tokens designed to hold a steady value, usually by being pegged to a currency such as the US dollar.
How they work
Most stablecoins are issued by private companies that claim to hold reserves, such as cash and government bonds, equal to the tokens in circulation. Because their value stays close to the currency they track, they avoid the sharp price swings of other crypto-assets.
Why hawala operators like them
Hawala operators need to settle balances across borders. Stablecoins move quickly between digital wallets anywhere in the world, round the clock, and outside the banking system, which is why the FATF finds them increasingly used for settlement.
The regulatory challenge
Tracing requires blockchain analytics and cooperation from exchanges and wallet providers, many of them offshore.
Where to go next
Prevention of Money Laundering Act, 2002
India's main anti-laundering law
In one line: The Prevention of Money Laundering Act (PMLA), 2002 makes money laundering a criminal offence and lets authorities attach and confiscate the proceeds of crime.
Key features
The Act came into force in 2005. The Enforcement Directorate investigates offences under it. Banks, financial institutions and other reporting entities must keep records, verify customers and report suspicious transactions to the Financial Intelligence Unit-India (FIU-IND).
Recent changes
In March 2023, businesses dealing in virtual digital assets were made reporting entities under the Act. In 2022, in Vijay Madanlal Choudhary v Union of India, the Supreme Court upheld the Act's key provisions on arrest, attachment and the burden of proof.
Why it is in the news
Digital hawala uses exactly the virtual asset channels that the 2023 change aimed to cover.
Where to go next
Take the 8 September 2026 quiz: 30 Prelims-style questions with answers