A centuries-old underground banking system is now transforming into a tech-enabled network, with virtual assets adding new layers to “digital hawala”. The shift is being exploited for purposes ranging from routine money laundering to, in some cases, financing terrorist organisations, the latest Financial Action Task Force (FATF) report said.
The global money laundering and terror financing watchdog’s report, titled “Investigating Professional Money Laundering, Underground Banking, and the Use of Hawala and Other Similar Service Providers”, identifies the fusion of virtual assets with the traditional “hawala” system as one of the most significant developments. According to the report, nearly 70% of surveyed jurisdictions have reported the integration of new technologies into such networks.
Six forms of ‘digital hawala’
The study has flagged six forms of “digital hawala” — a term covering a spectrum of technologies that facilitate the coordination, execution, settlement, or concealment of transactions.
One configuration involves digital coordination but traditional settlement, with operators using encrypted messaging applications, shared ledgers and online platforms to communicate instructions, recruit clients and couriers, and maintain records. The second is a “digital customer interface”, such as mobile wallets or fintech apps, although settlement between operators happens via cash or trade in both cases.
The next is virtual asset-based settlement, where stablecoins are used to settle balances directly. In the “integration with formal digital infrastructure” configuration, funds are moved via payment service providers, fintech platforms, and virtual International Bank Account Numbers (IBANs).
The fifth is artificial intelligence-based tools for automated transaction structuring, dynamic mule-account routing, and high-speed fiat-to-cryptocurrency conversion. The last one involves “hawala” apps, which may be bundled digital ecosystems combining messaging, cloud storage, social media, Virtual Asset Service Providers (VASPs), lending apps, and even gaming platforms.
The FATF found that these configurations make transactions faster, more opaque and more complex, while expanding the network’s reach and resilience. The report said that digitisation is acting as a catalyst for traditional settlement mechanisms rather than replacing them, with cash remaining critical at the collection and exit points.
Turkiye case study
It cited a case study of Turkiye’s discovery of a “digital hawala” network financing the terror group, the Islamic State of Iraq and the Levant (ISIL). In 2023, raids on a self-described ISIL “administrative officer” led to the seizure of about $57,250 in cash, followed by a further $5,54,000, along with “hawala” notebooks and digital transfer receipts. A jeweller and two mobile phone shops operated as fronts, and the transfers were disguised as charity donations.
Turkiye also reported the use of VASPs, Over-The-Counter brokers, and mule accounts, with jewellers and precious-metals dealers serving as cover. The FATF survey analysis found that such hybrid methods were progressively replacing or complementing cash/trade-based settlements in West Asia.
The shift to digital tools has made it harder for law enforcement agencies and financial intelligence units (FIUs) to trace networks through interpersonal links due to the use of access-controlled platforms by perpetrators, the report said. In response, the FATF has recommended greater use of technology in investigations, noting that Indonesia’s FIU uses blockchain analytics to trace virtual-asset flows where unlicensed transfer services intersect with crypto assets.
The FATF found that strong anti-money laundering/counter-terrorist financing enforcement and bank “de-risking” (severing financial transactions with high-risk jurisdictions) were themselves pushing genuine users and even licensed money service businesses into the informal channels often used by criminals. Therefore, it cautioned against overly punitive enforcement.
Observing that most jurisdictions did not have reliable data on the scale of underground banking, the report has flagged inconsistent use of terminology, such as “hawala”, as an impediment to cross-jurisdiction cooperation. It recommended disrupting entire laundering chains rather than individual transactions. Underground banking systems should be given a clear legal status, either integrated into licensed financial services or explicitly criminalised, it said.
The report states that nearly 90% of surveyed jurisdictions reported “hawala” networks operating within their territory, and over 80% now named them as a principal channel for professional money laundering. Over 60% rated such networks as a heightened risk in national assessments.
Quoting an example, it said the Netherlands’ Operation Klaver exposed a single underground banking operation that processed about €500 million in criminal proceeds over eight months, using couriers, counting warehouses, coded ledgers and international brokers.
Professionalisation is reshaping the networks into hierarchical and business-like structures run through formal management practices and digitised record-keeping. Lawyers, accountants, auditors, notaries and real-estate agents are increasingly being roped in, as per the report.
Published – September 07, 2026 09:53 pm IST
