Tax Law Center Blog

Hawala is a method of transferring money without any physical money actually moving. It is described as a “money transfer without money movement.” Hawala is used as an underground remittance network that exists outside of traditional legal banking systems. The hawala system refers to an informal channel for transferring funds from one location to another through service providers—known as hawaladars. While hawaladars are spread throughout the world, they are primarily located in the Middle East, Africa, and the Indian subcontinent.

Using a hawala to transfer funds carries significant legal and tax risks, particularly under U.S. anti-money laundering (AML) and tax reporting laws. The Bank Secrecy Act (BSA) and USA PATRIOT Act require money service businesses (MSBs) to register and report transactions. Unlicensed hawala operators and users may face criminal penalties under 18 U.S.C. § 1960, including up to five years in prison for engaging in unlicensed money transmission.

From a tax perspective, hawala transactions raise serious IRS compliance concerns, especially regarding unreported foreign income and accounts. Funds transferred informally may be subject to IRC § 6663 civil fraud penalties (75% of tax underpayment), FBAR violations (50% of account balance per year), and FATCA penalties for undisclosed assets. If the IRS deems the transfer part of a structured effort to evade taxes, criminal prosecution under IRC § 7201 (Tax Evasion) is possible.

A recent case exposes the many risks:

Jan. 23, 2025: An India- and New Jersey-based man who operated jewelry companies in New York City’s Diamond District was sentenced to 30 months incarceration for spearheading a scheme to illegally evade customs duties for more than $13.5 million of jewelry imports into the United States and for illegally processing more than $10.3 million through an unlicensed money transmitting business.

Monishkumar Kirankumar Doshi Shah, a/k/a “Monish Doshi Shah” (Shah) of Mumbai, India and Jersey City, New Jersey, previously pleaded guilty before U.S. District Judge Esther Salas to a two-count Information charging him with conspiracy to commit wire fraud and operating and aiding and abetting the operation of an unlicensed money transmitting business. Judge Salas imposed the sentence in Newark federal court and remanded Shah to begin serving his sentence.

According to documents filed in this case and statements made in court:

From in or around December 2019 through in or around April 2022, Shah engaged in a scheme to evade duties for shipments of jewelry from Turkey and India to the United States. Shah would ship and/or instruct his co-conspirators to ship goods from Turkey or India—which would have been subject to an approximately 5.5% duty if shipped directly to the United States—to one of Shah’s companies in South Korea. Shah’s co-conspirators in South Korea would change the labels on the jewelry to state that they were from South Korea instead of Turkey or India, and then ship them to Shah or his customers in the United States, thereby unlawfully evading the duty. Shah would also make and instruct his customers to make fake invoices and packing lists to make it look like Shah’s South Korean companies were actually ordering jewelry from Turkey or India. Shah also instructed a third-party shipping company to provide false information to U.S. Customs and Border Protection (CBP) concerning the origin of the jewelry. During the scheme, Shah shipped approximately $13.5 million of jewelry from South Korea to the United States without paying the appropriate duty.

In addition, from in or around July 2020 through in or around November 2021, Shah owned and/or operated numerous jewelry companies in New York City’s Diamond District, including MKore LLC, MKore USA Inc, and Vruman Corp. Shah used these entities to conduct more than $10.3 million in illegal financial transactions for customers—including converting cash to checks or wire transfers. Shah would also collect cash from customers and use other individuals’ jewelry companies to convert the cash into wires or checks. At times, Shah and other members of the money transmitting business moved hundreds of thousands of dollars in a single day. In exchange for their services, certain members of the money transmitting business charged a fee. None of Shah’s or his associates’ companies were registered as money transmitting businesses with New York, New Jersey, or the Financial Crimes Enforcement Network (FinCEN).

In addition to the prison term, Judge Salas ordered restitution in the amount of $742,500 for the wire fraud scheme and forfeiture in the amount of $11,126,982.33 for the wire fraud and unlicensed money transmitting schemes. In addition, the Court imposed a two-year term of supervised release.

Hawala networks are also common targets in money laundering and terrorist financing investigations due to their lack of formal recordkeeping. Under 18 U.S.C. § 1956, any transfer intended to conceal the origin or movement of funds may result in criminal charges. Transactions linked to sanctioned entities or high-risk jurisdictions (Iran, North Korea, Syria) could lead to OFAC penalties, asset seizures, and travel restrictions.

Financial institutions routinely monitor for hawala-related activity, and unexplained transactions may trigger Suspicious Activity Reports (SARs), leading to account freezes and government inquiries. For tax professionals advising clients with hawala exposure, early engagement with tax attorneys is crucial to assess risks, explore voluntary disclosure options, and mitigate potential civil and criminal liabilities.