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Last Updated:[28-12-2010 00:37:30 EDT] Zoom in Zoom out Back to Tradenews

Hawala Scare Grips Malaysia Flight of Capital Hurts Economy

tradenews A recent surge in illegal money transfers to the tune of several billions of USD each year has become a serious concern of the Malaysian central bank as it is feared that it may negatively impact the economic growth of the country. A senior official of Bank Negara Malaysia (BNM), the Central Bank of Malaysia revealed that the hawala system was dangerously poised to topple the financial market.

The situation is so complicated that the bank was not able to charge many of the offenders as they are high profile Malaysians including top businessmen, heads of some government-linked companies (GLCs) and politicians. Though the bank has been able to crack down and revoke licenses of close to 50 illegal money transfer firms, many licensed companies still are colluding with their foreign counterparts.

The hawala system has been described as a parallel banking system created to bypass tax, fund transfer caps, higher transaction charges and legalities involved in financial transactions. It is run on trust where money given to a money changer in one country will be paid out by a money changer in another with just one phone call or related communications means.

The use of hawala in Malaysia grew after capital controls were imposed in the wake of the 1998 Asian financial crisis where the movement of large sums of money to locations outside Malaysia required the central banks approval. Some individuals also prefer it as a cheaper and faster channel, which leaves no trail, than using conventional banks.

A large number of people use hawala system because the money is illicit funds earned from corruption, drug trafficking, prostitution, illegal wildlife trade and other criminal activities. The system in Malaysia gained media prominence last year when allegations surfaced that a senior politician had transferred huge sum of money to London through a moneychanger in 2008.

According to Transparency International, Malaysia fell to No. 56 from No. 47 last year, in a league table of 180 countries surveyed around the world, and that graft had hit alarming levels. Currently there are about 875 licensed money changers in Malaysia, and the central bank is planning several measures to mitigate the menace.

By Jose Roy

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