Hawala is the shadow banking system used by terrorist and crime organizations. It is also called Hewala or Hundi. See Wikipedia “Hewala”.
Hawala is a shadow banking system that works without actual transfers of money, without issuing invoices, cheques etc. At the following Wikipedia picture you can see a typical Hawala transaction.
As you can see from the picture, person A in city A, wants to send money for some criminal activity to person B in city B. He does not want to use the banking system because his transaction will be traced. Therefore person A goes to broker X, who is a Hawala agent in city A, and gives him 1 kilo of gold. Agent X asks the Hawala agent M, who is his connection in city B, to give person B 1 kilo of gold, or diamonds, or whatever. This transaction can not be traced by the secret agencies, even though they know the large Hawala agents.
Of course the Hawala shadow banking system has some disadvantages. For example transactions occur without issuing any supporting documents i.e. invoices, cheques etc, and in some cases the Hawala agents might not manage to honor these transactions, either because they went bankrupt or because they were robbed etc, and violence will follow. Hawala was Al-Qaeda’s favorite payment system.
The 500 euro note is the criminals’ favorite note, and that’s the reason it will probably go out of circulation. See for example Telegraph “500 euro notes withdrawn over organised crime fears”, May 2010
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