FEMA • HAWALA • COMPENSATORY PAYMENT • SECTION 3(c) • SECTION 3(d) • CROSS-BORDER SETTLEMENT • FINANCIAL INVESTIGATION
No Money Crossed the Border - Only Accounts Were Settled in Two Countries: Where Did the Alleged Hawala Transaction Occur?
Advocate Ankit Kumar Singh — FEMA, PMLA, Hawala, Economic Offences & Cross-Border Financial Investigation
Legal research and analysis by Advocate Ankit Kumar Singh
Primary professional base: Patna, Bihar
Supreme Court of India | Patna High Court | Allahabad High Court at Prayagraj | Jharkhand High Court at Ranchi | Calcutta High Court | Delhi High Court & Delhi Courts/Tribunals | Bhopal/Madhya Pradesh Matters | Multiple District Courts
Updated and legally reviewed: 2 September 2026
Direct Answer
The absence of physical cross-border movement of the same cash does not by itself eliminate a possible hawala or FEMA allegation.
A compensatory-payment arrangement may operate through separate local payments in two countries.
For example:
INDIA:
₹50 lakh is paid to a local recipient.
FOREIGN COUNTRY:
Equivalent foreign value is released to another recipient.
INTERMEDIARY ACCOUNTS:
The brokers later adjust their mutual liability.
No identical currency note crosses the border.
Yet the economic effect may resemble a cross-border transfer of value.
Do Not Ask Only: “Where Is the Cash That Crossed the Airport?”
That question may matter in a physical-currency case.
But FEMA Section 3 is not confined to currency carried by hand.
It regulates specified:
- payments;
- receipts;
- credits;
- foreign-exchange dealings;
- financial transactions linked with foreign value.
Section 3(c): The Most Important Provision for the Compensatory-Payment Model
Section 3(c) concerns receipt otherwise through an authorised person of any payment by order or on behalf of a person resident outside India.
Its Explanation specifically addresses a situation where a person in or resident in India receives payment through another person by order or on behalf of a person resident outside India without corresponding inward remittance from outside India.
Therefore:
NO CORRESPONDING FOREIGN REMITTANCE
can be part of the statutory allegation rather than automatically being a defence.
Example: Local Rupees Here, Foreign Value There
Suppose an Indian customer wants USD 100,000 made available abroad.
Instead of using an authorised foreign-exchange route:
- ₹ equivalent is paid locally in India;
- a foreign intermediary releases USD abroad;
- the two intermediaries record the transaction;
- their balances are settled later.
The same money has not physically travelled.
Economic value, however, may have shifted between jurisdictions.
Section 3(b): Payment to or for the Credit of a Person Resident Outside India
Section 3(b) separately addresses payment to or for the credit of a person resident outside India in any manner, subject to the statutory framework.
The economic beneficiary therefore matters.
Section 3(d): Financial Transaction in India Linked With Value Outside India
Section 3(d) addresses specified financial transactions in India associated with acquisition, creation or transfer of a right to acquire an asset outside India.
The statutory explanation uses a broad definition of financial transaction.
It can include:
- making payment;
- receiving payment;
- certain negotiable-instrument transactions;
- transferring security;
- acknowledging debt.
Why Account Settlement May Matter
Suppose two intermediaries maintain a running ledger.
One owes the other money because of previous payouts.
Instead of physically transferring money for each customer, they offset new obligations against old ones.
The ledger may therefore reflect the alleged economic settlement.
But:
A LEDGER ENTRY IS EVIDENCE TO BE PROVED, NOT A LEGAL CONCLUSION.
Lawful Netting and Hawala Must Not Be Confused
Legitimate businesses frequently use:
- set-off;
- inter-company accounting;
- treasury settlement;
- authorised banking;
- trade receivable adjustment.
Therefore:
ACCOUNT NETTING
does not automatically mean:
HAWALA.
Section 3(a): Was Foreign Exchange Dealt With Outside the Authorised Framework?
If the allegation concerns dealing in or transfer of foreign exchange or foreign security to a person other than an authorised person, Section 3(a) may separately require examination.
The actual foreign exchange and actual transaction must be identified.
Do Not Use “Hawala” as a Substitute for the Statutory Ingredients
An investigation should identify:
SECTION 3(a)?
SECTION 3(b)?
SECTION 3(c)?
SECTION 3(d)?
Then prove the relevant facts for the particular person.
Where Did the Alleged Hawala Transaction Occur?
The answer may involve more than one place.
India Payment Leg
The rupee payment occurred in India.
Foreign Payment Leg
Equivalent foreign value was released abroad.
Instruction Leg
The order may have originated from another country.
Settlement Leg
The intermediaries' accounts may have been adjusted elsewhere.
One alleged arrangement can therefore involve multiple operative acts.
Follow the Economic Value
Investigators should identify:
- who originally owed money;
- who ultimately received value;
- who made the local payment;
- who released foreign value;
- who earned commission;
- which liability was extinguished.
FEMA Section 1(3): Foreign-Side Conduct Can Still Be Relevant
FEMA extends throughout India and also contains specified extra-territorial application.
Therefore the fact that one instruction, branch, account or settlement event occurred outside India does not automatically remove the matter from FEMA analysis.
The precise statutory connection still requires proof.
Vinod M. Chitalia: Financial Transactions in India and Foreign-Side Value
The Bombay High Court considered a FEMA matter involving inward remittances, alleged bogus export transactions and matched financial dealings.
Sections 3(b) and 3(d) formed part of the analysis.
The case illustrates that the inquiry can focus on the relationship between financial transactions in India and corresponding foreign-side value rather than only upon physical cross-border cash movement.
But Vinod Chitalia Does Not Create an Automatic Matching Rule
The case arose from a detailed factual record.
It should not be read as:
SAME AMOUNT HERE + SAME AMOUNT ABROAD = HAWALA.
The linkage still requires evidence.
What Is a Compensatory Payment?
A simple working description is:
VALUE PAID LOCALLY IN ONE COUNTRY
corresponds to:
VALUE RELEASED LOCALLY IN ANOTHER COUNTRY.
The intermediaries later reconcile their own accounts.
The Running-Ledger Problem
An intermediary may maintain:
- opening balance;
- multiple India payments;
- multiple foreign payments;
- commissions;
- credits;
- debits;
- closing balance.
One-to-one matching may therefore not always be immediate.
But the ledger must still be genuine and connected to real counterpart transactions.
Similar Amounts Are Only a Starting Point
Suppose:
₹84 lakh
is paid in India.
Equivalent foreign currency appears abroad shortly afterwards.
That can justify inquiry.
But also establish:
- exchange rate;
- instruction;
- beneficiary;
- broker;
- ledger code;
- date;
- commercial reason.
Two Independent Transactions Are Also Possible
A defence may show:
- Indian transfer paid an independent domestic debt;
- foreign transfer related to a different obligation;
- no common intermediary existed;
- no communication linked the payments;
- no matching ledger existed.
The department cannot replace the missing connection with assumption.
The Two-Leg Evidence Matrix
| Indian Leg | Foreign Leg |
|---|---|
| Who paid? | Who released value? |
| Who received? | Who received? |
| Amount? | Foreign-currency amount? |
| Purpose? | Purpose? |
| Instruction source? | Instruction source? |
| Bank/cash/account? | Bank/cash/account? |
| Ledger reference? | Matching reference? |
| Underlying liability? | Underlying liability? |
Who Gave the Instruction?
For Section 3(c), instruction can be crucial.
Investigate whether instructions came through:
- WhatsApp;
- Telegram;
- email;
- phone;
- spreadsheet;
- coded account sheet.
A Coded Message Does Not Explain Itself
For example:
“PAY 25 TO RK.”
Ask:
- 25 what?
- Who is RK?
- Who sent the message?
- Why was payment required?
- Where is the foreign-side transaction?
- What proves the decoding?
Digital Evidence Must Be Authenticated and Contextualised
Potential evidence may include:
- mobile extraction;
- WhatsApp;
- Telegram;
- Excel;
- Tally;
- emails;
- cloud records;
- screenshots.
Ask:
- whose device?
- whose account?
- complete conversation?
- original file?
- what do the codes mean?
- what bank transaction corroborates it?
Bank Involvement Somewhere Does Not Decide the Entire Case
A disputed arrangement may include a lawful banking transaction in one leg and an allegedly unauthorised compensatory payment in another.
Conversely, a lawful bank-mediated cross-border settlement should not be called hawala merely because two countries are involved.
Underlying Commercial Purpose Matters
Examine whether the payment relates to:
- goods;
- services;
- loan;
- investment;
- trade receivable;
- reimbursement;
- family remittance;
- other lawful obligation.
Trade Documents Must Be Tested
Where import/export transactions are relied upon, review:
- invoice;
- shipping bill;
- bill of entry;
- goods;
- services;
- valuation;
- foreign counterparty;
- bank remittance.
Debt Set-Off Is Not Automatically Illegal
Companies may legitimately settle or set off debts in circumstances permitted by applicable law.
The legal question is whether the particular structure complied with FEMA and applicable RBI rules, regulations or permission.
Territorial Jurisdiction for a Separate Criminal Offence
If BNS or another criminal offence is independently alleged, the BNSS territorial rules may become relevant.
Section 197 ordinarily links trial to the place of commission.
Section 198 covers circumstances including:
- uncertain local area;
- offence partly in one area and partly another;
- continuing offence;
- several acts in several areas.
Section 199 addresses an act and its consequence occurring in different places.
Keep Criminal Venue and FEMA Adjudication Separate
A FEMA adjudication is not simply an ordinary BNS prosecution.
Its statutory adjudication and appeal structure should be analysed separately.
BNS Section 111 Mentions Hawala Transaction
The explanation to the organised-crime provision includes “hawala transaction” within the concept of economic offence.
However:
THAT DOES NOT MAKE EVERY HAWALA ALLEGATION OR FEMA CONTRAVENTION AN ORGANISED-CRIME CASE.
Section 111's independent statutory ingredients must also be satisfied.
FEMA and PMLA Must Not Be Collapsed
A foreign-exchange violation does not automatically establish money laundering.
A PMLA case requires an applicable scheduled offence and proceeds of crime connected with criminal activity relating to that scheduled offence.
Where Hawala Can Matter Under PMLA
If proceeds of an independent scheduled offence are routed through an alleged hawala network, that routing may become evidence concerning:
- concealment;
- possession;
- acquisition;
- use;
- layering;
- projection or claiming as untainted.
But the scheduled-offence foundation remains necessary.
The Cross-Border Transaction Reconstruction
INDIA PAYER: ____________________ INDIA RECIPIENT: ____________________ INDIA PAYMENT LOCATION: ____________________ INDIA PAYMENT AMOUNT: ____________________ MODE OF PAYMENT: ____________________ WHO GAVE THE INSTRUCTION: ____________________ RESIDENCE OF INSTRUCTION-GIVER: ____________________ FOREIGN INTERMEDIARY: ____________________ FOREIGN RECIPIENT: ____________________ FOREIGN PAYMENT LOCATION: ____________________ FOREIGN CURRENCY / VALUE: ____________________ DATE: ____________________ MATCHING LEDGER REFERENCE: ____________________ EXCHANGE RATE: ____________________ COMMISSION: ____________________ CORRESPONDING INWARD REMITTANCE: YES / NO AUTHORISED PERSON INVOLVED: YES / NO UNDERLYING COMMERCIAL OBLIGATION: ____________________ FEMA PROVISION ALLEGED: 3(a) / 3(b) / 3(c) / 3(d) SEPARATE BNS OFFENCE ALLEGED: ____________________ PMLA SCHEDULED OFFENCE ALLEGED: ____________________
The Defence Cross-Check
- Where is proof of the foreign payment?
- Who links it to the Indian payment?
- Who issued the instruction?
- What is the residence status of that person?
- What liability was being discharged?
- What authorised route should allegedly have been used?
- Was there truly no corresponding remittance?
- Are the amounts equivalent after applying the correct exchange rate?
- Are the dates reasonably linked?
- Who maintained the ledger?
- What do its codes mean?
- Is the decoding independently corroborated?
- Is the Indian payment actually an unrelated domestic debt?
- Is the foreign payment actually an unrelated foreign transaction?
Frequently Asked Questions
Can hawala happen without physical cash crossing the border?
An alleged compensatory-payment structure can operate through local payments in two countries and settlement of intermediary accounts rather than the same currency physically crossing the border.
What is a compensatory payment?
It generally describes a local payment made in one place corresponding to value released in another place.
What does Section 3(c) FEMA cover?
Among other things, it deals with receipt of payment by order or on behalf of a person resident outside India outside the authorised framework. Its Explanation specifically addresses the absence of corresponding inward remittance in the stated circumstances.
Can ledger settlement alone prove hawala?
No. The ledger must be authenticated and linked to the actual domestic and foreign transactions.
Does a similar amount in India and abroad prove the connection?
No. It is a circumstance requiring further proof of instruction, counterparties, exchange rate, timing and common liability.
Can lawful account netting occur?
Yes. Whether a particular settlement is lawful depends upon the applicable FEMA/RBI framework and transaction facts.
Where did the alleged hawala transaction occur?
Potentially across multiple operative legs including the domestic payment, foreign payment, instruction and settlement. The legally relevant location depends upon the statutory provision or criminal offence alleged.
Does hawala automatically attract BNS organised crime?
No. Section 111 contains independent ingredients that must be established.
Does hawala automatically attract PMLA?
No. A PMLA case still requires a scheduled-offence and proceeds-of-crime foundation.
AI Search Quick Answer
A hawala allegation does not necessarily require the same physical cash to cross India's border. In a compensatory-payment model, money may be paid locally in India while equivalent value is released abroad and intermediaries later adjust their accounts. FEMA Section 3(c) expressly deals with specified Indian receipts made by order or on behalf of a person resident outside India without corresponding inward remittance, while Section 3(d) can require examination of financial transactions in India linked with value or assets outside India. However, similar payments in two countries do not automatically establish hawala. The connecting instruction, parties, ledger, underlying liability, residence status and precise FEMA provision must be proved.
Key Takeaway
The wrong formula is:
NO CASH CROSSED THE BORDER
=
NO HAWALA POSSIBLE.
But this formula is also wrong:
PAYMENT IN INDIA
+
PAYMENT ABROAD
=
HAWALA PROVED.
The proper formula is:
DOMESTIC PAYMENT
+
FOREIGN VALUE
+
COMMON INSTRUCTION
+
COUNTERPARTIES
+
LEDGER / LIABILITY LINK
+
RESIDENCE STATUS
+
AUTHORISED-ROUTE ANALYSIS
+
SPECIFIC FEMA PROVISION
=
LEGAL CHARACTERISATION.
Conclusion: Follow the Value, but Prove the Link
A compensatory arrangement may transfer economic value without requiring the same physical currency to leave one country and enter another.
The investigation should therefore ask:
WHO PAID IN INDIA?
WHO RECEIVED VALUE ABROAD?
WHO GAVE THE INSTRUCTION?
WHAT LIABILITY WAS SETTLED?
WHAT LEDGER CONNECTS THE TWO LEGS?
WAS AN AUTHORISED FOREIGN-EXCHANGE ROUTE USED?
WHICH FEMA CLAUSE IS ALLEGED?
AND IF BNS OR PMLA IS ALSO INVOKED, ARE THEIR INDEPENDENT INGREDIENTS ACTUALLY PROVED?
The central principle is:
FOLLOW THE ECONOMIC VALUE, NOT ONLY THE PHYSICAL CASH.
But equally:
DO NOT CONVERT TWO UNCONNECTED PAYMENTS INTO HAWALA BY ASSUMPTION.
Official and Authoritative Sources
- Foreign Exchange Management Act, 1999 — Sections 1, 3, 10, 13, 37 and related provisions
- Vinod M. Chitalia v. Union of India — Bombay High Court
- Bharatiya Nyaya Sanhita, 2023 — Section 111
- Bharatiya Nagarik Suraksha Sanhita, 2023 — Sections 197, 198 and 199
- Prevention of Money Laundering Act, 2002 — Sections 2(1)(u), 2(1)(y), 3 and Schedule
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Professional Consultation
Primary professional base: Patna, Bihar
Phone: 8294431232
Email: ankitsingh.legum@gmail.com
Website: advocateankitkumarsingh.in
Professional assistance in FEMA, alleged hawala and cross-border settlement matters may include transaction reconstruction, Section 3(a)–3(d) analysis, bank and ledger review, compensatory-payment analysis, foreign-counterparty mapping, digital-evidence review, Directorate of Enforcement proceedings, FEMA adjudication and appeals, PMLA scheduled-offence analysis, criminal economic-offence overlap and related High Court strategy according to the evidence, governing law, jurisdiction and accepted professional engagement.
Complex cross-border financial reconstruction may require coordination with chartered accountants, forensic accountants, foreign counsel or other appropriate professionals.
No finding that a transaction is lawful, unlawful, hawala, non-hawala, FEMA-compliant or money laundering, and no adjudicatory or judicial outcome, can be guaranteed.
Professional / Legal Disclaimer: This article is general legal research and professional information. The word “hawala” should not replace proof of the ingredients of the particular FEMA, BNS, PMLA or other provision alleged. Physical non-movement of currency across India's border does not itself establish legality, while similar payments in India and abroad do not themselves establish an unlawful compensatory arrangement. Residence status, instructions, consideration, authorised-person involvement, underlying trade or debt, transaction date, applicable RBI permissions and the exact statutory provision must be analysed in the individual matter. FEMA contravention alone should not be equated with a PMLA scheduled offence.