You have heard the word before, from a cousin who sends to Somalia through a man in Peckham, from a neighbour who uses a shop in Manchester to send to Karachi, or from a news headline about sanctions that used it without saying what it meant. Hawala is not a crime. It is the way a family sends money to somewhere the formal apps do not reach. The word is Arabic and means transfer. The person who runs it is called the hawaladar. In Pakistan and Bangladesh the same system is called hundi. Somalis often just call it the shop.
You hand cash, or make a bank payment, to a hawaladar in London. He gives you a reference, usually a few digits scribbled on a slip. You send the reference to your family. They take it to a counterpart hawaladar in Mogadishu, or Sanaa, or Kabul, who pays out the local-currency amount in cash the same day, sometimes within the hour. No money crosses a border for your transfer. The two hawaladars run parallel books and settle up between themselves at intervals, netting against transfers going the other way, or moving funds when they can.
What UK law says about your hawaladar
A hawaladar operating in the UK as a business is a money service business. Two things have to be true before he can take your money legally, and both are things you can check yourself in ten minutes.
First, he has to be registered with HMRC for anti-money-laundering supervision. HMRC guidance is explicit that hawala and hundi count as money transmission under the rules, and that a business cannot offer these services before HMRC has confirmed the registration. The registration involves a fit-and-proper test on the people running the business, and an annual fee.
Second, because sending money for a customer is a payment service, he also has to be either registered or authorised by the Financial Conduct Authority under the Payment Services Regulations 2017. The FCA route sits alongside HMRC, not instead of it.
You can check both. HMRC publishes the 
Anti-Money-Laundering supervised businesses register. The FCA publishes its 
Financial Services Register. Ask the person you are about to send money through what business name he trades under, and look him up on both. A hawaladar who cannot answer that question, or is not on either register, is trading illegally in the UK, and everything below applies to him doubly.
Where the formal apps do not reach
The places where hawala is the everyday tool, in the UK diaspora sense, are the ones the formal transmitters either avoid or price out of reach: Somalia, Yemen, Sudan, Afghanistan, and Iran. In each of these the international banking system has been withdrawn or reduced, for different reasons – sanctions, war, or the local banks losing their overseas partners after supervisor withdrawal. Wise and Remitly do not send to Somalia at all. Western Union runs some of these routes, but not always, and not always cheaply. In these places you are not choosing between hawala and the formal system. You are choosing between hawala and not sending.
Hundi in the subcontinental sense is a different case. It runs alongside a working formal banking system in Pakistan and Bangladesh, and its use is often about government limits on moving money, tax, and speed rather than the absence of a formal option.
When it fails
The formal apps have a written record, a customer-service line, and a UK financial ombudsman standing behind them. Hawala has none of that. When it fails, what a UK court can enforce for you is very little.
The hawaladar on either end can disappear before the pay-out. Somebody in the chain can be sanctioned mid-transfer and the settlement between the two hawaladars breaks; your money sits in London while your family waits in Mogadishu. A rate you were quoted can move between agreement and pay-out, and the operator quietly hands over less than promised. A scrap of paper with a reference on it does not survive a UK court, and the 
Financial Ombudsman Service does not cover disputes with an unregistered operator.
These are not exotic failures. They are what happens in any system that runs on trust and cash rather than on a contract you can put in front of a judge.
When hawala is the right tool
Hawala is the right tool when the country you are sending to has no working formal alternative and the operator is on both HMRC and FCA registers. It is one of the money systems families running between two economies rely on when the formal apps do not go where they need. Somalia, Yemen, and a handful of others sit here. Check the registers before you hand over the cash, and if you can, ask a family member who has used the person already; the communities that run on hawala know which hawaladars settle every time and which do not.
It is not the right tool where a formal, competitively-priced app runs the same route. To Nigeria, Ghana, India, Pakistan or the Philippines, the fintech apps are cheaper and give a written record. Use those.
And it is not the right tool where the operator cannot show you both registrations. In that case you are not comparing hawala to the formal system. You are trusting a stranger with your family’s rent money.