Known as hawala, the system is thousands of years old and has its roots in the Indian subcontinent and the Middle East, where it is widely and openly used as a legitimate business practice.
“It would have been culturally familiar” to the terrorists, said Jonathan Winer, a former deputy assistant for international law at the State Department. “It would have been a logical thing for them to use.”
The system is not illegal, said Rowan Bosworth-Davies, a money laundering expert for the London-based security consultancy firm Control Risks Group. “It becomes illegal only when the money is used for terrorist activities, or when it violates currency laws.”
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The hawala system provides almost complete anonymity to those involved and essentially leaves no paper trail for those seeking to trace the movement of funds.
Hawala is the Hindi word for “trust” and aptly describes a system that relies upon business ties among brokers that frequently go back through many generations.
A typical transaction begins in one country, for example India, where an individual makes contact with a hawala broker. The individual gives the Indian broker a sum of money and asks that the same amount be delivered to an individual in another country, the United States, for example.
The broker gives the person depositing the money a receipt, usually nothing more than a small scrap of paper.
“There is no standard for these receipts,” said Bosworth-Davies. “It [the receipt] could be almost anything.”
Brokers leave no paper trail
The broker then makes contact– the Internet and e-mail are used frequently– with a fellow hawala broker in the city where the money is to be delivered, and instructs that broker to deliver the money to a certain individual.
The person for whom the money was intended then contacts the U.S. broker and the money is delivered.
There is no record of the transaction that links the money to the individual who received it and no money is returned to the place where the transaction originated.
“There is no reverse settlement,” said Bosworth-Davies. “The broker who delivers the money knows that sooner or later he will need the services of the broker who initiated the business. The broker in India and the broker in the United States trust each other and there is no record of the transaction.”
The brokers make money by charging a fee for their services.
The State Department has long been aware of the hawala system and of its use in international money laundering. The system is examined each year in an appendix to the department’s annual International Narcotics Control Strategy Report.
The latest report, issued in March, noted the role the system plays in the illegal movement of funds.
“Dubai, India and Pakistan form a hawala triangle responsible for significant international money laundering activities that go far beyond South Asia,” the report said.
Winer, who investigated international money laundering when he was at the State Department, said the U.S. government knew that the hawala system was used to help finance terrorist activity on the Indian subcontinent.
The Web site of India’s Central Bureau of Investigation contains several reports on the links between money moved using the hawala system and militant separatist activity in the Muslim-majority Indian state of Kashmir.
Money laundering
Four years ago Interpol launched a concerted effort to crack down on money laundering and singled out the hawala system as “one of the most worrying forms of international crime.”
Bosworth-Davies explained that in the Middle East, India, Bangladesh, Pakistan and increasingly in Europe and the U.S., legitimate, established businessmen act as hawala brokers.
Hawala transactions often are used to move money into and out of countries with strict currency controls, he said.
In the U.S., these brokers are frequently people who own high-volume, primarily cash businesses such as restaurants and specialty grocery stores that cater to immigrants from parts of the world where the hawala system is a traditional means of moving money.
“The vast majority of these [brokers] have no idea that they are involved in [helping] terrorism,” Bosworth-Davies said.
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Winer said efforts to control the hawala system have been largely ineffective.