By Nikos Passas

Before September 11, 2001, the topic of transnational organized crime was off the radar screen of most academics. And if you were one of the few who wanted to study it, you had a hard time finding funding. Even government bodies didn't care to learn more about serious crime that crossed national borders.

I know, because it was my field of interest. For years, I studied international financial corruption, bank fraud, money laundering. I was fascinated by the ways that corporations, well-regarded professionals, state agencies, and criminal enterprises committed these offenses, which had far graver social consequences than most criminologists realized.

After 9/11, though, everyone wanted to know more about global crime. And there was new interest in underground money transactions, including a system of funds transfer known as hawala. At a fall 2001 congressional hearing, in fact, a former U.S. official asserted hawala was helping to bankroll activity by al Qaeda and other militant Islamic groups.

At the time, I was the only academic who had studied hawala and similar systems. I'd learned about them in the mid-1990s when the Dutch Ministry of Justice's research unit asked me to submit a proposal for a study on underground banking, which no one knew much about. It didn't take me long to realize that what I'd been asked to study was actually aboveground—and involved no banking at all.

What people described as "underground banking" was really the traditional methods expatriates from different countries use to remit funds back home. Recognizing this, I coined a more precise descriptor, "informal value transfer systems" (IVTS), now the preferred term in the United States and throughout the world.

Hawala is one of the most prevalent IVTS. It originated centuries ago on the Indian subcontinent as a way of settling accounts. The local system became national, then international, as waves of immigration spread its human network around the globe.

The mechanics of hawala are simple. A remitter in London, for example, takes British pounds to a local "hawaladar" and asks for rupees to be delivered to a family member in Mumbai. The remitter provides the recipient's name and telephone number. Before the end of the day, the London hawaladar has faxed all the pertinent information to his counterpart in Mumbai. The money is delivered the next day at excellent rates (much better than those offered by banks or Western Union), sometimes straight to the recipient's front door.

As in modern banking, the money doesn't have to move physically. Every hawaladar maintains a cash pool made up of the funds brought in to send overseas. Operations are constantly liquid, and payments can be made as soon as faxed instructions arrive. Hawaladars settle up their accounts with one another on a regular basis, often through checks, payments in kind (trade goods), wire transfers to bank accounts, or money sent via couriers or third parties.

Although hawala is based on trust, customers rarely, if ever, lose their money. It is a time-tested, efficient, cheap, convenient way of transferring funds. In many remote and conflict-ridden places, such as Afghanistan or Somalia, there is simply no alternative to it.

In the United States and other labor-importing countries, hawala's customers are primarily immigrants with family members back in their native country who depend on their contributions. Rounding out the customer base are traders, investors, nongovernmental organizations, international organizations, and criminals.

Within labor-exporting countries, hawala's cash pool is fed mainly by importers, the parents of students living abroad, people paying medical expenses incurred overseas, and criminals.

The general pre-9/11 thinking in the West was that hawala probably didn't require the creation of any special laws. Existing laws prohibiting drug trafficking or money laundering applied, when necessary, to hawala cases that included those crimes. I also believed governments should do nothing to restrict hawala, unless new and specific risks were shown to be connected with it.

In summer 2001, I was in the process of looking at what special risks, if any, hawala and other IVTS posed for the Netherlands. The Financial Crimes Enforcement Network (FinCEN), an agency within the U.S. Department of the Treasury, had agreed to give me access to data and cases that would help me compile information.

After the attacks that September, with hawala now publicly associated with terrorism, FinCEN asked me to study the threat IVTS posed to the United States. I was also asked to collaborate on a study mandated by the Patriot Act, on how its new rules were working in practice. Once I'd gone through a background investigation, I was able to examine sensitive law-enforcement material, and officials knew they could talk to me. I had access to an astonishing wealth of information and contacts.

The National Institute of Justice (NIJ) sponsored an international arm of the FinCEN IVTS project, and I was able to travel to the United Arab Emirates, India, Hong Kong, and various European countries to see the hawala market for myself and talk to its clients, operators, and controllers. I discovered hawala is used by terrorists in South Asia and Africa. This was not surprising, however—everyone in South Asia and Africa uses hawala.

Moreover, I found there was no evidence the 9/11 hijackers had used hawala at all. They moved funds through bank accounts, wire transfers, credit cards, and couriers. Some partially or wholly corrupted charities and wealthy sympathizers provided the bulk of financial support for the 9/11 attacks. Other kinds of crime (credit-card fraud, identity fraud, robbery, small sales of illegal drugs, and so on) have helped other terrorist groups raise funds for other attacks.

Hawala settlement can involve all sorts of third-party deals, some of which are independent IVTS themselves. Savvy operators use misinvoicing, trade diversion, or the exploitation of price asymmetries for the same goods in different countries to make profits and move value very discreetly. Though the connection between these practices and terrorism financing has not yet been shown to be significant, they are activities that ought to be understood, monitored, and contained, because they can hide the relatively small amounts of money terrorists need to move.

Unfortunately, though, an impulse to act fast in the war on terror has led to dysfunctional rules that have effectively outlawed hawala in America. Individual states have introduced a patchwork of unrealistic licensing laws, such as million-dollar bond or capitalization requirements for corner businesses that, along with selling cheap airline tickets and international calling cards, help local expatriates remit a few hundred dollars each month.

What options are these corner stores left with? They can drop the hawala service, raise their fees, or go underground. Given the poorest immigrants' demand for overseas remittances, the latter option is most likely, turning what was once a more transparent activity into something hidden and murky—and alienating communities whose assistance in the war on terror is critical, when consensus would be a far more effective road to transparency and accountability.

My current research (also funded by the NIJ) is focusing on trade-based IVTS. Early results show that many large commercial transactions are not at all transparent and involve much higher risks for misconduct, including terrorism financing and illegal arms sales. While we over-

regulate mosquitoes, it seems, the elephants are dancing in the park.

Ultimately, my colleagues and I hope that our research leads to smarter and more evidence-based policies for all IVTS, including hawala. And that such policies will lead, in turn, to a fairer and safer America.

Nikos Passas is a professor in the College of Criminal Justice.