Known as hawala in India, hundi in Pakistan, or fei qian in China, Asia's underground payment systems are enormous and widespread.
These ancient but unregulated systems have achieved notoriety because of their presumed usage by Osama bin Laden's al Qaeda network. The systems, which are also associated with graft, drug payments, and money laundering, have broad acceptance in much of South Asia and the Middle East.
There are similar systems elsewhere, such as the Western Hemisphere's Black Market Peso Exchange. Underground payment systems follow immigration patterns and operate worldwide.
Most hawala remittances are routine, affordable in-country fund transfers between businesses or individuals. Statistically, the system is large:
- Up to 60% of Burma's drug money passes through these underground channels. In Pakistan, $2 billion to $5 billion a year moves through the system, more than the amount of foreign transfers through the country's banking system.
- In India, up to 50% of the economy uses hawala for routine transactions.
- Because these nonbank entities have virtually no record-keeping, investigators have virtually no trail to follow.
- It works like this: A client approaches a local underground dealer in, for example, New Delhi - usually a business like a goldsmith's shop, currency trader, or travel agency. He deposits $10,000 to be remitted to an associate in, say, Bangkok.
The shop in New Delhi, one among hundreds found in every major bazaar, gives the sender a receipt or chit, something as simple as a specially marked movie-ticket stub or a low-value rupee note. The chit is mailed to the Bangkok recipient, who then presents it to an associated goldsmith or travel agent there and withdraws the $10,000 in Thai baht.Since no banks are involved, there is no record of the cross-border transaction. Aside from regular mail, deals are made using telephone, fax, and - increasingly - e-mail.
Hawala dealers incur shortages and overages of money at different ends of the chain. Dealers settle among themselves using gold, which must be smuggled, since gold importation is prohibited.
Despite the underground aspect, the operative principle is the same as correspondent banking or money orders. The difference is the lack of governmental license, oversight, or controls.
The actual rules of hawala are somewhat archaic but are not unreasonable. See http://www. lankarani.org/resaleh/draft.htm for an English translation of a set of rules by Iran's Grand Ayatollah Fazel Lankarani.
Hawala systems usually charge less than banks, and they don't maintain extensive transaction records. They keep their costs low by not requiring customer identification, conducting background checks, or reporting large or suspicious transactions to authorities.
Hawala has often been debated and outlawed, mainly because of currency convertibility and import controls.
For example, the Indian rupee is only partially convertible. Section 9 (1) (f) of India's Foreign Exchange Management Act specifically prohibits hawala in order to prevent capital flight, and it requires the reporting of all transfers over $800. This encourages the use of hawala, since the independent transactions at either end of the chain are not illegal.
Hawala is commonly used to repatriate funds, since the systems use black-market exchange rates, which are better for the repatriator than the official rate. The systems are also used to purchase gold and, for obvious reasons, for tax evasion.
Currency devaluation in South Asia has shrunk the value of savings accounts in local currencies. Thus, in India and Pakistan, foreign currency accounts, usually dollars, have become a popular way to avoid devaluation.
Since 1998, when India and Pakistan detonated nuclear devices, these foreign currency accounts have been effectively frozen. Account owners can withdraw only accrued interest without incurring huge penalties and bureaucratic delays. Hawala, on the other hand, allow users to exchange or remit currency freely, anonymously, and immediately.
Thus, two direct ways to curtail hawala would be to abolish gold controls and to make local currencies stable in the international markets.
Asian politicians often accuse one another of using hawala to send bribes, kickbacks, and the like. For example, ex-Indian Prime Minister P.V. Narasimha Rao has been indicted for making many hawala payments. These sort of thing contributes to the unsavory image of hawala.
Various international agencies have studied hawala for years, including the Organization for Economic Cooperation and Development's Financial Action Task Force on Money Laundering, Interpol, and the U.S. government. For example, a report from the task force on money laundering methods, including hawala, can be found at http://www1.oecd.org/fatf/pdf/TY2000_en.pdf.
In summary, hawala systems exist for a variety of reasons having little to do with terrorism. If terrorist money movements are to be blocked, hawala and all of its sister unregulated payment systems must be brought into the world of regulated and tracked financial transactions. This world, in which it is more expensive to operate, is far less established outside the United States, where we are accustomed to a high degree of banking penetration.
The problem, of course, is that many regard the tracking of all financial transactions as an infringement on their personal freedoms. These parties include the Bush administration, which as recently as June decided not to continue the Clinton administration's money-laundering study and legislative efforts.
Freedom in financial transactions is also a sovereign issue. No efforts will ever be effective without coordinated multilateral actions, such as international rules, yet too many countries resist outside controls, especially when these controls help one country and hurt another.
Since money, especially our own dollar, is the most liquid, transportable commodity anywhere, building effective mobility barriers will be difficult; Osama bin Laden probably uses dollars for his own transfers through hawala.
Our historical regard for personal freedom and anonymity are at variance with a new world of completely recorded financial transactions.
Mr. Teixeira is the chief executive officer and a co-founder of Fiducite.com Inc., a Needham, Mass., Internet Consulting firm for the financial services industry. Mr. Cheema is a senior guide covering banking, capital markets, and international issues for the firm.
