Daniel Altman, "Managaing Globalization: Ins and outs of underground money," International Herald Tribune, July 11, 2006.

When investigators follow the money trail leading to a terrorist attack, they sometimes find that the cash has crossed borders using hawala, an informal transfer system that operates across Asia, Europe and the United States. But hawala isn't just a tool for terrorists, drug dealers and money launderers - it's an engine for the global economy, and even for globalization itself.

Before there were wire transfers, online bank accounts, Swift codes and fiber optic cables, there was hawala. For hundreds, perhaps thousands, of years, people in the Middle East, Africa and South and East Asia have used it to send money to each other. In medieval times, it was used to make payments without having to carry masses of gold along international trading routes.

It is an informal system that works on a simple principle: if you can find people who want to send equal amounts of money in both directions between two locations, then the cash doesn't actually have to travel.

Say Person A wants to send $500 from New York to Damascus, and Person B wants to send $500 from Damascus to New York. They each use an intermediary in their own city, and the intermediaries - hawaladars - communicate with each other. The hawaladar in New York takes Person A's $500 and gives it to the recipient chosen by Person B. The reverse happens in Damascus.

In practice, hawala works with much larger sums of money, aggregated across regional networks. But with little record-keeping and low overhead, hawaladars can charge small commissions and offer very competitive exchange rates.

Hawala has become a driver of the global economy "on a huge scale," said Roger Ballard, director of the Center for Applied South Asian Studies at the University of Manchester.

"In India, it is widely estimated that 40 percent and possibly more of all transactions are in the informal sector," he said. "In the Middle East, a huge amount of trade is financed this way. How does money get around in Iraq? There are very few banks."

In chaotic economies like Iraq, hawala - which is based on trust rather than laws and infrastructure - can actually stand in for a mature financial system. "The entire Somali financial system has been hawala-based for the past 10 years," Ballard said. In Afghanistan, he added, the hawala system survived all the changes of regime in the past few decades.

In those places, hawala can be an important tool of the economy and even of development, since the financial system provides the infrastructure for growth. But it can also lead to greater globalization. Workers may be more likely to seek jobs abroad if they know they will be able to use a cheap, reliable service to send part of their earnings home.

The networks that bundle transactions stretch across national borders but usually involve brokers of a single ethnicity, Ballard said. Migrant workers can thus find someone who speaks their language and has connections in their home country. Much of the trading between these international networks is done in Dubai, Ballard added, where bundles of transactions are paired up in multiples of $100,000.

But there are reasons to be wary of hawala, too - and not just that its informality can allow unsavory characters to use it without leaving much of a trace. "It does not offer anything except moving money from here to there, which is the bare minimum," said Vincent Schmoll, principal administrator in the secretariat of the Financial Action Task Force, an intergovernmental group that fights money laundering.

As a result, he said, one of the major advantages of a reserve banking system - the ability to lend money taken on deposit so it can be used in the economy - does not exist. In a country dependent on hawala, saved money simply sits around doing nothing.

In addition, hawala makes life easier for illegal immigrants, even more than for legal immigrants. The informality of the system - records can often be minimal and quite cryptic - makes it less likely that they will be tracked.

The Financial Action Task Force hopes that more hawala transactions can be brought into the light of day with more straightforward records, identification of customers and resources for hawaladars who suspect their clients may be up to no good. Schmoll said that when Saudi Arabia made informal hawala illegal a couple of years ago, financial companies filled the gap with low-cost remittance services.

Companies from wealthy economies are also stepping in to serve the hawala sector. In April, Western Union opened a domestic money transfer service in Yemen, the latest move in its expansion across the Middle East. But Sherry Johnson, a spokeswoman, said the company was not focusing on the hawala market specifically.

"Western Union does not actually have any kind of formal strategy for competing with informal money transfers," she said.

As the market changes, trying to regulate hawala - or banning it, as the Saudis did - could be counterproductive, Ballard said. "If we want to find out who the terrorists are, we could do no better than having close and positive relations with the hawaladars," he said.

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