The battle against blood money

Hawala brokers are common in Dubai's gold markets

By Jeremy Scott-Joynt BBC News Online business reporter

The merchants who throng the covered markets in old Dubai are used to all kinds of clientele.

But even they may have been a little surprised to find, on one day in early March, a phalanx of Western business suits bearing down on them.

Yet stranger was the identity of those occupying the gent's tailorings: no less a personage than US Treasury Secretary Paul O'Neill, accompanied by more than 30 officials and Secret Service agents.

Mr O'Neill was there to see for himself the hawala system of informal banking.

Hawala is a centuries-old way of making money in one place and spending it somewhere else, run on the basis of personal trust, tokens representing funds and no paperwork or records of any kind.

Its legitimate uses are legion. How else, for instance, does an Afghan expatriate get money to his or her family when Afghanistan's banks are in ruins?

But Mr O'Neill's interest in hawala stems from the suspicion that the system could also have been used to supply funds to the attackers who struck New York and Washington DC on 11 September last year.

Seizures

Unsurprisingly, not a single trader would admit to involvement in the business, nor to knowledge of how it works.

And a wry observer could find some irony in the fact that Mr O'Neill's wanderings led him - figuratively as well as at one point literally - down a blind alley.

Because according to some experts, the huge publicity surrounding the fight against terrorist finance in the past six months has yet to show much of a result.

The US is still winding up the rhetoric against terror funding straight after11 September

Certainly, within weeks of 11 September bank accounts around the world were frozen and organisations blacklisted.

In the UK alone, assets totalling £70m in 38 accounts were blocked by November, according to the Treasury, with more than 100 people and groups on the blacklist.

Similar actions were taken in the US, as well as in a number of European and Asian countries - a total of 142 in all.

US Treasury Secretary Paul O'Neill this week again warned states that unless they took action they risked being branded harbours for terror finance.

And the Financial Action Task Force (FATF), the small international secretariat in Paris charged by its 30-odd members with developing strategies to fight money laundering, has come up with eight recommendations to help governments and private organisations spot transactions linked to terrorist finance.

Skills shortage

But beyond that, there are indications that the rhetoric is running ahead of the reality.

Hawala has been a prime example. Although it is clearly perfectly fitted to the task of getting money into the right hands with the minimum of traceability, it is also - by necessity - a secretive business.

That makes it very difficult to penetrate. Despite promises from several countries in the Middle East and South Asia to try to regulate their "informal money transfer" sectors, little concrete action has been taken yet.

Which means the skills to tackle the hawala business are still fairly underdeveloped.

There's been a surge of media interest, but when you go to the conferences you find a relatively small number of rather bemused people... There's been lots of running around, but not much has actually altered

Prof Barry Rider
Institute of Advanced Legal Studies, University of London

A single British former policeman and current private detective, for instance, has been flown over to the US at government expense three times in the past four months, to lecture investigators on the ins and outs of the system.

And this in the country which, by common consent, has resources devoted to financial crime which dwarf those of all its allies put together.

That there is a shortage of human experience in the field is undoubted, according to Professor Barry Rider, head of London University's Institute of Advanced Legal Studies.

"There's been a surge of media interest, but when you go to the conferences (about disrupting money laundering and terrorist finance) you find a relatively small number of rather bemused people," he said.

"There's been lots of running around, but not much has actually altered."

Event horizon

Law enforcement on both sides of the Atlantic has been beefed up - not only as a result of the disaster on 11 September, but in the UK at least as a result of recent government reports warning that resourcing had slipped badly in the past few years.

Measures against terror funds

192 individuals and groups blacklisted by US

$104.8bn in assets frozen

142 countries have taken action against assets

But a related problem is that while money laundering experts are the best suited to take on the job of fighting terrorist finance, the two crimes have different characteristics.

"There's an idea that because you're good at beating the drug mafias, you can apply the same strategy to people like Osama bin Laden," said Professor Rider.

"But in money laundering there's an event horizon, an initial crime. That's not always the case with terrorist money."

After all, many of the organisations listed by US and UK institutions are charities, or above-board financial institutions or companies - many of whom are fervently protesting their innocence.

The warning signs on which investigators rely are rarely there.

In private

That makes it difficult for the private sector - banks, insurers, bureaux de change and other financial institutions - which for a long time have been told that they needed to work harder to identify suspicious transactions.

Financial institutions are the first line of defence

Observers of private sector involvement note the additional pressure to police transactions, know their customers and in effect act as the first line of defence.

But they stress that on both sides of the Atlantic the incentive - of knowing that reports are actually going to be acted upon - has been lacking.

"You can hit accountants and lawyers over the head with a stick (to report back), but it hasn't been clear what the point was if the private sector wasn't going to do anything much about it," one said.

Jumping ship

That much, at least, has now changed.

As well as the eight recommendations, the FATF is coming up with advice to help banks and other institutions do a better job of sniffing out behaviour which could indicate terrorist finance activities.

There's a problem with that too, though.

The private sector pays a lot more than the public - and what experts that exist are increasingly being headhunted by financial institutions, private investigations firms and other bodies which move considerably faster than governments and bureaucracies.

Professor Rider says of three law enforcement and intelligence officials he has contacted in the past month or so, all have been asked to jump ship to the private sector.

And two have already handed in their notice.