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Friday, 17 May, 2002, 13:04 GMT 14:04 UK
Call to regulate ancient banking system
Dubai gold market
Hawala brokers are common in Dubai's gold markets
Bankers and regulators have rejected calls to ban the informal "hawala" banking system, which transfers millions between Western countries, the Middle East and South Asia every day.

The centuries-old system, which relies on trust relationships and tokens and does not leave a paper trail, is thought to have been used by the groups responsible for the 11 September attacks on the US last year.


This system has worked for ages... Instead of killing it, we need to learn from this successful business model

Nikos Passas
Professor, Temple University
That sparked calls from some quarters for tighter controls or even prohibition.

But the 300 bankers and law enforcement specialists attending a conference in Abu Dhabi, the capital of the United Arab Emirates, said regulation was the key.

"The worst thing is to drive operators underground and make it harder to track," said Greg Bretzing, an expert in financial fraud working for the US Federal Bureau of Investigation (FBI).

"The vast majority of these funds are for good purposes. Only a fraction goes to criminal or terrorist activities."

The regulations laid out by the Financial Action Task Force in Paris - the main body overseeing the fight against money laundering and terrorist finance - should be followed by everyone with anything to do with banking or hawala, the conference concluded.

Prohibition

Hawala has already been banned in some countries, notably Saudi Arabia.

Pakistan, too, has urged prohibition, saying that it frequently serves as a conduit for laundering the proceeds of drug smuggling.

But it is also widely used both in business dealings and as a way for expatriates to get money to relatives in countries with limited formal banking facilities.

Trying to ban it would hurt more people than it would help, the conference heard.

Centre of the web

The UAE is a major hub for hawala, and has long been accused of being too lax in how its regulates financial services.

Its decision to host the conference was to defend itself against the accusations, according to the governor of the country's central bank, Sultan Nasser al-Suweidi.

"It will take a lot to convince me that a system of prohibition can be made to work," he said.

"I think it unlikely that there will be an international agreement on a ban. Moreover, this tactic has not worked in countries where a ban is in force."

The UAE had tightened its controls since 11 September, he said, freezing assets and setting up a specialist Financial Intelligence Unit within the central bank.

Pedigree

Hawala has been around for a very long time, allowing people to exchange funds without any money ever crossing a border.

Its reliance on trust means that a hawala broker in London, say, will send a token - a piece of paper, or these days perhaps an email - to a counterpart in Pakistan.

That alerts the Pakistan end of the deal that money has been received in London, and a similar sum - less expenses and fees - should be paid out in local currency.

The close relationship means the agents can trust one another to settle up at a later date - perhaps simply by matching transactions running in either direction and then simply paying out the difference.

According to Nikos Passas, professor of criminal justice at Temple University in the US, hawala's popularity is largely down to social, economic and political failures in many countries.

"The list is long," he said. "They include trade sanctions, embargoes, heavy taxation, currency controls, red-tape, lack of efficient banking infrastructure and economic instability."

"This system has worked for ages. Instead of killing it, we need to learn from this successful business model."

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