A senior western diplomat in Saudi Arabia has admitted that it is proving extremely difficult to track all the possible Gulf sources providing funding for terror groups.

But the diplomat, who asked not to be named, told the BBC that the Saudi authorities were co-operating fully with the western-led campaign to choke off terror funds.

The task confronting the authorities is daunting: how to monitor the financial transactions of up to 20 million people, a third of whom are non-Saudis.

The Saudi government knows that money has been reaching Osama Bin Laden's al-Qaeda organisation from inside Saudi Arabia, but it does not know how much.

Hot and cold

Officials have dismissed suggestions that Islamic charities have been used to funnel money to armed groups.

They say they have all been brought under the official umbrella of one of the ruling princes.

But when it comes to actions taken against people's private bank accounts, the authorities here are evasive.

Late last month the Saudi government issued an order to freeze the assets of people and groups said to be linked to terrorism.

But Saudi finance officials have not confirmed whether the orders have actually been carried out.

A US treasury official was quoted recently as saying that in some cases it may be more desirable to keep bank accounts open and monitor them as part of an investigation.

Bankless deals

One form of financial transaction that is proving especially hard to track is the local practice known as 'hawala'.

It is a centuries-old method used by traders in this region to transfer money from one part of the world to another, without going through the banking system.

A person hands over a sum of money to a friend in one country on trust, then the equivalent sum is delivered to his friend in another country.

A senior western diplomat here in Riyadh told the BBC that in some ways it was harder to track possible funding for armed groups than it was to tackle money-laundering.

In the latter, he said, you have dirty money going into the system, and trying to come out clean.

With so-called terror-funding you have small amounts of clean money going into the system, he said, and then disappearing.

Arab alliance

The problem is not confined to Saudi Arabia.

All six Gulf Arab states have agreed to exchange information to try and eliminate possible sources of funding for terrorism.

In Kuwait, the government has ordered the removal of all unlicensed charity booths from the streets, a move welcomed by the main Islamic charities who say they have nothing to hide from investigators.

And in the United Arab Emirates, where Bin Laden's alleged finance manager has reportedly received funds, a new money laundering bill has been proposed.

The bill will allow the authorities there to monitor the numerous money changers, and also to freeze suspicious accounts.

The US government says it is pleased with the sort of cooperation that it is getting from its Gulf Arab allies, but the question that some Western diplomats are now asking themselves is why was this not done long before 11 September.