Banking Expert says regulation, licensing best way to curb potential abuses

Stumble Upon

del.icio.us

Digg

Facebook

Print

Email

speakup

A New York taxi driver can use it to send money to his starving family in Somalia.

david shipley/telegraph-journalNauman Farooqi, a professor at Mount Allison University, spoke at a recent anti-money-laundering and anti-terrorist-financing conference in Toronto on hawala, a system of transferring money across international borders that dates back to the 12th century.

Al-Qaida can use it to finance terror attacks in North America.

Officials in North America are struggling to understand and regulate an ancient, informal financial transfer system known as hawala that can move money internationally without formal financial institutions.

"It's like a double-edged sword," says New Brunswick researcher Nauman Farooqi, an expert in hawala.

Farooqi, a professor at Mount Allison University, is helping government officials and police in Canada and the United States better understand the benefits and the risks of informal money transfer systems.

Hawala is a centuries-old informal method widely used in Africa, the Middle East and Asia for transferring money across national boundaries.

"It has been around for hundreds of years and it has been used for legitimate transactions," said Farooqi.

"It's not necessarily used for money laundering and terrorist financing."

Farooqi pointed to the example of a Somali taxi driver working in New York City who wants to send money back to his family in Africa.

Sending money via the formal international financial system is next to impossible as the banking system in Somalia is in ruin, he said.

"There are no branch networks or ATMs over there."

The hawala system works through agents in different countries. A person looking to transfer money gives their funds to the local agent and pays a fee, typically five per cent of the principal amount.

In the case of the taxi driver, a New York-based agent would contact a counterpart in Somalia, typically over the phone or by e-mail, who in turn releases the amount to the driver's family.

At the same time, a family in Somalia may want to transfer money to their child who is studying in the U.S. Using the hawala agents they may arrange for money to be sent to the student.

The agents settle any debts at a later date.

The hawala system allows funds to rapidly change hands without physically crossing borders.

After the Sept. 11, 2001, terrorist attacks, U.S. officials began to crack down on informal money transfer systems like hawala, which al-Qaida has used in the past.

Farooqi spoke about hawala, which dates back to the 12th century, during a recent anti-money-laundering and anti-terrorist-financing conference in Toronto.

He was the only academic invited to speak to the conference, which included representatives from major Canadian financial institutes as well as police and government officials.

The conference was organized in the wake of changes to Canadian law that require more rigorous financial reporting from banks and other similar institutions.

Farooqi said North American officials would be better off regulating hawala than simply outlawing it.

He noted that even with sophisticated financial tracking mechanisms, traditional banks and formal financial systems also continue to be used for illegal money laundering.

"A lot of countries have initiated licensing procedures (for hawala companies)," he noted.

Such procedures include requirements to keep records of clients and transactions.

"If you over-regulated (hawala) then the people who are doing illegal transactions will go further underground and whatever means we have of tracking them will be further diminished."