Northwest Washington, D.C. The landing is dark, and the door to the office--ostensibly a travel agency--is unmarked, save for a sticker proclaiming, "I Pakistan." Outside on the street, small clusters of men lounge against cars and in doorways, calling out to passersby. Inside, one rickety flight of steps up from Trina's Hair Gallery, the air is silent and stale. I obey a tiny sign, faintly visible in the gloom, instructing visitors to "ring bell." Then I wait--10, 20, 40 seconds--until a pair of gold-rimmed glasses appears in a small, arched window above the door. I wave and smile. A lock clicks and the door opens several inches, dropping a thin streak of light onto the dingy green carpet. "I'm looking for the money transfer place..." I explain, my voice trailing off as a middle-aged Pakistani gentleman eyeballs me warily. "Where do you want to send money?" he demands, clearly convinced that I am either profoundly lost or looking to make trouble. But when I utter the magic word--Pakistan--he steps aside with an almost apologetic smile. "You must admit it's strange..." he begins, gesturing toward the small office to our right. "Do you have friends there?"


Settling into a chair, I explain that I don't personally want to send money to Pakistan but am hoping to talk with someone about how to do so. The smile disappears. "I don't work here," the man says, his English deteriorating. "I'm here two days only. Owner gone. In Virginia. Vacation. I know nothing about--" He waves a hand over the desk to indicate that the process is all Greek to him. "Just a friend. Two days."

My host's agitation is unsurprising. The business that he knows absolutely "nothing" about is Hawala--an informal, underground banking network used by South Asian expats worldwide that has received a spate of bad publicity since September 11. It seems that one of the ways Osama bin Laden and his deranged holy warriors move money around the globe is through hawala agents, or hawaladar. Centuries old, the system works like a low-tech Western Union: A Pakistani worker in the United States (or Britain or the Gulf) wants to send his paycheck home to the family in Islamabad (or Peshawar or some outpost in the Hindu Kush). Rather than hassle with banks, the worker simply hands over, say, $5,000 to a hawaladar in the United States, who then calls (or faxes or e-mails) a colleague in Pakistan with details of the transfer. A member of the worker's family can then show up at his local hawala office, show an ID or relay a password, and retrieve the equivalent in rupees--minus the hawaladar's modest fee. The process is quick, leaves virtually no paper trail (records are often kept in code, if at all), and has long operated free from U.S. oversight.

Which is exactly the problem. Hawala represents a serious obstacle to President Bush's new push to choke off funding for terrorist groups. The system is too fluid to control with conventional banking laws, too insular and too diffuse to easily infiltrate, and too enmeshed in South Asian culture to abolish outright. (Other nations have tried.) In 1993 Congress passed a law requiring U.S. hawaladar to register with the government and to file suspicious activity reports like banks. Twice delayed because of concerns about the volume of paperwork (first by the Clinton administration, then by the Bushies), the regulations will now be fast-tracked. But while they'll provide additional leverage for prosecuting hawaladar suspected of shady deals, law enforcement will still need to know whom and what sorts of activity to investigate--a task for which they are sorely unprepared. If you can even find a hawala broker to interview, one former Clinton Treasury official joked to me, "you'll be doing better than the FBI." This is particularly grim given that, as the United States cracks down on Swiss bank accounts, the bad guys will increasingly turn to their friendly neighborhood hawaladar.

Though largely unheard of in the United States, hawala, derived from an Arabic word meaning "change" or "transform," runs deep and wide in Pakistan, India, Malaysia, Singapore, the United Arab Emirates, and pretty much any other country with a large South Asian population. (The near-identical "chop" system is similarly prevalent among ethnic Chinese.) Also known as hundi, hawala emerged several centuries ago as a way for Arab traders to avoid being robbed on their routes. Those routes included South Asia, where the practice caught on. No one knows how much money runs through the hawala system, but last year, Pakistani bankers estimated that the annual hawala inflow for that country alone was somewhere between $2.5 billion and $3 billion (versus only $1 billion via banks). According to a 1999 investigation by Institutional Investor magazine, some 1,100 brokers operate across Pakistan, and individual deals can run as high as $10 million. Hawaladar are also thought to operate in every city in the United States with a significant South Asian or Middle Eastern community. Here brokers generally work out of the back of another business, such as a jewelry store or travel agency, and are wary of outside scrutiny. Advertising is targeted at the local ethnic press, says William Wechsler, who served as head of transnational threats at the National Security Council under Clinton. And "they won't welcome with open arms someone who looks like their parents came from Germany or England."

My new friend at the travel agency/money transfer office--who declines to give his name--is obviously less than thrilled by my presence. But, too polite to throw me out, he reluctantly answers questions about non-hawala matters--his family, his extensive travels, the benefits of arranged marriage. Every few minutes, he stops to answer one of the two phones on the desk. "Moneytransfer?" he blurts out each time before switching to Urdu (or maybe Pashto; I forget to ask). At one point, he pulls a fat ledger from a desk drawer to look up some information. (He says he works as a bookkeeper, though most definitely not for this office.) A second ledger sits open on the desk, filled with neatly ruled, hand-written (indecipherable) entries that include what appear to be dollar amounts. I ask if this office keeps careful records of transactions. "Oh, yes," he assures me with a smile. "When you're running an office, you have to keep records--especially when dealing with money." But, unlike a bank, a hawaladar is the keeper of his own accounts--and his own conscience. Records can be easily misplaced or altered, as apparently happened with the hawala firm Dihab Shill, which federal prosecutors say served as the conduit for funding the 1998 bombings of U.S. embassies in Kenya and Tanzania. At trial, prosecutors introduced a ledger showing money transfers from Kuwait and Yemen to a suspected Al Qaeda member in Nairobi; but the ledger had been doctored and the company claimed to have thrown out all faxes from the involved parties.

Not surprisingly, this kind of anonymity fosters a variety of illegal activities, from political corruption to tax evasion to drug running. In its 1998 report on money laundering, the State Department noted that profits from the sale of Pakistani heroin were being laundered via a global hawala network with close ties to Dubai. (With its lax banking laws, Dubai, along with India and Pakistan, is considered by the State Department to be one leg of "the hawala triangle.") This May, India discovered that hawala money was funding separatist groups in Punjab and providing legal assistance for gang members on trial for smuggling in arms and munitions from Pakistan. In the late '90s U.S. officials (working closely with the Indian government) found that hawala had been financing the smuggling of 200 aliens per month--at $20,000 per head--from South Asia. Still, such discoveries are often the product of luck as much as smart police work. "No intelligence organization--except the Directorate of Revenue Intelligence in India, perhaps--has ever effectively cracked the system," Barry Rider, a London-based expert on financial crime, recently told the BBC. "You could count the number of successful penetrations on the fingers of one hand."

For his part, my new friend vehemently denies that hawala is used primarily for nefarious dealings. "I don't believe that," he says with a frown. "It is people working here who send money home to their families." He personally sends money overseas every month to his wife, three children, and four sisters. If he used a bank, the funds could take up to two weeks to reach his family. But through this hawala office, he explains, the transfer takes a mere two days. Every month he either makes a deposit into the travel agency's bank account or brings his dollars straight to the office. One phone call later, his brother-in-law in Pakistan can pick up the rupees. Hawaladar can also easily adjust their exchange rates and transfer fees to help draw in customers. Last year Pakistani hawaladar in Kuwait even offered video recorders, satellite dish receivers, and other incentives to expatriates looking to send money home.

Hawala flourishes in times of political upheaval. During the 1947 partition of India, currency exchange between Pakistan and India was banned. Hawala filled the gap. In the fall of 1998, the Malaysian government moved to prevent capital flight by curtailing people's ability to convert the ringgit. Again hawaladar stepped in to provide access to foreign currency. And in May 1998, when Pakistan faced global condemnation for testing nuclear weapons, domestic confidence in the banking system tanked. Money flowing into the country through official channels from overseas workers dropped from $150 million a month to $50 million, as hawala essentially replaced the banks. Ironically, U.S. intelligence agents have even used hawala to foment unrest. A former Pakistani-based CIA agent boasted to Institutional Investor that he used hawaladar to funnel money to mujahedin guerrillas fighting the Soviets in Afghanistan. "The hawala system goes beyond anything we can imagine," he told the magazine. "It is very, very well developed."

Though technically legal in many nations, hawala is unpopular with governments. Even when used for benign purposes, the system can damage a country's economy by undermining its exchange rate and siphoning off reserves of foreign currency (dollars stay with U.S.-based hawaladar instead of being injected into the local banking system). In recent years some countries, most notably India, have tried to strangle hawala activity. For nearly three decades such transactions have been illegal under India's Foreign Exchange Regulation Act, with the Enforcement Directorate actively pursuing violators. But the flow goes on. "I have absolutely no idea what the legal status of it is in India," says Wechsler, "but it still exists there." Singapore took a different tack, trying to regulate the system by requiring registration of all hawala and chop brokers. Even so, the brokers maintain a don't-ask-don't-tell approach to business. "My company does not question the amount or the purpose of sending the money," a Singapore-based hawaladar told the newspaper there. "They trust us, and I don't ask questions. Why should I, when I have a license to operate?"

The United States is now preparing to follow Singapore's lead. At a September 26 Senate hearing, Jimmy Gurule, the Treasury under secretary for enforcement, assured an anxious Evan Bayh that the administration plans to accelerate the registration of hawaladar and to require them to file suspicious activity reports as do banks. But those steps will do little more than generate mounds of paperwork unless law enforcement takes steps to better understand how hawala works. "U.S. law enforcement in general has done a very poor job over the years of understanding how it works in the United States," says Wechsler, "much less engaging in diplomacy to understand how it works abroad."

This bodes ill for Bush's much-hyped crackdown. As the administration steps up oversight of the international banking system, the poorly understood hawala system will become all the more important to groups like Al Qaeda. A decade ago the London Sunday Telegraph warned that "law enforcement agencies believe the success of new Western laws enabling the confiscation of assets and prosecution for money-laundering have greatly accelerated [hawala] use by international organised crime, especially in South-East Asian heroin deals." Similarly, as the United States has gone after the assets of Colombian drug cartels, the cartels have turned increasingly to what is known as the black-market peso exchange, a money transfer system similar in principle to hawala. Today the BMPE is the largest avenue for laundering drug money in the Western Hemisphere. And what the BMPE has done for drugs, hawala could do for terrorism, where the dollar amounts are generally smaller and thus harder to track.

My new friend is getting busier and busier. After about the sixth phone call--at one point he is holding a receiver up to each ear--I ask how business has been recently. "Very quiet," he says. "With everything..." The phone rings again and then the doorbell. My friend excuses himself, has a brief exchange with whomever's at the door, then reappears. We talk a bit more about all the things he doesn't know about hawala, then discuss my meeting the owner of the business. ("He doesn't speak English," he cautions. "But if he's willing--I mean, available--maybe I could help.") On my way out, I pass a Pakistani gentleman sitting on a bare mattress that takes up most of the front room. He looks up expectantly. I don't have the heart to tell him that there's no one around who can help him transfer money home. Certainly not my new friend, who hustles me quickly back onto the dark landing, then watches from the doorway as I make my way down the stairs.

Michelle Cottle is a senior editor at The New Republic.