Hawalas avoid banks, come under scrutiny of international authorities

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

Al-Qaeda 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 Hawalas 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 Hawalas.

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.

Hawalas are a centuries-old informal method widely used in Africa, the Middle East and Asia for transferring money between nations.

"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 would in turn releases the amount to the driver's family.