THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

Possible ties to murky finance system examined

By Bryan Bender
Globe Staff / May 15, 2010

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WASHINGTON — An informal money-exchange network known as “hawala’’ — a centuries-old system that operates outside conventional banking networks — is at the center of the investigation into three Pakistanis arrested Thursday in Massachusetts and Maine with alleged ties to the suspect in the failed Times Square bomb plot, law enforcement officials said yesterday.

The men, who were detained on immigration charges after several raids across the Northeast, were described by government officials as having funneled money to Pakistani-born Faisal Shahzad, who is in federal custody for trying to set off a car bomb earlier this month. The three men are being investigated for possibly using the hawala system to provide money that Shahzad used to finance the plot, the officials said yesterday.

But finding out where any such funds originated could prove exceedingly difficult, according to government officials and specialists in terrorist financing, who say that by its very nature hawala leaves few clues. The source of the transfer is often anonymous.

“We have more tools than ever before, but when you are dealing with people working very independently and very autonomously you can quickly come to a dead end,’’ said a senior law enforcement official familiar with the investigation who was not authorized to speak publicly.

Hawala, which originates from the Arabic word for change or transform, is a practice that predates modern banking systems and has been around for centuries. There are believed to be thousands of hawala brokers operating in the United States, and they are not necessarily operating outside US laws if they register with the US Department of Treasury. Many don’t, however, operating more like black-market, cash-based versions of Western Union.

Relying on an informal network of brokers who use designated couriers, the networks are used to transfer money in relatively small amounts in and out of developing nations where modern financial systems are scarce, such as in South Asia, the Middle East, and Africa. Transactions often can be completed within 24 hours and at a lower cost than a traditional wire transfer or bank draft that could take as long as a week and require official paperwork.

Hawaladars, as the brokers are known, often operate out of cash-intensive businesses such as restaurants, convenience stores, or gas stations, the officials said.

Federal agents on Thursday searched a Brookline gas station where one of the three men was employed and an apartment in Watertown where two of them lived. They also conducted raids in New York and New Jersey.

Officials said they are interested in searching for possible evidence of the financial transactions. Authorities have said that the owner of the gas station, Elias Audy, has not been implicated in any wrongdoing. Attorney General Eric Holder said Thursday that it is not known whether the three men who were detained were aware of Shahzad’s plans.

Ronny Sydmney, a Brookline selectwoman and a longtime friend of Audy’s, said yesterday she believes “he was totally unaware’’ of any illegal activities that may have been going on in the Mobil station. Audy’s lawyer, Susan Howards, did not return several phone calls.

The Department of the Treasury’s Office of Terrorism and Financial Intelligence estimates that, worldwide, tens of billions of dollars change hands through hawala each year. But most hawala transactions are for legitimate purposes, officials say.

For example, a Boston cab driver who wants to send a portion of his earnings home to his family in a remote village in Pakistan would contact a businessman in the local community who acts as a hawala broker. The broker is given the money along with a small handling fee and the address or cellphone number of his relative.

Then the hawaladar contacts one of his counterparts, usually by phone, near where the recipient lives and requests that the equivalent amount in the local currency be delivered the next day, according to specialists. The Pakistani broker at the point of origin will later settle the debt, leaving no identifying records of the customers on either end of the transaction.

“There is no paper trail,’’ said Rachel Ehrenfeld, the author of “Funding Evil’’ and director of the Economic Warfare Institute at the American Center for Democracy in New York.

People in Afghanistan and Pakistan are among the most prolific users of the hawala system to transfer money within the region or across the world, according to US officials. A new report by the State Department’s Bureau of International Narcotics and Law Enforcement Affairs estimates that only 3 percent of Afghanistan’s banking is done through the official banking system.

“It is estimated that between 80 percent and 90 percent of all financial transfers in Afghanistan are made through hawala,’’ according to the bureau’s 2010 annual report.

The State Bank of Pakistan requires hawaladars to register as official foreign exchange dealers; most do not. And the illegal operators, according to the State Department, are most active in the cities of Karachi, which is known to be a center of terrorist activity, as well as Peshawar, near the border with Afghanistan.

“Today, hawala and traditional banking exist as parallel, but intertwined, economic systems in India and Pakistan,’’ according to Interpol, the international police organization made up of 188 countries.

Special Agency James Casey, who formerly ran the Eurasia Section of the FBI’s Counterintelligence Division, says that despite the lack of records there are still ways to prosecute hawala brokers if they can be identified with the help of fellow members of the community.

The Bank Secrecy Act, for example, requires any person or group acting as a money-services business to follow several record-keeping and reporting requirements. They are also required by law to register with the Department of the Treasury’s Financial Crimes Enforcement Network, which Casey says “they usually disregard.’’

They are also required by law to report transactions exceeding $2,000 they suspect may be tied to illegal activity. Casey, who now runs the FBI’s Jacksonville, Fla., field office, said some transaction records may exist.

“Many keep extensive documentation because the settling of accounts often takes place well into the future,’’ he said. “What investigators need to look for are unconventional records or ones kept in a language other than English.’’

At the same time, hawaladars often use food stamps, lottery tickets, and phone cards as alternate currency, possibly other clues for investigators, he said.

Still, frequently even the hawala broker doesn’t know who originally requested the money transfer. If the men arrested were engaged in a hawala operation, “Who were the people who contacted them to give the money to Shahzad?’’ asked Ehrenfeld. “Catching such people is very difficult.’’

Bryan Bender can be reached at bender@globe.com.