Hawalah is the Arabic word for transfer, and the Hawalah system is the main way illegal immigrants send money back to their home country. After the WTC Bombing the US Government suddenly "discovered" all the Hawalah operations in New York - there are thousands - and decided to try to shut the entire system down. Although there were a few arrests, (a deli in Jersey City, a Hoboken video rental store) the government soon threw up its hands, claiming that Hawalah's could never be stopped. Most people don't know what a Hawalah is or how it works, even if they remember hearing the name tossed around after the bombing. Since I have been involved in a Hawalah (hold off the down votes, it was a harmless Jewish Hawalah, in fact we didn't even know what it was called until some FBI agent on CNN started explaining what we thought was an Israeli ethnic secret), I can enlighten those of you on E2 who would like a view into the dark art of money laundering.

Essentially, the system works by keeping a running total of people abroad who need money in the US and people in the US who need money abroad. The actual cash is never trasferred accross the border: instead, the accounts are settled in ledgers and the money is virtually transfered. When the first reports of Hawalah came out, it became clear that every ethnicity known to man was running these systems in all of the major cities of the world - Hindis, Pakistanis, Israelis, Greeks, Armenians, Arabs, Turks, Chinese, Vietnamese and Laotians - pretty much anyone who needs to get money in and out of a controlled economy was working with this system.

Since this might seem confusing, I'll give you an example. Some ethnic figure, let's call him Moshe, (although Israeli's are not the main proponents of this system if I have to offend someone I might as well offend my own) runs a falafel shop in the East Village. Yossi, Uri and Eli, three Israeli illegal immigrants working for an electronics wholesaler want to send money back to their family in Israel. They have a total of $20,000. They give it to Moshe for safe keeping. Moshe records their name in a ledger. Back in Tel Aviv, Moshe's cousin Sammy sells blue jeans in a small shop off of Allenby Street. He's approached by the local drug pusher who just made $25,000 USD selling XTC to club kids on the Tel Aviv Boardwalk and needs to get it to America. Sammy records this money in his ledger.

What happens next should be obvious: The drug pusher's banker shows up to pick up the $20,000 in NY at Moshe's falafel stand, while Yossi, Uri, and Eli's relatives pick up their share of the $20,000 in blue jeans store on Allenby Street. $5,000 remains with Sammy in a sort of waiting list for the next group of users of the system to come along. No money changes hand, everything is done on the telephone (or in the case of sophisticated Iranian Hawalah schemes near Paddington Station in London through well encrypted email) and as long as no one squeals there's nothing for the customs office to snatch. I'm not sure what happens when there's a serious monetary imbalance in one direction or the other - I believe in that case someone might make a one-shot transaction with a forged invoice, but this leaves a paper trail and can be risky.

As you systems engineers out there probably recognize, this is almost a fool proof way of operating - there is no paper trail other than a ledger which can easily be burnt and which is normally kept in code, the money does not leave the office, and it's a relatively safe way of going about things as long as everyone in the chain knows and trusts one another.

For those of you who are wondering why the War on Terrorism is so hard to win, Hawalah is a perfect example - insidious, simple, and yet sophisticated, it takes advantage of the shortening of true distances to nimbly avoid government barriers no matter how tight those barriers get.

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