http://www.netcrucible.com/blog/2001/09/25.html

Squeeze the Lifeblood - 
The President said that money is the lifeblood of terrorist operations, and the coalation against terrorism are going to starve the terrorists by cutting off their cash supply. Controlling this flow of lifeblood will be far more difficult than controlling airport and stadium security here at home. The flow is heavily dependant on an Islamic concept called Hawala. The rules under Shi'a Islamic law are described here by Grand Ayatollah Lankarani. Hawala creates a sort of extranational extranet of money transfer that evades currency exchange laws (and fees) and capitalizes on the devaluation of smaller countries' currencies. Basically, Hawala is an indirect method of transferring money, where you give money to a Hawala dealer on the promise that the Hawala dealer will have his buddy in another country make an equivalent gift to your buddy in that country. Of course, you would think that the Hawala dealer would eventually have to even up with the guy in the other country. And that would require a traceable international transaction of money, right? Rashmin Sanghvi explains why not. The Hawala dealers could go through the banks to transfer the debt, but then how could they offer a better exchange rate? No, they are smart; they just smuggle across something that has equivalent value to the accrued debt between their branch offices and is easier to transport. Obviously gold, diamonds, and drugs fit the bill. Consumer goods and especially electronics now fit the bill as well (either by straight smuggling or fudging invoices). The Economic Times describes how places like Nepal have recently become hubs for Hawala financing of terrorists. Especially in the case of Afghanistan, the link between Hawala and Terrorists would be very strong. Afghanistan is historically a smuggling-based economy, and the Taliban's earliest ally was the powerful Afghan smuggling mafia that moves opium, weapons, and other goods between Iran, Pakistan, and Russia. Before Osama, the Taliban were able to make money only off of taking toll taxes from the smugglers. Al Quaeda's international sprawl permitted a perfectly complimentary new product offering -- Hawala networks in other countries that could simultaneously bring in much more revenue and keep the smugglers more heavily employed.

The power of the hawala dealers and smugglers to make money is immense; it is estimated that nearly a trillion US dollars per year is moved through these networks. The profits come not only from avoiding international exchange fees and scrutiny, but in taking advantage of steadily devaluing currencies. And since hawala is such a good deal for the customers (who can remain blissfully ignorant of how the hawala dealers can offer such low prices), the demand will always be very high. The supply is basically constrained by the amount of valuable goods that can be smuggled across international borders. The sealing of the Iran and Pakistan borders seen in this light was a very good move, because the "flow" of smuggled goods is directly proportional to the "flow" of cash into Al Quaeda and Taliban coffers. On the other hand, attempts to control the flow of smuggled goods that fuel an insatiable public demand seem uncannily familiar. This is roughly identical to the situation that is faced in the "war on drugs", and we all know who is losing that one. It is hard enough to train marijuana-sniffing dogs, let alone diamond-sniffing dogs. Certainly there are some differences, but our failure to control smuggling of drugs or people's consumption of drugs should be evidence that we are biting off a huge task in attempting to control smuggling of all types and people's consumption of tax-free financial services. In fact, this relates to one of the reasons often given for the U.S. government's opposition to strong crypto. Strong crypto enables the growth of extranational banks that could exist beyond IRS (or FBI) scrutiny, and eventually deplete all income to the treasury as risk-free tax evasion becomes accessible to everyone. Controlling the flow of "small but valuable" goods is the other half of being able to collect taxes. So the two-pronged effort to gain more visibility into people's bank accounts while restricting the smuggling of contraband has the happy coincidence of having a two-pronged payoff. We squeeze off the lifeblood of terrorists (and other afficionados of small, expensive things like stinger missiles) while simultaneously clearing the arteries for the life-blood taxes of world governments. When you look at it that way, it's their blood or ours, and we clearly have no choice but to fight.

hawalais not the only name for this type of extranational banking. These are pretty much the same techniques used by money launderers who have no knowledge of Islam. The difference in this case is that hawala  across borders is endorsed by many of the Islamic banks, because the Quran sees the combined mass of believers (Ummah) as being a nation that takes precedence over political nations. hawala between Muslims is not subject to national laws or taxes. This wouldn't be such a threat to western governments, except for the fact that Islamic banks are becoming large enough to register on the radar of the Japanese and European Banks. The Islamic banks' use of Halwa creates a 200 billion dollar official international banking system that is free from Western meddling and taxes, and is useful to people like Bin Laden. And the Islamic banks are now big enough to resist pressure from the United States. Stating his confidence that the U.S. will be unable to crack into the Islamic banks in the wake of the WTC attacks, a banker in Bahrain says "If they touch Islamic funds, their own economies will be affected, and we know that economic considerations are top priority for Western countries".

Changing subjects, I bet the author of this paper is realizing how wrong he was by now.