“Hawala” has long been a method of both legitimate money transfer among Muslim nations, as well as a method of financing terror organizations through illicit and difficult to trace channels. It’s a system based not on checks, balances, account numbers or debts, rather, it’s based on honor. The brokers who operate hawala (hawaladars) base their entire careers off this honor system.

Long story short, hawala is a payment method that allows two people to transfer money very quickly. If you refer to the diagram below, it works as such: Person A wants to pay Person B for something. Person A tells B that the password is “Ironclad.”

Person A then pays Broker X the sum of money, with a little extra for the broker. A also tells X the password.

Broker X knows that Broker M is in Person B’s hometown — Broker X tells Broker M to “pay Person B the allotted amount.” The money never actually moves from X to M.

Broker M approaches B, and asks for the password. “Ironclad,” B says. Now Broker M knows that Person B isn’t just some random person about to receive a hefty payday. Broker M immediately pays person B from his own accounts.

This whole process, while it sounds complicated, is actually quite simple and can occur in under a day. The the two brokers (X and M) can settle up between each other on their own time, also splitting the extra transaction fee for themselves.

Read more about how the mechanics of hawala works here.

So who uses the hawala system? Is it legal? Does it work?

Hawala is illegal in many countries, to include several states in the U.S., as well as Pakistan and India. Many hawaladars and their brokerages have been shut down in anti-terror operations, to include some in Somalia and Afghanistan.

It is not illegal in many countries, as this is a great system for the average person to transfer money in rural places without financial infrastructure to depend upon. Someone in rural Afghanistan without a bank account sells a huge amount of livestock to someone in Kabul, but doesn’t have a bank account — hawala is a solid method of payment that doesn’t require him to make the long journey into the city with huge wads of cash in his pockets.

The honor-based system is what makes it difficult to track, and also what attracts terror organizations. If you refer again to the diagram above, you realize that the physical money paid by person A (the red arrow) is never actually transferred across the distance to the second broker. That particular payment never actually makes it to Person B, the second broker is technically just paying that person out-of-pocket (the two brokers settle up later).

However, the illicit movement of money attracts more than just terror groups. In the early 1990s, a political scandal involving Indian politicians using hawala in a bribery scheme consumed the headlines in India. Many of those who were accused wound up being acquitted because of the very essence of hawala — it leaves very little, tangible evidence behind.

While the practice of hawala is founded in Islam, it’s not exclusive to the religion. It’s a system that could conceivably be used by anyone — from terrorist groups in Somalia, to New York business executives hoping to move money quietly, to a couple of farmers literally anywhere in the world who, for whatever reason, want to transfer money from one person to the other.

In this file photo of Thursday, March 17, 2011, a Somali official of the central bank in Mogadishu, Somalia, arranges Somali bank notes at the bank. Somali politicians are returning from Arab nations with briefcases of cash, and a new report and an Associated Press investigation found that $80 million given to government officials that could have been used to fight terrorism, piracy or hunger is missing. The large cash payments are fueling Somalia’s 20-year-civil war by encouraging politicians to hang onto power while paying little attention to crucial needs. A lack of attention to government functions may also be hindering the fight against an al-Qaida-linked Islamic insurgency, officials say. | AP Photo/ Farah Abdi Warsameh

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