A centuries-old network of secret codes and shadowy brokers continues to outpace financial systems controlled by the state These brokers facilitate transfers through the ‘two-pot’ system. Imagine, for example, that you live in New York City and want to send $500 to your mother in Bangladesh. The first step is to hand over cash to your local broker. That broker will then provide you with a code – perhaps a verse from the Quran – and contact his partner in Dhaka. Once you share the secret code with your mother, she can cite it to her local broker in return for the equivalent total in Bangladeshi taka. Like magic, your $500 disappeared in New York and reappeared across the world. But no money has actually crossed the border. Instead, each broker has collected and distributed funds from their respective ‘pots’ in return for a small commission. Those pots are originally seeded through some other source of value, whether it be side businesses or family contributions, and continuously replenished through reverse flows or other side transactions.
This is a highly efficient system. Unlike international wire transfers through banks, which can sometimes take three to five business days, hawala networks can move money in a matter of minutes. They also often charge a much lower commission. Research by the United Nations found that hawala brokers charged 0.5 to 7 per cent depending on the nature of the transaction and its ultimate destination. And it has recently been reported that informal Chinese brokers are undercutting the competition by charging ultralow fees for international transfers. Most regulated firms cannot hope to match these prices, and those that try are often forced to compensate by providing customers with substandard exchange rates.
How do the brokers ensure they have enough cash on one side or another, though?
The real problem, especially for state regulators, is where feiquan brokers in the US are obtaining the large amounts of cash they need in their pots. Every underground banker operating in the US has to receive US dollars before they can redistribute that money to their clients. Normally, those deposits would gradually accumulate from repeated business. But, according to a blockbuster indictment in 2023 by the US Department of Justice, much of the cash Chinese students were receiving was found to have come from a troubling source: the Sinaloa drug cartel.