Lolling on a ragged carpet in his cupboard-sized shop in the heart of old Peshawar, Wahhab the money-changer beckoned customers with a sly smile. “Best rate,” he said, fingering a fat wad of banknotes over a low glass counter.
The portly man also offered another, more discreet, service: black market money transfers, any amount, to anywhere, in almost no time. Whipping out a calculator and a mobile phone, he explained how it worked.
“You give me the money; I call my contact in London,” he said. “Then in one hour your friend can go and collect the money – guaranteed.”
Quick, cheap and paperless, the age-old hawala money transfer is thriving in Pakistan. Millions of emigrants use it to remit their wages to families back home. But hawala is also favoured by drug smugglers, corrupt officials, and the financiers of militant Islam.
Foreign money is fuelling the tide of Islamist violence washing across northern Pakistan, according to diplomats, analysts and money laundering experts. Pakistan’s notoriously lax financial system helps them to move the money into the country.
Donors in petrodollar-rich Gulf countries, the US and Europe send donations – anything from a few thousand dollars to several million, said Seth Jones of the Washington-based Rand Corporation. “Without significant funding from abroad, especially the Gulf states, we would be nowhere near the current level of Islamist militancy,” he said. “We’re talking about tens if not hundreds of millions of dollars.”
President Pervez Musharraf is coming under fresh pressure to crack down on the flow. Last month’s Red Mosque siege in Islamabad raised questions about how a madrasa with no apparent source of income could afford to feed up to 6,000 students – and still have money to build a small arsenal of weapons.
Karachi is reputedly a hub of Taliban and Islamist financing. Last month Mariane Pearl, widow of Wall Street Journal reporter Daniel Pearl, who was murdered in Karachi in 2002, launched a court action against a bank she alleges helped her husband’s killers.
On August 2 the US undersecretary of state, Nicholas Burns, called for new laws. “There’s a lot of financing, money that gets laundered through banks that support these terrorist groups. We’ve asked the Pakistani government to take stronger measures,” he said.
But halting the flow of militant money is a complex – some say impossible – task. In Pakistan law enforcement is weak and militant money is often disguised as a religious donation – thrusting investigators into a sensitive area at the heart of Islam.
The government has already outlawed hawala, the system that Osama bin Laden used to transfer funds between Pakistan and Dubai, according to the 9/11 Commission. But police are powerless to stop it in the tribal belt, where the Taliban is strongest, and have shown little enthusiasm for crackdowns in major cities such as Peshawar.
Many militant donations are disguised as zakat, the annual Muslim charity tax, and channelled through a shadowy nexus of radical mosques, madaris (madrasas) and charities.
In Pakistan zakat – one of the five pillars of Islam – is levied by the state. But in oil-rich Gulf States Muslims also send zakat abroad – an estimated ?50m a year from Saudi Arabia. That money has helped fund an explosion of mosques and madaris in Pakistan; some also ends up in the coffers of militant groups.
“There’s a lot of people in the Gulf, particularly the rich merchant class, who feel a religious obligation to fund charities. They don’t think too hard about where it goes,” said Robert Baer, an ex-CIA agent and Middle East expert.
The Saudi money is most visible in North West Frontier Province. In Peshawar the number of madaris has increased from 13 in 1980 to more than 150 today, according to one study. One of the most recent is Jamia Asaria, a sprawling complex amid the green maize fields on the city outskirts.
Built last year, the ?500,000 Jamia Asaria is among the best madaris in Pakistan. Its multi-storey classrooms, dormitories, medical centre and bright, bejewelled mosque can cater for 1,200 students. Yet annual fees are just ?16 – one-tenth of the real cost – thanks to the generosity of donors in Saudi Arabia, Kuwait and Qatar. “We are very grateful to them,” said administrator Majid Khan.
Jamia Asaria follows the Ahle Hadith school of Islamic thought – sexes are strictly segregated, and it has links to schools in Saudi Arabia. Mr Khan stressed it had no links with militancy – but admitted there had been offers.
One time the charity Jamaat ud Dawa, which the US branded a “terrorist entity” last year, offered a fleet of free vehicles, he said. Another time “some wealthy Saudis said that if we became involved in political activities, they would fund it”. In both instances the school refused. “We told them this is an educational institution and we want it to remain like that,” he said.
Four years ago, under US pressure, the Saudi government started regulating zakat donations and charities. But the laws controversially exempted groups such as the International Islamic Relief Organisation (IIRO), a charity founded by Osama bin Laden’s brother-in-law, which still has a large office in Pakistan.
At its Islamabad HQ director Muhammad Javed said IIRO gave relief to victims of the Kashmir earthquake and Baluchistan floods, and ran two orphanages. He insisted all operations were “entirely transparent” but referred further queries to the Saudi embassy.
Militant funding also comes from donors in the UK, said Tahseen Ullah Khan of the National Research and Development Foundation, a Peshawar-based NGO that promotes madrasa reform. “If I go to the UK as a cleric and tell people that Islam is under attack, I can come back with lot of funding.”
The holy month of Ramadan, which starts in mid September this year, is the main fundraising season. “Muslims abroad need to be educated. They think their money is going for Allah. But they should check if their money is going to a poor student or to buy guns,” he said.
Western diplomats are getting impatient with Gen Musharraf’s promises of tighter regulation. An anti-money laundering law first pledged seven years ago is still languishing in parliament.
Diplomats suspect that powerful vested interests, possibly linked to official corruption or drug smuggling, are stalling the law. “This needs commitment at the highest level but it doesn’t seem to be there,” said one.
The government bristles at suggestions it is not doing enough. “We are making concerted efforts but we will do it in our own national interest,” admonished foreign minister Khurshid Kasuri. The State Bank of Pakistan recently set up a financial monitoring team.
Some experts say that laws and regulations alone will never be enough. Militants are adapting, pushing their money through increasingly obscure – or mainstream – channels. Abu Zubeida, an al-Qaida operative arrested in Pakistan in 2002, used to withdraw his funds from accounts in Saudi Arabia and Kuwait through ATM machines.
Mr Baer, the former CIA agent, said it was “plain nutty” to try and regulate something like zakat. “Some people use the money for Qur’ans, others for peroxide bombs. It’s just impossible to make it accountable,” he said.