Central banks can thwart the terrorists

One of the ways of thwarting future terrorist attacks will be preventing flows of their funds around the world. This often begins with the £53bn "industry" of remittance payments. That's economist terminology for immigrant and migrant workers who go abroad to work and send money home.

Remittance payments account for more development finance than international aid. They have been heralded as an economic success because countries essentially help themselves. Even during the 2001 recession, when foreign investment declined, remittances went up.

India and Mexico receive upwards of £5bn a year from their workers abroad. In most developing countries remittances form at least 5% of GDP, and they account for more than 25% of GDP in Lesotho, Jordan and Lebanon.

But unfortunately a thing that often provides economic good for the many can be perverted by the few. The problem lies with informal transfer schemes - sometimes called hawala or hundi - that are unregulated.

Migrant workers send home about £100 to £300 a month. Most workers go to banks or credit unions but these often require workers to open accounts, payments can take days to process and banks take commissions of 2.5% to 40%.

Workers quickly realise they can send their money home more quickly through other channels. These alternative remittance systems function through local and regional connections.

For example, an agent in London is connected with a friend in Karachi who perhaps runs an import-export business and wants extra foreign exchange. Or the London agent is in touch with someone in Mumbai who is owed money by someone else, and that someone else makes good on his debt by paying the intended remittance recipient.

Such alternative remittance services have many links and no paper trails.

This provides an opportunity for unscrupulous individuals to take advantage of the situation and launder money or transfer it to terrorist cells around the world. With £2.4bn leaving Britain each year through remittances it's difficult, if not impossible, to keep track.

Many developing countries keep scant statistics on remittances, although once they do, they are often shocked at the amounts. Mexico thought its remittance payments were worth about $8bn (£4.6bn) a year in 2000. In reality, they were closer to $17bn.

The solution is to encourage migrant workers to utilise formal transfer channels. The Bank of India recently introduced an internet remittance site for money from the US to India that guarantees payment in rupees within four days with no charge. Singapore has since announced plans to mimic India's scheme.

Workers benefit from the guarantee of a central bank and developing countries benefit from additional capital that local banks can use to further that country's development. Now is the perfect time for the world's central banks to thwart terrorist funding by ensuring remittances can be made with three clicks of the mouse.