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TERRORISTS, white collar criminals, drug dealers, and others who need to move large amounts of illegal cash without detection have a useful new tool at their disposal. Using disposable cell phones, millions of dollars can be shifted around the world through wireless financial networks. These transfers are fast, reliable, cheap, and very hard to trace.

Wireless electronic payment systems, also known as m-payment networks, are popular in developing countries, where cell phone use and demand for financial services are both rising rapidly. These networks are being developed for the migrant worker remittance market, which shifts about $20 billion a month from the United States and Europe to Africa, Asia, and Latin America. But many of these countries lack effective anti-money-laundering and terrorism-finance surveillance capabilities.

“There are already indications that money launderers and those that finance terrorism will avail themselves of the new m-payment systems. Responsible jurisdictions must find a balance between the expediency of m-payments, particularly in the developing world, and the need to guard against abuse,” says the latest International Narcotics Control Strategy Report, a document published annually by the Department of State.

It’s hard to tell how widespread the practice really is, because there is little reliable information. The U.S. government’s National Drug Intelligence Center estimates that drug traffickers process between $13.6 billion and $47.7 billion annually. Traffickers still rely heavily on traditional methods, such as bulk currency smuggling, to move their illegal funds, but they likely use new m-payment networks too.

“They like to diversify and we need to be a step ahead,” says one of the State Department report’s authors, who asked not to be identified.

“These payment methods are an emerging threat, so we shouldn’t be surprised that there is no data,” he says. Similarly, he notes, “we did not know much about hawala either, which was not reported much until 9-11.”

Hawala networks are informal communities of money brokers in the Middle East, Asia, and Africa; they are used to move money across borders with little risk of detection.

The official says the legal, jurisdictional, and technical challenges facing governments are considerable “because the money will be on a server that could be anywhere in the world.” He adds that, “Most investigators and law enforcement do not understand this stuff.”

Although the technology is complex, the principles behind these systems are simple. A sender hands over cash to a remittance center, paying a 3 to 5 percent fee. The center transfers the money electronically to the receiver’s cell phone account in the receiving country. Recipients receive a text message informing them that a transfer has arrived in their electronic wallet. They can withdraw cash from a licensed outlet or simply spend or transfer the credit electronically.

Regulators in the sending and receiving countries have placed limits on the amount of money that can be sent or stored electronically. But these ceilings can be evaded. John Forbes, a former U.S. Treasury investigator who now consults for the United Nations, says smurfing, in which criminals transfer large amounts of money by parceling them into smaller transactions to avoid scrutiny, has long been a common practice—it predates the current popularized use of electronic money and has simply been adapted to it.

Criminals can later pool money from different digital stores into a single electronic account. Furthermore, m-payments now bypass traditional banks, payment systems, and financial reporting systems.

Regulators appear unsure how to react to the problem. The Financial Action Task Force, the main international antimoney-laundering and terrorism finance agency, said in a report last year that existing rules “provide the appropriate guidance to address the vulnerabilities” but suggested “further examination of the effect these evolving technologies may have on cross-border and domestic regulatory frameworks.”

The U.S. government says that the Philippines, where cell phone use is widespread and remittance flows are substantial, has adopted effective but business friendly controls that are intended to stem abuse without placing an undue burden on bona fide clients.

Merchants and nonbank financial agents must complete a one-day antimoney-laundering course to obtain a special Central Bank accreditation. But the training is typically available only in Manila, even though insurgents operate in remote islands—which have full cell phone coverage.

“The transnational community is not ready to deal with this. There’s no need for panic yet, but we do need to think and establish a reasonable regulatory environment,” says Forbes, adding, “It needs to be looked at before it gets out of hand.”