Making remittances work against money laundering
Photo: Institute for Money, Technology and Financial Inclusion on flickr.com
In fear of money laundering activities and terrorism financing, informal remittance channels have often been approached with heavy handed regulation, if not outright banning. According to the new research paper Financial intermediaries - anti-money laundering allies in cash-based societies? such networks may however provide opportunities to strengthen capacities to regulate money laundering.
More important than aid
Remittances to developing countries from overseas workers total three times the amount of development aid. Such financial flows represent important sources of income for many countries: More than one in four of families in Somalia receive remittances from abroad.
Hawala is an informal remittance system that is independent from the formal banking system. It is particularly convenient for people with no access to formal financial services because they live in poor, remote, or conflicted areas. Delivery at the recipient’s home benefits women in parts of the world where they do not leave their houses unaccompanied.
The cost of remittances to hawala users is extremely low. Fees are often around just 0.1% of the remittance amount, while in formal alternatives fees can be over 10%.
Self-regulation through risk of losing reputation
The absence of formal oversight does not mean that hawala is not regulated for integrity. Regulation in hawala transactions occurs without state oversight: dishonest participants risk a devastating loss of reputation.
In some countries, hawala is illegal due to lack of transparency, but enforcement is difficult. Demand for these kinds of services will always be high. Heavy regulation can furthermore function as taxes on poor societies which are reliant on hawala systems.
There are advantages to hawala systems beyond the low transaction cost. Hawala operators as a general rule need to keep records of their transactions. Despite informality and lack of transparency, traceability is not lost. The reason is simple: Hawala operators as a general rule must keep records of their transactions. This makes transactions traceable.
Investigators should collaborate with hawala networks
According to proffessor Nikos Passas, officials should use the traceability of hawala money to engage in outreach. To the extent that each network is open for a collaboration, they offer an opportunity for investigators: Collaboration can produce information on money transfers that in turn can contribute to controlling illicit flows and assets.
Informal remittance channels may thus provide opportunities to strengthen regulatory capacities. For example, terrorist and drug trafficking operations have been discovered in India and the United Arab Emirates, thanks to the cooperation of hawala networks. Funds sent to finance the bombing of the US embassy in Kenya in 1998 were kept in records for years and produced in courts as evidence.
Hawala remittance system and money laundering (U4 Expert Answer)
Published by U4 Anti-Corruption Resource Centre (July 2015)