Remittances are playing an increasingly large role in the economies of many countries, contributing to economic growth and to the livelihoods of needy people (though generally not the poorest of the poor). As remittance receivers often have a higher propensity to own a bank account, remittances promote access to financial services for the sender and recipient, an essential aspect of leveraging remittances to promote economic development. The top recipients in terms of the share of remittances in GDP included many smaller economies such as Tajikistan (45%), Moldova (38%), and Honduras (25%).
The World Bank and the Bank for International Settlements have developed international standards for remittance services.
In 2004 the G8 met at the Sea Island Summit and decided to take action to lower the costs for migrant workers who send money back to their friends and families in their country of origin. In light of this, various G8 government developmental organizations, such as the UK government's Department for International Development (DFID) and USAID began to look into ways in which the cost of remitting money could be lowered.
HISTORY
Overview
Remittances are not a new phenomenon in the world, being a normal concomitant to migration which has ever been a part of human history. Several European countries, for example Spain, Italy and Ireland were heavily dependent on remittances received from their emigrants during the 19th and 20th centuries. In the case of Spain, remittances amounted to the 21% of all of its current account income in 1946. All of those countries created polices on remittances developed after significant research efforts in the field. For instance, Italy was the first country in the world to enact a law to protect remittances in 1901 while Spain was the first country to sign an international treaty (with Argentina in 1960) to lower the cost of the remittances received.
Remittance man
In the 19th century, the English usage of the word usually referred to money sent from England - the opposite direction to today's usual usage of the term. A remittance man was an exile living on money sent from home. Within Victorian British culture, this often meant the black sheep of an upper or middle class family who was sent away (from the UK to the Empire), and paid to stay away. These men were generally of dissolute or drunken character, and may have been sent overseas after one or more disgraces at home. There were also "remittance men" in several towns in the American and Canadian West. American writer Mark Twain and Canadian poet Robert Service make references to those specific "remittance men" in some of their literary works.
An example of this usage is in Robert Louis Stevenson's book The Wrecker where the character Tommy Hadden is cast as the 'remittance man'In the book
"
Tom Hadden (known to the bulk of Sydney folk as Tommy) was heir to a considerable property, which a prophetic father had placed in the hands of rigorous trustees. The income supported Mr. Hadden in splendour for about three months out of twelve; the rest of the year he passed in retreat among the islands.
Asia
A majority of the remittances from the US have been directed to Asian countries like India (approx. 26 billion USD), Philippines (approx. 16 billion USD) and China (approx. 23 billion USD). Most of the remittances happen by the conventional channel of agents (Western Union, Moneygram). However, with the increasing relevance and reach of the Internet and players, online money transfer Remittance to India and mobile phone money transfer has significantly grown
POTENTIAL SECURITY CONCERN
The recent internationally coordinated effort to stifle possible sources of money laundering and/or terrorist financing has increased the cost of sending remittances directly increasing costs to the companies facilitating the sending and indirectly to
person remitting. As in some corridors a sizable amount of remittances is sent through informal channels (family connections, traveling friends, local money lenders etc.) remittances can be difficult to track and potentially sensitive to money laundering (AML) and terror financing (CFT) concerns. Since 9/11 many governments and the Financial Action Task Force (FATF) have taken steps to address informal value transfer systems. This is done through nations' Financial Intelligence Units (FIUs). The principle legislative initiatives in this area are the USA PATRIOT Act, Title III in the United States and, in the EU, through a series of EU Money Laundering Directives. Though no serious terror risk should be associated with migrants sending money to their families, misuse of the financial system remains a serious government concern. The effects of enforcement action have sometimes had counterproductive effects as in the case of Al-Barakaat, a hawala network responsible for the largest remittance flows to Somalia
Top recipient countries
Country
Remittances 2004
Remittances 2006
Remittances 2007
Remittances* 2008
Remittances 2009
India
$21.7 billion
$26.9 billion
$27 billion
$45 billion
n.a.
China
$21.3 billion
$22.52 billion
$25.7 billion
$40.5 billion
n.a.
Philippines
$10.7 billion
$12.7 billion
$14.4 billion
$16.4 billion
$17.3 billion
Mexico
$21.7 billion
$25.6 billion
$26.1 billion
$25.1 billion
$21.2 billion
Poland
$12 billion
n.a.
$12.5 billion
$13.75 billion
n.a.
Bangladesh
$4.2 billion
$ 5.5 billion
6.6 billion
$9.0 billion
$10.7 billion
Pakistan
$4.2 billion
$5.1 billion
$6.0 billion
$7.0 billion
$8.7 billion
Morocco
n.a.
n.a.
$5.70 billion
$6.7 billion
n.a.
*World Bank estimated
Central Bank data for: Bangladesh, Mexican, Pakistan, Philippines
HAWALA
Hawala has its origins in classical Islamic law, and is mentioned in texts of Islamic jurisprudence as early as the 8th century. Hawala itself later influenced the development of the agency in common law and in civil laws such as the aval in French law and the avallo in Italian law. The words aval and avallo were themselves derived from Hawala. The transfer of debt, which was "not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages." The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent." In Roman law, the "contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him." On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general."
Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century. Today, hawala is probably used mostly for migrant workers' remittances to their countries of origin.
How Hawala works
In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition
instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.
The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. No records are produced of individual transactions; only a running tally of the amount owed by one broker to another is kept. Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.
In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally, the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.
Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies distortive exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is less complex (e.g. due to differences in legal environment in places such as Afghanistan, Yemen, Somalia).
Furthermore, the transfers are informal and not effectively regulated by governments, which is a major advantage to customers with tax, currency control, immigration, or other legal concerns. For the same reasons, governments do not favor the system, and accusations have been made in recent years that terrorist funding often changes hands through hawala networks.
Hundis (The Bill of Exchange)
On a similar note, Hundis referred to legal financial instruments evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another.
In the era of bygone kings and the British Raj these Hundis served as Travellers Cheques. They were also used as credit instruments for borrowing and as bills of exchange for trade transactions.
Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Being a part of an informal system, hundis now have no legal status and were not covered under the Negotiable Instruments Act, 1881. They were mostly used as cheques by indigenous bankers.
Angadia
The word angadia means courier (in Hindi) but it is also used for people who act as Hawaladars within the country (India). These people mostly act as a parallel banking system for businessmen. They charge a commission of around 0.2-0.5% per transaction from transferring money from one city to another.
Hawala after September 11, 2001
After the September 11 terrorist attacks, the American government suspected that some hawala brokers may have helped terrorist organizations to transfer money to fund their activities. The 9/11 Commission Report has since confirmed that the bulk of the funds used to finance the assault were not sent through the hawala system, but rather by inter-bank wire transfer to a SunTrust Bank in Florida, where two of the conspirators had opened a personal account. However as a result of intense pressure from the US authorities, widespread efforts are currently being made to introduce systematic anti-money laundering initiatives on a global scale, the better to curb the activities of the financiers of terrorism and those engaged in laundering the profits of drug smuggling. Whether these initiatives will have the desired effect of curbing such activities has yet to be seen; although a number of hawala networks have been closed down and a number of hawaladars have been successfully prosecuted for money laundering, there is little sign that these actions have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers.In November, 2001, the Bush administration froze the assets of Al Barakat, a Somali remittance hawala company
used primarily by the large Somali diaspora. Many of its agents in several countries were initially arrested, though later freed after no concrete evidence against them was found. In August 2006 the last Al Barakat representatives were taken off the U.S. terror list, though some assets remain frozen.In October 2009, the Swedish branch of the Somali bank-network al-Barakaat was removed from the United Nation's list of terrorist organizations. The company had been on the list for the past eight years, and had its bank account funds frozen. According to the Swedish Public Radio broadcaster SR, the UN did not explain why it had elected to remove al-Barakat from its terror list. However, it has been suggested that the recent change in the European Union's position regarding the many organizations "that have been too easily included in the UN terror list" might have influenced the UN's position. Al-Barakat is now also able again to access its bank account funds.
Hawala has been made illegal in some US states and other countries as it is seen to be a form of money laundering and can be used to move wealth anonymously
Money laundering
Often linked in legislation and regulation, terrorist financing and money laundering are conceptual opposites. Money laundering is the process where cash raised from criminal activities is made to look legitimate for re-integration into the financial system, whereas terrorist financing cares little about the source of the funds, but it is what the funds are to be used for that defines its scope.
While the fund required for a terrorist act may be as small as US$5,000, the process of recruiting, training and sustaining sleeper operations over years requires significant amounts of money. Since it is becoming more difficult for terrorists to raise funds from charities, they have resorted to money laundering. Terrorists are now working with drug traffickers and criminals to make and launder the proceeds of crime like fraud, prostitution, intellectual property theft, smuggling - this is now routine for them. Terrorists use low value but high volume fraud activity to fund their operations. Paramilitary groups in Northern Ireland are using legitimate businesses such as hotels, pubs and taxi operators to launder money and fund political activities. Even beyond Ireland, terrorists are buying out/controlling front-end businesses especially cash-
intensive businesses including in some cases money services businesses to move monies. Bulk cash smuggling and placement through cash-intensive businesses is one typology. They are now also moving monies through the new online payment systems. They also use trade linked schemes to launder monies. Nonetheless, the older systems have not given way. Terrorists also continue to move monies through MSBs/Hawalas, and through international ATM transactions. Charities also continue to be used in countries where controls are not so stringent.
Suspicious activity
Operation Green Quest was the US multi-agency task force set up in October 2001 to combat terrorist financing and had developed a checklist of suspicious activities. The following patterns of activity indicate collection and movement of funds that could be associated with terrorist financing:
Account transactions that are inconsistent with past deposits or withdrawals such as cash, cheques, wire transfers, etc.
Transactions involving a high volume of incoming or outgoing wire transfers, with no logical or apparent purpose that come from, go to, or transit through locations of concern, that is sanctioned countries, non-cooperative nations and sympathizer nations.
Unexplainable clearing or negotiation of third party cheques and their deposits in foreign bank accounts.
Structuring at multiple branches or the same branch with multiple activities.
Corporate layering, transfers between bank accounts of related entities or charities for no apparent reasons.
Wire transfers by charitable organisations to companies located in countries known to be bank or tax havens.
Lack of apparent fund raising activity, for example a lack of small cheques or typical donations associated with charitable bank deposits.
Using multiple accounts to collect funds that are then transferred to the same foreign beneficiaries
Transactions with no logical economic purpose, that is, no link between the activity of the organization and other parties involved in the transaction.
Overlapping corporate officers, bank signatories, or other identifiable similarities associated with addresses, references and financial activities.
Cash debiting schemes in which deposits in the US correlate directly with ATM withdrawals in countries of concern. Reverse transactions of this nature are also suspicious.
Issuing cheques, money orders or other financial instruments, often numbered sequentially, to the same person or business, or to a person or business whose name is spelled similarly.
It would be difficult to determine by the activity alone whether the particular act was related to terrorism or to organized crime. For this reason, these activities must be examined in context with other factors in order to determine a terrorist financing connection. Simple transactions can be found to be suspect and money laundering derived from terrorism will typically involve instances in which simple operations had been performed (retail foreign exchange operations, international transfer of funds) revealing links with other countries including FATF blacklisted countries. Some of the customers may have police records, particularly for trafficking in narcotics and weapons and may be linked with foreign terrorist groups. The funds may have moved through a state sponsor of terrorism or a country where there is a terrorism problem. A link with a Politically Exposed Person (PEP) may ultimately link up to a terrorist financing transaction. A charity may be a link in the transaction. Accounts (especially student) that only receive periodic deposits withdrawn via ATM over two months and are dormant at other periods could indicate that they are becoming active to prepare for an attack.
