€¢Ch'iao hui (overseas remittance) - Mandarin Chinese •Chiti banking –(refers to the "chit"...
Transcript of €¢Ch'iao hui (overseas remittance) - Mandarin Chinese •Chiti banking –(refers to the "chit"...
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Informal Value Transfer Systems (IVTS)
by R Suresha
email: [email protected] 19th Sep 2011
Agenda
© 2011 Oracle Corporation – Proprietary and Confidential 3
• Overview of Informal Value Transfer
Systems
• Informal Value Transfer Systems and
AML/CFT regulations
• Depth of this problem
• Regulatory framework to address the
Informal Value Transfer System
• Measures to deal with Informal Value
Transfer Systems
© 2011 Oracle Corporation – Proprietary and Confidential 4
Overview of Informal Value Transfer Systems
Informal Value Transfer Systems (IVTS)
• IVTS was coined to de-mystify and
describe more accurately what used to be
called “underground banking” or
“alternative remittance systems”.
• “Any system or network of people
facilitating, on a full-time or part-time basis,
the transfer of value domestically or
internationally outside the conventional,
regulated financial institutional systems”
(Passas, 1999)
Types of IVTS…
• Hawala (means “transfer" in Arabic and “reference” in Hindu) – India,
United Arab Emirates (UAE), and the Middle East
• Hundi (akin to a bill of exchange or promissory note; it comes from a
Sanskrit root meaning "to collect") - Pakistan, Bangladesh
• Invoice manipulation schemes
• Trade diversion schemes
• In-kind fund transfers (India and elsewhere)
• Courier services and physical transfer methods
• Stash house (for casa de cambio) - South American systems
• Chop shop - foreigners use this term for one of the Chinese methods
• Door to door, padala – Philippines
…Types of IVTS
• Stash house (for casa de cambio) - South American systems
• Black market peso exchange networks
• Fei ch'ien (flying money) – Chinese
• Phoe kuan – Thailand
• Black market peso exchange networks
• Ch'iao hui (overseas remittance) - Mandarin Chinese
• Chiti banking – (refers to the "chit" used as receipt or proof of claim in
transactions introduced by the British in China)
• Black market currency exchange – South America, Nigeria, Iran
IVTS Mechanisms
Hawala Network
• Originated in South Asia
• Born before the spread of Western banking in
the 19th and 20th centuries
• Hawala networks have emerged as a cheap
and convenient means for migrant workers to
remit their savings to their kinsfolk back home
– Small amount remits are prohibitively expensive
in formal banking system
• Over time, IVTS have become steadily more
sophisticated, aided by advancements in
communication technology, allowing for larger-
scale value transfers with speed, accuracy,
and with high levels of reliability
• Estimated value of hawala transactions in
India range between USD 15 billion to USD 20
billion
Hawala – Operational Details
IVTS Cash Pools
Reasons for Existence…
• High costs of banking or official channels
• Repatriation of immigrant income
• Lack of access to formal banking system (high costs, lack
of experience with institutions outside cultural traditions)
• Lack of confidence in the conventional banks
• Delays, in official sector, due to holidays
• Lack of efficient banking infrastructure
• Rigid/strict foreign exchange regulations
• Circumvent restrictive exchange controls and regulations
• To avoid currency reporting controls
• Quick service & lower fees
• Wide divergence between official and black market
exchange rates (i.e. Favorable exchange rate)
…Reasons for Existence
• Cultural, political, social reasons
• Criminal purposes such as money laundering, terrorism financing,
tax evasion, accepted by Hawala networks
• Avoid taxes
• High degree of anonymity
• Leaves no paper trail which impedes law enforcement investigations
• Is not subject to external auditing, control, or supervision by
regulatory authorities
Abuse of IVTS
Destabilization of Financial Markets
• Illegal funds are an unstable deposit base
Undermining legitimate private sector
• Local businesses cannot compete with companies that offer services below market rates because their primary income comes from money laundering
Economic Distortion
• Money Laundering occurs predominantly in construction/real estate. Decision to move out, can cause the sectors to collapse
Loss of Revenue
• Money launderers decrease government tax revenues
Loss of Control of Economic Policy
• Money laundering can distort currency and interest rates
© 2011 Oracle Corporation – Proprietary and Confidential 15
• Informal Value Transfer Systems and AML/CFT
regulations
Net Result of Global Regulations…
• In principle, the new regulations have not banned Hawala networks
• Demand conformity to AML/CFT, KYC and other financial services
industry regulations
• Initially, initiatives appeared to have desired effect
– Migrants switched to more expensive services of formally constituted banks
to send money home
– During 2001 to 2004, remittances through formal channels increased at the
expense of informal channels
• Post 2004, globally formal channel inflow slackened and no evidence
suggests the end of informal networks
• World Bank estimates suggest, the annual global flow of migrant
remittances through formal channels in 2005 exceeded $233 billion
worldwide, of which developing countries received $167 billion
… Net Result of Global Regulations
• Unrecorded flows moving through informal
channels push the total far higher (conservatively
estimated to amount to at least 50% percent of
recorded flows)
• Wherever possible Hawala dealers have adjusted
their practices to comply with AML/CFT regulations
– In doing so IVTS operators have taken every
advantage of local variations in interpretation of AML
requirements
• IVTS is still thriving across the globe
Non-Compliance of IVTS
Record Keeping
• Customer records are maintained by individual operators
in the IVTS network. Hence, the system is unaware of the
origin and destination of the funds
• Records are destroyed on completion of the transaction
• Missing Audit Trail
• No check with published lists of criminals and terrorists (
OFAC List etc.,)
Absence of KYC norms
• Customers identity is never established nor verified
• Makes it easy to launder money while staying anonymous
Few country specific cases - Regulations in
IndiaIndian Law
• In India, under the Foreign Contributions Regulation Act, 1976, Hawala operators
were not required to be registered, and thus weren‟t regulated
• In 2003, India enacted the Prevention of Money Laundering Act (PMLA), which
requires Hawala brokers to maintain detailed records about their transactions
• Due to lax enforcement, Hawala network remains unregulated and continues to
operate as before
Madhu Koda Case
• Mr. Madhu Koda laundered money through Hawala channels. Income Tax
Department uncovered illegal transactions worth USD 500 million
• Banks involved never raised a red flag when money to the tune of USD 160 million
was transferred to foreign accounts
• Provisions in Indian law require keeping records of the transactions and identify the
senders/recipients & registration of Hawala operators.
• Due to the nature of Hawala transactions, it is near impossible to keep proper
records or identify senders/recipients of such transactions.
• The case has laid bare the ineffectiveness of current AML regulations
Case of India …………………….contd
‘Hawala King’ Naresh Jain Case
– Alleged head of Global Hawala racket of over Rs 5,000 crore (Approx USD 1 Bil.)
– Described by Directorate officials as „the world‟s undisputed Hawala king‟
– Been on the watchlist of security agencies in the United States and the United
Kingdom for his alleged links with the underworld and the Al Qaeda
– Wanted in Italy for running a drug racket
– Allegedly ran his hawala network from Dubai for 20 years
– Investments in Real Estate
• Invested around Rs 100 crore ( approx USD 20 mil) in properties around Delhi
– Arrested in Dec 2009
Trade Invoicing
– Exporters under invoice goods, and receive the remaining balance through Hawala
– Beneficial for exporters since, money received through Hawala remains non-taxed
– Government loses out on tax revenue
– Similarly over invoicing by importers, allows them to bring in black money stashed
abroad
© 2011 Oracle Corporation – Proprietary and Confidential 21
Depth of this problem
Estimated Private Remittances(1981-2000)
Source: IMF, International Financial Statistics and Balance of Payments Statistics Yearbook.
© 2011 Oracle Corporation – Proprietary and Confidential 23
Regulatory framework for the Informal fund
transfer system
Overview of Present AML Regulations
• Provide more comprehensive details regarding customer due diligence
• Require firms to vary customer due diligence and monitoring according
to the risk of money laundering or terrorist financing
• Require firms to take enhanced customer due diligence measures in
higher risk situations, while allowing firms to take reduced identification
measures for specific situations with a lower risk of money laundering
• Allow firms to rely on certain other firms for undertaking customer
identification
Some Unorthodox Approaches…
South Africa
• Provides an example of how a country‟s AML/CFT regulations can be
modified to attend to the needs of low-income clients.
• Authorities have adopted a flexible approach to client identification and
verification
• Introduced a compliance exemption that relaxes requirements for a
category of clients known as mass banking clients (small balances and
small size transactions)
• Exemption applies to accounts that have maximum balance at any time of
around US$4,000, that limits the size of deposits or withdrawals.
• International fund transfers aren‟t allowed
Uganda, Tanzania, and Kenya
• Accept letters from the local authority in rural villages as identification for
their clients who do not have an official identity card
…Some Unorthodox Approaches
Microfinance
• Microfinance institutions should not compromise their core objective
of providing financial services to a broad range of poor people as a
result of compliance with AML-CFT regulations
• Use of credit can be monitored through the group lending system
whereby clients disclose the use of their loans to other group
members
• Part of the loan methodology could be weekly visits to clients by loan
officers, who already knew their clients well (as done in Mexico)
Implications
• Anti money laundering strategies targeting the Hawala system are
based upon suspicious transaction reporting and record keeping
for Hawala transactions
– Simplest strategy is to help the developing countries to expand their
banking networks and build up a trustworthy relationship with people
• AML/CFT regulations can have serious implications for financial
institutions that serve low-income clients
– Additional costs of compliance and tighter restrictions may have the
unintended consequence of driving low-income clients from the formal
financial sector
– Costs associated with regulations tend to be greater in countries
where there is generally a culture of poor compliance
© 2011 Oracle Corporation – Proprietary and Confidential 28
Measures to deal with the Informal
fund transfer systems
Measures…
Allow Hawala Networks to operate over ground, albeit they comply with
• AML Regulations
• KYC Norms
• Maintain Audit Trail
• Maintain records for a specified period
In countries where IVTS exist
• Hawala dealers should be registered
• Dealers should maintain adequate records in line with FATF recommendations
• Efforts should be made to improve the level of transparency in these systems
Measures…
Regulatory response should address weaknesses in the formal sector
• Formal and informal financial systems tend to benefit from each other‟s deficiencies
Regulations alone will not ensure compliance
• Regulators need to posses appropriate supervisory capacity to enforce regulationson IVTS.
• Compliance will be weak when major restrictions exist on transactions through theformal financial system
International standards should not be applied blindly
• Pay due regards to specific domestic circumstances and legal systems
…Measures
Policy makers should acknowledge the practical reasons behind the existence of IVTS
• As long monetary incentives exist, IVTS will remain in operation
• Addressing informal systems requires well-conceived economic policies and financial reforms, effective regulatory and supervisory framework
Leverage technology
• Informal movement of funds can be tracked along the transit routes – like airports, Railway and Bus routes and rigorous check on road travel.
• Central banks can closely monitor cash flow in various cities and regions to look at clues on increased flow of funds.
• De regulate the economy – a classic example that happened in India was freeing of the markets and associated exchange controls.
• Evolve cheaper and efficient funds transfer mechanism which would automatically discourage Informal fund transfer.
Suresha Iyer CAMSDirector, Oracle Financial Services Crime and Compliance Management - Professional [email protected]
Thank you