informal funds transfer systems building financial market integrity in afghanistan: anti-money...
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Informal Funds Transfer Systems
Building Financial Market Integrity in Afghanistan: Anti-Money LaunderingAML Regulation and Compliance Requirements, April 17, 2006
Emiko TodorokiThe World Bank
Informal Funds Transfer Systems
Informal Value Transfer System (IVTS)
Informal Funds Transfer System (IFTS)
Alternative Remittance System (ARS)
How the System works
Source: Nikos Passas“Informal Value Transfer Systems, Terrorism and Money Laundering”, January 2005
IFTS/ARS around the World
Usually names vary based on geographical locations and ethnic group. They also might have small differences from each other:
Hawala (it 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
Fei ch'ien (flying money) - Chinese Phoe kuan - Thailand Hui k'uan (to remit sums of money) - Mandarin Chinese Ch'iao hui (overseas remittance) - Mandarin Chinese Nging sing kek (money letter shop) - Tae Chew and Cantonese
speaking groups Chop shop - foreigners use this term for one of the Chinese methods Chiti banking – (refers to the "chit" used as receipt or proof of claim in
transactions introduced by the British in China;short for "chitty", a word borrowed from the Hindi "chitthi", signifying a mark).
Hui or hui kuan (association) - Vietnamese living in Australia Door to door, padala – Philippines Black market currency exchange – South America, Nigeria, Iran Stash house (for casa de cambio) - South American systems
Source: Nikos PassasInformal Value Transfer Systems, Terrorism and Money Laundering, January 2005
Informal Funds Transfer Systems
Common Characteristics:
A traditional system (dates back to 5,000-6,000 BC?)
Generally based on trust and strong family ethnic or business relationships
Utilized by a variety of individuals, businesses, and even governments to remit funds domestically and abroad
Complement weak and/or unstable (formal) banking system and access to finance
Efficient, reliable and cheaper than formal financial system
Parallel to formal banking system (occasionally interconnection)
Hawala System in Afghanistan
Cost Reliance Speed Scope Transaction Volume Documentation
US$200 million US$200 million
Fast, reliant and widely used system
Potential for Abuse
Lack of Paper Trail Weak or no consistent record keeping Where Records are maintained they are rarely accessible to third
parties Usually, no audit or financial reporting requirements Anonymity of transactions (sender/receiver) Account reconciliation conducted between “providers” to avoid
paying taxes Lack of transparency and accountability Absence of regulatory oversight. Parallel to formal banking system (occasionally interconnection)
Convenient for criminals who like to exploit the system
Potential for Abuse
Source: Samuel Maimbo, “ The Money Exchange Dealers of Kabul”, June 2003
In addition, Macroeconomic and Financial risks:
Monetary policy Exchange rate policy Fiscal policy
Other Risks of the Non-Regulated Sector
International Standards
Financial Action Task Force (FATF) R23 and SR VI: License or Registration EXTENDED AML/CFT requirements to
alternative remittance systems (R. 4-11, 13-15, 21-23, and SR VII)
Monitoring mechanism Appropriate sanctions
Lessons Learned
Need for awareness raising It is also helpful in order to identify providers that have failed to
identify themselves
Need for flexible, effective, and proportional regulations Two aspects to be effective:
Consider skills, capacity, and resources of supervisors Not to impose too much of an administrative and cost burden on remittance
provider Regulations will need to be incentive-compatible, and their design
will require engagement with the private sector
Participation and consensus building with the industry are essential
Regulators could seek out informal remittance associations or recognized leadership as potential partners in improving transparency and accountability in the industry
Requirements Clear and simple requirements, regardless of the
type of regime adopted (Registration or Licensing) Application process Annual renew or review Need for background checks Onsite inspections: one way to ensure compliance
Government guidelines are very helpful (ML/TF trends and typologies)
Regulation is not a panacea. Need to address demand side of the system.
Lessons Learned
Lessons Learned Appropriate documentation to identify customers
must be a strict regulatory requirement Need for flexibility on documents accepted for
identification If transaction requested by fax, telephone only
after business relationship has been established Full CDD done in a risk sensitive basis
Record keeping is essential Some countries have devised simple formats or
provided software Providers better able to determine if a transaction
is extraordinary or suspicious Sanctions must be enforced
Red Flags
Some red flags in ongoing monitoring to detect suspicious transactions:
Regular high levels of cash deposits which do not match with client’s profile
Cash deposited at banks located at distance from the suspected ARS business premises
Regular high-volume international transfers to third party accounts in countries which are not destination countries at the end of known or usual remittance corridors
Cash volumes and international remittances in excess of average income of migrant accountholders and/or in excess demand for migrant remittances in the areas
Structuring of deposits to avoid reporting thresholds or simply in an attempt not to draw attention
Source: Money Laundering & Terrorist Financing Typologies 2004-2005, FATF
Red Flags
Some red flags for operators to detect suspicious transactions:
Remittance in excess of norm for the customer’s economic background without logical business reasons
Escalating levels of remittance for an individual customer above what was to be expected from original KYC assessments
Personal remittances sent to destinations that do not have an apparent family or business link
Remittances made outside migrant remittance corridors Reluctance of customer to give an explanation for remittance Personal funds sent at a time not associated with salary
payments Requests for a large transfer but settling for smaller amount Heavy contamination of bank notes with heroin or cocaine
Source: Money Laundering & Terrorist Financing Typologies 2004-2005, FATF
