U06-EcoFin-InformalValueTransferSystems

The Institute for Domestic and International Affairs

Committee on Economic and Financial

Informal Value Transfer Systems

Rutgers Model United Nations

16-19 November 2006

Director: Kay Chen

© 2006 Institute for Domestic & International Affairs, Inc. (IDIA)

This document is solely for use in preparation for Rutgers Model

United Nations 2006. Use for other purposes is not permitted without the express written consent of IDIA. For more

information, please write us at [email protected]

Introduction _________________________________________________________________ 1

Background _________________________________________________________________ 2 How Informal Value Transfer Systems Operate ________________________________________ 4 Problems Posed by IVTS ___________________________________________________________ 6

Current Status _______________________________________________________________ 9 Attempts to Regulate IVTS ________________________________________________________ 10 Alternatives to Regulating IVTS ____________________________________________________ 10 International Conferences on Hawala _______________________________________________ 12

Bloc Positions_______________________________________________________________ 13 Developed states with Formal Economies ____________________________________________ 13 Developing States with Large IVT Systems ___________________________________________ 13 Underdeveloped States with IVTS __________________________________________________ 14 Business Interests ________________________________________________________________ 15

Summary___________________________________________________________________ 16

Discussion Questions _________________________________________________________ 17

Works Consulted ____________________________________________________________ 18

Rutgers Model United Nations 2006 1

Introduction Informal value transfer systems (IVTS) are systems used to transfer money across

state borders while avoiding the use of formal financial institutions, providing anonymity

and the ability to avoid government regulation or fees. As a result, the use of IVTS is

very attractive for both those using it for legitimate reasons and those using it for illegal

purposes. Those who use IVTS legitimately do so because it is cheaper than using formal

financial system, as banks typically charge

fees for overseas transfers. One group that

makes use of this process is immigrant

workers seeking to send money back to their

families in their state of origin. Known as

remittances, these funds are transferred without incurring charges or regulatory fees.

Informal value transfer systems are also used in some countries because there is a lack of

reliable formal financial institutions, leaving IVTS as the only option for transferring

money. Despite these legitimate uses, these systems are also abused due to the

anonymity and lack of government regulations that they provide. Sometimes blamed for

terror funding, these systems also serve smuggling and money laundering efforts.

IVTS has been in existence throughout the international community throughout

the modern era. Undermining local economies, people and businesses choose to use

informal means and the government loses regulatory control over the flow of money. If

IVTS were regulated, it would be less susceptible to criminal use; however it would also

result in the diminishment of some legitimate uses. When developing a policy that will

address informal value transfer systems, the United Nations and its Member States will

need to take care that they do not ruin the legitimate uses of the systems for the sake of

limiting illicit uses. This can be done in a number of ways. First, the United Nations and

individual governments could promote the use of formal systems by making them more

appealing towards those who use informal systems in the form of reducing taxation,

making registration for businesses cheaper, or even just providing incentives for those to

Remittance: Money sent from one place or person to another. A remittance economy is one dependent on such money transfers, often from a family member abroad to relatives back home. Source: research.amnh.org/biodiversity/symposia/ archives/seascapes/glossary.html


make the transference from informal to formal systems. Those using IVTS for legitimate

purposes would be more likely to use formal systems, leaving only those looking to avoid

regulations using IVTS. The other option for regulating IVTS is to practice direct law

enforcement, however this can only be effective if practiced with a clear understanding

regarding the definition of illegal uses of IVTS.

IVTS have been in existence throughout history including the hawala system in

the Middle-East or the fei

ch’ien system in Asia. As

a result, IVTS systems in

certain countries have

simply become a part of

the culture, and therefore

unnecessary for regulation.

Other countries such as

the United States, which

views IVTS as a security

threat, believe that regulating these systems would be useful in preventing international

crime. In the end, handling the issue of IVTS will require international cooperation

through the United Nations. Individual countries can take steps to eliminate IVTS within

their own countries, but unless other countries implement similar measures, IVTS will

always exist. Before any universal efforts can be made, the legal uses of this form of

monetary transfer must be separated from the illicit purposes, so as to ensure that

efficient financial transfers can remain a proper part of functioning economies.

Background Before understanding the informal value transfer system, it is necessary to

understand formal value transfer systems, which are any financial institution that falls

under government regulation, and through which transactions are carefully recorded,

Hawala: an underground banking system based on trust whereby money can be made available internationally without actually moving it or leaving a record of the transaction; Source: wordnet.princeton.edu/perl/webwn Fei Ch’ien: The Chinese underground banking system has many names. One is fei chien, or "flying money"--a bit of a misnomer as the money never leaves the place where it is paid. But it can still be collected almost anywhere in the world with an ethnic-Chinese community. So efficient is the system that police in Southeast Asia believe it transfers more money in and out of China than the official banking system. Now, for the first time, this network has reached the Russian Far East. Source: http://www.asiapacificms.com/articles/russia_chinese_crime/


subject to audit, and conditional on a fee for use.1 Traditional banks are formal in nature,

as there are specific accounting rules regarding the manner in which funds are transferred,

and state regulations are followed to ensure that nothing untoward is happening. Other

forms of formal transfer systems relate to banks in some fashion, and are subject to

regulation. The internet has offered to solutions in this field, such as PayPal, Google

Wallet, and other such systems. Despite their seemingly informal nature, there are

actually strict regulations regarding the manner in which payments are completed.

At times, formal institutions fail to meet the needs of clients, especially the needs

of workers seeking to send money back to their home country. In some cases the fees

that formal institutions charge could be too high, causing a significant proportion of the

remittance to be lost to fees, instead of being sent home. In Latin America countries,

formal institutions for money transfer are not banks; instead they are private companies

such as Western Union and MoneyGram. In Latin America, countries with the highest

fee percentage for transferring money are those that have no “regulations supporting

competition in providing low-cost transfers and no innovative financial technologies.” 2

Three Latin American countries that fit this description are Cuba, Nicaragua, and Haiti.3

The second problem with formal institutions is that at times it is impossible for money to

reach its final destination. In less developed countries, financial institutions tend to

center around major cities, and not in rural areas. Recipient households are required to

travel into commercial cities to receive their money, incurring additional costs, and

sometimes being out of reach entirely.4 When the formal sector fails to meet the needs of

clients, they are forced to find other means of transferring money, most notably informal

value transfer systems.

1 Thomas Timberg. “Informal Remittance Systems and Afghanistan.” Nathan Associates. http://www.nathaninc.com/nathan/files/CCPAGECONTENT/DOCFILENAME/0000502422/Informal%20Remittance%20Systems%20and%20Afghanistan.pdf (accessed February 5, 2006). 2 Ibid. 3 Manuel Orozco. “Remittances, the Rural Sector, and Policy Options in Latin America.” US Agency for International Development. http://www.basis.wisc.edu/live/rfc/cs_15a.pdf (accessed February 28. 2006). 4 Ibid.


Informal value transfer systems are a legitimate way to transfer money. Research

on remittance flows in Asian countries has shown that money sent using informal means

represent a significant proportion of these transfers. Studies in Mexico indicate that

informal transfers account for between 28 and 46 per cent of total remittances. In fact, it

is estimated that 35 per cent of USD $150 billion in global transfers to developing

countries were sent through IVTS.5 Pakistani officials estimate that more than USD $5

billion is sent through IVTS networks every year to and from that country. One third of

these transactions consist of the repatriation of funds from overseas Pakistanis to their

families. Overall, it is estimated that there is USD $680 billion in the hawala system.

The vastness of IVTS makes it vital that the international community take care not to

destroy the system in an effort to prevent illicit uses of this transfer method. If officials

forced individuals to use established formal value transfer systems, the actual amount of

money flowing into the state of origin would be significantly decreased due to the fees

associated global money transfer.

Workers remittance are responsible for much of the informal value transfer system,

therefore the countries with the

highest workers remittances are

also the countries with the

principal informal value transfer

systems. Below are two charts,

one showing workers remittance

systems broken down by regions,

and the second illustrating the

largest workers remittance

systems by country.

How Informal Value Transfer Systems Operate

5 Michael Freedman, “The Invisible Bankers.” Forbes, Vol. 176, No. 8 (2005). EBSCO, http://www.ebsco.com

Proportions of Remittances by Region

Source: Manuel Orozco. “Remittances, the Rural Sector, and Policy Options in Latin America.” US Agency for International Development. http://www.basis.wisc.edu/live/rfc/cs_15a.pdf)


How the Hawala System Works

Informal value transfer systems are defined as any “network or mechanism that

can be used to transfer funds or value from place to place either without leaving a formal

paper-trail of the entire transaction or

without going through regulated

financial institutions at all.” 6 IVTS

can operate in a number of ways. The

most common IVTS is the hawala or

‘Hundi’ system based in the Middle

East, which typically involves four

parties. The person wishing to send

money home contacts someone known

as a hawaladar and initiates the

payment. The hawaladar contacts a

partner in the country where the money

will be sent, who in turn gives the

money to a family member of the

person initiating the transfer. As a

result of this process, less of the money

will be subject to fees, meaning that

family members will receive more

money. In some cases, the fee charged through the hawala system can be less than one

per cent that which would be charged in the process of formal money transfer.7 Perhaps

most importantly, is that this system allows for ‘money transfer without money

movement.’ No money actually crosses state borders, and therefore little regulation is

necessary. The only difference between the hawala and a formal banking system is that 6 “Hawala and Other Informal Value Transfer Systems,” United States Department of State International Information Programs. http://usinfo.state.gov/eap/Archive_Index/Hawala_and_Other_Informal_Value_Transfer_Systems_How_to_Regulate_Them.html (accessed February 5, 2006). 7 Patrick Jost. “The Hawala alternative remittance system and its role in money laundering.” Interpol, http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp (accessed February 28, 2006).


regulation ensures the legitimacy of a bank, whereas the hawala relies upon faith and

moral rectitude.

There are a number of other informal value transfer systems. These include the

Black Market Peso Exchange in Latin America and fei ch’ien in Asia, which operate in a

style similar to that of the hawala system. There are also physical means of transferring

money, which would consist simply of smuggling currency across state borders, but these

raise obvious legal concerns. Invoice manipulation schemes are also practices utilized in

informal value transfer systems, as parties to a transaction simply over- or underpay

invoices as a means of transferring money.8 When informal value transfer systems were

first created, it was with the intention of serving legitimate purposes. However due to the

nature of these transfers, they are vulnerable to abuse for illegal purposes due to the

anonymity that they provide.

Problems Posed by IVTS IVTS seeks to avoid government regulations and to circumvent established

financial institutions. Subsequently, those who operate IVTS do not necessarily perform

regular background checks, keep customer or transaction records, or comply with laws

requiring the report of suspicious transactions. 9 Those who use its services are therefore

ensured anonymity, thereby making IVTS

an attractive method by which to conduct

illegal exchanges. IVTS provides a safe

way for criminals to break the audit trail of

their funds and hide the origin or destination of their money. 10 Criminals abuse the

anonymity of IVTS in order to pay for illegal imports and move money generated from

“criminal enterprises such as extortion, kidnapping, drug trafficking, smuggling of gold

8 Dina Siegel, Global Organized Crime Trends and Developments, (Boston: Kluwer Academic Publishers, 2003), 153. 9 Leonides Buencamino. “Informal Money Transfer Systems: Opportunities and Challenges for Development Finance,” United Nations: Economic & Social Affairs, http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf (accessed February 5, 2006). 10 Ibid.

Audit Trail: A step-by-step record by which financial data can be traced to its source. Source: www.unisys.com/common/investors/glossary/


and diamonds, human trafficking, human organ sales, theft or fraud.” 11 The use of IVTS

also serves to side-step customs and tax regulations in various countries.

One of the most common uses of IVTS is to assist in narcotics trafficking. In

1985, British courts convicted a Mister Choraria of being “concerned in the fraudulent

evasion of the prohibition of importation of … heroin.” He was described as the “banker

who knowingly enabled payment for heroin imported into [the] country.”12 Choraria

operated two businesses - an import/export business, and a remittance business. With his

two businesses, he was able to broker the transfer of funds for heroin smuggling through

the hawala syste,. In fact, during the trial, Choraria’s nephew was required to explain the

system of hawala to Choraria’s bankers in order for them to grasp a full understanding of

how he was transferring the funds, showing clearly how hawala can be used for illegal

purposes. Another case of when informal value transfer systems were used for illegal

purposes was with the investigation of an India-based hashish trafficking organization.

The hashish was smuggled out of India into Germany, and hawala was used to repatriate

the proceeds of the hashish sale in Germany back to the Indian traffickers. 13

Not only do informal value transfer systems serve the needs of criminals partaking

in black market trading, but they also assist terrorists in transferring funds among groups.

For the same reasons that they appeal to criminals, they also appeal to terrorists.

Following the attacks of 11 September 2001, evidence surfaced that al Qaeda had moved

most of its USD $30 million budget in

2001 through Middle-Eastern hawala

systems. Kevin Dellicolli, director of

financial investigations at the U.S.

Immigration and Customs Enforcement remarked, “When you are moving hundreds of

11 “Hawala and Other Informal Value Transfer Systems,” United States Department of State International Information Programs. http://usinfo.state.gov/eap/Archive_Index/Hawala_and_Other_Informal_Value_Transfer_Systems_How_to_Regulate_Them.html (accessed February 5, 2006). 12 Patrick Jost. “The Hawala alternative remittance system and its role in money laundering.” Interpol, http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp (accessed February 28, 2006). 13 Ibid.

Al Qaeda: International terrorist network that claimed responsibility for the September 11 attacks; "Al Qaeda means "the base" Source: school.newsweek.com/misc/pronunciation.php


millions of dollars to Pakistan and potential Islamic fundamentalist groups out there,

there’s an increasing chance it is being used for terror financing.”14 A major challenge in

combating terrorism is establishing effective financial controls. Without means to

transfer funds, terrorist operations are choked off, as IVTS allows for terrorists to transfer

funds easily and without detection. With the stricter regulation of IVTS, terrorists would

be forced to find an alternative for transferring funds. In this sense, IVTS is an

international threat. If not regulated effectively, terrorists could continue transferring

funds for their activities through informal channels.

The final way by which IVTS is used illegally is for evading custom and tax rules.

Money transfers done through informal value transfer systems are not subject to

government regulation, thus there is no need to declare the money being transferred. The

money is also not subject to taxation and other rules regarding the moving of currency

between borders. While the hawala transfer itself might not be illegal, it does provide for

the potential for laws to be broken. Hawaladars can and have been charged with tax

fraud, customs violations, and making false statements. 15 The problem is that no matter

what intentions one might have for using IVTS, the system is informal and circumvents

government regulations. Informal value transfers systems have thereby become a

representation of the breakdown of the formal sector.

The economic implications of IVTS are substantial. IVTS has an impact on the

monetary accounts of both the receiving and sending country. As the money is not

moved through formal means, the funds cannot be counted in important economic

measurements such as gross domestic product or national wealth, therefore distorting the

economic progress of states in which the process takes place. Perhaps most detrimentally

is that money transferred through IVTS are not subject to taxes of any sort. As such

14 Michael Freedman, “The Invisible Bankers.” Forbes, Vol. 176, No. 8 (2005). EBSCO, http://www.ebsco.com 15 Patrick Jost. “The Hawala alternative remittance system and its role in money laundering.” Interpol, http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/Hawala/default.asp (accessed February 28, 2006).


governments throughout the world lose important revenues, thereby having a negative

affect on the economy as a whole.16

Current Status It is necessary for the international community to prevent the abuse of IVTS while

preserving the legitimate uses. One option for preventing the abuse of IVTS is by

regulating the systems, which would serve to deter those using IVTS illegally, while

continuing to allow those who use IVTS legitimately to do so. Any attempts at regulation

must consider the different political and economic circumstances of individual countries

that make the creation of a single set of laws for the entire world implausible. 17

Additionally, because some countries have already made all IVTS illegal, any attempts to

create one standard of regulation would be at odds with existing laws and regulations.

While there is much debate over how exactly to regulate IVTS, there is consensus that

any attempts to over-regulate the systems would merely cause the informal systems to

push both legitimate and illegal transactions further underground. Such an outcome

would make the illegal channels much harder to separate from the legal ones. 18 By

pushing IVTS further underground, officials also risk IVTS becoming even more

secretive than it is presently. 19 There is also the need to avoid unintended

consequences.20 Many low-income immigrants have come to rely on IVTS since they

have no other means of sending money back to their country of origin. By criminalizing

IVTS, these immigrants would be deprived of their only option. Finally, when regulating

this system, it is important that no single form of exchange is targeted while other types

16 Kristen Parker, “Hawala and Terrorist Financing.” http://faculty.concord.edu/chrisz/M-AIB-05/PDFs/11HawalaandTerroristFin.pdf (accessed February 5, 2006). 17 Mohammed El-Qorchi. “Hawala.” IMF. http://www.imf.org/external/pubs/ft/fandd/2002/12/elqorchi.htm (accessed February 5, 2006). 18 Ibid. 19 Dina Siegel, Global Organized Crime Trends and Developments, (Boston: Kluwer Academic Publishers, 2003), 153. 20 Samuel Maimbo. “The Regulation and Supervision of Informal Remittance Systems.” http://www.inafi-la.org/espanol/docu/RegulationandSupervisionInformalRemittanceSystems.pdf (accessed February 5, 2006).


are permitted – for instance Black Market Peso Exchange is outlawed while hawala is

permitted.

Attempts to Regulate IVTS One country that is currently working against IVTS and has developed very strict

rules and regulations regarding IVTS is the United States. Following the terrorist attacks

of 11 September 2001, the United States passed the USA PATRIOT Act, which

expanded the definition of financial institutions to include IVTS operators. As a result,

all IVTS operators now fall subject to rules and regulations with which regular financial

institutions must comply. It became illegal in the United States to operate a money

transmitting business without a license. Any owner of a business that transfers money

without a proper license is subject to civil and criminal punishment in the form of fines

and imprisonment for up to five years. The same regulations and penalties apply even if

the owner did not know that the operation required licensing.21

The United States also issued reports to formal banking institutions listing a set of

activities that could be defined as suspicious activities linked to informal value transfer

systems. Behaviors on this list include “sudden and/or unexplained deposits of cash for a

business that previously had few or minimal cash deposits” and “periodic aggregate wire

transfers sent to IVTS hub regions (e.g., UAE; London; New York; Hong Kong).”22

These two activities alone are very broad, and could be explained in a number of ways

not relating to IVTS. As a result, United States regulation might end up causing

unintended consequences. This system works well in the Western world, but might not

be as effective for poorer countries. Least developed countries might not have the means

necessary to actively enforce laws passed against informal value transfer systems.

Alternatives to Regulating IVTS A different approach to preventing abuse of IVTS is using a “demand-side” policy

that creates incentives for those who use informal systems for legal purposes, to transition

21 “Informal Value Transfer Systems,” FinCEN Advisory, Issue 33 (2003), 1. 22 Ibid.


to the use of formal systems, making it easier to isolate those who use IVTS for illegal

purposes and to begin prosecuting them. In Bangladesh, India, Pakistan, Sri Lanka and

Vietnam, governments have introduced foreign currency accounts and bonds for migrant

workers to facilitate workers’ remittances. These foreign currency accounts offer a

premium exchange rate for the conversion of the original currency into local currency,

making them an attractive alternative to IVTS.23

Another alternative to preventing the use of IVTS is to fix certain macroeconomic

concerns within each country, ranging from realistic and reliable exchange rates to the

existence of dependable financial institutions. Governments in countries dealing with

IVTS need to take into account the black-market exchange rate for currency when

deciding official exchange rates. Even though informal systems will typically offer rates

lower than the official exchange rate, they will attract more business than formal systems

due to their anonymous nature. Governments also need to encourage financial

institutions to adopt certain desirable features of IVTS, including the low cost of

transferring money, efficiency, reliability, speed, outreach, and the wide range of

products offered. 24 These policies might be unreasonable for some countries to

incorporate into their systems simply because they are too expensive and would require

the cooperation of the private sector. Additionally, such policies would not begin to

show results for several years, and do not address the problem expediently. With the help

of the United Nations, however, IVTS could slowly be eliminated while developing the

financial sectors of each country.

Other than creating policies that aim to eliminate the use of IVTS, government

should also formulate restrictions that regulate formal sectors. One of the main reasons

why IVTS use is so frequent in Latin America is that the money transfer sector is

unregulated, making it easy to take advantage of consumers. In many countries, money

transfer firms are not subject to a clear set of policies, operate under their own rules and 23 Leonides Buencamino. “Informal Money Transfer Systems: Opportunities and Challenges for Development Finance,” United Nations: Economic & Social Affairs, http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf (accessed February 5, 2006). 24 Ibid.


charge excess transfer fees while using below market exchange rates.25 Money transfer

firms also tend to have a monopoly on the market. By preventing monopolies,

governments could drive down the costs of formal value transfer systems, making them

more attractive toward consumers.

International Conferences on Hawala There have been three international conferences on hawala. The United Arab

Emirates (UAE) hosted the First International Conference on hawala in May 2002. In

April 2004, the Second International Conference on hawala was held under the

leadership of both the Central Bank of the UAE and the International Monetary Fund

(IMF). And finally in April 2005, the Third International Conference on hawala was

held to analyze the results of the previous two conferences.26 As a result of the First

International Conference on hawala, 40 countries from every region of the world

recognized the “Abu Dhabi Declaration on hawala.” Countries such as the UAE,

Pakistan, and others, started taking steps to regulate hawala in their own countries for the

first time. They also began realizing that simply banning hawala is not a realistic option.

Rather than complete licensing which would be costly and burdensome, a simple

registration would be required to take away the anonymity so preferred by those abusing

the system.27 The Second International Conference on hawala resulted in a statement

that identified the challenges of implementing further frameworks on informal value

transfer systems, specifically, the workers remittance system. Participants also

reaffirmed the importance of the Abu Dhabi Declaration on hawala.

25 Manuel Orozco. “Remittances, the Rural Sector, and Policy Options in Latin America.” US Agency for International Development. http://www.basis.wisc.edu/live/rfc/cs_15a.pdf (accessed February 28. 2006). 26 “Third International Conference on Hawala.” Central Bank of the United Arab Emirates. http://www.cbuae.gov.ae/Hawala/HAWALAconferece.htm (accessed February 28, 2006). 27 Anthony Wayne. “International Dimension of Combating the Financing of Terrorism.” US House of Representatives. http://wwwa.house.gov/international_relations/108/wayn0326.htm (accessed February 28, 2005).


Bloc Positions Developed states with Formal Economies Western powers with regulated economies and a stable financial system seek to

work against IVTS. Banking systems in these states are effective, causing the importance

of IVTS to be diminished in these states. As a result, all money transmitting businesses

must be registered, and must fall under government regulation. In the United States, the

USA PATRIOT Act expanded the definition of financial institutions to include informal

value transfer system operators. 28 Any business that fails to register is considered

unlicensed and are subject to penalties ranging from civil and criminal fines to

imprisonment. By passing this law, the United States has made all forms of informal

value transfer systems subject to official government regulation.

Western powers tend to look at the negative aspects of informal value transfer

systems. They recognize that terrorists and criminals abuse these systems because it is

less transparent than their formal counterparts. As a result, they view the need to quickly

promote alternatives to IVTS and want all money transfer systems to be fully transparent

so as not to provide an anonymous shield. Western powers call for immediate and direct

action against illegal uses of IVTS and will also work with countries in order to develop

greater levels of transparency and accountability within the informal sector. 29

Developing States with Large IVT Systems Developing states such as India and Pakistan with large informal value transfer

systems recognize that the only way to effectively stop these systems is to provide

incentives for citizens to switch to formal systems. India has already been taking steps to

attract business to the formal sectors by reforming its financial institutions in order to

make it more attractive towards those who use these means. It has also begun to

28 “Informal Value Transfer Systems,” FinCEN Advisory, Issue 33 (2003), 10. 29 Anthony Wayne. “International Dimension of Combating the Financing of Terrorism.” US House of Representatives. http://wwwa.house.gov/international_relations/108/wayn0326.htm (accessed February 28, 2005).


liberalize its markets, loosening import regulations.30 Countries with formerly large

informal trade sectors and informal value transfer systems however, need to realize that

in order for this change to last, policies will have to change with time. Banks will have to

continue to be attractive and regulations will have to change with time so as not to

become restrictive as the economy evolves.

Nations with large value transfer systems recognize that it provides significant

support for their economies. As a result, they tend to not take direct action against the

systems as to prevent the destruction of its legitimate uses. They recognize that the

legitimate reasons behind using both systems far outweigh illicit purposes.

Underdeveloped States with IVTS Underdeveloped states, primarily those in the Middle East, have one of the largest

and oldest informal value transfer systems in the world, meaning that pressure from

Western states to limit these systems is unlikely. In fact, if governments were to

acquiesce, it might cause backlash amongst citizens who could interpret such actions as

caving to Western demands. Governments of underdeveloped nations view the money

flowing through informal channels as legal and legitimate and see no need to enforce

regulations to limit this flow. Additionally, they simply do not have the means to

continually monitor the informal value transfer sector.31

Underdeveloped nations with IVTS require the most help from the international

community in order to develop their own financial institutions. Such progress would aid

the transition from informal value transfer systems to formal ones. If international

regulations for IVTS were passed, it is very likely that these developing nations would

not choose to enforce them within their own countries. Underdeveloped states recognize

that money flowing into their country will eventually help their own economies and

30 Leonides Buencamino. “Informal Money Transfer Systems: Opportunities and Challenges for Development Finance,” United Nations: Economic & Social Affairs, http://www.un.org/esa/desa/papers/2002/esa02dp26.pdf (accessed February 5, 2006). 31 Robert Looney. “Following the Terrorist Informal Money Trail: The Hawala Financial Mechanism,” Center for Contemporary Conflict. http://www.ccc.nps.navy.mil/si/nov02/southAsia.pdf (accessed February 5, 2006).


would not want to take any action to prevent this flow of money. For the most part,

underdeveloped states have no alternative but to use informal value transfer systems.

Business Interests Informal value transfer systems are illegitimate businesses. However, this does

not change the fact that they are, indeed, businesses that generate profit. As a result, any

attempts to regulate or restrict informal value transfer systems would be resisted by those

owning and operating the businesses. Regulations and restrictions would only contribute

to a higher cost in operating the business. Profits would also fall, causing informal value

transfer systems to begin declining.

On the other hand, curbing the use of IVTS would greatly benefit legitimate

businesses. Direct regulation of IVTS would cause the illegal systems to shut down, and

would force users to engage in legitimate methods of money transfer, such as the use of

banks and money-wire systems. Business for these legitimate systems would increase, as

would profits. The modernization and regulation of formal systems would also be

profitable. Modernization would entice users to use legitimate means, rather than their

illegitimate counterparts. After modernization, there would be very little need to use

illegitimate systems for legitimate purposes. Regulation of the formal sector, however,

would be resisted by formal value transfer systems. Regulation of the formal sector

would force several formal value transfer systems to give up their monopoly on the

legitimate transferal of money. Realistic rates would be set, driving down profits in the

short-run. Still, once a monopoly of the formal value transfer system has been broken up

and realistic rates are introduced, the formal sector would be much more enticing.

Business, as a result, will increase in the formal sector, leading to a general profit for all

formal systems.


Summary When formulating a policy to combat informal value systems, governments need

to take into consideration if IVTS pose enough of a problem to be regulated at all. If they

decide that it is necessary to take action against IVTS, they have two options, including

eliminating IVTS for a period of time, or confronting the macroeconomic issues that

cause people to use these systems in the first place. In order to effectively confront the

problem behind IVTS, governments will need to separate the illegal uses from the

legitimate ones. IVTS have been used for legitimate purposes throughout history and

therefore eliminating such exchanges completely cannot be effective.

Governments also need to recognize the reasoning behind the use of IVTS for

legitimate purposes. While at first it may seem that users of IVTS seek to circumvent

government regulations, this is not the only reason why these systems exist. At times, it

is cheaper for parties to use informal systems due to the bureaucracy, expensive

regulations, and taxation behind official financial institutions. Additionally, those who

choose to use informal means might have no other choice. The fees associated with

formal systems might make it too expensive to send money across the globe, and even if

consumers choose to use formal means, at times, their money cannot reach the intended

destination.

In order to stop criminal abuses of IVTS, governments first need to convince those

using informal means to switch to formal means. Those who use informal value transfer

systems for valid transactions are not concerned with anonymity but are drawn to IVTS

because it is cheaper and easier. If the formal sector adopts these characteristics, the only

people left using informal means would be those who wish to maintain their anonymity,

or those who choose to abuse IVTS for illegal uses. Only after isolating this group can

governments take effective action against IVTS. If government chooses to take action

before this is accomplished, it risks criminalizing those who use IVTS for legitimate

purposes.


Discussion Questions • Is there a cost to society by regulating informal value transfer systems? If so,

what action should governments take?

• After the government takes action to promote the change from informal to formal value transfer systems, how should it pursue action against those who use the two informal systems for illegal purposes?

• What type of incentives can governments provide in order to promote the change from informal systems to formal systems? Are these incentives effective in the long-run and will they prevent the usage of informal system in the future?

• What is the UN’s role in this issue? How can it promote the use of formal value transfer systems over informal value transfer systems?

• Would it be effective for there to be one strict global policy on regulating informal value transfer system?

• What alternatives are there to directly regulating informal value transfer systems? Which countries would these alternatives appeal to?


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U06-EcoFin-InformalValueTransferSystems

Documents

use of ivts

large ivt systems

formal financial system

formal economies

domestic international

international community

international conferences

regulatory fees