Back Matter

Back Matter

Author(s):
Mohammed El Qorchi, Samuel Maimbo, and John Wilson
Published Date:
August 2003
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    Appendix I Types of Settlement for Hawala Intermediaries’ Remittances
    Table A1.1.Settlement via Reverse Hawala Transaction from Country B to Country A
    Reverse Transaction(Note: Simple exact balancing of initial transactions highly improbable because A to B remittances > B to A remittances.)
    Remittance Sender, Country BRemittance Recipient, Country A
    AssetsLiabilitiesAssetsLiabilities
    – LC (cash)– LC (net worth)+ $ (cash)+ $ (net worth)
    (Net worth of remitter declines)(Net worth ofrecepient increases)
    Hawaladar B (HB)Hawaladar A (HA)
    AssetsLiabilitiesAssetsLiabilities
    + $ (cash)+ $ (HA)– LC (cash)
    + $ (HB)
    Summary of Hawaladar Accounts, Including Reverse Transaction
    A to B Remittance
    Hawaladar A (HA)Hawaladar B (HB)
    AssetsLiabilitiesAssetsLiabilities
    + $ (cash)+ $ (HB)– LC (cash)
    + $ (HA)
    B to A Remittance
    Hawaladar A (HA)Hawaladar B (HB)
    AssetsLiabilitiesAssetsLiabilities
    – $ (cash)+ $ (cash)+ $ (HA)
    + $ (HB)
    Table A1.2.Bilateral Financial Settlement Through Bank in Country A
    After Customer Remittance Transaction (see Table 3.1)
    Hawaladar A (HA)Hawaladar B (HB)
    AssetsLiabilitiesAssetsLiabilities
    – $ (cash)– $ (HB)+ $ (BA)
    –$(HA)
    Bank A (BA)
    AssetsLiabilities
    + $ (investments)+ $ (HB)
    Note: HA deposits $ in HB’s bank account; bank intermediation assumed. Bank A is in country A; exchange controls may impede settlement in country B.
    Table A1.3.Bilateral Settlement via Exports to Country B
    After Customer Remittance Transaction (see Table 3.1)
    Hawaladar A (HA)Hawaladar B (HB)
    AssetsLiabilitiesAssetsLiabilities
    – $ (cash)– $ (HB)+ $ (HA)
    + $ (goods)
    Note: HA pays for exports shipped to HB.
    Table A1.4.Clearing by Means of International Services for HB Paid for by HA
    After Customer Remittance Transaction (see Table 3.1)
    Hawaladar A (HA)Hawaladar B (HB)
    AssetsLiabilitiesAssetsLiabilities
    – $ (cash)– $ (HB)– $ (HA)– $ (net worth)
    Note: HB purchases services from country A; these services paid for by HA, e.g., Pakistan Hajj sponsorship scheme; HB’s net worth declines due to services expenditure.
    Table A1.5.Clearing by Means of Nonbank Capital Flows
    After Customer Remittance Transaction (see Table 3.1)
    Hawaladar A (HA)1Hawaladar B (HB)2
    AssetsLiabilitiesAssetsLiabilities
    –$ (cash)1–$ (HB)–$ (HA)
    + $ (shares)
    Nonbank Entity2
    AssetsLiabilities
    + $ (cash)+ (shares) (HB)

    HA purchases securities, real estate, and so on, in the name of HB, using cash provided by hawala customer.

    HB thereby exchanges claim on HA for external portfolio assets.

    Box A1.1Informal Hawala: Levels of Financial Consolidation

    Initial TransactionRemitter and beneficiary transactions effected.
    Hawaladars A and B have unsettled balance sheets.

    Likelihood of “offsetting” reverse transactions is small.

    Country A likely has open capital markets and no currency controls.

    Country B may have restricted capital markets and foreign exchange controls.

    Consolidation/Aggregation IHawaladar A pays amount due to intermediary.
    Hawaladar B receives amount due from intermediary.

    Higher level “financial” intermediary assumes that balances and amounts increase.

    Some empirical evidence of such consolidation.

    Intermediaries likely residents/entities in countries A and B.

    Consolidation/Aggregation IIFurther level(s) of same?

    No empirical evidence on number of “consolidation” levels.

    Final SettlementVarious permutations.

    Goods market: for example, exports/imports; smuggling.

    Financial market: accounts with financial institutions.

    Miscellaneous international transactions: for example, capital flight; foreign property purchase.

    At this point, all parties are cleared and settled.

    Likelihood of interaction with formal financial system increases, but hawala background obscure.

    Chance of exchange control violations especially in recipient countries.

    Appendix II Formulation and Simulation of the Quantification Model

    This study used a simple model of hawala remittances constructed for 15 recipient countries that met certain conditions for informal activity, principally (1) appreciable numbers of nonresident nationals, (2) a history of parallel exchange markets with statistically available data on parallel rates, and (3) available statistics on recorded private transfers. For present purposes, the countries selected were Algeria, Bangladesh, Ecuador, El Salvador, Guatemala, India, Indonesia, the Islamic Republic of Iran, Pakistan, the Philippines, Sri Lanka, Sudan, Tanzania, Turkey, and Zimbabwe.39 In each case the model was applied to cover experience from 1981 to 2000, using officially compiled balance of payments data on inward private transfers and information on parallel market exchange rates, if any, as well as applying the information mentioned above.

    The model has the following form for each country examined. The estimated share of hawala remittances in total private transfers is specified as

    where

    RI =informal remittances/transfers;
    R =total remittances/transfers;
    RP =recorded private transfers in the BOP accounts of each country;
    R =RI + RP (thus, R = RP/[1-RI/R]);
    B =“black market premium” (in percent of the official rate) on the currency;
    MIN =intercept (= a), that is, minimum share of “hawala” in total remittances (when B = 0); and
    MAX =maximum share of informal transfers in total (when B is high).

    The model is specified as a cubic function on the assumption that the “hawala share” of total remittances starts at some generally nonzero level if/when B = 0, and rises through a certain range of values for B, reaching a peak at some value beyond which RI/R stabilizes at MAX (RI/R)* < 1. Obviously, this is just a way of saying that hawala transfers cannot exceed total remittances, measured and unmeasured.40

    Assumptions play a large role in this model, because RI cannot be measured directly, and there is no obvious way to assess an error structure in estimation.

    To further parameterize the structure, we assume that the inflection point in the curve traced by this model occurs at a value of B* = X, and the maximum value of the hawala share, say (RI/R)* = MAX, is reached at Y = 2X.41 For values of B > Y, it is assumed that RI/R stabilizes at MAX. That is, at least some small portion of total transfers will continue to go through recorded channels, no matter how strong the exchange rate incentive to use unofficial ones.

    The contour of this reaction function (that is,RI/R responding to exchange market incentives) seems to be plausible, but the model has to be imposed on available data. Results are obtained by selecting values of the intercept MIN and MAX and X, according to country characteristics and exchange rate experience. For instance, many observers have noted that hawala is deeply entrenched in Pakistan, which suggests the choice value of MIN for Pakistan is well above zero and that of MAX would be high, say around 0.9. That is, the assumptions for Pakistan suggest that hawala remittances may be substantial, even if B is not exceptionally high, and high levels of B may not be needed for hawala remittances to account for a large share of the total.

    Another factor to be considered—in choosing “X,” in particular—is the exchange rate history of each country in the sample. In some countries there may be parallel markets, but without large or sustained divergences over time between official and black market rates. In others, for example, Algeria or the Islamic Republic of Iran, there is a long history of parallel exchange rates that are far above official rates. This difference in experience raises the analytical problem of how such countries respond compared to those in which divergences have not been so extreme or protracted. If there is, say, a 100 percent divergence in exchange rates, would a country in which 100 percent might be “below average” have the same degree of hawala remittance activity as a country where this same divergence might be above average? For purposes of this exercise, at least, we assume that “peak levels” of hawala activity occur at higher levels of exchange rate divergence (B) in countries with a history of large divergences than for those with a history of small divergences. Thus, peak activity (RI/R) for Algeria, for example, might be reached at a level of B that is well above the maximum for the Philippines.

    Figure A2.1 shows the general form of the simulation function. In this figure, MIN = 0.1, MAX = 0.9, X = 50, and Y = 100.

    Figure A2.1.Estimating Function for Hawala Share in Total Private Remittances

    Parameter choices for the 15 countries included in our sample are shown in Table A2.1.

    Table A2.1.Parameter Values Used in Informal Hawala Estimates
    Intercepts (RI/R)Black Market Exchange Rate Premium (B)
    CountryMIN1MAX1Inflection (X)2Peak(Y)2,3
    Algeria0.20.8100200
    Bangladesh0.20.850100
    Ecuador0.10.72040
    El Salvador0.20.850100
    Guatemala0.10.72040
    India0.10.71530
    Indonesia0.20.92040
    Iran, I.R. of0.10.750100
    Pakistan0.40.92040
    Philippines0.050.61020
    Sri Lanka0.20.92040
    Sudan0.10.72040
    Tanzania0.10.72040
    Turkey0.10.61020
    Zimbabwe0.10.74080

    Expressed as RI/R.

    Black market exchange rate premium over official rate (%).

    As implemented, Y - 2X.

    It is noted again that selected values are judgmental, based on our current understanding of the factors that bear on hawala remittances in each of these countries. While these enable us to obtain estimates, readers are at liberty to experiment with alternative specifications and parameter values based on different assumptions.

    Tables A2.2A2.5 provide an overview of the results of this experiment. These numerical results are only specimens for the 15 included countries, but it is hoped they are illustrative of the potential real world scale of informal payments activities.

    Table A2.2.Summary of Estimated Private Remittances, 1981–2000(In billions of dollars)
    CountryTotalRecordedUnrecordedShare of Unrecorded in Total (percent)
    Algeria53143873
    Bangladesh84355059
    Ecuador97218
    El Salvador2515938
    Guatemala87116
    India1431202316
    Indonesia1612423
    Iran, I.R.of98317068
    Pakistan136627555
    Philippines555059
    Sri Lanka2314938
    Sudan157955
    Tanzania1981158
    Turkey87721417
    Zimbabwe63344
    Total77645631941
    Source: Authors’ calculations.
    Table A2.3.Recorded Private Current Transfers(In millions of U.S. dollars)
    Country19811982198319841985198619871988198919901991199219931994199519961997199819992000
    Algeria5135294143505299176284776034002695001,1001,4001,1009001,0601,060790790
    Bangladesh9331,2951,4291,2661,1821,2181,5031,6331,3971,6141,8121,8091,9522,0912,2671,9132,1372,1732,5012,426
    Ecuador3530382585511351041061191231343183915066167389331,1881,437
    El Salvador752101541761872523373484385256278531,0051,2911,3931,2591,3641,5341,5661,830
    Guatemala976634322176196228255218277406371456508537629743754911
    India3,0262,9393,0752,7892,7992,6383,0342,7393,0932,8533,7364,1575,3758,2088,41011,35013,97510,40211,95813,504
    Indonesia250134114167882592572543394182625715376199819371,0341,3381,9141,816
    Iran, I.R.of2,0002,0002,0002,0002,0002,0002,0002,0002,5002,5002,0001,9961,5001,200800471400500508539
    Pakistan12,5643,1753,3973,3493,0953,1852,8992,7602,7702,8342,8903,5022,3372,9192,6112,7393,9812,8013,5824,188
    Philippines25468109446596946968098741,0021,2031,5212,2222,2763,0094,9284,3065,7424,9266,7946,050
    Sri Lanka3894514655044695035305645475796457307958828478819671,0541,0781,166
    Sudan40413227430736935833233457714312823385120346236439732702651
    Tanzania152136128180394501610643682593504650390312370371314427413406
    Turkey2,5752,2951,8062,1312,0222,0302,4562,2203,5744,5255,1314,0753,8003,1134,5124,4664,9095,8605,2945,317
    Zimbabwe14287951931721702212112112041923472716914912612811512275
    Sources: IMF, International Financial Statistics and Balance of Payments Statistics Yearbook, various years. Some values obtained from IMF Staff Reports or estimated, where missing—Islamic Republic of Iran, pre-1989; Algeria, post-1992 from published country reports; Zimbabwe, 1995ff.

    Includes State Bank of Pakistan purchases from the curb market. Fiscal year basis.

    Measured as income of Filipino workers overseas, rather than as actual remittances.

    Table A2.4.Black Market Exchange Rate Premiums(In percent of previous period offdal rate)
    Country19811982198319841985198619871988198919901991199219931994199519961997199819992000
    Algeria247266330369389246419416358264833003582501751331251505050
    Bangladesh41414245130218211272210199136674030191911000
    Ecuador29966491850313816231910654251100
    El Salvador843498100204821001958536121218151510101100
    Guatemala222570244515332892214454422000
    India91328161781314121518455663222
    Indonesia4102011161631426975061155
    Iran, I.R. of4033793205625579771,5761,0301,9651,9653,2523,36088100150193186150400200
    Pakistan412530110119100698886611252020
    Philippines675011283466124790000
    Sri Lanka6103832153236251691064110000
    Sudan35754102431228527034491552957850251001155
    Tanzania19320530128728124813910035505936986471155
    Turkey20151110789216644404044
    Zimbabwe5351192805370504776375033191510716900400400
    Sources: World Currency Yearbook for 1985, 1990-93; Wood, 1988; Global Development Finance and World Development Indicators for 1996-97. Certain missing values interpolated by the authors.
    Table A2.5.Simulated Shares of Informal Hawala in Total Private Transfers(In percent of total; R = Rl + RP)
    Country19811982198319841985198619871988198919901991199219931994199519961997199819992000
    Algeria0.800.800.800.800.800.800.800.800.800.800.280.800.800.800.640.430.400.500.230.23
    Bangladesh0.280.280.280.300.800.800.800.800.800.800.800.440.270.240.210.210.200.200.200.20
    Ecuador0.380.700.700.700.700.100.430.620.170.270.200.120.110.110.100.100.110.130.100.10
    El Salvador0.600.250.770.800.800.570.800.800.610.260.210.210.210.210.210.200.200.200.200.20
    Guatemala0.250.300.700.280.700.170.470.350.120.250.150.100.110.100.100.100.100.100.100.10
    India0.140.190.600.240.250.130.190.200.170.220.290.110.110.110.120.120.100.100.100.10
    Indonesia0.200.200.200.200.200.240.280.280.200.200.200.450.220.210.210.200.210.240.210.21
    Iran, I.R. of0.700.700.700.700.700.700.700.700.700.700.700.700.540.700.700.700.700.700.700.70
    Pakistan0.900.560.650.430.400.400.490.420.400.410.420.410.410.410.410.410.430.570.500.50
    Philippines0.090.110.600.050.050.050.120.060.060.080.090.050.050.060.100.140.050.050.050.05
    Sri Lanka0.210.230.830.620.270.200.200.750.430.290.230.230.210.200.200.200.200.200.200.20
    Sudan0.100.700.700.700.700.700.700.700.700.700.700.700.700.700.300.130.100.130.110.11
    Tanzania0.700.700.700.700.700.700.700.700.540.700.700.580.120.120.110.100.110.130.110.11
    Turkey0.590.360.230.100.100.150.160.180.100.100.130.140.120.110.110.100.120.100.110.11
    Zimbabwe0.330.310.700.700.330.540.300.270.630.200.300.180.120.110.110.100.120.700.700.70
    Source: Estimates are for RI/R, using methodology described in text.

    Table A2.2 provides a summary overview of the results of this experiment for the entire period.

    Table A2.3 displays private current transfers as recorded in national balance of payments statistics and reported to the Fund, usually for publication in International Financial Statistics.42 These series are the data captured by national compilation systems (i.e., those transfers that pass through “sanctioned” channels) but, even there, the measurements are not infallible.43 Recorded series are merely a rough benchmark to help scale hawala as described above.

    Table A2.4 provides time series on approximate black market exchange rate premiums (B), from the sources discussed above and as compiled by the World Bank. This is the second crucial ingredient in making hawala estimates with this particular model. It should be noted, in particular, that the history of black market premiums is quite divergent across countries, and also that in most cases the black market premium tends to decline noticeably from the early 1980s to the late 1990s.44

    Time-series-simulation results for RI/R (the hawala share) for each of the 15 countries are given in Table A2.5, which can be examined in conjunction with parameter values displayed in Table A2.1. Obviously, these results are bounded by MIN and MAX for each country, so somewhat different values could be obtained if an analyst varies these parameters. The lowest intercept for RI/R is .05 for the Philippines, for reasons discussed in the text, and the highest value for MAX is 0.9, which applies to Indonesia, Pakistan, and Sri Lanka. However, with the values chosen for X and Y, there are few instances where these levels are reached.45 At the same time, given the parameter choices, details in Table A2.5 suggest that the “hawala share” of remittances can be large for many of these countries.

    Results. Results of this exercise suggest that the amount of informal remittances around the world can be considerable, especially in view of the fact that only a subset of participant countries is included here. If these results are in any way indicative of actual trends, the global total for informal remittances could amount to billions of dollars. Table A2.2 summarizes total recorded (RP) and constructed unrecorded (RI) private transfers for each of these countries across the 20-year sample, and the “average” share of unrecorded transfers over this period for each of them. For some of the countries (e.g., Algeria, Bangladesh, the Islamic Republic of Iran, and Pakistan) the results are notably high, and for a few, especially the Philippines, they are modestly low. India, Ecuador, and Guatemala also fall into a “low” category, or less than 20 percent. This is, of course, reflective of the parameters chosen and could be somewhat raised or lowered with different choices.

    Time-series perspectives on these results can be seen in Figures A2.2 and A2.3. The first of these plots the time series of BOP-recorded private transfers over the period in question. Recorded data start in the vicinity of $15 billion some 20 years ago and rise close to $40 billion by the year 2000. As suggested by earlier comments, if the share of estimated informal hawala transactions has declined somewhat over this period, the share of recorded transfers in the total likely has increased, so that the 20-year rise in recorded transfers may be somewhat stronger than the background increase in total remittances.46

    Figure A2.2.Recorded Private Transfers

    (In billions of US. dollars)

    Figure A2.3.Estimated Hawala Share in Total Private Remittances

    (Percent of total, Rl/R)

    Figure A2.3 provides, in bar graph form, a summary of estimated hawala remittances as a share of the total transfers over the sample period. Given the parameters used in the exercise, hawala remittances appear to have receded from some 50-70 percent of totals during the 1980s to somewhere around 20 percent at the end of the 1990s. This reflects changes in the main determinant of informal hawala transactions, the black market exchange rate premium that, for many countries, retreated to near zero during the concluding years of the decade.

    Finally, Figure A2.4 expresses the 15-country total of hawala transfers in dollar terms. The results suggest that informal transfers started high, about $35 billion per annum, early in the 1980s, then oscillated in the $15-$20 billion range through the early 1990s, and finally could have declined to around the $10 billion per annum range late in the sample period. According to our assumptions, this evolution was driven mainly by the “disappearance” of many black market exchange rate premiums for countries included in the investigation. A decline of estimated informal hawala transactions to even lower annual rates is not likely to occur so long as there are ethnic, geographic, cost, or other factors that influence people to stay away from official channels in favor of unofficial ones.

    Figure A2.4.Estimated Value of Hawala Transfers

    (In billions of U.S. dollars)

    An important consideration is that these empirical results are merely rough simulations that should not be given undue significance in discussions about IFTs. So far as quantification is concerned, there simply is no known means to get authoritative results, and educated guesses are about the best that can be obtained. If these results have any significance at all, they just suggest that the “amount of hawala” can be fairly significant for certain countries that have the economic and cultural conditions that nourish this business, and certainly larger on a world scale than the figures generated by these selected sample cases. More importantly, these results may also suggest that the growth or decline in the use of IFT systems may be negatively correlated to the level of development of the formal financial sector. Hawala-type operations appear to have been more dominant in countries where financial institutions are inefficient or financial policies restrictive. The seemingly downward trend of hawala system usage in the sample countries may be in response to the international move toward more liberal exchange rate policies and more free floating currencies. Between 1989 and 1995, for example, at least 53 countries moved toward more flexible (adjusted according to set of indicators, or managed or independent float) exchange rate regimes.47

    The model in the paper is a simulation, not an “estimation,” model. It merely identifies the black market premium on exchange rates as a key factor in the economic incentives for remitters to use the hawala channel rather than some sanctioned, official channel, for purposes of sending funds to the home country. There are other factors too, such as cultural norms and costs of the official channel, but they cannot be easily quantified in a time-series sense for purposes of an exercise such as this. Thus, black market premiums show up in the model as the principal variable factor that influences informal remittances, but the intercept and peak used for each country endeavor to capture some other influences.

    As for black market premiums, these have been (more or less) measured over the years, and they are given in Table A2.4 for all 15 countries. (Incidentally, roughly the same data have been used recently by Reinhart and Rogoff in their paper on the history of exchange-rate regimes.)48 The empirical experience shows that, for a number of these countries, this black market premium has tended to decline during the 1990s, but this conclusion does not hold for all of them. It would generally be argued that convergence or unification of formal and informal rates in any country’s exchange market represents some improvement in the management of these markets. Usually, this would be the result of policy changes that remove incentives for parallel markets or outright liberalization of official rates and motion toward a floating regime. Thus, it is the empirical evidence on exchange rates (in the sample countries) that suggests there has been some “improvement” in the regimes, but this was not a premise of this experiment.

    Given the form of the simulation model, the reduction in overall black market exchange premiums during the 1990s naturally leads to a decline in the relative amount of hawala (compared to total remittances) that the model generates. It was built that way. If other priors are applied to the modeling effort, different results can be generated. Our results are plausible in the coarse sense of showing that the informal channel is potentially “large” when driven by large exchange market incentives, and it tends to recede when costs and incentives in official channels become more favorable. The model results illustrate this.

    Appendix III Regulatory Frameworks for Money Exchange and Remittance Business
    Table A3.1.Pakistan
    Money Exchange BusinessMoney Remittance Business
    Regulatory authorityThe State Bank is responsible for day-to-day administration of foreign exchange policy, which is exercised through its Exchange Policy Department.The State Bank is responsible for day-to-day administration of foreign exchange policy, which is exercised through its Exchange Policy Department.
    Legal statusLegal: Foreign Exchange Regulations Act, 1947 and Notifications Issued Hereunder.Illegal: Foreign Exchange Regulations Act, 1947 and Notifications Issued Hereunder. No person in, or resident in, Pakistan shall make any payment to or for the credit of any person resident outside Pakistan [clause 5 (a)]; draw, issue, or negotiate any bill of exchange or promissory note or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favor of any person resident outside Pakistan [5(b)]; make any payment to or for the credit of any person by order or on behalf of any person resident outside Pakistan [5 (c)]; place any sum to the credit of any person resident outside Pakistan [5(d)]; make any payment to or for the credit of any person as consideration for or in association with (1) the receipt by any person of a payment or the acquisition by any person of property outside Pakistan and (2) the creation or transfer in favor of any person of a right whether actual or contingent to receive a payment or acquire property outside Pakistan [5(e)]; draw, issue, or negotiate any bill of exchange or promissory note, transfer any security or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favor of any person as consideration for or in association with any matter referred to in clause 5(e) [5(f)].
    Licensing/registration: Documentation1. Business Plan: Stating the nature of transactions that are desired to be dealt with. 2. Management: Confirmation that trained staff and the required systems and equipment to handle foreign currency transactions are available.
    Permitted activities1. Permitted Activities: No person other than an authorized dealer shall in Pakistan, and no person resident in Pakistan other than an authorized dealer shall outside Pakistan, buy or borrow from, or sell or lend to, or exchange with, any person not being an authorized dealer, any foreign exchange. 2. An authorized dealer may have dealings in all foreign currencies or may be restricted to authorizing dealings in specified foreign currencies only; may be authorized to engage in transactions of all descriptions in foreign currencies or may be restricted to authorizing specified transactions only; may be granted authority for a specified period, or within specified amounts. 3. No person whether an authorized dealer or otherwise, shall enter into any transaction which provides for the conversion of Pakistan currency into foreign currency or foreign currency into Pakistan currency at rates of exchange other than the rates for the time being authorized by the State Bank [clause 4(2)].
    Prudential regulation1. Customer Identification Records: Authorized Operators should, before approving any transactions, satisfy themselves about the bonafides of the applicant and the genuineness of the transaction by verifying the necessary documents. They should ensure that the applications are on the prescribed forms, wherever such forms are prescribed, and are supported by appropriate documentary evidence. In all these cases it will be deemed that they have satisfied themselves about the bonafides of the applicants and the correctness of the statements made by them on the application and the accompanying documents, if any. 2. Disclosure: Authorized Operators are required to bring the Foreign Exchange regulations to the notice of their customers and to ensure compliance in their day-to-day operations. 3. Suspicious Transactions Reports: Authorized Operators should also report to the State Bank every case of evasion or attempt, direct or indirect, at evasion of the provisions of the Act and Notifications or any rules, orders or directions issued thereunder, immediately as it comes to their notice [3 (4)]. 4. Prudential Reports: Authorized Operators must submit to the State Bank returns of their dealings in foreign exchange on due dates in the forms prescribed in the Manual.
    Supervision1. Where any person is tried for contravening any provision of this Act or of any rule, direction, or order made hereunder which prohibits him from doing an act without permission, the burden of proving that he had the requisite permission shall be on him [24(1)]. 2. If in a case in which the proof of complicity of a person resident in Pakistan with a person outside Pakistan is essential to prove an offense under this Act, then after proof of the circumstances otherwise sufficient to establish the commission of the offense, it shall be presumed that there was such complicity, and the burden of proving that there was no such complicity shall be on the person accused of the offense [24(2)]. 3. Where the person accused of having made any payment in contravention of clause (c) of sub-section (1) of Section 5 is proved to have received from any person outside Pakistan a message which raises a reasonable suspicion that it relates to certain payment to be made, the Tribunal may in the absence of proof to the contrary by the accused person presume that he had made such payment in pursuance of such message [24(3)]. 4. If, after the issue of a notification under clause (a) of section 9, any person is found to be in possession of, or to have under his control, any foreign exchange specified in the notification, in circumstances which tend to raise a reasonable suspicion that he has contravened the notification, he shall be presumed to have contravened the notification unless he can, by proving the time when and the manner in which the foreign exchange came into his possession or under his control, show that he had not in fact contravened the notification [24(4)].
    Revocation, restriction, or variation of license1. An authorized money changer shall comply with such general or special directions or instructions as the State Bank may, from time to time, think fit to give including those for supply of data, the rate and code of conduct in doing business. Failure to comply with the instructions may lead to suspension of the license or other actions as necessary [3A(4), 3B].
    Source: State Bank of Pakistan, Foreign Exchange Regulations Act, 1947 and Notifications Issued Hereunder.
    Table A3.2.United Arab Emirates
    Money Exchange BusinessMoney Remittance Business
    Regulatory authority: LegislationThe Central Bank of the U.A.E. 1. Federal Law No. 10 (1980) concerning the Central Bank, monetary system, and organization of banking.
    2. Resolution No. 31/2/1986 regarding the regulation of money changing business in the U.A.E.
    3. Resolution No. 123/7/92 regarding the regulation of the money changing business in the U.A.E.
    The Central Bank of the U.A.E. 1. Federal Law No. 10 (1980) concerning the Central Bank, monetary system, and organization of banking.
    2. Resolution No. 31/2/1986 regarding the regulation of money changing business in the U.A.E.
    3. Resolution No. 123/7/92 regarding the regulation of the money changing business in the U.A.E.
    Licensing/registration: Documentation1. Business Plan: Nature and scale of money changing business, future development plans, including management plans [clause 3(a)].
    2. Applicant: Name, address, brief statement about the applicant, copy of passport or of U.A.E. identity card [3(b)].
    3. Guarantee: An undertaking to provide a bank guarantee drawn in favor of the Central Bank equal to 50 percent of the capital of the applicant [3(c)].
    4. Supervision: An undertaking to comply with all Central Bank resolutions, instructions, directives, and subject the business records to the examination, audit, and supervision of the Central Bank [3(d)].
    5. Other Documents: Any other information required by the Central Bank for purposes of processing the application [3(e)].
    1. Business Plan: Nature and scale of money changing business, future development plans, including management plans [clause 3(a)].
    2. Applicant: Name, address, brief statement about the applicant, copy of passport or of U.A.E. identity card [3(b)].
    3. Guarantee: An undertaking to provide a bank guarantee drawn in favor of the Central Bank equal to 50 percent of the capital of the applicant [3(c)].
    4. Supervision: An undertaking to comply with all Central Bank resolutions, instructions, directives, and subject the business records to the examination, audit, and supervision of the Central Bank [3(d)].
    5. Other Documents: Any other information required by the Central Bank for purposes of processing the application [3(e)].
    Licensing/registration: Ownership1. Paid up Capital: Dh. 2 million [Article 4(a)] Individuals: The applicant is a U.A.E. national above the age of 21 years [4.2(b)].
    2. Ownership Structure: The share of U.A.E. nationals in the company is not less than 60 percent of the total paid up capital [4.2(b)]. No commercial bank is allowed to manage the licensed person whether local or foreign [4.4(c)].
    1. Paid up Capital: Dh. 2 million [Article 4(a)] Individuals: The applicant is a U.A.E. national above the age of 21 years [4.2(b)].
    2. Ownership Structure: The share of U.A.E. nationals in the company is not less than 60 percent of the total paid up capital [4.2(b)]. No commercial bank is allowed to manage the licensed person whether local or foreign [4.4(c)].
    Licensing/registration: Fitness and probity test1. Personal Reliability: Be of good conduct and behavior; not convicted of any offense involving dishonor or dishonesty or violence, or have failed to honor his liabilities toward banks or other creditors; shall not have been declared bankrupt or reached a settlement; have had their assets put under judicial receivership [4.3(a)].
    2. Professional Qualifications: Must have the appropriate theoretical knowledge of money changing business and the necessary management experience [4.3(b)].
    1. Personal Reliability: Be of good conduct and behavior; not convicted of any offense involving dishonor or dishonesty or violence, or have failed to honor his liabilities toward banks or other creditors; shall not have been declared bankrupt or reached a settlement; have had their assets put under judicial receivership [4.3(a)].
    2. Professional Qualifications: Must have the appropriate theoretical knowledge of money changing business and the necessary management experience [4.3(b)].
    Permitted activities“Money Changing business” means the purchase and sale of foreign currencies in the form of bank notes and coins, the purchase and sale of travelers checks, the handling of remittance business in both the local and foreign currencies and other matters approved by the Central Bank.“Money Changing business” means the purchase and sale of foreign currencies in the form of bank notes and coins, the purchase and sale of travelers checks, the handling of remittance business in both the local and foreign currencies and other matters approved by the Central Bank.
    Prudential regulation1. Capital: Total assets must not exceed ten times the paid up capital and must not fall below the approved limit [8.1 (a)]. Any partner in the business may not withdraw any amount from the business in excess of his share of net annual profits [8.2(1)].
    2. Management: Managers must always receive prior approval from the Central Bank [8.2(b)].
    3. Ownership: The bank’s ownership and capital structure should not be altered without Central Bank permission [8.2(c)].
    4. Organizational Restructuring: No mergers, amalgamations, or joint ventures without Central Bank permission [8.2(d)].
    5. Location and Branches: The premises and change of premises for conducting the business requires central bank approval. No other activity of whatsoever nature can be undertaken in the same premises [8.2(e)]. No branches can be opened without Central Bank permission [8.2(g)].
    6. Business Name: The business name shall not include the words “bank,” “financial institution,” “investment/commercial/real estate company,” or any other than money changing business [8.2(f)].
    7. Auditors: The business must appoint a Central Bank approved auditor [8.2(h)].
    8. Accounting Records: The business must maintain proper accounting records and submit these forms as required by the Central Bank [8.2(h)]. The business is authorized to issue drafts in its own name and drafts must be signed by the duly authorized signatories [8.2(j)]. The business shall provide, upon request from the Central Bank, all data, information, or statistics, at any time, and for any specified period, and such information shall be identical to the records of the business and it shall be regarded and treated as confidential.
    9. Transaction Receipts: Dealings between the business and customers must be supported by official receipts [8.2(i)].
    10. Disclosure: Customers must be informed by a public notice their right to a receipt and the rates at which the transactions are conducted [8.2(i)].
    11. Asset Quality: The business shall not encumber any assets without the prior permission of the Central Bank [8.2(j)].
    12. Insider Borrowings: Shareholders, partners, directors, managers, or controllers of the business may not borrow from or lend to the licensed business and they may not have current accounts or any other accounts with the business [8.2(m)].
    13. Prudential Reports: The business is required to submit on a quarterly basis to the Central Bank a signed copy of the year end accounts and the auditors report [8.2(n)].
    1. Capital: Total assets must not exceed ten times the paid up capital and must not fall below the approved limit [8.1 (a)]. Any partner in the business may not withdraw any amount from the business in excess of his share of net annual profits [8.2(1)].
    2. Management: Managers must always receive prior approval from the Central Bank [8.2(b)].
    3. Ownership: The bank’s ownership and capital structure should not be altered without Central Bank permission [8.2(c)].
    4. Organizational Restructuring: No mergers, amalgamations, or joint ventures without Central Bank permission [8.2(d)].
    5. Location and Branches: The premises and change of premises for conducting the business requires central bank approval. No other activity of whatsoever nature can be undertaken in the same premises [8.2(e)]. No branches can be opened without Central Bank permission [8.2(g)].
    6. Business Name: The business name shall not include the words “bank,” “financial institution,” “investment/commercial/real estate company,” or any other than money changing business [8.2(f)].
    7. Auditors: The business must appoint a Central Bank approved auditor [8.2(h)].
    8. Accounting Records: The business must maintain proper accounting records and submit these forms as required by the Central Bank [8.2(h)]. The business is authorized to issue drafts in its own name and drafts must be signed by the duly authorized signatories [8.2(j)]. The business shall provide, upon request from the Central Bank, all data, information, or statistics, at any time, and for any specified period, and such information shall be identical to the records of the business and it shall be regarded and treated as confidential.
    9. Customer Identification Records: Money changers that are involved in money funds transfers must record details of persons or institutions that transfer an amount of Dh. 2000 (two thousand) or equivalent in other currencies. To ensure the correct identity of the client, any of the following original documents are required: (1) passport, or (2) U.A.E. ID card for U.A.E. nationals, or (3) labor card for non-U.A.E. nationals, or (4) driver’s license. With the necessity to carefully check the person’s photo in all cases: (1) recording the phone number only (without the address). In the case of transfers in amounts less than Dh. 2000, the transferor should be given a receipt without the said details.
    10. Transaction receipts: Dealings between the business and customers must be supported by official receipts [8.2(i)].
    11. Disclosure: Customers must be informed by a public notice their right to a receipt and the rates at which the transactions are conducted [8.2(i)].
    12. Asset Quality: The business shall not encumber any assets without the prior permission of the Central Bank [8.2(j)].
    13. Insider Borrowings: Shareholders, partners, directors, managers, or controllers of the business may not borrow from or lend to the licensed business and they may not have current accounts or any other accounts with the business [8.2(m)].
    14. Prudential Reports: The business is required to submit on a quarterly basis to the Central Bank a signed copy of the year end accounts and the auditors report [8.2(n)].
    SupervisionThe Central Bank reserves the right to inspect the activities of the licensed person at any time it finds it appropriate to ensure adherence to the provisions of its resolutions [9].The Central Bank reserves the right to inspect the activities of the licensed person at any time it finds it appropriate to ensure adherence to the provisions of its resolutions [9].
    Revocation, restriction, or variation of licenseThe Central Bank may revoke a license if (1) it appears there is a breach of the conditions of the license; (2) the business is in breach of any instructions or circulars issued by the Central Bank; (3) the Central Bank is issued with false, misleading, or inaccurate information from the business; (4) the interests of customers or potential customers of the business are in any other way threatened; (5) a competent judicial authority orders its liquidation; (6) a judicial receiver or manager has been appointed; (7) a bankruptcy order has been made against the business; (8) the business is unable to pay its debts as they fall due; (9) the value of the assets are less than the amount of its liabilities, taking into account its contingent or prospective liabilities.The Central Bank may revoke a license if (1) it appears there is a breach of the conditions of the license; (2) the business is in breach of any instructions or circulars issued by the Central Bank; (3) the Central Bank is issued with false, misleading, or inaccurate information from the business; (4) the interests of customers or potential customers of the business are in any other way threatened; (5) a competent judicial authority orders its liquidation; (6) a judicial receiver or manager has been appointed; (7) a bankruptcy order has been made against the business; (8) the business is unable to pay its debts as they fall due; (9) the value of the assets are less than the amount of its liabilities, taking into account its contingent or prospective liabilities.
    Sources: Central Bank of the United Arab Emirates, Resolution No. 123/7/92 Regarding the Regulation of Money Changing Business in the UAE and Notice 1815/2001 to All Money Changers Operating in the UAE on Outgoing Transfers, dated 01 /10/2001.
    Appendix IV Examples

    Box A4.1.U.A.E. Money Transfer Form for Money Changers

    Transferred Amount:

    (For outgoing transfers of Dh. 2000 or the equivalent in other currencies or more.)

    • Method of Payment for Transfer:

    • Cash

    • Travelers’ Checks

    Full Name of Transferor:

    • ID No.:

    • Type of ID:

    • Passport/Nationality:

    • U.A.E. ID Card/Labor Card:

    • Driving License (U.A.E.):

    • Telephone Number:

    • Name of Beneficiary:

    • Address of Beneficiary:

    • Signature of Transferor:

    For Use of the Money Changer:

    • Authorized Signature:

    Source: Notice 1815/2001 to All Money Changers Operating in the U.A.E. on Outgoing Transfers, dated 01/10/2001.

    Box A4.2.Registration Requirements for Money Service Operators in the United Kingdom

    (1) A person who, on or after June 1, 2002, acts as a money service operator must be registered by the Commissioners.

    (2) Paragraph (1) does not apply to a person who, immediately before June 1, 2002, is acting as a money service operator, provided he has before that date made an application to be registered which has not been determined.

    (3) A person to whom this regulation applies must:

    (a) make an application to be registered in such manner as the Commissioners may direct; and

    (b) furnish the following information to the Commissioners, that is to say:

    (i) the applicant’s name and (if different) the name of the business;

    (ii) the applicant’s VAT registration number or, if he is not registered for VAT, any other reference number issued to him by the Commissioners;

    (iii) the nature of the business;

    (iv) the address of each of the premises at which the applicant carries on (or proposes to carry on) business;

    (v) any agency or franchise agreement relating to the business, and the names and addresses of all relevant principals, agents, franchisers, or franchisees;

    (vi) the name of the relevant money laundering reporting officer (if any); and

    (vii) whether any person concerned (or proposed to be concerned) in the management, control, or operation of the business has been convicted of a money-laundering offense or of money laundering within the meaning of regulation 2(3) of the 1993 Regulations.

    (4) At any time after receiving an application to be registered and before determining it, the Commissioners may require the applicant to furnish them, within 21 days beginning with the date of being requested to do so, with such further information as they reasonably consider necessary to enable them to determine the application.

    (5) Any information to be furnished to the Commissioners under this regulation must be in such form or verified in such manner as they may specify.

    (6) In this regulation, “the business” means money service business which the applicant carries on or pro-poses to carry on.

    Source: The Money Laundering Regulations, 2001, available via the Internet: http://www.hmce.gov.uk/business/othertaxes/stat-instrumsb.pdf.
    Bibliography

    In October 2001, the Financial Action Task Force on Money Laundering (FATF) agreed to adopting “Special Recommendations on Terrorist Financing,” which included extending anti-money-laundering requirements to alternative remittance systems. Report available via the Internet: http://wwwl.oecd.org/fatf/40RecsTF_entm.

    Although often applied to informal fund transfers, the term “padala” can also refer to formal transfers. It is a generic word, which means “to send” anything. Derivations of the word can be applied to transfers through a courier, a bank, a relative, or door-to-door transactions.

    As indicated in the 2002 IMF paper, “Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision—Overview,” for surveillance to be effective, individual Article IV consultations need to retain a clear focus on the key issues in each country. The paper is available via the Internet: www.imf.org/external/np/pdr/surv/2002/031302.pdf.

    In this context, an international conference on remittances, organized by the World Bank and the U.K. Department for International Development, is planned for September 2003.

    These included seminars organized by the U.S. Department of Treasury’s Financial Crimes Enforcement Network in Washington, May 2002; Oaxaca, September 2002; and by the U.K. government in London, January 2003.

    For present purposes, costs and commissions are omitted.

    In this paper, we consider only the direct transaction cost paid by the customer for the use of the informal hawala system to transfer funds and not the true cost in economic terms. Computing the true economic cost requires more in-depth analysis encompassing several country-specific factors such as the regulatory and tax regime, the level of financial sector development, or other factors such as a war, insolvency, and state ownership.

    This is not to imply that the system is restricted to particular ethnic groups, circles of customers, or retail businesses. This system is used not only by individuals but also often by companies and other institutions.

    The authors thank the Chinese authorities for their valuable comments on the history of funds transfer systems in China.

    Kaplan1997.

    A piece of paper (e.g., a half banknote) that served as evidence presented by a beneficiary to receive the funds. Although “chiti” came from the Indian language Hindi, it was introduced into China by the English and refers to (along with “chop shop”) the Chinese system of alternative remittance.

    The term hawala has widely acquired a negative connotation in India. It is associated with illegal payments to politicians and is used by companies for a variety of advances, payments, and transfers. The famous Jain Hawala scandal, involving bribes to politicians, had repercussions throughout the 1990s. This case is recounted in Kapoor (1996).

    Fry (1974, p. 240).

    In Arabic, hawala instruments were was also referred to as Attalaa (

    ), a bill on which a debtor writes his name and seals it, offering the holder safe movement between regions (Al Allaili, 1978, p. 101).

    Goodwin v. Roberts, 1875, cited in ibid., p. xvi.

    The legitimacy of informal hawala transactions is subject to national legal frameworks.

    In societies where personal honor and family pride play a key role in social relations and status, dishonoring a commitment has dire consequences for a person’s reputation, his business, and family.

    Hawaladars may be able to avoid capital controls in the short-term without any difficulty in settling their external accounts. However, if these controls persist, hawaladars may experience difficulty in settling their accounts, especially if the volume of funds transfers requires using the formal banking sector. Different settlement mechanisms may have to be devised (see Section V), including the smuggling of physical cash.

    For example, “Hawala works by transferring money without actually moving it. In fact ’money transfer without money movement’ is a definition of hawala that was used, successfully, in a hawala money laundering case” (Jost and Sandhu, 2000, p. 2).

    An interesting, and plausible, account of bilateral hawala settlements via provision of—or payment for—international services is given by Mr. Rahim Bariek (Bariek Money Transfer) in the U.S. Senate hearings in November 2001 (see U.S. Senate, 2001b). In this case all the participants in the hawala circuit are described as family members.

    This is not to say that hawala and other informal financial transactions never give rise to errors and omissions or other effects in BOP accounts. It is certainly possible that some transactions downstream from (and in larger scale than) the initial set described here may be picked up by the BOP compilation systems of one or more of the affected countries. For instance, errors and omissions will be affected when only one side of an operation (such as imports) is recorded by official statistics whereas the financing side is not captured in the data. This depends crucially on both the particular form of the (usually capital) flows and the details of the BOP compilation sources used by national authorities, topics that are beyond the scope of the present discussion.

    Physical currency movements are discussed, inter alia, in Wilson (1992).

    There are many ways that “cash dollars” can wind up in curb markets in various countries, most of which should be technically classified as capital flows. If an expatriate worker brings cash home and gives it to his family, this could be considered a bona fide remittance. There is, unfortunately, no feasible way to measure boundaries between the different kinds of transactions that can put foreign cash in local markets.

    For example, to measure capital flows of nonbank sectors, some countries now use the Bank for International Settlements (BIS) international banking statistics. Hawala transactions “financed” by capital (out) flows directed to foreign bank accounts might affect these numbers, but there is no way to associate variations in such balances with background transactions, of which there are many besides the hawala-related ones.

    The mechanism is somewhat similar for money changers and other remitters in the sense that cash is mostly used in official transfers. The difference, however, is that in official transfer transactions, cash usually reintegrates rapidly in the banking system while in the hawala system cash reintegrates in the banking system, if at all, only at a later stage in the process.

    Fry (1974, p. 241).

    A good example is Elbadawi and Rocha (1992, p. 9), who note that “there is ample anecdotal evidence that the volume of unofficial remittances is substantial in many countries. . . . There are a variety of informal channels through which the migrant can remit, including triangular operations with family, friends, and middlemen to actually operate outside the home country. Although recourse to informal channels usually involves a cost, the migrant will be willing to incur such costs when there is a large premium between the exchange rates in the black and official markets. . . . The black market premium becomes a central variable in models that focus on the choice of channels of remittances.”

    An econometric approach to quantification might be considered, but it would also entail heavy assumptions imposed on the estimating functions and results.

    At present, the best study known to us is Pohit and Taneja (2000). The authors found “hawala” payments account for up to 15 percent of small-scale trade between India and Bangladesh.

    Franz Pick began this work long ago. See Currency Data and Intelligence’s World Currency Yearbook (formerly Pick’s Currency Yearbook), various years.

    Money exchange dealers are required to register their businesses with the Central Bank’s International Affairs Department. The registration process includes making a deposit with the Central Bank of 20 million Afghanis (US$526). Thereafter, annual license fees are 1 million Afghanis (US$26).

    In the absence of regional records and the open nature of the Kabul money exchange market, these estimates must be viewed as speculative in nature as there is no basis upon which to accept these estimates with any measure of confidence.

    Statutory Instruments, 2001, No. 3641 of the Anti-Money Laundering Regulations became law on November 9, 2001.

    Saudi Arabian Monetary Agency (1994, p. 24). Banking business is defined to include “payment orders, promissory notes and similar other paper of value, foreign exchange transactions and other banking business.”

    Saudi Arabian Monetary Agency (1981).

    Ibid., article 3.

    Ibid., article 7.

    Mexico and others might be included, but in such cases there is no “documented” history of black market exchange rates.

    The cubic form suggests a response that first accelerates, and then decelerates, as B rises from zero toward some level at which hawala remittances reach a peak relative to the total.

    For Y = 2X, the solution value for b equals zero. Other solution values result when Y = 3X or other possible formulations.

    Not all the countries in this sample compile and report complete BOP data for use in the IMF’s Balance of Payments Statistics Yearbook.

    Note, for instance, anomalies in the transfers/remittances statistics of Pakistan and Philippines.

    It is tempting to surmise that Fund advice influenced this result, but it is impossible to know for certain.

    As X and Y are lowered, of course, it becomes easier to “bump these ceilings” and therefore raise the amount of estimated hawala.

    Of course, a decline in the relative share of informal remittances/transfers (RI) does not necessarily mean a fall in the absolute values.

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    176. Back to the Future: Postwar Reconstruction and Stabilization in Lebanon, edited by Sena Eken and Thomas Helbling. 1999.

    175. Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992-97, by Luis M. Valdivieso. 1998.

    174. Impact of EMU on Selected Non-European Union Countries, by R. Feldman, K. Nashashibi, R. Nord, P. Allum, D. Desruelle, K. Enders, R. Kahn, and H. Temprano-Arroyo. 1998.

    Note: For information on the titles and availability of Occasional Papers not listed, please consult the IMF’s Publications Catalog or contact IMF Publication Services.

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