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Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

Since the September 11, 2001, terrorist attacks in the United States, there has been renewed public interest in informal funds transfer (IFT) systems. Press coverage, which often focused on the putative connection between the IFT systems and terrorist financing activities, helped to increase the level of official concern about IFT systems’ potential susceptibility to financial abuse. Some national financial regulators began examining existing regulations and, in some cases, designing, developing, and implementing new financial sector policies, including those that address IFT systems.1 Such actions led to a need to better understand the historical context within which IFT systems have evolved, the operational features that make the systems attractive, the fiscal and monetary implications for remitting and recipient countries, and the regulatory and supervisory responses to its current usage.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

This study responds to the growing interest in the operational characteristics and economic and regulatory implications of IFT systems. It contributes to the limited analytical literature on financial remittance mechanisms operating outside the conventional banking sector. It draws on the experience of a select sample of countries known to rely on the informal hawala system and reports on the (1) historical context within which the hawala has evolved; (2) operational features that make the system’s use attractive for both legitimate and illegitimate purposes; (3) fiscal and monetary implications for hawala-remitting and hawala-recipient countries; and (4) regulatory and supervisory responses. Although quantification of hawala remittances is subject to great uncertainty, this study also attempts to show, through a simulation, how this system can be quantified in 15 countries that are likely recipients of informal remittances.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

Different terms are used to describe informal funds transfer systems, including “alternative remittance systems,” “underground banking,” “ethnic banking,” and “informal value transfer system.” This study uses the term “informal funds transfer systems” for four basic reasons. First, in some jurisdictions, these systems are the dominant means by which financial transfers are conducted and therefore cannot be referred to as “alternative remittance systems.” Second, in some communities, informal funds transfer service providers operate openly—with or without government recognition; thus, this system cannot be referred to as “underground.” Third, the use of these mechanisms is often cross-cultural and multiethnic; thus the term “ethnic banking” is overly restrictive. Fourth, IFT better captures the sense and nature of financial transfers akin to conventional banking that are of primary interest to this discussion.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

Since the terrorist attacks of September 11, 2001, there has been increased public interest in informal funds transfer (IFT) systems. This paper examines the informal hawala system, an IFT system found predominantly in the Middle East and South Asia. The paper examines the historical and socioeconomic context within which the hawala has evolved, the operational features that make it susceptible to potential financial abuse, the fiscal and monetary implications for hawala-remitting and hawala-recipient countries, and current regulatory and supervisory responses.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

IFT systems are ancient and well rooted in the cultures of various countries. Despite the different terminology ascribed to them—fei-ch’ien (China), hui kuan (Hong Kong), hundi (India), hawala (Middle East), padala (Philippines), and phei kwan (Thailand)—the growth of informal funds transfer systems is primarily entrenched in the monetary facilitation of trade between distant regions. Before the advent of paper money, traders historically used gold and other precious metals for payments. However, insecurity along many trade routes led to developing alternatives that did not require the physical movement of gold and precious metals. This process occurred at different times in the various regions of the world and gave birth to instruments that are similar to, or work on the same basis as, IFT systems.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

Assertions that hawala “sends money without sending money” are misleading. Many discussions of remittances through the informal funds transfer systems give the impression that this kind of transaction is very different from making international payments through established institutions, such as banks or money exchanges.20 It is as if in informal hawala transactions, “money” simply submerges on one side of a border and pops up in a village on the other side, with no further complications, and in a manner unlike that of any other kind of financial transaction. Table 5.1 gives a summary overview of how value is transferred in various kinds of channels.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

Because of their significance, IFT systems have been the subject of regulatory concern for a very long time. Their recent notoriety has merely rekindled and galvanized this interest. Overall, the study found distinct differences between remitting and recipient countries’ government policy toward the informal hawala system. On the one hand, in recipient countries, important influences on the regulatory attitude toward the system have been state policies prohibiting informal financial transfers, the quality of the formal financial sector, and the level of political stability. On the other hand, hawala-remitting countries generally have fairly liberal foreign exchange policies and developed financial sectors. In these countries, the interest in IFT systems primarily stems from concerns about their potential criminal abuse. This section briefly reviews the evolving oversight framework for hawala dealers in some countries in line with changes in government policy. The examples in this section illustrate current practice in a number of countries. The description of one country’s approach does not imply that it is the only country pursuing this approach.

Mr. Mohammed El Qorchi, Mr. Samuel Munzele Maimbo, and Mr. John F. Wilson

Abstract

Historically, IFT systems are relatively commonplace. Despite the different terminology ascribed to IFT systems—fei-ch’ien (China), hui kuan (Hong Kong), hundi (India), hawala (Middle East), padala (Philippines), and phei kwan (Thailand)—they developed to provide monetary facilitation of trade between distant regions at a time when conventional banking instruments were either absent or weak. Over time, the operational features of speed, low cost, cultural convenience, versatility, and potential anonymity led to their use for various legal and illegal remittance purposes.