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Vital and Vulnerable: The Two Faces of Money and Value Transfer

Tom Keatinge believes the unintended consequences of FATF Recommendation 14 for Hawala and other similar service providers requires better understanding by all involved.

August 24, 2015 | Tom Keatinge

Too often in the name of security, policy makers and regulators in fact create greater insecurity as they fail to anticipate the unintended consequences of their actions: the regulation of the money/value transfer sector is a classic case in point.

Following the attacks of 9/11, the Financial Action Task Force (FATF), guardian of global standards for tackling money laundering since 1989, was tasked with addressing the global desire to disrupt the financing of terrorism.  Firing the first shot in his ‘War on Terror,’ George W Bush called for terrorists to be starved of funding.  The nine so-called ‘Special Recommendations’ (SRs) that followed included SR6, aimed at curbing the ability of terrorists to move funding through informal and unregulated channels.

In 2012, FATF’s Recommendations were revised and consolidated, but the focus on money/value transfer remains.  FATF’s new Recommendation 14 requires that countries ‘should take measures to ensure that natural or legal persons that provide money or value transfer services (MVTS) are licensed or registered, and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.’  Those that fail to operate with a licence or appropriate registration should feel the appropriate force of the law.

Yet such informal conduits for the flow of finance play a vital role for diaspora seeking to send much-needed funds to relatives in developing countries or for aid agencies to distribute wages and donor-funding to their programmes in jurisdictions around the world ignored by the formal banking system.And here in lies the dichotomy.  Remittance companies (sometimes referred to as Hawalareflecting the nature of the transfer mechanism) provide a highly efficient, reliable, cost-effective but (to the authorities) opaque ‘trust-based’ transfer system.  On the one hand, for the humanitarian community Hawala is an essential mechanism for providing finance to the unbanked in developing countries.  On the other, for the international security community, Hawala has proved to be an enigma and, despite attempts at control and regulation in a variety of countries, continues to be viewed as a potential weakness in the structure of the global counter-terror finance regime.

The importance of remittance flows is undeniable with diaspora-remitted funding often dwarfing bilateral or multilateral donor aid.  Such remittances are often a lifeline for those that receive them – remittance flows to developing countries are estimated by the World Bank to have totalled US$436 billion in 2014.

But the informal, often unregulated nature of these transfers leaves them open to abuse.  The most recent typologies report published by the FATF regional-style body for Asia Pacific (APG) reveals a range of illicit activity in the region supported by remittance flows, including human trafficking, money laundering, and gambling-based embezzlement.

There is no doubting the significant value that Hawala and other similar service providers can bring to those that, for entirely valid reasons, have to operate outside the formal financial sector.  Equally, it is unquestionably the case that such money flows are less transparent and thus more open to abuse than flows that pass through the regulated banking system.  Thus, whilst regulators and policymakers must comply with their FATF obligations to ensure that Hawala and other similar service providers (HOSSPs) are licenced and registered, they must also avoid disrupting an industry that plays a vital role for those whom the formal banking sector cannot serve.  Likewise HOSSPs, individually and through national associations, must recognise that high standards of governance and due diligence are not optional and must be maintained at the highest level.

The security and potential abuse of the financial system for the purposes of money laundering and terrorist financing are key concerns for authorities around the world.Balancing this fear with the continued operation of a critical global funding mechanism should be the concern of all involved.

Tom Keatinge is a Director at the Centre for Financial Crime and Security Studies, Royal United Service Institute, London




Keywords:Risk And Regulation, Financial Crime, Financial Action Task Force

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