Alternative Remittance Systems are alleged to handle between 100 and 300 billion dollars per year (Chene, 2008) through virtual transfers of money, i.e. “money transfer without money movement” (Jost and Sandhu, 2003); most of times, transactions involve only an exchange of debt, so money does not pass through any Central Bank nor SWIFT (Fisher and Hills, 2002). Underground bankers usually operate through legitimate businesses, gold or silver shops, remittance houses, moneychangers or unregulated financial houses (Trehan, 2003). Typical transactions in Hawala-like systems involve four agents (the sender, the receiver and two brokers) and they are carried out according to the following steps: the client first asks the broker to send money to a specific person (i.e. the beneficiary) living in another town or abroad; the broker sends the request to his partner (by mail or telephone) in that town/country, giving details allowing to identify the beneficiary, and he gives an identification code to the
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sender, which must be exhibited by the receiver in order to get the money. The Hawaladar profits by charging an exchange rate spread or a fee: the former is usually computed on the basis of unofficial exchange rate because no foreign exchange transactions take actually place; the latter instead depends on such factors as the location of receiver’s town (if he/she lives in remote areas and/or in countries lacking infrastructures, the commission is higher), the amount of money to remit (higher amounts may enjoy some discount), the frequency of transfers made by the same client, the ties between the Hawala dealer and the customer, the timing of transfer (if the transaction is urgent, Hawaladars charge higher fees) and the payment currency (local or foreign) (Passas, 2003).
The two partner brokers do not record the transaction by contracts or paper trails since the system is based on trust between parties. As stated by Chene (2008), “the system is culture friendly”, so migrants having strong ties with Hawala brokers can make transactions very easily. This practice makes it very difficult for authorities to recover the details of the transactions, including the identification of both senders and receivers. Connections are hence the basis on which Hawala networks are built up: the fact that in India the system is called Hundi, i.e. trust, confirms the importance of personal connection between users and brokers (Jost and Sandhu, 2003).
Gold is frequently used to balance the books of Hawaladars operating in different places, but settlement may even involve formal banking channels. As settlement operations are carried out periodically, Hawaladars must take into account foreign exchange rate fluctuations before settling. Depending on whether the provider carries out other businesses or not, settlement may be accomplished in several ways (FATF, 2005); some procedures examples are:
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Import transactions: HA (i.e. Hawaladar in country A, who is the debtor) may finance exports to HB (creditor) which acts as importer and accepts goods rather than cash; Simple reverse Hawala transaction: a payment in the opposite direction, i.e. if
someone remitted from country A to B, HB gives local currency to the beneficiary but do not receive money from HA; later, when someone in country B asks to transfer money to country A, HA pays without getting the sum from HB. Net settlement through banking wire transfers occurs only if flows between A and B are very disproportionate.
Complex reverse Hawala transaction: broker in country B (HB) gets money from a person wanting to have funds abroad but living in country C, which is subject to capital controls (e.g. countries in the Indian region and Africa). Settlement may be carried out in different ways: HB asks help to HA, which may suggest recurring to HC either because they are correspondent or because they still have to settle their accounts; alternatively, HA may order HC to make funds available for any receiver in country C; finally HB and HC may involve in a direct transaction and ask HA to settle their positions;
Bilateral settlement: HA simply makes a payment into HB’s accounts;
Multilateral settlement: same as bilateral settlement, but HA deposit money in HB’s foreign account, i.e. accounts held in countries with convertible currencies;
International services: HA settle his debt by providing services like education, medical assistance or travel to HB or residents of country B;
International investment transaction: HA buys financial products or services for HB (bonds, stocks but even real estate), whose country restrict foreign investments.
Transfers through Conventional Banking Systems. Physical Cash Movement.
Except for the last two cases, cash does not materially move cross-borders; settlement simply consists in adjusting credit and debt positions among Hawala dealers (El-Qorchi, Maimbo and Wilson, 2003; FATF, 2005 and 2013).
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Hawala dealers often have accounts in different places to make settlement process easier and to reduce their exposure to currency rate fluctuations. Anyway, if they do not have foreign accounts, a common practice is to settle positions by recurring to third-party intermediaries, usually located in other countries; by doing so, they can enjoy quicker settlement and lower costs in terms of fees and exchange rates. Most of these intermediaries are established in places offering economies of scale and more convenient foreign exchange rates, for example Dubai, New York, London, Hong Kong, Singapore and Switzerland (Passas, 2003).
Balance Sheet Effects of Prototype Hawala Transaction(Dollar ($) and local currency (LC) components, as indicated)
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Users’ Profile. Alternative Remittance Systems are generally used by migrants leaving poor families and moving abroad in order to get a job. Most of times both senders and receivers lack financial access because credit institutions do not operate in their areas or just because they are poor and they cannot afford those service; this is why underground banks are also called “the poor man’s banking system” (Buencamino and Gorbunov, 2002). Additionally, in case of wars and conflicts, IFTS are considered a safer means of transferring money; Afghanistan is an emblematic case because during the conflict and the Taliban regime, Hawala has completely substituted the formal sector. The most common origin countries of Hawala’s users are those having many worker expatriates, such as the Indian region, Middle East and East Asia. Some Non-Governmental Organizations have also started using underground banks in order to supply monetary aids to some populations (Chene, 2008).
Mechanics of IVTS and Settlement Process in IVTS in view of Possibly Multiple Intermediaries C
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