Lack of real action on remittances increases terrorist financing risk

Pushing money remitters out of the market is only likely to increase the risks of money laundering and terrorist financing. Shutterstock

Globally migrant communities will send nearly US$435 billion to family members in home countries this year. These remittances are vital and sustain not only the livelihoods of the recipients, but also the economies of poor countries.

Recently Westpac, mirroring 2013 steps by Barclays in the UK, became the last big Australian bank to terminate its services to small remitters. This poses a serious risk to the continued, transparent flow of remittances.

Not all Westpac remitter accounts were closed as a group of remitters brought a [legal case](https://www.comcourts.gov.au/file/FEDERAL/P/NSD1222/2014/order_list#;javascript:void(0) against Westpac. This case as well as discussions between the newly organised Australian remittance industry, the banks and the Australian government continue. The lack of real and urgent action however threatens to increase terrorist financing risks.

Moving money – above or below board

Informal, ethnic remittance services – for example, in the form of hawala – are well-developed and often said to pre-date Western banking. These systems shift value across borders without moving physical money. The flow happens through a network of trusted agents, often involving cross-border trade and over and under-invoicing.

Informal remittance systems transfer funds cheaply and efficiently for honest customers. However, the lack of transparency and industry practices also expose them to abuse. Informal remittances are ideal for money laundering, tax evasion and terrorist financing.

Alongside informal services, formal providers channel money through the banking system. Formal remittance transactions are generally handled by large international companies like Western Union and Moneygram and a host of small service providers. These providers - generally small businesses with ties to ethnic communities - provide affordable and accessible services to ethnic migrant communities. To remit money through the formal financial system, remitters require bank accounts.

From 2001 governments decided to formalise these services and terminate informal remittances. Yet full regulation of remittance services was deemed challenging. Governments settled for basic registration of providers who were required to implement anti-money laundering and terrorist financing (AML/CTF) measures.

The AML/CTF compliance burden soon proved too onerous for small remitters, while the registration processes were inadequate to weed out criminal elements and ensure the integrity of registered remitters.

Simultaneously the duty of banks to monitor their customers to prevent criminal transactions was increased, especially in relation to higher-risk customers. Regulators identified remittance businesses as higher-risk customers, thereby requiring banks to spend more money on monitoring their accounts than those of less risky customers. It soon became clear the costs of maintaining these accounts exceeded the income they could generate.

Further pressure was placed on remittance relationships when regulators began to impose superfines on banks for AML/CFT failures. Large international banks began to refuse to deal with smaller banks that could not prove they were adequately managing remittance risks. Targeted law-enforcement action against remitters provided evidence of serious criminal infiltration and collusion by some providers.

For many banks it just made compliance and business sense to exit the small remitter market, thereby undermining the formalisation policy objective.

What now?

Remitter account closures are occurring worldwide and regulators appear unable to prevent it. The most promising development to date was the establishment of a joint government and industry task group in the UK (the Action Group on Cross Border Remittances) to develop, among others, a safe UK-Somalia remittance corridor.

In general, however, regulators have merely called on banks not to engage in wholesale account closure, without taking any steps to change the rules that have led to this response. Given that money service business account closures started in the mid-2000s in the US, the lack of action is disappointing. Regulators have had 10 years to intervene. . The reality is that remittance flows will not stop. Immigrants who need to support vulnerable and often desperate family members abroad will continue to do so. They have no option.

If they cannot afford the more expensive services of the larger, formal providers, they will use informal channels or one of the myriad new online channels. Greater use of these channels will increase terrorist financing risks to society. In addition, the frustration and alienation experienced by members of such communities in Australia and abroad may translate into higher terror risks.

There are therefore compelling reasons to turn this situation around. What can be done?

1) Develop a holistic policy

The remittance debacle constitutes clear policy failure. Initial policy interventions were driven by security concerns. The sense of urgency in 2001 did not allow for sufficient fact-gathering and consultation. A holistic policy that aligns the national security, regulatory and international development goals of government is required.

Cross-border cooperation is also required. Money remitted from Australia is received elsewhere. When the recipient is in Somalia or another developing country where secure identification is not available, Australia will need to cooperate with foreign governments to limit criminal risks.

2) Regulate remittance services appropriately

The amount of money involved and the social impact of remittances demand appropriate regulation, including consumer protection. Governments recognised the need for regulation but were not prepared to do what it takes. They therefore restricted the regulatory focus to AML/CTF aspects only and burdened banks with an uncommercial, quasi-regulatory monitoring function.

This approach has clearly failed. The industry requires a regulator with a broad mandate, one that reflects and balances the interests of the broader industry, providers, customers and society. Industry self-regulation could assist in nurturing the industry but government must shoulder the weight of the regulatory responsibility.

3) Cap transactions by small remitters

The regulatory and supervisory frameworks can be proportionate if a risk-based approach is adopted. The most challenging entities to regulate are the small, independent remitters. One light-touch option is to provide a special minimal compliance regime enabling them to process a limited number of small remittance transactions.

For example, one could impose limits on individual transactions, with a total cap on the value of their monthly remittance business. Such caps are used successfully to reduce the risks posed by mobile money in developing countries. Correctly calibrated caps would align the risk of abuse with the compliance capacity of the business, while facilitating affordable remittance flows.

These are longer-term solutions. In the short term – counted in days and weeks – we need government action to secure banks that are still willing to engage these remitters. It’s up to government to devise a scheme that can keep small remittances flowing – and terrorist financing risks contained – until a more appropriate framework is developed. Having created the regulatory conditions for account closures, it is insufficient to merely call on banks not to close these accounts.

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