Baanking Article
TR E N D S & ISSUES
No. 300
in crime and criminal justice July 2005
Underground Banking: Legitimate Remittance Network or Money Laundering System?
Rob McCusker
Underground banking, where money is transferred through informal rather than formal banking sectors, is a recognised method by which legitimate remittances from overseas workers are routinely transferred. However, underground banking has also long been regarded as a conduit for money laundering by criminal organisations and arguably by terrorist networks. It is important to achieve a balance between regulating the underground banking sector in an attempt to reduce the flow of illicit funds, and permitting its continued use as a legitimate, alternative remittance system. This paper provides policy makers and others with an interest in underground banking matters with a concise overview of how underground banking systems work, along with the potential associated with such systems for criminal activity and the various regulatory responses that governments have employed to date.
Toni Makkai Director
ISSN 0817-8542 ISBN 0 642 53884 0
Definition
Underground banking is a generic term used to describe any informal banking arrangements which run parallel to, but generally independent of, the formal banking system. Underground banking systems are also referred to as alternative remittance systems (FATF 1999), informal funds transfer systems (World Bank & IMF 2003) and informal value transfer systems (FinCEN 2003). Particular types of underground banking systems are also used to describe the underground banking process. These include hawala (India), hundi (Pakistan) and fei ch’ien (China) (Passas 1999). Underground banking takes place in many parts of the world ranging from Hong Kong and Paraguay to Canada and Nepal (Passas 1999). The combination of the geographic diversity and varied typology of underground banking systems makes them attractive for illegal activities and difficult for regulators to
No. 300
in crime and criminal justice July 2005
Underground Banking: Legitimate Remittance Network or Money Laundering System?
Rob McCusker
Underground banking, where money is transferred through informal rather than formal banking sectors, is a recognised method by which legitimate remittances from overseas workers are routinely transferred. However, underground banking has also long been regarded as a conduit for money laundering by criminal organisations and arguably by terrorist networks. It is important to achieve a balance between regulating the underground banking sector in an attempt to reduce the flow of illicit funds, and permitting its continued use as a legitimate, alternative remittance system. This paper provides policy makers and others with an interest in underground banking matters with a concise overview of how underground banking systems work, along with the potential associated with such systems for criminal activity and the various regulatory responses that governments have employed to date.
Toni Makkai Director
ISSN 0817-8542 ISBN 0 642 53884 0
Definition
Underground banking is a generic term used to describe any informal banking arrangements which run parallel to, but generally independent of, the formal banking system. Underground banking systems are also referred to as alternative remittance systems (FATF 1999), informal funds transfer systems (World Bank & IMF 2003) and informal value transfer systems (FinCEN 2003). Particular types of underground banking systems are also used to describe the underground banking process. These include hawala (India), hundi (Pakistan) and fei ch’ien (China) (Passas 1999). Underground banking takes place in many parts of the world ranging from Hong Kong and Paraguay to Canada and Nepal (Passas 1999). The combination of the geographic diversity and varied typology of underground banking systems makes them attractive for illegal activities and difficult for regulators to
References: Attorney-General’s Department 2004a. Anti-money laundering reform issues paper 2: real estate dealers. Canberra: AGD. http://www.ag.gov.au/aml ——— 2004b. Anti-money laundering reform issues paper 3: dealers in precious metals and stones. Canberra: AGD. http://www.ag.gov.au/aml ——— 2004c. Anti-money laundering reform issues paper 4: the gambling industry. Canberra: AGD. http://www.ag.gov.au/aml Aufhauser D (General Counsel, US Treasury Department) 2003. Testimony before the Senate Judiciary Committee, Subcommittee on Terrorism, Technology and Homeland Security 26 June. http:// judiciary.senate.gov/testimony.cfm?id=827&wit_ id=2354 AUSTRAC 2004, Annual report 2003–04. Sydney: AUSTRAC. http://www.austrac.gov.au/annual_ report_2003-04/AUSTRAC_Annual_Report0304_ 290904.pdf Ballard RB 2003. A background report on the operation of informal value transfer systems (hawala). Manchester: University of Manchester Centre for Applied South Asian Studies. http://www. art.man.ac.uk/CASAS/pdfpapers/hawala.pdf Buencamino L & Gorbunov S 2002. Informal money transfer systems: opportunities and challenges for development finance. Discussion paper of the United Nations Department of Economic and Social Affairs (DESA) no 26. http:// www.un.org/esa/esa02dp26.pdf Committee on Banking, Housing and Urban Affairs 2001. Statement of Rahim Bariek, Bariek Money Transfer. Hearing before the United States Senate Subcommittee on International Trade and Finance, 107th congress on hawalas and underground terrorist financing mechanisms. http://www.senate. gov/~banking/_files/107660.pdf El-Quorchi 2002. Hawala. Finance and development 39(4) December. http://www.imf.org/ external/pubs/ft/fandd/2002/12/elqorchi.htm Financial Crimes Enforcement Network (FinCEN) 2003. Informal value transfer systems. FinCEN Advisory Issue 33. Washington DC: US Department of Treasury. http://www.fincen.gov/ advis33.pdf Financial Action Task Force on Money Laundering (FATF) 1999. 1998–1999 report on money laundering typologies. Paris: OECD. http://www1. oecd.org/fatf/pdf/TY1999_en.pdf ——— 2003a. Combating the abuse of alternative remittance systems: international best practices. Paris: OECD. http://www1.oecd.org/fatf/pdf/SR6BPP_en.pdf ——— 2003b. The forty recommendations. Paris: OECD. http://www1.oecd.org/fatf/pdf/40Recs2003_en.pdf Hayaud-Din MA 2003. The hawallah network: culture and economic development in Afghanistan. International social science review vol 78. http:// www.findarticles.com/p/articles/mi_m0IMR/is_1-2_ 78/ai_106558980 International Labour Office 2000. Making the best of globalisation: migrant worker remittances and micro-finance. Geneva: ILO. http://www.ilo.org/ public/english/employment/finance/download/ remitt.pdf International Monetary Fund (IMF) 2005. Approaches to a regulatory framework for formal and informal remittance systems: experiences and lessons. Washington DC: IMF. http://imf.org/ external/np/pp/eng/2005/021705.pdf Lehmkuhler S 2003. Countering terrorist financing: we need a long-term prioritizing strategy. Journal of homeland security April. http://www.homelandsec urity.org/journal/articles/displayArticle. asp?article=87 Maimbo SM 2003. The money exchange dealers of Kabul: a study of the hawala system in Afghanistan. World Bank working paper no 13. Washington DC: The World Bank. http://www-wds. worldbank.org/servlet/WDS_IBank_Servlet?pcont= details&eid=000090341_20031016085357 Passas N 1999. Informal value transfer systems and criminal organisations: a study into so-called underground banking networks. Netherlands: Ministry of Justice. http://usinfo.state.gov/eap/img/ assets/4756/ivts.pdf ——— 2003. Hawala and other informal value transfer systems: how to regulate them? Washington DC: US Department of State. http:// www.usinfo.state.gov/regional/ea/chinaaliens/ shawala.htm Permanent Subcommittee on Investigations 2001. Minority Staff of the Permanent Subcommittee on Investigations report on correspondent banking: a gateway for money laundering. Washington DC: US Senate. http://www.senate.gov/~gov_affairs/ psi_finalreport.pdf Ratha D 2003. Workers’ remittances: an important and stable source of external development finance. In Global development finance: striving for stability in development finance. Washington DC: The World Bank Sander C 2003. Migrant remittances to developing countries. London: Bannock Consulting. http:// www.bannock.co.uk/PDF/Remittances.pdf Schneider B 2003. Measuring capital flight: estimates and interpretations. Working paper 194. London: Overseas Development Institute. http:// www.odi.org.uk/publications/working_papers/ wp194_maintext.pdf Secretary of US Department of Treasury 2002. A report to the Congress in accordance with section 359 of the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act). Washington DC: US Department of Treasury. http://www.fincen.gov/hawalarptfinal11222002.pdf The 9/11 Commission 2004. The 9/11 Commission report: final report of the National Commission on Terrorist Attacks upon the United States. Washington DC: US Government Printing Office. http://a257.g.akamaitech.net/7/257/2422/ 05aug20041050/www.gpoaccess.gov/911/pdf/ fullreport.pdf US General Accounting Office 2003. Terrorist financing: US agencies should systematically assess terrorists’ use of alternative financing mechanisms. Washington DC: General Accounting Office. http://www.gao.gov/new.items/d04163.pdf Wilson JF 2002. Hawala and other informal payments systems: an economic perspective. Washington DC: International Monetary Fund. www.imf.org/external/np/ leg/sem/2002/cdmfl/eng/ wilson.pdf World Bank & IMF 2003. Informal funds transfer systems: an analysis of the informal hawala system. Washington DC: World Bank. http://wwwwds.worldbank.org/servlet/WDSContentServer/ WDSP/IB/2003/05/03/000094946_ 03041904002082/Rendered/PDF/multi0page.pdf Wucker M 2004. Remittances: the perpetual migration machine. World policy journal XXI(2). http://www.worldpolicy.org/journal/articles/wpj04-2/ Wucker.pdf 6 Rob McCusker is a research analyst in the Global, economic and electronic crime program at the Australian Institute of Criminology General editor, Trends & issues in crime and criminal justice series: Dr Toni Makkai, Director, Australian Institute of Criminology, GPO Box 2944 Canberra ACT 2601 Note: Trends & issues in crime and criminal justice are peer reviewed The AIC is a statutory body with a Board of Management comprising Australian, state and territory government representatives, administered under the Criminology Research Act 1971