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10. Some Critical Issues on Informal Value Transfer Systems in Eastern and Southern Africa Anti–Money Laundering Group Member Countries

Author(s):
International Monetary Fund
Published Date:
March 2005
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Author(s)
Charles Lengalenga

The Eastern and Southern Africa Anti–Money Laundering Group (ESAAMLG) was conceived in 1999 and is a Financial Action Task Force–style (FATF-style) regional body with a membership of 14 countries—Botswana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe.

This article examines the overall historical development of informal value transfer systems (IVTSs) in the ESAAMLG region and also looks at how the lack of formal banking facilities (or their cost, where available) has affected the evolution of the IVTS. This article also looks at a number of possible interventions by ESAAMLG member countries that could minimize the possibility of an IVTS being used as a vehicle for financing of illegal activities, including terrorist financing. In addition, this article examines the possible challenges that may be inherent in the available interventions.

Background

As a starting point, one needs to appreciate that most of the member countries, save for a few, are classified in the very poor economic brackets.

In addition, it is appropriate to highlight the historical perspective. From the late 1950s through the early 1960s, most of the member countries embarked on extensive educational reform, which resulted in a lot of their citizens passing through formal education systems and enabled them to acquire vocational and professional skills. However, given the imbalances in industrial development, which saw few countries making advancements in their economic setups, the migration of skilled and unskilled workers became very common. Frequently, skilled and unskilled workers migrated farther south to South Africa or to then Southern Rhodesia, both of which had relatively well-developed capitalist systems with the capacity to employ large numbers of both skilled and unskilled laborers.

It was common to have large numbers of Malawian, Mozambican, and Zambian skilled and unskilled laborers working in the South African industries and the Southern Rhodesian mines. However, because of the austere living and working conditions, the migrant workers left their families and dependents in their home countries. As the migrants were the primary providers for their families, an informal value transfer system emerged. The migrant workers remitted money to their kin through unofficial means, using bus drivers and long-distance truck drivers that were traveling the extensive road network as their couriers.

To date, the existing plethora of regional bodies, such as the Southern Africa Development Community (SADC), Common Market for Eastern and Southern Africa (COMESA), and East African Community (EAC), has given an added dimension to the informal value transfer systems. The existing need for regional integration has led to the construction of networks of all-weather roads throughout eastern and southern Africa. Currently, there is a modern, well-established passenger bus transport system as well as a heavy-duty overland-vehicle system all the way from South Africa, through Zimbabwe, Zambia, Tanzania, and Uganda. With the increased regional integration that allows the local citizenry to work or conduct commercial business in other countries, it is very common to see income earners, whether they are unskilled or skilled laborers, consigning cash on the extensive road network to their home countries.

To use the well-established road transport, all the remitter needs to do is give the cash to the bus crew or trucker, along with the name of the recipient and the pickup point, at very minimal cost. This system of informal value transfer is advantageous because it is relatively inexpensive, timely, and reliable. This is distinct from the formal value transfer system, which has prohibitively expensive transfer charges and is plagued by stories of cash shortages at the value destination point. In one case study, to send the equivalent of US$150 by bus from the city to a rural outpost cost US$3, compared with US$22 for sending the same amount by postal bank.

Undeveloped Banking and Formal Value Remittance Systems

One of the critical factors in the use of the unconventional and unregulated IVTS is the lack of banking facilities and other modern amenities for managing money, which has left many rural communities without any alternative but to use the person-to-person method of delivering value.

A recent evaluation of the region’s efforts to combat money laundering and the financing of terrorism has shown that less than 40 percent of the populations of some countries have access to banking facilities. This means that close to 60 percent have to find alternative means to conduct commerce or transfer their income between points. The available anecdotal information indicates that the ratios of people without access to banking facilities are even higher among the poorer members of the groups evaluated. This state of affairs leaves the informal value transfer system as the automatic stopgap and is seen as a natural feature of the cash-based economies of the region.

Cost of Banking Facilities

The use of alternative systems is encouraged by the cost of using the formal remittance system. In some documented cases, a remitter is charged as much as 20 percent to 30 percent of the principal amount being remitted. To the majority of the people in the region, whose very survival is hampered by extreme poverty and the lack of the basic resources to sustain life, having to pay such comparatively large remittance charges is a choice they cannot entertain. Thus, in the circumstances, most people would prefer the cheaper IVTS, which in some instances has the added advantage of having someone known to the remitter transport or deliver the funds. However, from the standpoint of recouping the value in the event the remittance is lost in transit, the informal value transfer system has its risks.

Although some governments have attempted to regulate such transnational transactions at borders by restricting the amounts that can be imported or exported, the system remains porous, and it is largely left at the mercy of the IVTS users. The border regulatory mechanisms in such cases are very weak. Also, where the border control officers come across such a transaction, which may be in excess of what is permitted, corruption by the very public officers charged with the policing duties portends another problem. Generally, government law enforcement officers, like other civil authorities, are not well compensated. Thus, the risk of the law enforcement officers taking a little “tip” from the remitted funds is great.

Possible Intervention in the Use of the Informal Value Transfer System

To ensure that the use of informal value transfer systems is kept in check to minimize its potential for various abuses, the responsible authorities have a number of options open to them.

Make more banking services available to remote areas. This is a more academic than practical solution in that most of the communities in the member countries cannot sustain a banking facility. In many countries, as most rural populations live at 70 percent to 80 percent below the poverty levels, the setting up of banking facilities would be doomed to failure right from the start. In a number of countries in the region, the ambitious setting up of banking facilities has often been followed by subsequent bank closures. Most banks, particularly the more risk-sensitive foreign-owned banks, have outright shunned setting up branches, preferring to remain in the metropolitan centers.

Increase awareness that people can lose their money in the event of an accident. While the citizenry is well aware of the risks of loss through accidents, this possibility is apparently largely seen as remote and is usually accepted as an unavoidable twist of fate when it does occur. There have been incidents of fire and other road traffic accidents involving the transport vehicles carrying these types of uninsured valuables.

Tighten border controls. Although this tool has always been available to combat illicit imports or exports of foreign currency, the propensity of civil service authorities to connive with errant IVTS operators creates rather than solves a problem. The attitudes and corruption of some public officials have tended to consign this approach to the backstage of civil rhetoric, notwithstanding the good intentions of prospective reformers.

Develop a mechanism of regulating such remittances. Currently, there are no watertight mechanisms to regulate informal value transfer systems. Only recently has ESAAMLG been exploring ways of having the member countries place IVTSs in their scope of monitoring and control. With the lack of research findings and proper documentation of the patterns and existence of IVTSs, it will be a long time before any noticeable monitoring and control mechanisms are brought to bear.

Make formal banking services such as remitting funds cheaper and consider establishing maximum threshold figures on commission charges. Although this is an attractive proposition, it may be seen as going against the general wind of economic liberalization—embraced by most member countries—which encourages individual business entities to determine their own value-generation parameters.

Define and name the system, as a starting point, because as it is, the system has no name. Naming and defining a system is a good starting point for any actions meant to bring the monitoring and control of IVTSs into the scope of ESAAMLG member states. Whereas in the eastern member countries the informal money transfer system has been conceptualized and a name—hawala—ascribed to it, that is not the case farther south. If any universal policy decisions and actions regarding IVTSs were to be undertaken in the region, it would be necessary to ascribe a regionally recognized conceptual name to the system. Perhaps hawala, a word that is already widely used in East Africa, could be considered for adoption in the wider regional circle.

Obtain political commitment. In taking any actions meant to monitor or regulate IVTSs, political commitment is essential. However, such a commitment does not come cheaply because the member countries have other perceived national priorities. Thus, the problems of IVTSs, as with money laundering in general, are largely seen as secondary to the more pressing health, education, and poverty issues. The lack of documentation and regulation of IVTS in the region has not helped the situation, because there is no authoritative basis on which policy decisions can be made.

Other Challenges of Monitoring and Regulating IVTSs

Although the 14 member countries of ESAAMLG have agreed to adopt and implement FATF’s eight special recommendations, very few countries have made any real progress in adapting them to their financial institution regulatory frameworks. By and large, most member countries are still engaged in political debate on the necessity of what some quarters see as largely intrusive and liberty-thwarting principles. A few jurisdictions have drafted legislation to combat the financing of terrorism but, as may be expected, promulgation has not come automatically because of various sensitivities relating to religion and perceived infringements of personal liberties. The following are impediments to implementing the eight special recommendations.

  • Currently there are no documented authoritative studies on IVTSs. This is a major stumbling block, as any meaningful policy decisions or actions have to draw on documented and recognized typologies of IVTSs. Going forward, there is obviously a lot of scope for research into the subject and documentation of IVTS characteristics.
  • IVTSs are considered normal and part of the commercial and socio-economic setup of the member countries. In short, a very good case needs to be established for the citizenry to appreciate why IVTSs regulation is needed.
  • In some jurisdictions, the existing banking systems encourage IVTSs; for example, in some countries, persons can only remit so much at a time—US$1,000 a day—so a remitter has to find a convenient alternative means to beat the official threshold. In some countries, a severe foreign exchange shortage has necessitated austere exchange controls, which in turn have forced people to opt for IVTS to avoid the attendant penalty charges or to circumvent the red tape associated with the formal process of handling foreign currency.

Conclusion

Some countries in the group have yet to come to terms with the need to play an active role in ensuring that IVTSs are not left open to possible use by terrorism financiers. Indeed, it will take a lot of persuasion by all concerned international stakeholders to get some member countries to realize the need to move with the rest of the international community toward focusing on informal value transfer systems as possible terror financing avenues. Probably the very nature and economic composition of most member countries will necessitate a “softly-softly” approach, recognizing the cash-based feature of our economies. Taking a prescriptive approach without properly unraveling the key issues related to the use of IVTSs could just worsen the situation by causing the involved players to drive their activities underground. This is where the setting up of ESAAMLG comes in handy. The group brings together the key multidisciplinary cadre needed to work through issues and advise the member governments on what realistic and balanced actions they can take to ensure that the IVTSs are not abused.

Although all 14 ESAAMLG member countries have signed up to adopt and implement the 8 FATF special recommendations on terrorist financing, the authorities have yet to fully explore and understand the problem. Indeed, most of the jurisdictions are still in the process of implementing the first stages of the FATF 40 recommendations on anti–money laundering practices. Therefore, it is going to be a while before member countries make any meaningful progress in putting IVTSs into the scope for appropriate regulation. Although acts of terrorism have occurred at various places in the region, there is little or no firm, documented evidence that an IVTS has been the conduit of the money used in the terrorist activities. However, we can safely conclude that an IVTS presents a possible and serious avenue for financing of terrorism.

Clearly, the larger part of the population may not be aware of the potential for IVTSs to be used for the financing of terrorism. Some ESAAMLG countries have considered themselves out of harm’s way insofar as international terrorism is concerned. Thus, our initial impression is that, up to a certain point, it will require considerable effort to get such jurisdictions—at some levels within the member countries—to consider monitoring and regulating IVTSs.

Charles Lengalenga is the executive secretary of the Eastern and Southern Africa Anti–Money Laundering Group.

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