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Saturday, September 23, 2006

Informal Payment Mechanisms and Terrorism

This article from the Asian Times describes informal payment mechanisms in developing countries, markets that authorities are attempting to shut-down to prevent the flow of money to terrorists. However, in the process many small businesses who rely on these markets are finding it much more difficult to conduct financial transactions:

Moving money without really moving it, by Indrajit Basu, ATimes: Emerging from his damp cubbyhole office in one of the labyrinthine lanes in Burrabazaar, Kolkata, the busiest trading hub in the eastern part of India, Champalal Bubna mopped his brow. ...[O]rdinarily he would have hated walking up the long road ahead - too narrow for a car to enter - carrying the heavy grocery bag he had with him.

But that day, he didn't mind, for the bag ... was full of hard cash, and he had to hurry to deliver the consignment to his associate's office about 3 kilometers of winding lanes ahead. The money had to move through informal channels that day for a payment in US dollars to a marble exporter in Cairo. Soon thereafter, he had to rush to meet a new client who also wanted to move money informally to an iron-scrap supplier in Georgia.

"It's getting hectic these days," said Bubna ... an erstwhile hawaladaar ... "Moving money by hawala is getting very difficult...," he said, "but thank God it is, because that's why demand is booming and my knowledge of the tricks of this trade and the contacts are coming in handy."

Indeed. The Indian government may have intensified its "war on terrorism" and its financial channels including hawala or hundi and angaria, but that has only resulted in a burgeoning demand for "informal value transfer systems", because in the pursuit to regulate money-laundering in the wake of renewed terrorist attacks, the government is also clamping down on regular or formal money-transfer systems, which is making life difficult for the numerous small-business people in the country.

"For any transaction above as little as Rs50,000 [$1,100], Indian banks ask for a host of documents these days...," said Santosh Rathi, who imports marble from Cairo. "Even a money transfer for a simple thing like rent payment through the banking channels requires reams of documentation." ...

Hawala and/or hundi and the angaria - which involves movement of cash within the country - are alternative remittance systems that operate outside of, or parallel to, traditional banking or financial channels. ...[T]hese systems developed before the introduction of Western banking practices and gradually proliferated to emerge as major remittance systems around the world.

Several other such systems such as "chop", "chit" or "flying money", all indigenous to China, are also used around the world, but hawala, despite being an "underground banking" system, remains the most popular because of its components of trust and the extensive use of connections such as family relationships or regional affiliations. Unlike traditional banking or even the chop system, hawala makes minimal (often no) use of any sort of negotiable instrument. Transfers of money take place based on communications between members of a network of hawaladaar, or hawala dealers.

Hawala and its kind work by transferring money without actually moving it. A fax, e-mail or telephone call communicates to the counterpart overseas the amount, name, address and telephone number of the recipient. Pools of cash are maintained at both ends of transactions and payments are made reliably, fast, cheaply and conveniently in places where banking services are unavailable or inefficient. Therefore when compared with traditional means of remitting money, such as obtaining a check or ordering a wire transfer, these systems are much simpler, cheaper and "tax efficient", since transactions can easily be kept outside the domain of revenue officials.

This is why hawala and angaria have been a part of the Indian (and Pakistani, Bangladeshi and Philippine to name a few) money-transfer systems for decades. They thrived on the plethora of restrictions that India's erstwhile closed economy imposed on transactions... Moreover, not all hawala transactions were illegal, and it helped business in remote areas, such as enabling a farmers deep in the hinterland to make and receive payments.

However, things changed after September 11, when governments across the world realized that hawala and its cousins were being used extensively for money-laundering and, most important, transferring terrorist funds. According to Interpol, almost all terrorist attacks the world over in the past five years have used hawala and other informal value-transfer systems to fund their operations. ...

Therefore, like the US and many other countries, India started clamping down on hawala and even the regular transfer channels. For instance, ... Indian banking laws have been tightened to make a plethora of documents necessary for simple transactions... Consequently, even as authorities claim they have been able to check hawala transactions drastically, according to Bubna, its demand has increased manifold. "I quit this business a few years back because I was scared of the clampdown. But now I get a new query almost every other day," said Bubna. "We have to be very careful too, so my service charges are three times what [they] used to be five years back."

But Bubna insisted that all his clients are straight: "Please note, all my clients are just businessmen; no terrorism or drug dealers," he said. According to him, hawala's biggest users are jewelry traders, the construction, tourism and transportation sectors, and large companies that need to move cash in a hurry.

"I do not know how much money moves in India through hawala channels these days but my guess is 40% of the Burrabazaar's [literally, Huge Market] businesses depend on hawala and angaria," said Bubna. "In Delhi and Mumbai it could be even more." ... [Note: Names and other identifiable details have been changed for obvious reasons.]

    Posted by on Saturday, September 23, 2006 at 07:11 PM in Economics, Financial System, Terrorism | Permalink  TrackBack (0)  Comments (4)


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