Remittance Sector in Flux Part Two: Who or What Will Fill the Void of Small Remittance Agencies

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On the 1st of February I wrote an article which outlined the shutdown of traditional remittance services, spurred on by stricter know your customer regulations. These regulations forced banks, who provided the necessary bank accounts to remittance agencies, to know not only the identities of these remittance agencies, but also the customers that they dealt with. This has caused banks such as Westpac and ANZ to cease dealing with remittance agencies in the Pacific. The increase in regulations were motivated by increased fears and evidence of terrorism funding through small remittance agencies. The full article can be found at http://lucaswatt.com/fears-terrorism-funding-shutting-remittance-sector-many-rely-upon/ . This initial article however has only raised more questions in terms of how this affects the remittance sector. The biggest of these is, who or what will fill the void of the now extinct small remittance agencies? Will the void be filled by large remittance agencies such as Western Union or Money Gram? What is the impact of new regulations on these remittance giants? What are the other methods of remitting money without going through a remittance agency? Will mobile remittance services fill the void? Are these equally regulated by the new remittance regulations? These are the questions I investigate in this article.

In the press, opinion suggests that remittance giants Western Union and Moneygram will be relatively unaffected by the new regulations. Only small remittance agencies seem to be cut of the loop by financial institutions and the new remittance regulations. This initially led me to question whether Western Union and Moneygram were perhaps operating as “banks” that can store sender’s money in an internal organisational bank account before being processed to the receiver. This would allow them the access to a bank account without the need of a partner financial institution, leaving them unaffected by the shutdown of remittance accounts by banks. However, with some research it was found that Western Union and Moneygram are not legally classified as “Banks” (however there is evidence that Moneygram has tried to legally classify itself as a bank with no success). As a result they cannot hold an internal organisational bank account where the remittances of senders can be stored before being processed to the receiver. They therefore must have an external registered bank such as Westpac or ANZ to hold a bank account for them to process their transactions. The question therefore needs to be asked why banks still provide bank accounts to these remittance giants and not to small remittance agencies. By all indication, these big remittance agencies do already require their customers to diligently provide identification at their outlets and post offices where transfers can be made. Efficient systems must be in place where customer identification details are passed on to their partner banks. The economies of scale between these large institutions must ensure that it still profitable for the partner bank to provide them such services. A certain degree of long established institutional trust may also exist. Small remittance agencies on the other hand may not have the number or size of transactions for banks to provide such services in a profitable manner. Their institutional trust may also not be well established with banks. The  relative non-effect and continued strength of large remittance agencies has led some to believe that they will stumble into windfall profits as their competition is decimated. There is also concerns that the lack of competition will allow them to increase fee charges to the detriment of their customers.

This is unlikely to occur as there are increasingly new methods of sending remittances that bypass the financial sector and regulations. In my previous article I did highlight the inform remittance sector where they can be delivered personally or by a known intermediary. There is also the “hawala system” whereby an informal intermediary is paid to deliver remittances. This is a system which I envision to be similar to the title picture of this article, wads of cash, in-depth conversations, and mobiles in hands. However there are new innovative systems emerging. One of these is where individuals in developed countries purchase goods and services for relatives at online stores. These include supermarkets or appliance stores. The sender either arranges delivery to the receiver’s house, or the receiver can go pick it up with identification. Because this form of remittance service delivers common goods, and money is received by a known retailer, it is not regulated with the same scrutiny by the financial sector in the same manner as cash remittances. Another method of sending money that bypasses financial regulation is sending money to a registered local organisation that involves itself in local projects such as the building of schools or infrastructure. This project does not benefit the households that migrants have left behind directly, but the wider community which they are a part of. Because money is not directly sent to an unknown entity but rather to a registered and known organisation these transactions are straight forward to process.

Another innovative way of sending money home is through the use of mobile phones. This can firstly be done by purchasing credit for someone’s mobile back home. This is restricted to phone related uses, therefore reducing its flexibility to be used for the variety of receiver’s needs/wants. However, sometimes the very purpose of such mobile top ups is to ensure that migrants and those that remain in the home country are able to stay in contact. Secondly, mobile remittances are also being facilitated by a variety of start-up companies which allow migrants to send electronic money from their mobile phone to another’s mobile phone back home. The difference here is that the electronic cash received via the mobile can be transformed into physical cash which can be used for whatever the receiver desires. The entire process entails; the sender turning physical cash into electronic cash which is then stored on their mobile, sending the electronic cash via mobile to the receiver’s mobile, the receiver then turning this electronic cash into physical cash again via an agent. Agents are located at small kiosks (as shown below), or the stores of telecommunication providers. The users do not have to come into contact with banks. This type of service is being pursued in the Pacific by a New Zealand based company called Klickex which has partnered with the telecommunication company Digicel Pacific. The amount of remittances sent from developed countries in the region, including New Zealand and Australia, to island states such as Tonga, Samoa, and Fiji are substantial due to large migration flows between these countries. Partnerships such as Klickex-Digicel have great potential for growth and use. With the shutdown of small remittance agencies, perhaps mobile remittance services will increase in prominence.

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A fairly typical mobile money agent kiosk

 

The question that needs to be asked is, how are the regulatory requirements for mobile remittance companies such as the Kilckex-Digicel partnership different to the small remittance agencies? The answer is that they are no different. Firstly, a bank account still needs to be held to process the transactions. The transaction costs for banks in carrying out all the regulatory requirements are therefore equally cumbersome and expensive. As a result we can expect the exclusive participation of big players that have economies of scale and institutional trust such as Digicel and Vodafone, much like Western Union and Moneygram. The presence of small mobile remittance companies is unlikely to emerge. Secondly, know your customer regulations still need to be adhered to. In the mobile remittance system, when the sender signs up to the service, identification is required and this is attached to their mobile number. Any transaction that is processed through that number is therefore associated with their identity. The receiver also must have a Klickex account, or if they don’t, they must show their identity to the agent when collecting the money off their mobile. At first glance such a system seems fairly straight forward with the appropriate identity checks. However, it seems that money could be sent to the mobile of an “innocent” party with contacts that partake in terrorism. The physical cash that this innocent party withdraws could then be transferred to this individual associated with terrorism. The security of the system therefore seems as dubious, (if not more!), as the services provided by small remittance agencies, or by any remittance agency for that matter.

So what is the outcome? Large remittance agencies such Western Union and Moneygram, along with mobile remittance businesses backed by large telecommunication companies such as the Klickex-Digicel partnership, will dominate the market. These agencies will be served by banks, and they will fulfil the regulatory requirements. Their size and institutional trust will ensure that the service is profitable with a more or less safe outcome for the institutions and transactors involved. Small remittance agencies on the other hand will cease to exist. This may have adverse effects as they may have served isolated areas or provided services or a sense of relatedness to customers that big agencies are not able to provide. Informal and innovative remittance services may fill the void, such as mobile remittances or buying food from supermarkets online for relatives back home. However more evidence is required in assessing what, to what extent, or if this void will be filled.

So stay tuned!

Remittance Sector in Flux Part One: Fears of Terrorism Funding are Shutting Down the Remittance Sector that so Many Rely Upon

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A concerning topic has arisen since late November 2014 that remittance services by banks will increasingly cease to be offered in developing countries. Remittances can be classified as international money transfers  that usually originate from migrants in developed countries to family back home in developed countries. Remittances provide a substantially large proportion of money received by developing countries. This is exemplified by the fact that The World Bank has estimated that in 2013 global remittances were estimated at $542 billion dollars with $404 billion of these dollars being sent to developing countries. On a more micro level remittances often provide a large proportion of the incomes of those that live within developing countries. It is estimated that remittances sustain the welfare of 700 million people globally. These remittances are usually set aside for the paying of school fees for children, healthcare, clothing, or can be used as a source of investment in micro-enterprise. Perhaps of equal importance is that remittances sent between family members or friends evokes a sense of social solidarity that can be so easily lost over such large distances. These connections include migrant workers sending money to home and international students receiving money from home. These migrants require such feelings of solidarity when separated from their home families and cultures. Since the importance of remittances is well established and that remittance services are now ceasing to be offered, the following questions need to be asked. What is the role of banks in providing remittance services? How is the threat of terrorism funding affecting the remittance sector? How are new remittance sector regulations causing the cessation of remittance services? Is there a solution in the foreseeable future in restoring remittance services?

Remittance agencies are usually businesses connected to local communities that can provide cheap, affordable, and responsive remittance services to local communities. These include large agencies such as Western Union or Money gram, but also includes a multitude of small scale agencies. These agencies however require bank accounts to receive and withdraw money from. This designates such remittance services as formal because banks are financially regulated by the governments of host countries. Remittances can also be provided by the informal sector such as using family members or friends travelling between countries to act as remittance delivers. In some cases, in particular the Middle East, trusted men of the community are paid to deliver money from town to town. The benefit of formal remittance services is that it can be regulated from who money is received and withdrawn from. This is not true of the informal remittance market and therefore can be used for funding dubious activities such as terrorism without the eyes of the authorities. However it must be noted that the vast majority of these informal remittance services are for genuine livelihood purposes.

It has become clear that the regulation over the formal remittance market has not been very strenuous over the last couple of years. On the 17th of September the financial intelligence agency AUSTRAC suspended the operations of a remittance agency called Bisotel Reih on the suspicion that it was using the company to fund terrorist activities in the Middle East. It is claimed that Bisotel Reih could have handled  as much as $21.3 million over the period January to August 2014 for terrorist related funding before investigation. The company was based in Sydney and had an office in Tripoli (North Lebanon). This location made it a prime candidate to fund extremist activities in nearby Syria. Bisotel Reih was owned by the sister and brother in law of Sydney terrorist Khaled Sharrouf. Khaled is known as the poster boy of Australian based terrorism, in 2005 he was charged over possession of items designated for a large scale terrorist plot. Investigations began after the company often failed to reveal recipients of money to regulators. Since investigation it has been revealed that one individual that was sent money was a US citizen known to be fighting in Syria. It is claimed that this US citizen has been sent $12,000 dollars during this period. Whilst Bisotel Reih was suspended and later deregistered from continuing remittance services it is clear that they had the opportunity to fund terrorist activity for a long time prior to the investigation and of a very high value. It can only be assumed that such cases have been one of the key causes of increased regulation in the remittance sector especially in the Australian and wider Pacific region.

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Above: Hassan El-Sabsabi of Bisotel Reih (brother in law of Khaled Sharrouf) after a raid in Southbrook Melbourne. Photo by: Jason South

The new regulations in the remittance sector have primarily entailed stricter know-your-customer regulations for banks. It not only requires them to know the remittance agency’s identity but also the remitters that the agency deals with. These strict regulations have increased the transaction costs for banks in the remittance sector which many are not willing to shoulder. Banks are also conscious about the personal relations consequences of not adequately fulfilling the necessary counter-terrorism requirements. As a result Banks such as Westpac and ANZ to cease providing bank accounts to remittance agencies that provide such services to many Pacific islands. Westpac has also additionally been forced to cease remittance services because JP Morgan chase, which clears all of its US dollar transactions, is also pressuring it to act in unviable strict accordance to counter terrorism regulations. Regulators have been negotiating with banks encouraging not to cease their services to remittance agencies and to correspond to the new regulations. This has only amounted to temporary reprieves. Westpac for instance will open up remittance services to a select number of companies until March 31st 2015, however a long term solution does not seem to have materialised. This trend is not only occurring within our Pacific region but rather on a global level. In Somalia for instance it has recently been announced that the Merchants Bank of California will drop the accounts of remittance agencies there.

So what is the solution to this remittance crisis? First of it all it can be argued that strict formal regulations in the remittance sector will only slow but not stop terrorist funding. Such remittance services will be offered rather through informal channels that bypass regulatory structures. This argument postulates that genuine remitters are being unjustly punished for no reason as less genuine remitters will still carry out their operations underground. Some call for the return to the status quo. Secondly, it must be asked whether banks have some moral obligation to provide services that are so vital to the livelihoods and emotional welfare of such a large proportion of the global population regardless whether it decreases their profits by a few percentage points or not! One solution therefore is for the banks to take the hit. An unlikely solution. Thirdly, the blame cannot entirely be put on banks. Governments must also shoulder the blame as they have burdened the banks with regulatory requirements and have foregone the financial responsibility themselves. It can be argued that counter terrorism funding activities need to be provided by an industry regulator with a broad enough mandate and power to provide such regulation. Currently regulators do not have this broad mandate or government funding. Government needs to take some responsibility, however where will those required funds come from and at the expense of what? Lastly it can be argued that perhaps alternative regulations need to be offered that both combat terrorist financing activities but also do not cripple banks and remittance agencies with unviable transaction costs. One of these suggestions has been to cap transactions by small remittance agencies. This may not prevent terrorist funding but it will also not prevent those relying on remittances for their livelihoods to be left in the cold. Such a solution offers a balanced approach albeit not a complete solution.

This topic is of particular interest to me and I will continue to track it as solutions and opinions continue to develop.