Making Remittances Work: Balancing Financial Integrity and Inclusion

DIRECTIONS IN DEVELOPMENT

Finance

Making Remittances Work

Balancing Financial Integrity and Inclusion

Emiko Todoroki, Wameek Noor, Kuntay Celik, and Anoma Kulathunga

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Attribution—Please cite the work as follows: Todoroki, Emiko, Wameek Noor, Kuntay Celik, and Anoma Kulathunga. 2014. Making Remittances Work: Balancing Financial Integrity and Inclusion. Directions in Development. Washington, DC: World Bank. doi:10.1596/978-1-4648-0109-9. License: Creative Commons Attribution CC BY 3.0 IGO

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ISBN (paper): 978-1-4648-0109-9

ISBN (electronic): 978-1-4648-0110-5

DOI: 10.1596/978-1-4648-0109-9

Cover photo: © Opmeer Reports. Used with the permission of Opmeer Reports. Further permission required for reuse.

Cover design: Debra Naylor, Naylor Design

Library of Congress Cataloging-in-Publication Data

Todoroki, Emiko.

Making remittances work: balancing financial integrity and inclusion / Emiko Todoroki, Wameek Noor, Kuntay Celik, Anoma Kulathunga.

pages cm. — (Directions in development)

Includes bibliographical references.

ISBN 978-1-4648-0109-9 (alk. paper) — ISBN 978-1-4648-0110-5 (ebk)

1. Migrant remittances. 2. Emigrant remittances. 3. Foreign exchange. I. Title.

JV6118.T636 2014

332’.04246—dc23                                                2014008435

Contents

Boxes

Figures

Map

Tables

Foreword

Remittances are a critical source of financing for people in most developing countries. The importance of remittances goes beyond numbers: For many households in developing countries, they are probably the most stable source of primary or additional income. As recognized by Her Majesty Queen Máxima of the Netherlands, who is the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development and the Honorary Patron of the G20 Global Partnership for Financial Inclusion, the impact of helping migrants and their families will be lasting and global if we link remittances to other financial services and [if we] make them more affordable and more relevant to their needs.¹

At the same time, continuing caution is required: The terrorist attacks on September 11, 2001, exposed the potential for abuse of international remittance channels by those who are focused on financing terrorism. In response to that threat, the international community issued new standards on international anti-money-laundering and the combating of financing of terrorism (AML/CFT), which affected remittance transfers and their service providers.² For the first time, remittance service providers were made subject to government oversight, and were required to be either registered with or licensed by a competent authority under AML/CFT obligations.

While the Recommendations of the Financial Action Task Force (FATF) appear straightforward, regulating and supervising the money transfer business has, in practice, proven to be a very challenging task in both developed and developing countries.

Significant concerns have been raised about the implementation of these recommendations from the perspective of financial inclusion and economic development. Specifically, such concerns point to ill-designed AML/CFT requirements that may impose too great a burden on remittance service providers and thus have a negative effect on remittance flows and customers. At the same time, concerns remain about the risks of money laundering and the financing of terrorism involving the international remittance system, especially in light of the still-low level of compliance with the relevant FATF Recommendations. As a result, the money-transfer industry suffers from a perception that it is at high risk of money laundering and financing of terrorism (ML/FT), even when customers are predominantly migrant workers and their families who rely on remittances as a lifeline.

Significant progress has been made over the past decade in reconciling these perspectives, and in highlighting the needed synergies between these two approaches, notably from a policy and risk standpoint. This study finds that the general perception of systematic high risk among all remittance services providers does not appear to be substantiated by the evidence. However, this does not mean that risk is entirely absent. Potential as well as real risks do exist, as they do with other financial institutions (including banks). The risk perception is further complicated when these remittances are sent to families in conflict zones or to fragile states where there are no alternative methods of sending money. In such circumstances, the government is often either absent or weak, and there is no regulator or supervisor to govern the affairs of the money-transfer businesses. All these factors increase the ML/FT risk.

A balance must be struck between maintaining financial integrity and enabling the poor to have access to basic financial services—all the more so, since financial exclusion can create greater risks of money laundering and terrorism financing. Some developing countries lack sufficient AML/CFT regulation and supervision; other countries overregulate far beyond the actual risk of specific products and transactions—with the unintended downside of driving remittance transfers and their service providers underground.

In some developed countries, AML/CFT enforcement actions on banks have sometimes resulted in banks halting their partnerships with some money-transfer businesses, as well as closing the bank accounts of those money-transfer businesses, citing AML/CFT risk concerns. These actions resulted in the cutoff of remittance services to those most in need of them, particularly in Somalia and some other East African and Middle Eastern destinations. Money-transfer businesses there serve migrant workers or ethnic communities that require an affordable and convenient way to send funds back to their poor families. Finding a solution to such situations requires a stronger regulatory and supervisory regime in the remittance-receiving countries, as well as a more differentiated approach to risks in remittance-sending countries.

The World Bank has been at the global forefront of research on remittances. A number of studies have shown that remittances play a critical and positive role in poverty reduction and in accelerating financial-sector growth and development in many developing countries. That is why protecting the integrity of remittance transfers is of vital importance.

We hope that this study will help assist policy makers, regulators, and supervisors of money-transfer businesses as they try to craft effective regulatory and supervisory frameworks governing remittances that meet international AML/CFT standards, while at the same time they aim to ensure that the neediest have access to these crucial financial services.

Klaus Tilmes

Acting Vice President and Director, Strategy and Operations

Financial and Private Sector Development Network, The World Bank

Notes

1 H.M. Queen Máxima of the Netherlands, Financial Services to Help Migrants and Their Families Get the Most From Remittances (address at the Global Forum on Remittances, held in Bangkok, Thailand, 20 May 2013). See http://www.unsgsa.org/resources/speeches/financial-services-help-migrants-and-their-families-get-most/.

2 FATF 2001 Special Recommendation VI on Alternative Remittance Systems and Special Recommendation VII on Wire Transfers are the two recommendations most directly linked to AML/CFT requirements on remittance transfers and their service providers. A new set of revised FATF Recommendations was issued in 2012—new Recommendation 14 (renamed Money or Value Transfer Services) and Recommendation 16 (Wire Transfers) replace and update Special Recommendations VI and VII. See the regulatory section of this study (chapter 3) for further details.

Acknowledgments

This study was written by Emiko Todoroki (Task Team Leader), Wameek Noor, Kuntay Celik, and Anoma Kulathunga. The authors are especially grateful to Jean Pesme, Manager, Financial Market Integrity, for his guidance and comments in producing this study; and to Ameet Kaur, who assisted the team tirelessly and provided invaluable inputs during the last mile of the project.

The following individuals provided instrumental peer review comments: Massimo Cirasino, Carlo Corazza, Andre Walter Corterier, Sonia Plaza, Francesco Strobbe, Gunhild Berg, and Cari Votava, of the World Bank; Anne-Francoise and Timothy Goodrick, Financial Action Task Force; Scott Rembrandt, U.S. Treasury; Amina Tirana, United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, Her Royal Highness Princess Máxima of the Netherlands; and Deputy Governor Nestor A. Espenilla Jr., Bangko Sentral ng Pilipinas.

This work would not have been possible without the tremendous assistance and effort of country regulators, who gave their time so generously to answer detailed surveys regarding their national anti-money laundering/combating the financing of terrorism regulatory and supervisory frameworks governing remittances. Multiple individuals within the regulatory authority in each country helped answer the survey questions. The efforts of all these individuals are greatly appreciated. Although this list is not exhaustive, the authors are especially grateful to:

• Michael Donovan, Financial Transactions and Reports Analysis Center (FINTRAC), Canada.

• Veronica Fucile and Paola Arena, Banca d’Italia, Italy.

• Hans Martin Lang, Jens Fuerhoff, and Christina Pitzer, Federal Financial Supervisory Authority (BAFIN), Germany.

• Andrew Strijker, Leopold Hendrick, and Martine DeKoninck, Ministry of Finance and Financial Markets Directorate, the Netherlands; and Ayse Zoodsma-Sungur, De Nederlandsche Bank (DNB), the Netherlands.

• Saleh Al Sayegh and Shaikh Ahmed, Qatar Central Bank.

• Hyun Soo Kim, Korea Financial Intelligence Unit, Republic of Korea.

• Brain Stewart, Keith Davis, Brian Garcia, and Faizan Jabbar, U.K. Financial Services Authority.

• Shanna Price Wright, Financial Crimes Enforcement Network (finCEN), U.S. Department of the Treasury.

• Susan Rojas and Karen Anaite Lainfiesta, Financial Intelligence Unit, Guatemala.

• Joseph Berthony, Jean Francois Dyess, and Jean Claude Marseille, Central Bank of the Republic of Haiti.

• Larene Samuels, Bank of Jamaica.

• Raul Hernandez Coss, María Fernanda Trigo, and Yearim Valles, Comisión Nacional Bancaria y de Valores (CNBV), Mexico.

• Roy