Measuring the Immeasurable: Hawala International Remittances via Informal Channels

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Measuring the Immeasurable Hawala International
Remittances via Informal Channels
International Technical Meeting on Measuring
Remittances January 24, 2005

• John F. Wilson
• International Monetary Fund

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Lets Google Hawala.

• Jost and Sandhu (Jan. 2000, Interpol), The
  Hawala Alternative Remittance System and its Role
  in Money Laundering
• -Works by transferring money without moving it
• -Abduls visa has long since expired Wants to
  send 5,000 to brother in Karachi
• -Manipulation of invoices common means of
  settling accounts.
• -Tax evasion. Money remitted through official
  channels might invite scrutiny from tax
  authorities
• -Black Hawala Money laundering, etc.
  (centered on HA)
• Time Magazine (Oct., 2001), A Banking System
  Built for Terrorism In the labyrinthine depths
  of old Delhi, these men are moving money to
  exporters, drug traffickers, tax evaders, corrupt
  politicians. And terrorists.
• Sanjay Kapoor, Bad Money, Bad Politics The
  Untold Hawala Story , 1996

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Motivations for Informal Transactions

• Black or grey market exchange rates.
• High costs of banking or official channels
  e.g., Western Union or MoneyGram
• Lack of banking offices in some areas, e.g.,
  Pakistan NWFP
• Reliability and speed!
• Cultural factors family or tribal connections

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Hawala Basics

• Informal channels used for private transfers,
  including workers and migrant remittances
• Main actors
• 1. Sender and recipient
• 2. Financial intermediaries (hawaladars AB)
• 3. Higher level consolidators
• Technical mechanisms
• 1. Funds sent to recipient via intermediaries.
• 2. Hawaladars settle asset/liability accounts
  later.
• See Mohammed El Qorchi, Samuel Maimbo, and John
  Wilson, Informal Funds Transfer Systems An
  Analysis of the Informal Hawala System, IMF
  Occasional Paper No. 222, October, 2003.

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How Informal Remittances Work Step 1
Country B
Country A
Sender
Recipient
Cash (LC)
Cash (LC)
Fax or phone call
HA
HB
LClocal currency HA, HBhawaladars
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Balance Sheet Effects of Informal Transactions
1. Principals remittance sent home (US assumed)
Remitter, in Country A
Recipient, in
Country B Assets Liabilities and NW
Assets
Liabilities and NW - -
(NW) LC
LC
Notes Net worth of remitter declines. Net
worth of recipient rises.
Transactions usually across international borders.
2. Financial Intermediaries
Hawaladar A (HA)
Hawaladar B
(HB) Assets Liabilities and NW
Assets
Liabilities and NW (cash) (HB)
-LC
(cash)
(HA)
Notes HB pays out cash to recipient and
acquires claim on HA. HA and HB
Change in balance sheet composition. Net worth
unchanged. No foreign exchange
transaction by any participant.
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Hawala differences from
? Institutional transactions? Only the
channels HA, HB vs. banks, Western Union,
exchange houses ? Technical/economic
mechanisms? Balance sheet effects No
differences Settlement mechanisms Usually
informal Foreign exchange Not captured by
authorities Statistical trail Little
chance ? Other systems such as fei-chien
(China), hui kuan (Hong Kong), hundi (India),
padala (Philippines), and phei kwan (Thailand)
etc.? No substantial differences ?
Remittances as source of development finance
e.g., Adams, Maimbo, Ballard, Seddon, Blackwell,
inter alia.
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Step 2 Clearing and Settlement Selected Options
1. SIMPLE REVERSE REMITTANCES (HIGHLY
IMPROBABLE) 2. BILATERAL FINANCIAL SETTLEMENT
THROUGH BANK (UNLIKELY) 3. BILATERAL SETTLEMENT
FINANCE EXPORTS TO COUNTRY B (POSSIBLE)
Various possibilities, including smuggling of
goods. Export/import settlement likely
to take place at consolidated level. 4. CLEARING
WITH SERVICES FOR RESIDENT OF B PAID FOR BY HA
(POSSIBLE) Resident of B presumably
pays HB in local currency. HB himself
could purchases the services, e.g, medical or
educational. 5. CLEARING BY MEANS OF
ASSET PURCHASES IN COUNTRY A (PROBABLE?)
Could be real estate or financial assets.
Likely to take place at the consolidated
level. 6. etc., etc., in many permutations Littl
e chance of statistical compilation that shows
any connection to original remittances! See El
Qorchi, Maimbo, and Wilson, Appendix I
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Informal Remittances Quantitative Dimension
Source Simulation model in El Qorchi, Maimbo,
and Wilson, Appendix II
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Improving Measurement of Remittances Source
Countries

• -- Focus on countries with large immigrant
  populations
• -- Attention to those with immigration from large
  LDCs (e.g., GCC area)
• -- Ensure compilation from relevant institutional
  channels
• -- Eliminate back of envelope estimates
• -- Reasonable geographic articulation
• -- Periodic consultations/peer review on findings
• -- Adherence to agreed BOP measurement norms
• -- Add estimates for flows via informal channels?
• -- Unlikely to help BIS statistics and similar

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Improving Measurement Recipient Countries

• -- Remove impediments to institutional channels,
  especially
• Exchange market and capital control
  impediments
• Costs and administrative issues
• -- Ensure relevant institutional coverage
• -- Field surveys on amounts and channels of
  remittances received
• -- Proper analytic classification (e.g., SBP
  forex purchases Philippine procedures)
• -- Better data on emigration and overseas
  workers Philippine model
• Further recommendation
• Revive periodic measurement and publication of
  black/gray market exchange premia (Pick, et al.),
  now essentially lost from all statistical
  sources,
• via Bank/Fund collaboration.