John F. Wilson International Monetary Fund Measuring the Immeasurable: Hawala International Remittances via Informal Channels International Technical Meeting on Measuring Remittances January 24, 2005 John F. Wilson International Monetary Fund 9/18/2018 jfw

Let’s 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 -Abdul’s 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 9/18/2018 jfw

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 9/18/2018 jfw

Hawala Basics Informal channels used for private transfers, including workers’ and migrant remittances Main actors: 1. Sender and recipient 2. Financial intermediaries (hawaladars A&B) 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. 9/18/2018 jfw

How Informal Remittances Work: Step 1 Country A Country B Sender Recipient Cash (LC) Cash (LC) Fax or phone call HA HB LC=local currency; HA, HB=hawaladars 9/18/2018 jfw

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. 9/18/2018 jfw

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-ch’ien (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. 9/18/2018 jfw

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 Little chance of statistical compilation that shows any connection to original remittances! See El Qorchi, Maimbo, and Wilson, Appendix I 9/18/2018 jfw

Informal Remittances: Quantitative Dimension Source: Simulation model in El Qorchi, Maimbo, and Wilson, Appendix II 9/18/2018 jfw

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 9/18/2018 jfw

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. 9/18/2018 jfw