Why Consider Alternative Money Transmission Businesses?
The banking system has been under the spotlight numerous times in recent years since the economic crisis that began in 2008. The media is keen to report the failings and excesses of the senior managers.
Massive Ponzi fauds have rocked the banking system. The big name banks have not been able to strengthen the world's finances since the crash of 2008. Governments cannot afford to let another major bank fail, or so they say. Other commentators will say that it is wrong to support a system that is inherently weak. The world relies on the banks as a framework for enterprise and trade and expect them to be free from fraud. But there is another financial system that hardly ever gets reported in the news, yet is responsible for circulating trillions every year.
Because the Hawala style alternative money transmission services attract crooks wishing to launder money, they are often viewed with suspicion. They may be a target for the fraudsters, smugglers and extortionists, but the mainstream banks are equally guilty of association with massive scams and swindles and bank frauds, identity theft and money laundering hit the high street names with alarming frequency.
Alternative money transfers have been practiced for centuries, long before the modern system we all know was developed. But it is not allowed in certain parts of the world! It is thought to have first developed in India, and used by migrants living in ethnic communities around the world. Indeed, today it is used by groups of people such as Asians living in the West to transfer money back home.
Hawala banking, sometimes called Hundi, has been developed into many different forms and guises to suit the needs of many diverse groups. Fundamentally it is a financial conduit using trust and a global array of Hawala agents who manage a system of indebtedness trading. In this way there is a reduced need to physically transfer money from country to country. The idea is that if the net funds coming in equal the net funds going out, no money needs to move and transfer costs can be reduced to a minimum. Also, official government exchange rates can often be bypassed. In some countries where exchange restrictions exist this can mean saving even more costs.
If a migrant from Somalia wishes to send say £200 to his parents back home, he does have the option of going to his high street bank and paying £20 to send the money. This is a fee of 10% and the exchange rate obtained may well be poor also. He could go to the Post Office or use Paypal, but again the cost is high and there is the need for formalities, email accounts, bank accounts etc. and the exchange rates are likely to be unfavourable. If however he goes to his local Hawala agent, he might have to pay a lower commission, and get a good exchange rate. He will hand his money over, trusting that his parents will receive the money in their local currency a day or two later.
But his cash will not necessarily leave the UK. In fact it could be sent anywhere. After the individual clients' cash has been collected and passed by the agent to the Hawalador, it might be paid directly to UK customers waiting to receive money from abroad - in the same way as a cash till is used in a high street building society or bank. Alternatively, if more money is being exported than imported, the money might be sent to somewhere like Dubai using conventional money transfer methods. By sending a large sum, economies of scale mean the costs are still low.
Money sent abroad might be cycled just as conventional money is cycled. The Dubai Hawalador may use the funds in the local communities, such that Somalians in Dubai expecting money from home will be paid, thus setting up a debt in their home country where the Hawalador will settle the UK transactions. The system of indebtedness around the world can get very complicated, and the obvious difficulties in following trails of money in this way can be quite attractive to criminals wishing to launder money around the world, escape exchange controls or avoid heavy taxes in certain countries.
The alternative banking systems fulfill a need of many millions of people around the world, transferring vast sums of money. They are relatively unregulated owing to the sometimes secret way in which they have operated in the past. However, with the increased scrutiny following the introduction of the Proceeds of Crime Act and the general global crackdown on money laundering, many Hawala businesses operate legitimately and respectably. They have to operate in a way that satisfies the taxation and regulatory authorities as would any risky business dealing in large sums of money. They need to carry out checks on their customers (such as Know Your Client) and report any suspicious transactions should they encounter these.
It is quite true to say that Hawala Banking as well as other forms of alternative money transmission businesses are just as legitimate as conventional banks. In fact, because Hawala banks are run on the basis of trust, with communities using their trusted local Hawalador, there is probably less chance of fraud due to identity theft. Unfortunately, all banks are the target of money launderers who must have some way of moving their money around. Therefore alternative bankers, like their high street counterparts, must show similar levels of diligence and a law abiding approach.
Massive Ponzi fauds have rocked the banking system. The big name banks have not been able to strengthen the world's finances since the crash of 2008. Governments cannot afford to let another major bank fail, or so they say. Other commentators will say that it is wrong to support a system that is inherently weak. The world relies on the banks as a framework for enterprise and trade and expect them to be free from fraud. But there is another financial system that hardly ever gets reported in the news, yet is responsible for circulating trillions every year.
Because the Hawala style alternative money transmission services attract crooks wishing to launder money, they are often viewed with suspicion. They may be a target for the fraudsters, smugglers and extortionists, but the mainstream banks are equally guilty of association with massive scams and swindles and bank frauds, identity theft and money laundering hit the high street names with alarming frequency.
Alternative money transfers have been practiced for centuries, long before the modern system we all know was developed. But it is not allowed in certain parts of the world! It is thought to have first developed in India, and used by migrants living in ethnic communities around the world. Indeed, today it is used by groups of people such as Asians living in the West to transfer money back home.
Hawala banking, sometimes called Hundi, has been developed into many different forms and guises to suit the needs of many diverse groups. Fundamentally it is a financial conduit using trust and a global array of Hawala agents who manage a system of indebtedness trading. In this way there is a reduced need to physically transfer money from country to country. The idea is that if the net funds coming in equal the net funds going out, no money needs to move and transfer costs can be reduced to a minimum. Also, official government exchange rates can often be bypassed. In some countries where exchange restrictions exist this can mean saving even more costs.
If a migrant from Somalia wishes to send say £200 to his parents back home, he does have the option of going to his high street bank and paying £20 to send the money. This is a fee of 10% and the exchange rate obtained may well be poor also. He could go to the Post Office or use Paypal, but again the cost is high and there is the need for formalities, email accounts, bank accounts etc. and the exchange rates are likely to be unfavourable. If however he goes to his local Hawala agent, he might have to pay a lower commission, and get a good exchange rate. He will hand his money over, trusting that his parents will receive the money in their local currency a day or two later.
But his cash will not necessarily leave the UK. In fact it could be sent anywhere. After the individual clients' cash has been collected and passed by the agent to the Hawalador, it might be paid directly to UK customers waiting to receive money from abroad - in the same way as a cash till is used in a high street building society or bank. Alternatively, if more money is being exported than imported, the money might be sent to somewhere like Dubai using conventional money transfer methods. By sending a large sum, economies of scale mean the costs are still low.
Money sent abroad might be cycled just as conventional money is cycled. The Dubai Hawalador may use the funds in the local communities, such that Somalians in Dubai expecting money from home will be paid, thus setting up a debt in their home country where the Hawalador will settle the UK transactions. The system of indebtedness around the world can get very complicated, and the obvious difficulties in following trails of money in this way can be quite attractive to criminals wishing to launder money around the world, escape exchange controls or avoid heavy taxes in certain countries.
The alternative banking systems fulfill a need of many millions of people around the world, transferring vast sums of money. They are relatively unregulated owing to the sometimes secret way in which they have operated in the past. However, with the increased scrutiny following the introduction of the Proceeds of Crime Act and the general global crackdown on money laundering, many Hawala businesses operate legitimately and respectably. They have to operate in a way that satisfies the taxation and regulatory authorities as would any risky business dealing in large sums of money. They need to carry out checks on their customers (such as Know Your Client) and report any suspicious transactions should they encounter these.
It is quite true to say that Hawala Banking as well as other forms of alternative money transmission businesses are just as legitimate as conventional banks. In fact, because Hawala banks are run on the basis of trust, with communities using their trusted local Hawalador, there is probably less chance of fraud due to identity theft. Unfortunately, all banks are the target of money launderers who must have some way of moving their money around. Therefore alternative bankers, like their high street counterparts, must show similar levels of diligence and a law abiding approach.
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