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The nature and use of alternative remittance systems

Context and historical background

Alternative remittance appears to have arisen in a number of parts of the world, including possibly China, central and southeast Asia and the Middle East. However, the way in which it originated is not clear. Although differing social conditions led to the practice taking a number of different forms, the variants had a great deal in common. Fundamentally, the systems arose when there was a need to move the value of money without moving the money itself (Passas 2005a). This is something modern financial systems do regularly, so today it is not necessarily a distinguishing feature of alternative remittance.

The system that developed in India was known as hawala. This word appears to be based on the Arabic phrase for 'transfer' (Passas 2005b). At the most basic level of hawala, the remittance process involves four participants—a sender, a beneficiary and two intermediaries. The sender approaches an ARS agent in their jurisdiction and advises how much they want sent, to whom and in which jurisdiction the recipient resides. The ARS agent then contacts another agent in the recipient's jurisdiction and requests that they pay them the requisite sum. Reflecting more current banking practices, no money changes hands. Following the transaction, the first ARS agent is indebted to the second ARS agent. However, it is likely that an ARS agent would be involved in a number of transactions at any given time and have links with many other ARS agents, therefore having multiple debts. A debt can be settled in a number of ways. A fairly simple method would be a cash courier, or in modern times, a transfer from one agent to another via a bank account.

The phrase hundi is now often used interchangeably with hawala in Pakistan and Bangladesh, but originally, a hundi was a bill of exchange or credit note that could be used as a remittance vehicle. It therefore came to form part of the hawala system but it is not essential to it (Passas 2005a).

A system known as fei-ch'ien (flying money) developed in China during the Tang dynasty. During this time, an increased trade in tea developed between the Chinese imperial capital and southern China. Provincial governors maintained tax offices in the imperial capital. Southern merchants would provide the money that they had made from the sale of goods in the capital to these offices, which would use this money to pay any tax quotes owed by southern provinces to the imperial bureaucracy. The provincial tax offices would issue any merchants who gave them money with a certificate and when the merchant returned home, they presented this certificate to the provincial governor's office which would refund the money (Cassidy 1994).

The use of chits arrived in China in the nineteenth century when Westerners arrived in large numbers (Cassidy 1994). The system was then taken overseas with large-scale Chinese immigration. It has been suggested that this system has been used historically to protect the income of ethnic Chinese from taxation (Buencamino & Gorbunov 2002).

The hawala and fei-ch'ien systems are the most well-known and form the basis for modern ARS. The development of ARS systems in the Middle East is unclear, but it has been suggested that a hawala-type system operated for centuries to facilitate trade and also to protect the caravan trade (Ballard 2003a). It has been noted that ARS is comparable to Islamic banking in a way that Western banking practices are not (for instance, providers charge a commission for service rather than interest) and a hawala-type system may have been working in the region before the sixth century and was certainly operational by the time of the Arab expansion (Razavy 2005).

In summary, to some extent, alternative remittance appears to have arisen partially due to the impact of social unrest (which often led to travel conditions being unsafe) and partially for convenience as economic systems developed and immigration increased. Just how important social unrest was in the development of ARS systems is contentious. Fundamentally, alternative remittance was designed to move value between communities without the need to carry large amounts of currency, since currency was subject to theft, taxation, or was simply inconvenient to carry. In this way, alternative remittance facilitated trade. It was also a system whereby people in one community could send financial support to another, so from its inception, it had social and cultural aspects as well as important commercial functions. Therefore, it should not be assumed that alternative remittance systems were simply a response to adverse conditions such as the prevalence of theft.

Alternative remittance has survived because of its commercial utility. It has been suggested that the beginning of ARS was

in fact, benign, and [was] the result of people of similar ethnic background seeking a workable, efficient, cheap and secure means of transferring money and settling accounts with one another (Buencamino & Gorbunov 2002: 1).

But there has always been a potential for ARS to come into conflict with the interests of government. Initially, one of the aims of using an ARS system would have been to avoid theft by corrupt government officials as well as by bandits. Such systems could also have been used to avoid legitimate government activity such as various forms of taxation or licensing. Today, ARS is illegal in a number of jurisdictions for a wide variety of reasons, including fears that it may be involved in domestic terrorism or exchange rate manipulation. This suggests that the practice is viewed with suspicion by many governments.

Prior research

There is a considerable body of academic literature regarding ARS. There is debate regarding the motivations of users of ARS and the extent to which the system is subject to misuse. There are also a number of social structures supporting ARS and they are often co-dependent.

The economic basis to alternative remittance services

Commentators, including Buencamino and Gorbunov (2002), have emphasised the macroeconomic underpinnings behind the ARS system. These commentators emphasise that the fundamental reason for the existence of ARS is economic inequality between jurisdictions. In their view, ARS systems serve a useful economic purpose because they move value to areas that need it in a cheap, cost-effective way. One commentator summarised the situation in the following terms:

The recognition that macroeconomic and institutional deficiencies are the primary reasons [users move] from formal to informal channels, shifts the emphasis to political and economic crises, to extensive government intervention, including through repressive financial policies, excessive taxation, currency and trade restrictions and banking systems that are not trusted by the population and also global market dominance by large service providers such as Western Union. As long as these problems exist, IMTS will continue to thrive in many developing countries and fill important gaps left by the conventional financial system at the national, regional and international levels (Buencamino & Gorbunov 2002: 5)

These commentators note that ARS is arguably subject to abuse, but that this risk is no higher than with more formal systems, and that criminals may actually target formal institutions because moving large sums through such institutions may attract less attention than moving them through ARS (Buencamino & Gorbunov 2002).

From this perspective, the continuing existence of ARS may be economically beneficial, although this may be dependent upon a number of factors. These may include the level of criminality such systems attract and the issue of whether money that is remitted back to countries of origin is actually used for purposes that are of long-term economic benefit. It is possible for remittances to be spent on funding civil wars, which would obviously be damaging for the receiver's country, and would lead to a greater demand for remittances, by those who have been left unemployed or dispossessed. It can also be argued that because remittances support many people in the developing world, this lessens pressure on the governments of those countries to improve their economic performance and the standard of living of their citizens (Allam 2008).

Commentators who emphasise the macroeconomic basis for ARS do not necessarily object to there being greater regulation, or even government policies that aim to move remittances into more formal or regulated channels by ensuring that remittances are not affected by currency exchange controls or by lowering import duties for articles such as precious metals. They also see a role for banks to improve their attractiveness to those who wish to send remittances via more formal channels with initiatives such as delivering remittances to the recipient's door. However, there is opposition to the abolition or substantial restriction of ARS (Buencamino & Gorbunov 2002).

In summary, there seems to be little doubt that ARS performs a valuable function in a least some areas. In the most extreme circumstances, when a jurisdiction's banking system has been effectively destroyed (such as in Somalia or in Afghanistan under the Taliban), ARS agents may prove the only effective way of moving value into the country for either an individual expatriate or an international body such as the United Nations. In Taliban-controlled Afghanistan, the ethnic-based remittance system was the only effective way of moving money into the country and most money deliveries occurred within 24 hours at a commission of only one to two percent (Maimbo 2003).

In 2006, alternative remittance was the only way to move money to and from and within Somalia because the formal banking system was not operational. ARS providers could distribute money to virtually all parts of the country within 24 hours because even in the most remote areas, there was internet access which allowed for both instructions and money to be sent electronically (Hamza 2006). In such circumstances, interference with the ARS system can cause great hardship to the general population but there is always the risk that if the system is seen as crucial then increased regulation may drive it underground.

The commercial driver for alternative remittance services

A major factor in the continuing existence of ARS is the perception that it provides a superior commercial service to that provided by institutions such as banks and large corporate remitters. Ethnic-based remitters are often faster, substantially cheaper, more reliable and more flexible about services such as delivering remittances from door to door. Commentators who have looked in detail at this aspect of ARS have emphasised that it has survived for practical reasons. If this is the basis for use of ARS, then increased levels of migration may provide a powerful macroeconomic and commercial driver for its increased use (Dougherty 2006).

ARS generally flourishes where the formal financial system is weak; as formal systems strengthen, the use of ARS declines. What constitutes a weak formal financial system is not always easy to define. A financial system that has virtually ceased to exist, such as the system in Somalia, is an extreme example. A less extreme, and far more common, situation is when a formal banking system is perceived as not fulfilling the needs of sectors of its population because it charges high fees for remittances (particularly small ones), it only provides remittances to a limited number of urban areas in other jurisdictions, it takes a long time to deliver a remittance and it provides no system of redress if the remittance is not delivered.

The actual size of financial institutions makes it hard for them to address the issue of charging relatively high fees for sending small amounts and it may not be economically viable to put branches in some areas in order to address the problem of banks being concentrated in urban areas. In these circumstances, it is not surprising that ARS continues to prove popular. It is also relevant that many new immigrants may find formal financial institutions intimidating. Language barriers may worsen this potentially alienating experience. Further, new immigrants may not be able to satisfy a financial institution's identification requirements; they are more likely to be able to satisfy an ARS provider regarding identification because both parties may be known within the relevant community.

The World Bank has undertaken a number of detailed studies with regard to remittance corridors. Remittance corridor is the term used to describe the link between particular countries along which remittances flow. The World Bank's perspective is that remittances are beneficial for both economies and individuals (and the cheaper it is to send remittances, the greater the benefit), but that in the medium to long term, a formalisation of the remittance process is desirable because this will assist in protecting remitters from being cheated, will lessen the chance of criminals and/or terrorists misusing the ARS system and will allow the overall economy of the country in question to become more structured in nature (Hernandez-Coss 2005a).

It has been suggested that, in economic terms, there is a natural progression from informal to formal systems of banking. This is based on the assumption that as economies become more complex, they have a greater requirement for arrangements such as enforceable contracts, and informal systems do not provide this level of commercial certainty. However, the validity of this assumption can be affected by economic circumstances or government action (Hernandez-Coss 2005a). Some of the remittance corridors studied by the World Bank have been established for a considerable length of time, such as the US–Mexico corridor, while others are fairly recent such as the Canada–Vietnam corridor. The World Bank reports suggest that as remittance corridors age, they tend to become more 'formal' and one sign of this is that the formal financial sector becomes more involved in providing remittance services (Hernandez-Coss 2005a). It has been suggested that the use of remittance-like structures may be a basic stage of development; that once an economic system reaches a certain size and level of sophistication, it needs the stability provided by more formal and regulated systems with features such as a formal system of contract which is regulated by law (Maimbo 2005). The process of formalisation differs between each corridor, as the process is very much influenced by the nature of the jurisdictions involved and the attitudes of the relevant governments (Hernandez-Coss 2005a).

The World Bank's study regarding the US–Mexican corridor demonstrates that there are number of motivating factors behind the use of ARS. In Mexico, remittances perform a very important economic and commercial function. The study estimates, using an analysis of data provided by Banco de Mexico regarding formal remittance flows, that in 2003, remittances provided Mexico's second largest source of income after oil. These figures do not take into account the impact of informal remittances, which cannot be reliably calculated (Hernandez-Coss 2005a).

The World Bank study quotes Inter-American Development Bank research that states nearly one in five Mexican adults receive a remittance from the United States and those adults are not limited to the poorer or less-educated members of the population (Hernandez-Coss 2005a). The remittances are not purely exchanges between individuals; there are hometown associations that foster continuing social links between hometown communities of origin and towns in the United States.

The biggest senders of remittances were found to be Mexicans living in the United States. Because of the size of the market, there is a high level of competition between remittance providers, therefore commission levels can fluctuate. The Mexican and US Governments are supportive of the increased involvement of formal institutions in the remittance process and have introduced financial measures to make the sending of remittances cheaper, but they are constrained by other political and economic concerns. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (the Patriot Act), the United States has introduced requirements that ARS providers be registered at a federal level and also comply with state licensing requirements. Since many ARS providers operate in more than one US state, this can be complicated and expensive and thus not attractive to many ARS providers, particularly if providing ARS is only a relatively small part of how they earn their living. In Mexico, there is the issue of how to encourage commercial banks to set up branches in remote rural areas. The World Bank report suggests that there is a decline in the use of informal funds transfer systems; they are still important, but the growing use of formal systems is having an impact on their popularity (Hernandez-Coss 2005a).

The World Bank has also undertaken a detailed study of the Canada–Vietnam corridor (Hernandez-Coss 2005b). At the time the research was undertaken, Canada did not require formal registration of remittance businesses (this changed in June 2008 with the introduction of a registration system) and Vietnam had no relevant regulatory structure, so it was not possible to determine the size of the remittance industry. There were two groups of Vietnamese people involved in sending remittances to Canada (Hernandez-Coss 2005b). The first group comprised people who were in Canada on short-term working visas where the Vietnamese Government had made official arrangements for them to send remittances home. The second group comprised Vietnamese immigrants to Canada.

The study determined that much of the remittance industry linked to the second group was ethnically-based and both senders and recipients were wary of Vietnamese Government involvement in the remittance business (Hernandez-Coss 2005b). Many recipients valued the relative anonymity that was offered by the informal system; they did not want their neighbours to know they were receiving money and they did not want government officials to know because they feared officials would try to extort money from them. Commercially, ethnic remitters were cheaper than any formal structure and Vietnam's formal banking system was largely limited to urban areas anyway.

Remittances in the Pacific (particularly Tonga and Samoa) often take the form of goods and they are sent to both individuals and institutions such as churches (Connell & Brown 2005). Remittances have, to some extent, been based on debt or self interest; people might remit back to their country of origin to pay off money they borrowed to pay educational or travel expenses, or so that others could invest on their behalf or leave them something in their wills. People were more likely to continue to remit if they intended to return to their country of origin at some point and the volume of remittances tended to decline with each generation. Many methods of remittance were used including credit cards, corporate remitters, ethnic-based remitters or cash carrying (Connell & Brown 2005).

Research on the Tamil community in Canada has emphasised the effectiveness of ARS in potentially moving money more quickly than governments are able to, particularly in the case of an event such as Boxing Day 2004 Tsunami (Charan & Aitken 2005). Remittances are important in allowing overseas members of the Tamil community help those affected by the Boxing Day 2004 Tsunami and the aftermath of civil war and remittances are often channelled through to villages in Tamil-held areas.

Based on findings from focus groups of Tamil ARS providers that were held in Canada, Singapore and Sri Lanka, the high level of use of ARS by Tamils to send value back to Sri Lanka is based on both historical and commercial factors, with trust being crucial to the process (Charan & Aitken 2005). The Tamil community in Canada use formal banking systems for their domestic banking, but ARS for sending remittances. Besides the issue of trust, ARS commissions are substantially lower than Western Union or MoneyGram. Focus groups also reported that bank fees are high and that the civil war has led to many rural areas having no formal banking structure at all, particularly in Tamil-held areas. Remittances are sent for many reasons, but at least some of them are cultural, such as female puberty celebrations and housewarming celebrations (Charan & Aitken 2005).

The assumption behind much of the research into the commercial aspects of ARS is that ARS users will benefit from an increased role by the formal sector in the remittance process (or at least an increased formality in the process itself via regulation). Whether this is, in fact, the case is debatable. First, as discussed above, major corporate institutions may well struggle to provide remittances at the same low cost as ethnic-based ARS because of high corporate overheads. Second, they may find that it is not economically viable to penetrate rural and remote areas. Even if they can overcome these hurdles, there are cultural and religious aspects to ARS that a corporate structure may find difficult to address.

The World Bank's assumption that there is a natural and desirable progression from informal to formal financial exchange methods has not been proven. This process may occur due to factors such as government involvement or a major change of policy in the formal banking sector, but there does not appear to be any inevitability in the process and if there is widespread corruption or inefficiency within governments, or government financial institutions, such a transition may not occur.

Cultural and religious drivers for alternative remittance services

Commentators have suggested that the significance of ARS should not be limited to economic and commercial factors and that it also fulfils important cultural and social needs that more mainstream organisations may struggle to satisfy.

Research on the US–Mexican remittance corridor noted that although the corridor certainly has important economic and commercial drivers, it also fulfils an important social role in that it maintains links between both immigrants and their immediate families, and immigrants and their broader community in their country of origin (Hernandez-Coss 2005a). Such cultural factors may positively influence the use of informal channels of remittance, at least until formal channels become competitive with regard to issues such as price, cost, reliability and accessibility. In the case of Mexicans living overseas, the fact that the Mexican banking system suffered severe difficulties in the 1990s and was very unreliable as a result, may increase this tendency.

ARS agents are likely to be accepted and respected members of the community and therefore more trusted; they may in fact be related to the person sending the remittance. In a conservative setting, it may not be acceptable for a wife whose husband is sending remittances back to her from overseas to visit a bank, but it would be more acceptable for a trusted member of the community to call on her personally to give her a remittance (Dougherty 2006). The ethnic and family ties that often form part of remittance system help make it possible for the remitter to telephone the country of origin to ascertain whether the remittance has been delivered.

Razavny (2005) asserts that whether or not ARS is Islamic in origin, it has become associated with Islam because it is well suited to the cultural practices of many Islamic countries. Hawala was used by both the government and individuals in Islamic regions run by the Abbasids, Ilkhanids, the Saldjuks and the Ottomans to avoid problems associated with transporting cash and, from the state's perspective, to speed up the collection of revenue.

It has been suggested by one commentator that because ARS providers usually charge a commission rather than interest, this makes it acceptable to Islam. Islam, through the Koran, the hadiths of Muhammed and Sharia law, condemns the charging of interest because it sees it as an exploitative practice, but it does accept the idea of transferring a debt (Razavy 2005). The same commentator cites hawala dealers who emphasise that the commission they charge is not interest because they are charging a fee for a service and they must cover the costs of providing that service (Razavy 2005). Razavy (2005) suggests the possibility that the fact that Sharia law is supportive of ARS would, to Muslims, overrule the laws of the secular jurisdiction. Therefore, for some Islamic communities, the use of ARS may have religious significance. Improvements to the formal banking sector with regard to remittances, such as lowering fees or increasing the speed of the service, may neglect the religious aspect.

The influence of religious beliefs is difficult to quantify because religious and cultural factors may be intertwined. A recent study regarding the impact of the Somali diaspora noted that

[t]he benefits of sending money back home are not limited to the economic well-being of those left behind, but also have important social significance. Besides being a lifeline, the remittances are the glue that binds together families separated by physical distance (Sheikh & Healy 2009: 19).

In summary, the evidence appears suggest that although commercial, cultural and religious factors are relevant to the use of ARS in the majority of cases, the commercial factor is more important during decision-making. The work of Hernandez-Coss (2005a) on the US–Mexico remittance corridor demonstrates that the formal sector can certainly make inroads into the remittance market if it is prepared to make the necessary operational changes. Government support can be relevant in encouraging this process, but this takes commitment from both government and the formal financial sector, and it has not been demonstrated that such a commitment exists in Australia or whether the expense involved in such an initiative would be justified. If there is a desire to commercially benefit a community by sending money there, the more reliable, flexible and cheaper a transfer process, the more likely it is to be used. Alternative remittance currently satisfies these criteria.

Criminal drivers for alternative remittance services

The reactions of international bodies such as FATF and jurisdictions such as the United States to the events of 11 September 2001 have been criticised as being simplistic. There is an assumption that the same policy initiatives that have been used to address money laundering will also be effective against terrorism financing, for example, the closure of the al Barakat overseas remittance company.

There has been much speculation as to whether ARS can be linked to either criminal and/or terrorist behaviour. In a number of jurisdictions, ARS is illegal and thus, by definition, using ARS is a crime. The reasons for this illegality can include the use of ARS to further domestic internal struggles or concerns that ARS is being used to evade currency controls. Furthermore, in theory, ARS can be involved in activities such as capital flight (as can formal banks). An important distinction between mainstream banking structures and ARS is that formal banks are obliged to follow the laws of all the jurisdictions in which they operate whereas ARS, in reality, does not always do so. In fact, they are most prevalent where jurisdictions have instituted measures such as foreign exchange rate controls (Passas 2005a).

At least one commentator has questioned whether the increased regulation of ARS, both at an international and national level, will yield results in preventing money laundering and the financing of terrorism (Roberge 2007). The aim of money laundering is to introduce money back into the economy and this often involves the use of financial intermediaries. So there is some justification for increasing regulation of this sector, such as by introducing more reporting requirements, although in Roberge's view, a desire for increased regulation has to be balanced with maintaining the goodwill of the financial sector (Roberge 2007). However, maintaining the goodwill of the private sector may be even more important when it comes to dealing with the issue of the financing of terrorism.

The aim of terrorist financiers is to raise money from all kinds of sources, including legitimate ones such as charities, using both legal and illegal methods, and then spending it on a number of projects that support, maintain and foster the ideological basis of the group the money was raised for. The amounts of money used to finance terrorist attacks can be small, particularly compared to the amounts potentially involved in money laundering, and virtually impossible to detect other than by intelligence work, which may rely on informal contacts in many different groups including, potentially, the financial services sector. An excessively heavy-handed regulatory environment may alienate many people and impact adversely on informal sources of information, including ARS providers (Roberge 2007).

It has been further suggested that the main basis for suspicion of ARS providers is that they are perceived as 'outsiders'. However, there is little evidence linking them to terrorism, although there is some evidence of links to general criminal behaviour and organisations. As Viles (2008) emphasised, if Al Qaida used ARS networks in Afghanistan prior to the event of 11 September 2001, so did the community as a whole because it was the only viable financial system in the country.

It has been suggested that the structure of a typical ARS operation could make it very susceptible to use by money launderers (Dougherty 2006). The fact that most ARS providers operate other businesses, such as grocery stores, from the same premises means that they could potentially be involved in all stages of a money laundering operation. For the purposes of placement (ie the placement of funds in the financial system), funds from various sources could be mingled together. Then false invoices could be used to layer the funds to be laundered and something like an import/export business could be used to integrate the laundered funds back into the economy (Dougherty 2006). There has been speculation that increasing levels of migration have, in turn, increased the size and complexity of ethnic communities to the point where personal contacts based on trust are no longer always relevant and that people use methods such as code words to identify themselves in the course of transactions (Passas 2008).

It has been suggested that ARS funds are at their most vulnerable when they are 'consolidated', that is, an ARS agent or a group of agents consolidate a group of remittances to send them together so as to reduce costs (Passas 2008). A more senior ARS agent may have responsibility for organising this and would have no direct contact with the people providing the remittances. Consolidation may also occur in overseas centres, such as Dubai, where many ARS transactions are balanced. Passas (2008) emphasises that during this phase, money will be arriving from many different sources.

It may be true that ARS are vulnerable to misuse, but the issue is whether they any more vulnerable than other financial systems. As has already been mentioned, ARS systems contain self-regulating features and these features may be influenced by the number of people involved and are linked to the social nature of ARS. An ARS provider who operates within a community will need to retain the trust of that community as well as other ARS providers he deals with during activities such as consolidation. These factors may well encourage ARS providers to behave honestly.

It has been suggested that ARS transactions are susceptible to abuse because there are limited, or no, records involved. A more detailed analysis would suggest that the vulnerability is with the nature of the records themselves (Passas 2004). In jurisdictions where ARS is illegal, records may be very cryptic and subject to destruction. However, in many Western jurisdictions where ARS is legal, records can be both computerised and voluminous (Passas 2004).

On balance, the research to date suggests that the commercial driver behind ARS is very important and in the long run, may overcome many (but perhaps not all) cultural and religious issues. The basis of ARS is, to a considerable extent, commercial practicality; it is cheap, quick, reliable, can deliver to remote areas and is culturally sensitive. As long as these factors remain, there is little incentive for ARS users to change to more formal systems such as banks or corporate remitters. This puts the onus on such institutions to change their practices if they wish to enter the remittance market. Whether the remittance market is sufficiently attractive for them to do so is, at times, questionable as the average remittance is less than $300.

Commentators are currently divided regarding what sort of regulation (if any) should be applied to ARS and their views on this issue are linked to whether they see ARS as presenting a serious threat in relation to criminal or terrorist activity. Commentators such as Passas (1999) have distinguished between systems that transfer funds and those that transfer value; he believes the latter to be more prone to misuse and has expressed concern that over-regulation of legitimate ARS providers may encourage those who have previously specialised in the first activity to go 'underground' and become involved with the second. Nevertheless, Passas (2005a) now supports regulation of ARS providers in the form of registration and then possibly licensing, although he acknowledges the expense and possible risks involved.

Types of systems currently in use

There are currently a number of variants of ARS used around the world, but they share many similarities. The simplest variant has been outlined previously, however, the process often becomes far more complicated, involving a large number of intermediaries.

Figure 2 demonstrates that the communication between ARS providers does not move currency between jurisdictions, but that use of ARS does generate a need to eventually 'balance the books' between providers.

At a minimum, the process may involve a number of persons and at least two banks (see Figure 3 and Figure 4; Keene 2007). In fact, the process can involve many participants, particularly intermediaries who may be based in a variety of jurisdictions.

Traditionally, telephone and facsimile have been used by ARS providers to convey messages to each other, but now the internet is becoming more important. Figure 3 shows a relatively simple version of ARS and Figure 4 shows a more up to date version demonstrating links with the formal banking sector.

One of the reasons behind these complex structures is that because remittances tend to flow from a wealthy country to a relatively poorer one, the debts created between ARS providers are likely to be asymmetric. ARS providers need to balance their accounts; a process which can take several years. This imbalance can be addressed by a variety of methods. Commentators have noted the use of cash payments via cash couriers, precious stones or gold or other valuable commodities, over- and/or under-invoicing, postal orders, cheques, official drafts, bearer instruments and wire or banks transfers (Keene 2007; Passas 2003).

Figure 2: ARS providers

Figure 2: ARS providers

Source: Keene 2007: 189

Figure 3: ARS complicated variant no 1

Figure 3: ARS complicated variant no 1

Source: Keene 2007

Figure 4: ARS complicated version no 2

Figure 4 ARS complicated version no 2

Source: Keene 2007

A variant of ARS that has emerged in the United States (and elsewhere) is the Black Market Peso Exchange (BMPE), which in the US variant operates between North and South America and is used for a number of activities, varying from the avoidance of import and export tariffs to involvement in the narcotics trade. However, this form of ARS appears to have a fundamental criminal rationale which is lacking in other ARS systems (Buencamino & Gorbunov 2002).

The illegality of any of these practices may depend upon the laws of the jurisdictions in which the arrangements were made, although over/under-invoicing is likely to be illegal because it leads to inaccurate reporting of income and also involves avoidance of duty. It may also have other criminal uses such as fraud, trade diversion, money laundering and corrupt payments (Passas 2005a).

The use of precious stones, gold or other valuable commodities can involve the black market, which means taxes such as goods and sales tax can be avoided. The settlement process between various layers of ARS providers demonstrates the main feature of ARS that distinguishes it from formal banking and the major corporate remitters. A proportion of ARS providers and users who use the system ignore the requirements of the jurisdictions through which they move their transactions. Many ARS providers may have bank accounts in central locations such as Dubai, New York, Hong Kong and Singapore to facilitate the consolidation of accounts which reduces costs (Keene 2007). An operator in one of these intermediate positions is not strictly an ARS provider because they have no connection with retail customers; their role would be as financial intermediaries (Passas 2003). The existence of these central locations means that transactions may not be linear between sender and beneficiary.

Extent of usage overseas—number and value of transactions

It is difficult to quantify the size of remittances within the world economy because the remittance industry utilises both formal and informal channels and the use of informal channels implies an unquantifiable level of non-reporting. In 2007, however, the International Fund for Agricultural Development (IFAD) estimated that in 2006, 150 million migrants sent a total of more than US$300b back to the developing world (IFAD 2007). This involved more than 1.5 billion transactions that generally ranged from US$100–300. The total comprised all remittances and was based on information from banks, other government sources, money transfer companies, international organisations and academic sources. IFAD (2007) noted that it suspects there is a high degree of under-reporting, particularly with regard to informal channels such as hawala.

IFAD (2007) commented that the costs of sending a remittance differed widely between regions and that the level of competition was a crucial factor. For instance, IFAD (2007) noted that sending a remittance to a remote rural area may be more expensive if the local banking industry does not extend its operations to rural areas, leaving the field open to alternative remittance providers (IFAD 2007).

The World Bank calculated that in 2007, recorded remittances to developing countries were likely to be approximately US$240b and that the true size of remittances was likely to be larger due to unrecorded flows (Ratha et al. 2007). They suggested that this represented an increase from $221b in 2006 and was more than double the level of 2002. It attributed the rise of remittance flows since 2002 to a number of factors, including an increased amount of migration, an increased level of scrutiny of remittances since 2001, a relative reduction in remittance costs and a general growth in the remittance industry. A depreciation in the US dollar has also encouraged higher remittances to cover its falling purchasing power in countries of origin. In 2007, the World Bank suggested that the advent of the cell phone and internet-based remittance may increase remittance flows even further.

In 2007, the World Bank estimated that in jurisdictions such as Tajikistan, Moldova, Tonga, the Kyrghz Republic and Honduras, remittances exceeded 25 percent of the gross domestic product (GDP; Ratha et al. 2007). It also calculated that remittances were more than twice the level of official development assistance flows to developing countries.

In November 2008, the World Bank revised its estimates for remittances in 2007 to US$265b. In 2008, it also reported that remittance flows to developing countries were beginning to slow in the third quarter of 2008, although it estimated that overall remittances for 2008 would reach $283b and that it expected this downward trend to increase in 2009 (Ratha et al. 2008). The World Bank noted that the relative decline of remittances in 2008 was less than that of other capital flows, which demonstrates the resilience of the remittance practice. The World Bank suggested that the decline in remittances will be less than the decline in official aid (Ratha et al. 2008).

The Qatar Financial Centre (the Centre) has suggested a number of possible methods for estimating ARS flows (Collins 2008). It notes that the World Bank and the IMF usually base their estimates on balance of payment (BOP) figures. This approach can be limited by a number of factors, including the fact that jurisdictions may apply different definitions and concepts regarding BOP figures, some jurisdictions do not report BOP figures and remittances do not always flow in a straight path from remitter to beneficiary.

The Centre has also suggested that more refined modelling involving an analysis of the 'black market' and the 'shadow economy' may assist in estimating the size of informal remittance (Collins 2008). It emphasises that the money moving through these sectors will not show up in BOP figures because it is not officially reported; it suggests that ARS may be part of the 'shadow economy' due to its nature. In Australia, AUSTRAC receives both International Funds Transfer Instructions (IFTI) and Suspicious Transaction Reports from ARS providers so the principle that such figures would not show up in Australian BOP figures would still apply. Another method suggested by the Centre for estimating the size of the ARS market is to base the estimate on the size of an expatriate population and then estimate the size of the average remittance. However, it concedes that expatriate populations may be very hard to estimate, partly because some workers are not part of any formal system and the population is constantly changing (Collins 2008).

The Centre has suggested (partly based on World Bank figures from 2003) that there is a significant worldwide downward trend in the use of ARS (as distinct from the use of bodies such as corporate remitters) and this is due to a number of jurisdictions encouraging the use of official, that is, formal channels (Collins 2008). Such encouragement has taken the form of a number of initiatives including the prohibition of informal transactions, increased registration of ARS, the freeing up of exchange rates, increased use of formal banking services with the opening of rural branches and the provision of incentives to the financial sector to improve its service quality with regard to those people who send remittances.

The informal nature of a number of remittance transactions and the possibility that a proportion of them may have no contact with either the formal financial sector or regulatory authorities makes it impossible at this point to gauge the size of the world's remittance industry. There are a number of countervailing figures that may affect the industry at any one time. It is likely that if governments and the formal financial structure genuinely cooperate in making an attempt to attract remitters into the formal sector this will impact the use of the informal sector. It is also likely that economic liberalisation regarding exchange rates may have a similar impact. Such measures may serve to make using the formal sector cheaper, which is possibly the most attractive single feature of alternative remittance—its lower cost. A decline in the world economy means many expatriate workers have returned to their countries of origin due to lack of work which also potentially lessens the size of the alternative remittance industry.

However, other factors may serve to increase the size of the remittance industry (particularly the informal sector of the remittance industry). Some of these factors could be political. Any event that makes the banking sector more wary of dealing with the remittance industry, or with remittances at all, would serve to increase the size of the informal sector. A change of government policy that means that a government is less determined to foster links between formal and informal banking sectors might lead to the formal sector taking fewer initiatives to attract remitters. A more restrictive immigration policy might lead to more illegal immigration and illegal immigrants with no documentation have little option but to use the informal remittance sector. This final example emphasises that not all the reasons for using remittance are purely economic—there are important political and cultural motivators, as well such as religious events, holidays, ethnic celebrations, political unrest and natural disasters—and the factors that impact upon the industry are by no means purely economic either.

Comparative costs

Table 2 demonstrates what was involved in sending $200 from Australia to Vietnam as at 15 September 2009.

The possibility of using the banking system for such a transfer is based upon the recipient having access to a bank account. The corporate remitter requires that funds be transferred to an agent and therefore agent availability is crucial. The corporate remitter's rules state that the receiving agent should not charge extra fees, but this may depend upon local custom.

On the basis of the consultations undertaken during the present study, it appears that although cost may be an important factor in differentiating between banks and ARS providers, it may no longer differentiate so strongly between corporate remitters and alternative remittance. The possibility that some agents in the country of origin may charge extra fees may be very important as are community perceptions of the role in the decision regarding which remittance method to use. Speed is still a major differential between banks and alternative remittance providers and may also be crucial depending upon the number, location and quality of agents that a corporate remitter can provide.


As a system for exchanging value, the use of remittances predates modern banking. It is likely to have arisen in a number of parts of the world and the various forms it has taken have been influenced by the cultural practices of those who use it. Although there are a number of variants, the essential aim of the use of remittances is to move value without having to risk physically moving money or goods. Today, remittance services are provided by a variety of remitters, including banks, corporate remitters (eg Western Union) and ethnic-based remitters who usually send money to only one region or country and sometimes only one community. Ethnic-based remitters are known by a variety of names, including alternative remittance providers.

Table 2: Comparative costs and transaction time in connection with a money transfer between Australia and Vietnam
Bank 1 Telegraphic transfer: $30 (15%) Internet Banking: $20 (10%) Up to 5 business days to transfer to account
Bank 2 Telegraphic transfer: $28 (14%) Internet Banking: $22 (11%) Up to 4 business days to transfer to account
Corporate remitter Transfer fee: $4 (2%) 10–15 minutes to relevant agent
Alternative remittance No exact figure provided Very short time period; probably similar to corporate remitter and remittance likely to be delivered to trusted local

Source: Public sources and consultations with Vietnamese ARS providers and community members

Remittance has attracted increased academic and regulatory attention since the terrorist attacks of 11 September 2001 and there has been particular concern about the possible involvement of informal ethnic-based remitters and/or their customers in a wide range of criminal activities, including money laundering and terrorism. This has led to considerable debate regarding many aspects of the informal remittance industry, including the reasons why the practice is used. Although a mixture of economic, commercial, cultural and criminal motivations have been suggested, academic opinion favours commercial factors such as speed, reliability and reduced cost as being crucial to the popularity of alternative remittance (as distinct from institutions such as banks or corporate remitters). Alternative remittance may provide the only avenue for sending money to some jurisdictions that have no viable formal banking structure, or to rural areas in jurisdictions where formal banking structures are confined to major cities (eg it has been used by international bodies to send money into countries affected by war or other issues).

Alternative remittance also has cultural significance in that it allows value to be moved and received in ways that are culturally acceptable. An example of this would be that it allows for respected members of the community to deliver money to people who would not be able to go to a bank to collect it. This cultural significance reinforces the commercial attractiveness of alternative remittance for many users.