Informal Value Transfer Systems and Criminal Enterprises Analysis

Informal Value Transfer Systems and Criminal Enterprises
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Abstract
The use of money as a store and transfer of value has had numerous impacts to social and economic development. Financial institutions have been created to oversee the transfer of funds and anything that has value. Bad actors, however have capitalized on the informal value transfers systems (IVTS), some of which were used as a legitimate value transfer system. Due to its anonymity, bad actors have leveraged the various IVTS including Hawala, and Black Market Peso Exchange to infiltrate the formal financial systems with proceeds from their illegitimate businesses like human trafficking, drug trafficking, and money laundering. Some of the proceeds are also used in financing terror groups and the transactions made possible with the use of the underground system. Pakistan, Colombia, Somalia, and Mexico are some of the states overrun by cartels of all sorts, making use of the IVTS platform. Governments and relevant authorities have made effort to curtail the informal value transfer with very little success.
Keywords: Financial institutions, IVTS, Hawala, Black Market Peso Exchange, money laundering
Introduction
Money in the current day and age has been taken for granted, not taking into consideration of the rich history that the commodity has had, parallel with that of civilization. In ancient times, barter trade was the only means where people could exchange value and that later changed when civilization brought about the earliest forms of money before the introduction of metallic coins: cowrie shells, whale teeth, Yap stones, wampum, cattle. Money then transformed up until the modern era of economics where it has been used for three basic functions: store of value, unit of account, and medium of exchange. The flow of money from one person to the other became somehow cumbersome and risky, necessitating the introduction of more organized, regulated, and efficient mechanisms where money could be exchanged. This led to the emergence of the financial institution that serves to direct and regulate the flow of money while acting as an intermediary between borrowers and lenders. Banks are the most popular financial institutions, structured in a manner that governments and relevant authorities closely monitor and can easily intervene in their operations due to the critical role that the monetary institutions play in the economic stability and strength of a country. However, powerful individuals, governments run by terror groups, and organized crime syndicates have created networks and systems capable of bypassing the regular financial institutions to transfer value both locally and internationally popularly known as underground banking. A more technical term for underground banking is Informal Value Transfer Systems (IVTS).[ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"B19aVLaK","properties":{"formattedCitation":"Glyn Davies, {\\i{}History of Money} (University of Wales Press, 2010).","plainCitation":"Glyn Davies, History of Money (University of Wales Press, 2010).","noteIndex":1},"citationItems":[{"id":3402,"uris":["http://zotero.org/users/local/IBolxqVE/items/UQXIFSTS"],"uri":["http://zotero.org/users/local/IBolxqVE/items/UQXIFSTS"],"itemData":{"id":3402,"type":"book","publisher":"University of Wales Press","source":"Google Scholar","title":"History of money","author":[{"family":"Davies","given":"Glyn"}],"issued":{"date-parts":[["2010"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} Glyn Davies, History of Money (University of Wales Press, 2010).] [Nektarios Michail, “A Brief History of Money and Credit,” in Money, Credit, and Crises (Springer, 2021), 3–26.] [David S. Kidwell et al., Financial Institutions, Markets, and Money (John Wiley & Sons, 2016).]
Informal Value Transfer Systems
The terms underground banking and alternative remittance systems were the most commonly used terms to describe a form of value transfer that is characterized with a lot of secrecy and only thrive where there is trust. As the world started to get to terms with legitimate banking systems, the need to coin a phrase that best describes the illegitimate value transfer arose and the term Informal Value Transfer Systems (IVTS) emerged. IVTS can therefore be defined as any network, system, or mechanism capable of transferring monetary value or any other transaction that has a value from one place to the other anonymously without passing through the proper channels and the appropriate financial institutions. From the definition, it is possible to infer two distinct forms of IVTS: those strictly dealing with fund transfer termed Informal Fund Transfer Systems (IFTS) and those playing a part in the transfer of any other commodity that has value, in essence, Informal Value Transfer Method (IVTM).[Amanda McCormick, Yvon Dandurand, and Doug LePard, “Informal Value Transfer Systems, Money Laundering, and the Financing of Terrorism: Canada’s Response to the Threat,” 2018.]
Informal Fund Transfer Systems
Informal Fund Transfer Systems (IFTS) were the transactional conventions for different ethnic groups that served the purpose of enabling trade between distant groups in the place of modern-day banking systems. Asian countries, specifically India and China, have been heavily linked with the emergence of IFTS and as the world comes to terms with globalization, IFTS is spreading like a wave to the entire globe. Although IFTS has some regulation, with most of its operations termed legitimate, it has negative implications to the enactment of monetary policies, inhibiting the supply and demand of legitimate currency. Besides, since IFTS operate outside the formal financial institutions, where regulations by government authorities and monetary policies on taxation have been properly implemented, IFTS can harm the economic situation of the countries where the transaction are made through these systems. Most Asian countries have had different terminologies to refer to the different kinds of IFTS, with the term Hawala used across the Middle East.[Mohammed El Qorchi, Samuel Munzele Maimbo, and John F. Wilson, “Informal Funds Transfer Systems: An Analysis of the Informal Hawala System,” 2003, /external/pubs/nft/op/222/index.htm.] [Qorchi, Maimbo, and Wilson.]
Informal Value Transfer Method
Unlike the IFTS which mainly deals with the transfer of funds, IVTM has systems in place capable of transferring both money and anything of value from one place to the other without being detected by the relevant authorities. Unlike the IFTS that requires a well-established network to accomplish value transfer, IVTM can be executed by as few as two people with the help of the formal financial institutions without leaving a trail of any illegitimate transfer of value. Because IVTM makes use of legitimate financial institutions, they can transfer vast amounts of value. These capabilities with the IVTM makes it popular with the major illegal offenses such as terrorism, money laundering, weapons proliferation, tax evasion, subsidy fraud, or even funding military groups that often require huge amounts of money.[Qorchi, Maimbo, and Wilson.]
How It Works
Despite the different types of IVTS including Hawala for the entire Middle East, Hundi for Pakistan, Fei Ch’ien for China, Phoe Khuan for Thailand, Black Market Currency in South America and parts of Africa, and Stash House in the USA, all IVTS follow a framework typical of that used with the Hawala value transfer systems. A typical IVTS transaction will involve at least four players: a sender, recipient, and at least two trusted intermediaries. A sender will have to contact the trusted IVTS agents who are liable for the success of a transaction and are entitled to a commission for every transaction that goes through. Mis-invoicing and under-invoicing are the most common techniques used with typical IVTS systems to enhance the demand for the illegitimate systems while also making possible tax evasion.[Froilan Tuccat Malit Jr, Mouawiya Alawad, and George Naufal, “More than a Criminal Tool: The Hawala System’s Role as a Critical Remittance Channel for Low-Income Pakistani Migrants in Dubai,” Remittances Review 2, no. 2 (2017): 63–88.]
IVTS in the Contemporary Societies
The anonymity and the inadequate bureaucracy that often comes with the IVTS systems have attracted a lot attention from bad actors. Besides, IVTS facilitates the transfer of a huge sum of money and value that is untouchable or deductible by governing authorities, making it a lucrative business although risky and uncalled for. Failed nations, organized crime syndicates, and even terror groups have taken advantage of the underground capabilities of IVTS especially with it being used in some parts of the world that have no proper or formal value transfer systems. Despite the global effort to stiffen Anti Money Laundering (AML), IVTS remains a major challenge to the global financial institutions and in the fight against terrorism. Countries in Asia, South America, and Africa have a high propensity of IVTS usually fuelled by the failed state of the nation or simply overrun by rogue leaders or terror groups.[McCormick, Dandurand, and LePard, “Informal Value Transfer Systems, Money Laundering, and the Financing of Terrorism.”]
IVTS in Pakistan
Pakistan is one among the countries with the least human development, emerging at number 146 out of 187 as per the United Nations ranking on human development index. The country has been dominated by terror groups with political affiliation, drug dealers, Islamic militia groups, and insurgencies supporting the neighboring countries overrun by terrorists. The state bank of Pakistan (SBP) has reasons to believe that t...