AML/CFT Regulations and Informal Remittance Services: The Case of Hawala

Introduction

Often crimes are driven by the motive of money where the criminals perceive that money can buy anything to satisfy them. This desire force criminals to earn more money to earn further in the laundering process. The process of money laundering functions as a vehicle for criminals to achieve their malicious objectives. Money laundering is a threat to countries in which the main objective is the well-being of the citizens. The global initiatives to prevent money laundering and terrorist financing (ML/TF) evolved with the establishment of the Financial Action Task Force (FATF) in 1989. Since then, the FATF has engaged in activities that are aimed at the efforts of countries to strengthen the framework of anti-money laundering and combating the financing of terrorism (AML/CFT). In that context, it sets international standards that aim to prevent illegal activities and the harm they cause to society. On the other hand, the FATF works closely with the countries to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. However, the effectiveness of global initiatives in combating ML is questionable since it has failed to reduce global financial crimes over the period. For example, UNCTAD (2020) reports that capital flight, which captures trade mis-invoicing and other balance-of-payment transactions, was estimated at $88.6 billion, on average, during 2013–2015 or around 3.7 percent of African GDP. The capital flight between 2000–2015 was $836 billion or 2.6 percent of GDP. UNODC (2020) reports that the estimated amount of money laundered globally in one year is about 2% to 5% of global GDP or $800bn–$2tn in current US dollars. These estimates may include formal as well as informal channels. However, when it comes to informal channels these figures may even bigger. In an Indian case, an alleged hawala dealer and his accomplices have “generated” black money worth ₹ 565 crores from their global networks and it is also reported that he has facilitated parking of funds abroad by Indian nationals through his international hawala transaction structure created in India and various other jurisdictions (India News, 2020). Ouédraogo (2017) finds that the quality of governance, the quality of institutional settings, and the unemployment rates are major determinants of the size of the informal economy and a high level of corruption and poor institutional settings favour an increase of the informal economy. Weak AML/CFT regimes also characterise these fundamental issues and hence informal economy plays a vital role in economic activities. The weak regimes are often subject to the close monitoring of FATF. However, these countries fall into deficient regimes once they were evaluated again for compliance as well as the effectiveness of the AML/CFT regime.

Therefore, it is questionable whether the FATF is on the correct track to achieving its objectives.

The FATF works to prevent related threats to the integrity of the international financial system which come from criminals. The criminals can use formal as well as informal channels to move criminal proceeds from one place to another sometimes it may be from one country to another. Formal channels are operated through financial institutions (FIs) where FIs are subjected to the regulatory framework of the country in terms of the AML/CFT regime. The FIs develop proper AML/CFT programs within the institutions in order to comply with AML/CFT regime. The non-compliance with the regulatory requirements will be dealt with following proportionate and dissuasive sanctions. Therefore, criminals are a little bit reluctant or think twice before using formal channels to remit criminal proceeds through the formal financial system.