Australian Institute of Criminology

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Executive summary

People and businesses wishing to transfer money between themselves can make use of a variety of procedures. In addition to using simple cash transactions, most money transfers in Western societies take place using conventional banks and other financial institutions. In addition to ordinary banking, however, money and other forms of value can be transferred through the use of so-called 'remittance services' which have operated for hundreds of years in non-Western societies. Originating in southeast Asia and India, users of these systems transfer funds through the use of agents who enter into agreements with each other to receive money from people in one country (such as overseas workers) and to pay money to specified relatives or friends in other countries without having to rely on conventional banking arrangements. Funds can be moved quickly, cheaply and securely between locations that often don't have established banking networks or modern forms of electronic funds transfers available.

Because such systems operate outside conventional banking systems, they are known as 'alternative remittance', 'underground' or 'parallel banking' systems. They are invariably legitimate and legal in many countries, although concerns have arisen in recent years that they could be used to circumvent anti-money laundering and counter-terrorism financing controls that now operate across the global financial services sector. Particular risks arise from the irregular forms of record-keeping which are often employed and the possibility that the laws of those countries in which they operate may not be fully complied with.

A heightened awareness of how terrorist activities are financed has led governments in developed countries to include alternative remittance systems (ARS) within the regulatory controls that apply to conventional banks. In Australia, for example, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) classified the provision of alternative remittance as a designated service which requires providers to not only report suspicious matters to Australia's financial intelligence unit and anti-money laundering and counter-terrorism financing (AML/CTF) regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC), but also to register with AUSTRAC before designated remittance services can be provided. This legislation places remittance providers under the same obligations as other reporting entities. This includes obligations to adopt AML/CTF programs and to file annual compliance reports with AUSTRAC.

It is important, however, to achieve a balance between regulating the remittance sector in an attempt to reduce the flow of illicit funds and permitting its continued use as a legitimate, alternative to the conventional banking system—especially for those in less-developed countries. Remittance systems provide many ethnic communities with the ability to send money and/or goods back to their country of origin, usually to their families who remain there, who may be dependent on receipt of such transfers. Remittance systems are also used for a variety of other commercial and social reasons.

This report provides a review of the operation of ARS in Australia and an examination of the risks that they entail for illegal movement of the proceeds of crime and financing of terrorist activities. It also examines the measures being used to regulate such systems around the world and whether these are effective in reducing the risk of crime.

Specifically, the aims of the project were to determine:

  • which remittance systems are used by people in Australia, why and to what extent;
  • whether, and to what extent, such systems are used for money laundering and the financing of terrorism and how the risk of illicit use can be minimised; and
  • how compliance with the current regulatory regime can be enhanced.

Research was undertaken by independent consultants in Sydney and Melbourne who conducted interviews and focus groups with 33 providers of remittance services and 134 people from five ethnic community groups who made use of the services, namely, the Somali, Samoan, Vietnamese, Indian and Filipino communities. These groups were chosen as being the community groups in Australia that most often make use of ARS and who were willing to take part.

In addition, consultations were undertaken with representatives of the Australian Federal Police (AFP), AUSTRAC, the NSW Police Force, Victoria Police, the Australian Crime Commission (ACC), the Australian Customs Service, the NSW Crime Commission (NSWCC) and the Asia-Pacific Group on Money Laundering (APG). Finally, a comprehensive review of published prior research on the topic was undertaken.

The use of alternative remittance services in Australia

Since the commencement of the AML/CTF Act, approximately 5,891 providers of designated remittance services (PoDRS) have registered with AUSTRAC (figure current as at 4 February 2010; AUSTRAC personal communication 2010). The majority of providers operate in Sydney and Melbourne.

Although a number of religious, cultural and commercial motivations exist for using remittance services, the predominant reason is commercial. The speed, reliability, affordability and discretion of remittance (particularly the alternative remittance associated with ethnic providers) are crucial factors in its popularity. Remittance is used to move money and value for a variety of purposes and its use is not confined to making payments to immediate or extended family members back in countries of origin (although that is the single most common reason). Other motivations may include:

  • assisting a community as a whole by supporting a community event or project;
  • repaying debts; and
  • providing finance for commercial ventures such as the purchasing of land.

There is a tendency for the use of remittance to decline over time and inter-generationally, where second-generation community members may be unwilling to send resources overseas.

Many alternative remittance service (ARS) users reported unsatisfactory experiences with the formal banking system (particularly in relation to high costs and slow and unreliable delivery) and also expressed concern that use of the formal banking system could expose their relatives to extortion attempts by law enforcement bodies back in their countries of origin (in these cases, the discretion afforded by ARS providers was particularly appreciated). However, in Australia, it was found that some communities use corporate remitters as well as ARS and sometimes a combination of the two.

Misuse of alternative remittance services

Evidence of misuse of the remittance system exists both in Australia and overseas and a number of successful prosecutions have occurred in the United States, United Kingdom and Australia. The cases demonstrated misconduct by offenders over long periods of time, involving substantial amounts of money. In Australia, it was found that, on some occasions, the flow of legitimate and illegitimate remittance intertwined and that some ARS dealers were often prepared to handle suspect transactions in exchange for a higher rate of commission. It was also found that misuse of the remittance system was more likely to involve criminal behaviour, such as dealing in narcotics proceeds and tax and customs evasion, rather than the financing of terrorism, although the lack of information regarding terrorism investigations makes the level of involvement of ARS hard to estimate. There is currently no clear evidence of the level of misconduct associated with alternative remittance, although on the basis of the current research and consultations, it is apparent that most transactions are legitimate.

Australian ARS users reported little personal knowledge of misuse of the system, although they expressed a degree of concern at the possibility of being cheated or the system being abused. They emphasised that they expected remittance providers to abide by the law, although they often had little idea of what the law was. A number of participants stated that they had some knowledge of ARS providers whom they believed to be dishonest and they avoided using their services. Users emphasised that they considered the remittance system (particularly the alternative remittance system) a valuable one, which serves a legitimate purpose, and they would resent any attempt to close the system down. Many users did not understand that the aim of the current regulatory regime is to guard against AML/CTF risks and that it is not designed for consumer protection.

Supervision and risk management

Since the 2001 terrorist attacks in the United States, regulatory bodies have devoted more attention to ARS providers. There is no clear consensus regarding the form of regulation that would be most effective in preventing ARS from being used for criminal activities. There is also no consensus regarding the level of risk the practice of alternative remittance poses with regard to activities such as money laundering and terrorism financing.

The recommendations made by the Financial Action Task Force (FATF) in 2003 regarding the regulation of ARS (and other AML/CTF matters) have been used by many jurisdictions, including Australia, as a basis for the regulatory AML/CTF frameworks they have introduced. For example, member countries of FATF and FATF-style regional bodies participate in both self- and mutual-assessment procedures in order to gauge their compliance with FATF's 40 Recommendations and Nine Special Recommendations (see Choo 2010; Johnson 2008). FATF recommendations allow for regulatory regimes ranging from basic registration (which Australia and Canada have adopted) to licensing systems that entail the use of assessments of the fitness and propriety of people involved in the running or ownership of an ARS.

FATF recommendations emphasise that any regulatory regime must be flexible and not unduly burdensome so as to avoid the risk of the ARS being driven underground. However, it was found that a number of overseas jurisdictions (such as the United States and the United Kingdom) have adopted regulatory systems that place ARS providers under a considerable burden. In the case of the United States, this burden involves federal and state requirements, which means that ARS providers face differing requirements depending upon which states they operate in.

For many small remittance businesses in Australia, a registration-based form of regulation (coupled with AML/CTF programs) is not necessarily proving effective, owing to the fact that many such businesses are unlikely to have the organisational skills necessary to implement the regulatory framework required (AUSTRAC 2009b). In 2009, FATF outlined in its guidelines that money service businesses (MSBs) could adopt a risk-based approach but that such an approach would not always be the most suitable and some jurisdictions would find a rule-based system easier to manage (and potentially less costly for less sophisticated remittance businesses; FATF 2009). The application of this principle to individual industries, or even sectors within industries, may have merit for Australia.

Remittance providers who took part in the consultations demonstrated a high level of knowledge of the legal requirements relating to provision of remittance services. The providers appeared to resent other providers who did not comply with regulatory requirements. This was largely based on the perception that non-compliant providers could operate more cheaply than those who complied with regulatory requirements, although little detail was provided as to why this might be the case.

Somali ARS providers, in particular, seemed to be notably compliant with the legislation and emphasised that they make every attempt to follow the rules of each jurisdiction in which they operate. The Somali community was noticeably supportive of ARS providers, highly protective of the remittance process and potentially resentful of any perceived government attempt to close it down.

Users and other community representatives who took part in the consultations expressed interest in obtaining further guidance from AUSTRAC or other body concerning the impact of the provisions of the AML/CTF Act and other relevant legislation. Generally, they had little knowledge of Australia's current regulatory regime and did not appreciate that the emphasis of this regime is on addressing AML/CTF issues rather than consumer protection. Participants expressed concern at the possibility that people who send money overseas might be criminally liable under the anti-terrorism laws. However, they also expressed support for any consumer protection initiatives that may lessen the possibility of users being cheated and stated that, in their view, the implementation and monitoring of any such a system should be the responsibility of government. A number of community participants expressed sympathy for ARS providers who are allegedly struggling to understand and comply with regulatory arrangements. Users also suggested that consideration should be given to the provision of more practical assistance to ARS providers to ensure that they fulfil their obligations.

There were a number of comments regarding how government consultation with communities might be undertaken. Some positive options included the use of roundtables, information sessions conducted in languages other than English and the involvement of intermediaries in presenting information.

There was also support for a mechanism whereby both remittance providers and users could report providers they suspected of illegal behaviour and/or non-compliance with regulatory requirements, with an option to do so anonymously.

Generally, it was found that a system that places more responsibility on the regulated parties may not be suitable for many alternative remittance providers, who may not have the capacity to respond in any meaningful way. Community engagement and the provision of a simple mechanism for reporting misconduct may offer opportunities to manage risk and change behaviour.

Future directions and conclusions

Alternative remittance is seen by many as a valuable and legitimate practice. However, some people who use or provide ARS are concerned that they are being unfairly targeted by regulators and law enforcement bodies. Those who use ARS wish to see the industry better safeguarded with regard to consumer protection and compliance with the AML/CTF regulatory regime and are prepared to assist, at least to some degree, to help regulate the system from 'inside'. The criminal justice system also has a role to play in dissuading ARS providers and users from criminal conduct and punishing them if they take part in such conduct. However, as the alternative remittance industry involves many different kinds of providers and users, a regulatory strategy must consider the use of a number of different approaches simultaneously to be effective.