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Illegal use of alternative remittance systems

Prior to 2001, the evidence relating to the misuse of ARS was, to a considerable extent, haphazard, although there clearly had been instances of misuse. In 2010, the situation is still unclear regarding the degree of involvement of money/value transfer businesses in criminal or terrorist activity.

The events of 11 September 2001 increased the level of interest in ARS. This interest expressed itself in a number of ways; one of which was the issuing by FATF of a number of international recommendations regarding the regulation of ARS.

It can be said that the threat presented by ARS is as much about potential as reality. One commentator recently emphasised:

...the qualities that make hawala popular among legitimate remitters also attract[s] corrupt officials and criminal actors seeking to launder cash and to make or receive illicit payments around the world. Like any financial medium, hawala can be abused. It is particularly susceptible since it operates in weak states and conflict zones, namely parts of the world where the capacity or will to regulate it is often lacking. It frequently mixes funds transfers, currency deals and trade transactions, while it handles large volumes in which criminal transactions are easier to hide. Several South Asian governments have attempted to contain hawala by criminalising it and cracking down on those operating or using its services, since it allows the evasion of taxes, duties, currency exchange and capital controls. That their efforts have consistently failed reveals the strength of demand for hawala, as well as the flexibility of the system, which can adapt to maintain operations despite government repression (Passas 2008: 42).

The ARS system is particularly subject to misuse when the funds are collected or dispersed by ARS providers (especially if the customer is unknown to the ARS provider) and when the takings of a large number of ARS providers are consolidated by more senior ARS providers who have no direct contact with customers (Passas 2008).

Passas (2006) has also emphasised countervailing factors that may limit the misuse of alternative remittance, such as the disapproval of ethnic communities for any local ARS provider that brings the system into dispute. Excessive regulation may drive the practice underground (Passas 1999) and both the records kept by ARS providers and the records kept by formal banking structures of their links with ARS are of potential assistance to law enforcement. On balance, Passas (2008) now favours registration and possible licensing of ARS providers, but his changing views are indicative of the fact that there is as yet no clear evidence regarding the level of criminality in alternative remittance systems or consensus about how any such criminality should be addressed.

There may be a number of indicators that indicate that an ARS is being misused (Passas 2005a). These indicators include:

  • different commission rates being charged to different clients;
  • different recording methods for some clients;
  • no recording of some transactions;
  • large sums being sent by single customers;
  • different collection methods for different transactions;
  • transactions diverging from the normal pattern associated with a customer;
  • transfers to companies in very different businesses; and
  • transfers to accounts of individuals or companies involved in illegal activities.

In some of the cases and issues discussed below, these indicators can be present, but they are not conclusive and can be subject to a number of interpretations.

The regulation of ARS poses some difficult questions. As well as the practical issue of how such regulation can be accomplished in an effective way, there is the question of what constitutes a proportionate response to any potential threat posed by the ARS system. Any financial system is subject to abuse. The question is whether the ARS system is subject to more abuse than others and what would be the impact of controls, including unintended impacts? The important role that alternative remittance plays in the lives of both individuals and communities cannot be ignored.

International typologies

ARS has attracted considerable attention from international bodies such as FATF and the APG in terms of their typology work on money laundering and to some extent on terrorist financing (APG 2009, 2008,2001, 2000; FATF 2008c, 2008d, 2005a, 2002, 2000, 1999).

The misuse of ARS does not dominate these typology reports, which cover a broad range of institutions and activity. The typologies that involve ARS have become increasingly detailed and slightly more numerous as the practise of ARS comes under greater scrutiny, and does not necessarily demonstrate that misbehaviour by ARS providers has increased. In the typologies that involve misconduct by alternative remitters, such misconduct was often facilitated through the remitter in question having links with a formal financial body such as a bank. In other cases, an offender used both formal and informal financial institutions to launder funds. The offences reported involve far more criminal conduct, including but not limited to money laundering, than they do terrorism, although the fact that little detailed information on terrorist financial operations is released into the public domain means that it is difficult to assess the level of involvement in terrorist activity.

As an example, the APG Yearly Typologies Report (APG 2009) noted a number of trends regarding alternative remittance and links with money laundering and terrorism financing. The material provided by Australia included a comment in one case that when a number of PoDRS who were transferring proceeds of crime abroad were closed down, remittance levels quickly recovered through other channels. In another case, the exploitation of a sub-agency by a criminal group occurred when reporting obligations were not well understood by the sub-agency's staff and the principal agent (who controlled a large number of sub-agents) encouraged a relaxed attitude to compliance because it wanted to maximise commissions. The criminal group approached the sub-agency towards closing time in order to put staff under more pressure.

The APG Yearly Typologies Report (APG 2009) also listed cases of PoDRS trying to evade new reporting requirements by using tactics such as fictitious customer names. There was one report of a Pakistani national living in the United States using an unlicensed remittance network (a hawala network) to both launder money and conceal terrorist financing; money was sent to a number of jurisdictions, including Australia.

The concerns expressed by ethnic-community participants in the consultations carried out for this study, and by law enforcement agencies, are reflected in the APG Yearly Typologies Report (APG 2009), particularly the relationship between principal agents and sub-agents (and particularly the poor training of sub-agents) and the potential for abuse when super agents have a large number of sub-agents which may need varying levels of monitoring and training.

Australia

Seven of the typologies set out in AUSTRAC's Typologies and Case Studies Report 2007 involve ARS (AUSTRAC 2007a). The typologies range from using an ARS provider to send money overseas (in some cases, the ARS provider made a suspicious activity report regarding the conduct that was instrumental in it being detected by law enforcement; in others, the ARS provider deliberately did not comply with their IFTI obligations) to one case (dated 2003–04 and quoted from the APG Annual Typologies Report 2003–04) involving a complicated arrangement with a number of individuals and organisations in the movement of precious metals.

The AUSTRAC Typologies and Case Studies Report 2008 (AUSTRAC 2008b) contains 15 illustrations relating to criminal use of ARS, as well as an emerging criminal methodology known as cuckoo smurfing which involves using an overseas criminal remitter to move money overseas. Although these typologies cover a broad range of criminal behaviour, there seems to be a number of emerging trends. The amounts of money sent were often small but there was a high volume of transactions, often by the same person who used a mixture of remitters and formal banking institutions to move money. In some typologies, the remitters were knowingly involved in illegal conduct and colluded in activities such as the falsifying of records or the structuring of transactions, but in others they appeared unaware of the criminality of the conduct (or became suspicious and reported it to AUSTRAC). AUSTRAC emphasise in the report that often the distinguishing factor that suggests criminality on the part of a customer is not the amount of money involved in a particular transaction, but the fact that the financial behaviour of a customer is 'inconsistent with the customer profile that has developed during the course of the business relationship' (AUSTRAC 2009a: 10).

The AUSTRAC Typologies and Case Studies Reports 2009 (AUSTRAC 2009a) contains a number of cases involving criminals or criminal organisations that made use of remittance services with or without the provider's knowledge. In such cases, the criminals in question also frequently used other financial channels such as banks. One case involved a remittance corridor between Australia and Eastern Europe that originally started because there was no other way to send remittances. Once more formal banking channels had been established in the region, the corridor was largely taken over by a criminal group who used it for money laundering (AUSTRAC 2009a).

A number of Australian law enforcement bodies (ACC personal communication 2008; AUSTRAC personal communication 25 February 2008, 28 April 2008; CDPP personal communication 25 January 2008; NSWPOL personal communication 15 January 2008; VicPol personal communication 17 October 2007) have provided perspectives on the use of ARS with regard to criminal and terrorist activities. These comments can be summarised as follows:

  • Currently, law enforcement agencies in Australia only have limited contact with ARS providers and only have cause to deal with them if there is a specific compliant or relevant investigation.
  • Law enforcement bodies have experienced difficultly in making contact with ethnic communities particularly regarding issues that may have criminal implications.
  • Corporate remitters can potentially pose concerns for law enforcement agencies due to the amount of money handled by these organisations, the contractual employment of super agents who are made responsible by the corporate remitters for the training of sub-agents and the sometimes poor standards and timeliness of suspicious activity reporting by corporate ARS providers.
  • Law enforcement has concerns that new technologies could present considerable challenges and drew particular attention to stored value cards (SVC).
  • ARS is very much community-based; there is little evidence of people using remitters outside their own ethnic community; it is possible that people using ARS providers of different ethnicity could indicate something unusual is occurring.
  • Trust is crucial to the ARS system and that any breach of this trust could severely impact upon the ARS provider, so this may lessen the possibility of criminal behaviour by providers.
  • The operation of an ARS business involves the congregation of large numbers of people and this can often be mistaken by police for illicit activity.
  • ARS providers are often (although not always) highly-respected members of the community and one police officer commented that he was not aware of links between ARS providers and activities like money laundering.
  • Some law enforcement bodies expressed support for a licensing system for ARS, possibly coupled with a 'fit and proper person' test; they believed the current registration-based system did not accomplish anything and did not deter illegality because individuals or companies could easily re-register under a new name.

Case 1

Azees Ansari and Haja Ansari were directors of Exchange Point (a currency exchange business) in Sydney. Under investigation since July 2003 by a joint group (AFP, NSW Police Force, NSW Crime Commission, ACC and AUSTRAC), Exchange Point operated as an ARS provider and had a number of contacts overseas, particularly in Singapore. Exchange Point received more than $2.5m in funds to be deposited into Australian accounts. This was done in a 'structured' way, with amounts being deposited in less than $10,000 lots. Exchange Point received orders detailing which accounts Australian currency was to be placed into.

Apparently, Exchange Point also received money from Australians. They used the Australian currency as a cash pool and then instructed overseas ARS providers to make money available to participating Australians when they were overseas. This was done over the phone, no records were kept and no cash left the country. The Ansari's built up a cash pool which they then deposited in various accounts in Australia when asked to do so by overseas associates. The Ansari's appealed their sentences to the NSW Court of Appeal who dismissed the appeals and imposed various terms of imprisonment in respect of the money laundering offences they were found guilty of.

Source: A Ansari v R, H Ansari v R [2007] NSWCCA 204 (14 August 2007)

Case 2

From 2005, a number of Australian agencies have been involved in Operation Gordian, an ACC led taskforce investigating money laundering and tax fraud. Over 70 people have been charged with a variety of offences, including ARS providers.

Those prosecuted included managers of the Long Than Money Transfer Company, which had offices in Melbourne and Sydney. The managers allegedly moved $93m out of Australia. They allegedly failed to use taxation records, hid the identity of clients and used other ARS providers to help send money so that the amounts sent at any one time were diluted.

On 17 December 2009, seven people were sentenced in the County Court of Victoria to serve periods of imprisonment of up to 12 years for attempting to launder up to $68m through Long Thanh and associated cash remittance businesses in Sydney and Melbourne. ACC Chief Executive Officer Mr John Lawler commented that the convictions sent a message to alternative money remitters that they must fully comply with the AML/CTF legislation (ACC Media Release 17 December 2009).

However, some investigatory bodies expressed concerns over the activities of ARS providers and users. These concerns included:

  • that ARS providers were sending value out of Australia but building up large cash reserves within Australia, which they may be tempted to use illegally;
  • links between Pakistani ARS in Sydney and money laundering activity; and
  • that some ARS providers operated using a two-tier fee structure; for suspicious transactions they charged substantially more commission.

Case 3

AUSTRAC referred a matter to law enforcement that subsequently led to the discovery of a drug lab which was connected to organised crime. The investigation revealed that money launderers had used their contacts to provide a remittance service to Eastern European residents in Australia who had no other way of sending money to families in their country of origin. The remittance activity continued as more formal banking channels were established, and increasingly, the ARS was used for criminal purposes. The remitting individuals concealed the remitting activity by meeting secretly to gather funds and then using third-party individuals and accounts to send the funds. The remitters also organised for other persons to purchase and then mail or courier bank drafts.

Source: AUSTRAC 2008b

The ACC has commented that

[i]n Australia, most money laundering occurs through the regulated financial system. Criminals also use both legitimate and illegitimate money transfer systems, professional facilitators and legitimate business enterprises to disguise their criminal proceeds (ACC 2007: 11).

Following concerns regarding the operation of ARS in Australia, the ACC is undertaking research into money flows in and out of Australia which may produce valuable insights into the operations of ARS. It cannot estimate at this stage how much money is leaving Australia via ARS without being properly reported. The ACC's concerns regarding ARS are partially based on features of the ARS system that they believe make it vulnerable to misuse. It also believes that the reporting standards of many remitters are not satisfactory (ACC personal communication 22 October 2008).

United States

The response of the United States to the events of 11 September was swift and had a number of consequences for MSBs, which included ARS providers. Under amendments introduced into the Bank Secrecy Act 1970 by the Patriot Act 2001, MSBs were required both to register with Financial Crimes Enforcement Network (FinCEN) and to comply with all state licensing requirements. The possibility of requiring all MSBs to register had been raised in 1994 legislation but was never put into regulations.

Expert evidence presented at a hearing before the Subcommittee on International Trade and Finance of the Committee on Banking, Housing and Urban Affairs of the US Senate in November 2001 emphasised that prohibition of alternative remittance providers was not likely to be effective and that it ran the risk of driving the system underground. While the evidence provided some information regarding the operational details of ARS, it showed there was little knowledge of any possible links with criminal and/or terrorist organisations (US Senate 2002).

Case 4

In November 2002, a money exchange business located in South America was implicated in the laundering of proceeds from illegal alien smuggling through several bank accounts in New York. The funds were remitted to companies and individuals in the United States. An individual was arrested and charged with both money laundering and operating an unregistered MSB. The activity had been detected through a US Immigration and Customs Enforcement (ICE) analysis of Suspicious Activity Reports (SAR; FinCEN 2004).

Case 5

In March 2006, ICE indicted individuals in the US District Court in Brooklyn for running an unlicensed MSB and smuggling money to Yemen. Members of the Yemeni community living in New York collected cash from other community members that they then gave to two lawyers and a real estate broker. The lawyers and the real estate broker wrote cheques for the equivalent amounts from their professional banking accounts and members of the Yemeni community then transported these cheques to Yemen without filing currency transaction reports (Gup 2007).

Source: AUSTRAC 2008b

The hearing was also presented with evidence by the US Customs Service regarding the al Barakat company, which was an SRC operating in the United States. In the aftermath of the 11 September attacks, al Barakat was accused of having financial links with al Qaida and its overseas remittance channel was shut down. The evidence presented at the hearing suggested that five percent of al Barakat's revenue went to al Qaida, but there was no guidance as to the methodology used to arrive at this figure (US Senate 2002). By 2006, only four criminal charges had been brought against al Barakat and none of them involved the financing of terrorism. The majority of al Barakat's assets that had been frozen in the United States after 11 September 2001 had been unfrozen after a court challenge.

A November 2002 report to Congress by the US Treasury recommended that there was, at the time, no need for further legislative change to the laws affecting MSBs (US Department of the Treasury 2002). It suggested that prohibition of alternative remittance activities would be counterproductive due to the risks of driving the practice underground and that the United States would be wise to follow the FATF Special Recommendation regarding licensing and registration. The Treasury also recommended that that education and outreach to ARS providers would be more effective ways of addressing issues such as poor record-keeping rather than further regulation. The Treasury report stated that ARS providers had been involved in wrongdoing but it provided no detail as to what this may have involved. The report methodology involved interviewing law enforcement personal, some academics and remittance service providers (United States Department of Treasury 2002).

Case 6

In January 2008, Sigue Corporation and Sigue, LLC of California (a money service business headquartered in San Fernando, California) agreed to pay US$15m by way of a civil order penalty over the condition of its anti-money laundering (AML) program. At the time, Sigue had more than 7,000 agents providing money transmission services to Mexico and Latin America. Typically, these agents were small businesses. FINCEN determined that Sigue's AML program had failed to detect that over an extended period of time, 47 agents had assisted clients in the structuring of transactions so as to avoid the currency transaction reporting requirements of the Bank Secrecy Act (BSA). The transactions were allegedly linked to narcotics trafficking. In FINCEN's view, this failure was systemic and long standing.

Source: FinCEN 2008

The 2002 report was quoted by the US General Accounting Office in its November 2003 Report to Congressional Requesters regarding terrorist financing (US General Accounting Office 2003). The report reflected concerns that recent increased regulation of the banking sector may have displaced illicit activity into alternative remittance systems. The report conceded that there was no real information as to the possible misuse of the ARS system and that the Federal Bureau of Investigation (FBI) and ICE needed to analyse the whole subject of terrorism financing more thoroughly, with the FBI to undertake further research on the subject. The report also expressed concern regarding the use of charities for terrorism-financing purposes. It made the point that increased regulation meant a greater workload for law enforcement agencies (US General Accounting Office 2003).

The United States released an interagency Money Laundering Threat Assessment (MLTA) in 2005 (US Department of the Treasury 2005). The working group who compiled the MLTA included Treasury (including FinCEN and the Internal Revenue Service (IRS)), Department of Justice (including the FBI), Homeland Security, the Federal Reserve and the US Postal Service.

Findings included:

  • MSBs offer an attractive alternative for both legitimate banking and money laundering and not many of them are registered;
  • bulk cash smuggling is well entrenched and may be on the rise, with most of it associated with illegal narcotics;
  • many of the more complex money laundering schemes involve the use of international trade.

The US Government responded to this document in 2007 with a National Money Laundering Strategy that focused exclusively on money laundering (US Department of The Treasury 2007). The strategy noted that banks and depositary institutions are the primary gateways to the US financial system and that technological developments are increasing the difficulties these institutions face in identifying their customers. It also emphasised:

  • the need to ensure greater registration by MSBs and, if necessary, attempt to harmonise laws;
  • the need to focus on detection of bulk cash smuggling, particularly across the Mexican border; and
  • a need to focus on trade-based money laundering.

Case 7

In July 2008, Dong Dang Huynh, the owner of the money remittance company US Tours and Remittance Inc trading as US Tours in Houston, was convicted for his involvement in an international narcotics scheme. US Tours received drug proceeds in the guise of legitimate remittances which it then sent to Vietnam with the intention to move them back to the drug manufacturers in Canada at a later date. The company broke the monies down into smaller sums to avoid reporting requirements, assigned fictitious names to these smaller amounts and attached false receipts to them so as to not to be detected by an IRS audit. The money was then deposited evenly by the company into domestic accounts and then finally wired to a remittance business in Ho Chi Minh City that was owned and operated by the offender's brother. During the course of the operation, over US$24m was sent through to Canada (United States Department of Justice 2008).

Case 8

In July 2008, E Gold Ltd, an internet-based digital currency business, and its three principal directors and owners, pleaded guilty to money laundering and the operation of an illegal money transmission business. E-Gold allowed accounts to be opened without requiring customer identification and ordered untrained staff to monitor large numbers of transactions for criminal activity. The directors were aware of criminal activity and encouraged clients whose illegal activities had been detected to transfer money to other accounts. At the time of writing, the directors face the possibility of both fines and prison. The company has undertaken to comply with all federal and state registration and licensing requirements for MSBs and to put in place a money laundering detection program that will include verified customer identification, suspicious transaction reporting and regular supervision by the IRS (US Department of Justice Press Release 21 July 2008).

There have been a number of US cases and investigations involving alternative remittance. As has been discussed in the second section, a high proportion of cases involve the issue of registration. However, there are certainly cases involving major criminal conduct.

In summary, misconduct by MSBs of various kinds are an issue for the United States. However, there does not appear to be evidence of systematic misuse of the alternative remittance system. The regulatory system adopted by the United States is applied inconsistently to ARS providers (due to the different states they operate in) and runs the risk of criminalising a large number of ARS providers because they have not complied with both federal and state regulations.

Case 9

On 22 April 2008, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) announced that it had designated a number of individuals and entities for acting on behalf of the Revolutionary Armed Forces of Columbia (FARC). FARC was designated as both a trafficker of narcotics and a terrorist organisation. Two of the entities designated under the April 2008 notice were Columbian money exchange businesses, who allegedly laundered foreign currency provided by FARC which was the product of drug sales. The two money exchange businesses then provided funds to FARC so that it could operate in Columbia. The designation freezes any assets these organisations may have in the United States and prohibits US businesses or individuals from dealing with them (United States Department of the Treasury 2008).

United Kingdom

The Serious Organised Crime Agency's (SOCA) identified money transmission agents, including ARS providers, as an avenue that criminals have used to launder money (SOCA 2007). The threat assessment did not provide details on how great the involvement was, nor did it distinguish how many ethnic-based ARS providers were specifically involved, as distinct from the rest of the MSB community. These concerns were repeated in the report produced by SOCA (SOCA 2009). The assessment noted that MSBs (including Bureaux de Change, money transmission agents and cheque cashers) were frequently used by criminals to launder the proceeds of crime and that, of these bodies, money transmitters were the most vulnerable to abuse (SOCA 2009). The assessment commented specifically on IVTS and identified them as a 'specific risk area where the legitimate and criminal economies intersect' (SOCA 2009: 17). The SOCA assessment did not provide any details regarding how it had come to this conclusion.

Case 10

Eleven people were jailed in 2008 on charges relating to the use of ARS to launder money. An HM Revenue & Customs (HMRC) investigation found that three firms (Bradford Travel Centre, Ramzan Travel and Watan Travel) had used ARS to illegally launder millions of pounds, much of which had been derived from drug trafficking. The investigation was based on a variety of factors including reports from financial transactions, reported large transactions by the three businesses and surveillance showing large sums of cash being dropped off at the firm's branches in Yorkshire. Estimates of the amount of money involved range up to £500m. Some of the defendants, in part, argued that there was little understanding of how much money a legitimate ARS could generate and that the amount involved did not, of itself, demonstrate any wrongdoing. They also commented that the cash had been accumulated by intermediaries and that they had no idea about the money's origins or how it had been raised. One defendant pleaded guilty to laundering millions of pounds through cigarette smuggling (R v Liaquat Ali, Akhtar Hussain and Mohsan Khan Shahid Bhatti [2005] EWCA Crim 87).

Ballard (2003b) has commented at length on the issues raised by such prosecutions as he acted as a defence witness in some of the proceedings mentioned in Case 7 (see box). He suggests that the prosecutions have altered ARS provider behaviour to the extent that they have encouraged them to register. But he also suggests there may have been innocent reasons for some of the behaviour that generated suspicion, such as the movement of large amounts of cash. Ballard (2003b) emphasises that legitimate, large ethnic-based remittance operations can generate large sums of money and that the most rapid way to move this money is through the use of couriers; speed being one of the most economically-desirable factors in the choice to use ARS.

Ballard (2003b) also notes that ARS operators do keep records, but that trust is a factor in keeping down costs, and that trust to some extent may replace bureaucracy, particularly in the consolidation phase where more and more money is being brought together; a view which he shares with commentators such as Passas (2008). Ballard (2003b) emphasises that the 'trust factor' permeating the ARS system constitutes self regulation, although he is unable to quantify how effective such self-regulation may be, particularly if a system grows and involves people who have no direct knowledge of each other.

Case 11

In 2006, an individual was charged with operating an unlicensed remittance company, contrary to the Banking Act, by the Taiwan Chiayi District Prosecutors' Office. The individual allegedly established 57 accounts with nine different financial institutions for the purpose of engaging in laundering over NT$18.3b crime proceeds (ie proceeds from fraud and gambling) from non-specific persons. The individual who allegedly earned commissions exceeding NT$30.47m has yet to be sentenced. The case was a result of suspicious activity reports submitted by a bank (Money Laundering Prevention Centre 2007).

Taiwan

The Taiwanese remittance industry encompasses a large number of players and operational methods. Only banks are authorised to provide domestic or foreign remittance services, although they are allowed to establish agency relationships with foreign remittance service providers. Illegal underground banking continues (APG 2007).

Case 12

Reports submitted by Directorate General of Customs to the Chinese Ministry Justice and Investigation Bureau indicated that Yu, a Taiwanese citizen, was reportedly carrying physical cash amounting to ¥487.45m, US$93,000 and KRW3.6m during his most recent 14 trips out of the country between October 2003 and October 2004.

Subsequent investigations revealed that Yu was engaged by a domestic unlicensed remittance company (Company A) to carry physical cash out of Taiwan to be handed over to Company A's Hong Kong's partner (also an unlicensed remittance company). Yu allegedly received a commission of 0.1 percent. The investigations also revealed that Yu and Company A were involved in another money laundering case. In the latter case, an individual named Lin and several others, allegedly defrauded several domestic banks using forged credit letters. He instructed the banks to wire a total of US$42.8m to shell companies set up by himself and his associates. The crime proceeds were subsequently remitted back to Taiwan via Yu and company A (Money Laundering Prevention Centre 2007).

Trade-based money laundering

In 2006, FATF analysed the implications of trade-based money laundering, defined as:

the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins (FATF 2006: 3).

Methods used to do this may include multiple invoicing, over/under invoicing, fraud, counter-feinting, smuggling and false descriptions of goods (FATF 2006). FATF expressed concern that due to the effects of displacement (ie the moving of criminal activity from formal financial sector activities, such as banking, to other forms of activity due to the impact of increased regulation of the formal financial sector), the criminal element would start using trade-based money laundering. Since ARS can involve the use of goods to pay remittances, it is possible that this aspect of ARS could be subject to abuse.

Case 13

An ARS provider in the United States wanted to transfer funds to Pakistan in order to settle an account with a Pakistani ARS. He arranged a Pakistani exporter to over-invoice a US importer. The US ARS provider transferred funds to the US importer to compensate him for the over-invoicing. The Pakistani exporter used the extra amount he received through over-invoicing his US counterpart to compensate the Pakistani ARS. The criminal facet of the transaction is that the Pakistani exporter received a 20 percent Value Added Taxation rebate due to the over-invoiced price of the goods. (FATF 2006a)

The cases mentioned throughout this section, and the typologies produced by international bodies such as FATF and the APG, appear to show that if ARS is misused, it is far more likely to be misused for criminal purposes such as money laundering the proceeds of crime (particularly drug crime) or evading tax or duty than for the financing of terrorism (although the limited amount of information released regarding terrorist investigations makes any risk hard to evaluate). It has been suggested that Al-Qaida has used ARS networks operating in Pakistan, the United Arab Emirates and throughout the Middle East to raise money, particularly after it moved into Afghanistan in 1996 and that ARS providers and charities in Saudi Arabia are used to raise money for terrorist operations (Suskind 2006). At this stage, there is little factual detail regarding these assertions and this makes them difficult to evaluate.

Vulnerabilities of Australian alternative remittance systems

The first major point of vulnerability in the Australian system is a lack of knowledge regarding basic issues relating to alternative remittance—as the number of remitters, where they are currently trading and where they are located is not currently mapped. This vulnerability is not unique to Australia, although the fact that, until recently, Australian law enforcement and prosecutorial bodies paid relatively little attention to alternative remittance as a separate issue may increase this vulnerability. At this stage, law enforcement and regulatory activity in relation to alternative remittance is reactive rather than preventative.

A second point of vulnerability is the difficulty Australian law enforcement bodies may encounter in establishing contact with ethnic communities. Consultations suggest that ethnic communities may be prepared to liaise with regulatory and law enforcement bodies if the contact is established through suitable intermediaries.

AUSTRAC has suggested that many businesses in the MSB sector are not compliant with current regulatory requirements relating to issues such as customer identification and AML/CTF programs (AUSTRAC 2009b). There may be many reasons for this, including poor English-language skills and lack of knowledge in dealing with bureaucracy. Innovations, such as AML/CTF programs, require both resources and staff training and this may tax the capabilities of many alternative remittance providers.

AUSTRAC has stated that it will target remittance providers, as appropriate, and that it will be focusing on major remitters such as Western Union and Australia Post on the grounds that these bodies (or rather their agents) undertake most of the relevant transactions (AUSTRAC 2009b). Intelligence upon which to make targeting decisions may be provided by IFTIs and SARs to some extent and there is the possibility that the communities that use these services may also be a source of information if they are correctly approached.

Displacement

It has been assumed that increased regulation of the formal banking sector will lead to the displacement of at least some criminal activity to the informal sector. In this scenario, criminal groups (including terrorists) would make a tactical decision to move money through the informal sector (particularly ARS), rather than the formal financial sector (particularly banks). This reasoning has been used to justify the increased level of regulation of ARS providers. However, there may be a number of flaws in this assumption. First, the model is predicated to a considerable extent on there being relatively separate formal and informal sectors. The available evidence is that the two sectors intersect constantly. It should also be noted that the informal sector includes activities such as physical cash movement. On the basis of various typology reports, it is suggested that criminals often use both systems, depending upon which is more convenient in a particular set of circumstances (possibly not dissimilar to the way that individuals decide which form of remittance service they are going to use to send value.

Second, it could also be argued that the current risk-based approach in Australian regulation may not necessarily 'displace' activity neatly between formal and informal sectors of the economy. A risk-based approach puts much of the onus for estimating risk on reporting entities (including ARS providers)—a fact noted by both FATF and AUSTRAC (AUSTRAC 2009b; FATF 2009). The response to this challenge is unlikely to be uniform, even between entities of roughly the same size or in the same financial sector. Some will be more effective in introducing customer identification procedures and AML/CTF procedures than others and some will be prepared to spend more on compliance than others. It may well be that criminal elements target entities that are seen as being less effective in managing risk, whether they are formal or informal in nature.

Finally, both academic evidence and the AIC consultations suggest that, for a number of reasons, ARS may not always be suited to criminal activity, or at least there are countervailing factors that may lessen the chance of its misuse by criminal or terrorist elements. These countervailing factors include evidence suggesting that small ARS providers are often personally familiar with their customers and that communities who use alternative remittance are concerned to ensure that this system is not compromised by criminal conduct. There is some anecdotal evidence from the consultations that users avoid ARS providers whom they suspect are not behaving honestly. Although it is not easy to quantify these factors, they are relevant to the quantification of risk.

Conclusion

ARS has generated considerable concern from academics, regulators and law enforcement regarding its potential for misuse. This concern has some factual basis as the above cases and typologies demonstrate. As yet, there is no consensus on to how best regulate the remittance industry. It appears that much of the activity of concern relates to criminal behaviour rather than behaviour linked to the financing of terrorism. There has certainly been some penetration of remittance services by criminal elements and a number of ARS providers basically operate as a front for criminal activity. This arrangement may be both more efficient and less risky for criminal elements than trying to penetrate a community-based remittance network. The use of agents and sub-agents by both corporate and ethnic-based remitters increases the risk that an agent or sub-agent might take part in criminal activity without the knowledge of a principal. Australian law enforcement bodies do have concerns regarding the operation of the remittance industry (both corporate and alternative remittance), but they lack detailed knowledge because the remittance industry has not, until recently, received focused attention.

With regard to terrorist financing, the biggest risk may be for users who inadvertently (or at times, wilfully) provide financing for terrorist activities when they send remittances overseas to relatives without having a detailed knowledge of what the relative is doing with the remittance. This issue is made even more difficult when a terrorist organisation uses funds for purposes such as education, health or schooling rather than direct terrorist action. There is also the possibility that liability for such transactions would also extend to providers of remittance services. The information relating to terrorism activities and prosecutions is limited and so it is not possible to determine the level of involvement by the alternative remittance sector in this regard.

Attempts to identify signs that ARS services are being misused are important, but they do not provide conclusive evidence of illegality and can be subject to misinterpretation. The payment of small regular amounts can be associated with payments to family and communities in countries of origin, but there are legitimate reasons for the payment of large amounts such as community members pooling resources together to send a large amount for a particular occasion such as a festival, wedding or funeral. The size and/or regularity of payments can provide some guidance as to the possible purpose behind them, but any interpretation needs to be cognisant of the nature and patterns of behaviour of a community.

The evidence discussed in the typologies and cases in this section suggests that there are, in reality, several flows of alternative remittance currently operating. The larger flow is generated by expatriate populations; the smaller by criminal activity. The flows do intersect; for instance, the same ARS provider can potentially service both flows. However, communities are likely to know the identity of at least some of these ARS providers and avoid them. Community members may be wary of reporting such providers to regulatory or law enforcement bodies for fear of reprisals, even though they may personally have had no unfortunate experiences when using ARS. There are points where the remittance process is likely to be particularly vulnerable to misuse—academics have emphasised the vulnerability associated with the consolidation stage, where remittance funds are mixed together. The typologies have demonstrated the links between the formal and informal financial systems and the importance of reporting suspicious transactions. The reliance placed on such reports suggests that there would be benefit in making reporting as simple as possible.