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The regulatory response

There is considerable debate regarding the methods by which private sector organisations should be regulated (assuming they should be regulated at all) and what the various forms of regulation can hope to achieve. This issue is of relevance to the regulation of ARS. In Australia, debate is taking place in the context of the public policy desire to obtain the benefits of efficient competition and to avoid anti-competitive conduct such as the unnecessary restriction of entry into the market and excessive regulation that might stifle competition (Bensoussan & Myers 1996).

The traditional perception of regulation has generally been punitive (Grabosky 1995) and as one commentator has pointed out:

Regulation is the sustained and focused attempt to alter the behaviour of others according to defined standards or purposes with the intention of producing a broadly identified outcome or outcomes, which may involve mechanisms of standard-setting, information-gathering and behaviour modification (Black 2002: 20).

For example, professions have a number of ways of regulating themselves and enforcement action (either by an internal regulatory body or by an external regulatory or law enforcement agency) is usually seen as a last resort. The method of regulation depends upon a number of factors, including the length of time that the profession has been recognised as a profession, the prestige that the profession enjoys in the community and the nature of the work undertaken. Traditionally, professions such as medicine and law have enjoyed considerable autonomy.

Professionals can be characterised as a group of people who are trained to do a specialised task that is too complicated for an untrained lay person to undertake. This specialisation may provide them with a level of prestige and autonomy in their work practices. If they are supervised at all, they are supervised by more senior professionals who have undertaken the same sort of training. Professionals tend to be both represented and regulated by a professional body made up of the professionals themselves. This professional body often has a role in ensuring that unqualified people do not practice in the profession (Smith 2002). Professions such as law may also require that a practitioner be a 'fit and proper person' and that they maintain this status throughout their career.

Many professions use codes of ethics to regulate the behaviour of their members, although professions have an indifferent record with the regard to the enforcement of such codes of conduct (Coady 2002). Governments can encourage professions to establish codes of conduct as an alternative to statutory regulation (Carlton 2002). This may be less expensive than statutory regulation.

An increasingly popular model of regulation is that of 'co-regulation'. This is a system of regulation where the relevant occupation is involved in the administration of the regulatory scheme. It differs from self-regulation in that co-regulation often involves people drawn from outside the practitioner group and its workings are not purely determined by the professional group being regulated (Bensoussan & Myers 1996).

Governments are more likely to become involved in co-regulation, or to set up external regulatory and enforcement regimes if they believe the level of risk and/or the seriousness of consequences that may flow from a breach justifies the expense. In the case of AML/CTF, the perception is that the consequences of deviance are serious.

The regulation of ARS within Australia presents government with a problem, in that ARS providers are not represented by any industry body (unlike in the United Kingdom with the UK Money Transmitters Association, or the United States with the National Money Transmitters Association), nor are they guided by any industry code of ethics. There are also no industry bodies able to stop individuals or companies performing this role if they are not recognised. This makes the implementation of co-regulation very difficult and it also makes the formulation of a code of ethics problematic; any such code is likely to be the creation of the regulator.

The consultations undertaken suggest that ethnic communities who use remittance providers (both corporate and alternative remittance providers) have a considerable interest in ensuring that remittance systems are honestly run and not linked to criminal activity. There are ambiguities connected with this concern; users of alternative remittance want to ensure that this method of remittance remains as cheap as possible and more extensive regulation may compromise this. Nevertheless, it is possible that community involvement in some form of co-regulation for ARS may be effective as an approach for regulating ARS, particularly if it was linked to involvement by providers and sponsored by government.

With regard to the regulation of ARS, commentators have expressed a wide variety of views regarding the suitability of the FATF Special Recommendations to regulate ARS operations. FATF guidance regarding the implementation of Special Recommendation VI, which specifically concerns the operation of money/value transfer, emphasises that governments need to ensure that whatever regulatory system they adopt does not impose undue burdens and does not lead to money/value transfer going 'underground' (FATF 2003b). There has been a large increase in regulation of ARS since the terrorist attacks of September 2001 and much of this regulation (particularly in the case of the United States) was introduced quickly and with perhaps little time for reflection.

Many commentators have emphasised that remittances play a vital economic role for both individuals and developing countries (leaving aside the issue of whether remittances are always used for a rational or economically-productive purpose) and that in policy terms, there is considerable interest in further increasing the speed and decreasing the cost of the remittance process (Buencamino & Gorbunov 2002; Passas 2005b). However, the events of September 2001 have led to the formation of a competing policy interest that involves minimising the possibility of criminals or terrorists making use of the ARS system. Balancing these two concerns is very difficult. The effects of unsuccessful regulation can include increased remittance costs, lower numbers of remitters in the market and the alienation of both the remitters and possibly wider ethnic communities (Passas 2005b).

There is some evidence that there is a considerable degree of self-regulation and community regulation in the ARS system. In Afghanistan, the ARS system certainly had a long history of independence from regulation. During the Taliban period in Afghanistan, the banking system was inoperable and the hawala system (not regulated by government) was the only effective way to move money or value. Following 11 September 2001 and the fall of the Taliban, the situation changed. International concerns regarding terrorism (and links with narcotics) meant that the ARS system could not be left unregulated. As a result, the Central Bank of Afghanistan introduced a licensing system that also involves a 'fit and proper person' test. This regulatory system is more onerous than many developed financial systems. Although it is not clear to what extent Afghan remittance providers have been involved in wrongdoing, the international situation makes it politically imperative that regulation be introduced (Maimbo 2005).

The primary aim of SR VI is to increase the transparency of the ARS system, but it is doubtful whether this will occur in view of factors such as ARS being illegal in some jurisdictions and not others and that a typical transaction can involve multiple, interlinked transactions and intermediaries (Maimbo 2004). One suggestion is that registration for ARS providers be used where ARS operates legally, but that jurisdictions should consider encouraging users to use the formal sector by offering initiatives such as accounts that are not subject to foreign exchange regulations. However, this may only appeal to workers with relatively high incomes (Maimbo 2004). Initiatives may also involve the need for substantial government/private financial sector cooperation and this would not address issues such as foreign workers not being able to satisfy a bank's identification requirements.

Maimbo (2004) has emphasised that any regulatory approach needs to take into account a wide variety of social and economic factors, including:

  • the economic role of ARS;
  • that ARS often operates in countries where there is no effective legal or financial system; and
  • that ARS often provides links between specific communities, such as between ethnic communities in individual cities in the United States and individual towns in Mexico.

Strategy comprising a mixture of regulatory and incentive-based approaches is likely to improve the knowledge base regarding ARS and potentially encourage people to use the formal, instead of the informal, sector. However, such an approach is very time consuming. It is also unlikely to lead to harmonisation of laws between jurisdictions and may well have the opposite effect as jurisdictions try a mixture of strategies depending on their circumstances.

Other commentators (eg Shah 2007) have emphasised the need for international standards to address a number of administrative and social issues. These should address:

  • definitional issues;
  • the need for international cooperation and coordination;
  • the need to ensure that informal transfer systems remain viable for legitimate users;
  • the need to monitor informal transfer systems;
  • the need for standardised record-keeping;
  • the need for transfer and settlement methods to be monitored;
  • the need for standardised customer policies;
  • the regulation of informal transfer business organisations and interconnections; and
  • the sanctioning of informal transfer operations (ie those who have not complied with relevant regulatory frameworks).

The issues raised by Shah (2007) and others are important, but their suggestions may contain an element of impracticality. It is difficult to see how any international system that is attempting to provide jurisdictions with general regulatory AML/CTF principles could take into account so many issues. FATF's Special Recommendations have been criticised on the grounds that, in many ways, they attempt to impose upon issues (such as the possible links between the operation of value transfer systems and terrorism financing), the same regulatory structure that is advocated for money laundering (Roberge 2007).

However, it should be noted that the FATF has conceded from the beginning that individual jurisdictions need to take account of their own circumstances as they consider the application of the FATF Recommendations and Special Recommendations to issues such as ARS (FATF 2003a, 2003b, 2003c, 2003d). It should also be noted that the emphasis of the FATF material is on AML/CTF issues, not consumer protection. It is possible that consideration should be given to widening the interest in the remittance sector to include consumer protection issues, which would address user concerns and possibly encourage greater community involvement in informally policing this sector.

A number of commentators have suggested alternative transfer systems flourish fundamentally because of certain economic and commercial realities (Buencamino & Gorbunov 2002) and that until those economic and commercial realities are addressed, alternative transfer systems will continue to be used. Ironically, applying FATF's 40 Recommendations and Nine Special Recommendations to ARS can be seen as an attempt to make them more like formal institutions. The implementation of initiatives such as customer due diligence (CDD) and AML/CTF programs involves a much higher degree of bureaucracy and cost, which could reduce the cost and speed advantages currently enjoyed by ARS. At the same time, any serious attempt by formal institutions to increase their involvement in the remittance industry means they may have to address the issues of reducing cost and bureaucracy and in a sense become more 'informal'.

Regulation in Australia

Under the FTR Act, ARS providers (who were included under the definition of cash dealer contained in s 3 of the Act) had a number of reporting obligations. The FTR Act requires cash dealers to report certain transactions and transfers to AUSTRAC. These transactions and transfers include suspect transactions (of any amount), cash transactions of $10,000 or more (or the foreign currency equivalent) and IFTIs. When FATF conducted a mutual evaluation of Australia in 2005, it rated Australia as only partially compliant with SR VI (FATF 2005b). FATF made a number of criticisms of the FTR Act's effectiveness in regulating such services. The criticisms included the lack of a general licensing or registration system and the limitations caused by the FTR Act's emphasis on terms such as cash dealer and account (Deitz & Buttle 2008).

Partially as a result of the criticisms contained in the FATF mutual evaluation, Australia's regulatory arrangements relating to ARS have been revised by the operation of the AML/CTF Act. The AML/CTF Act was introduced to bring Australia's AML/CTF regime into accordance with FATF's Recommendations and Special Recommendations and to reduce the risk of Australian businesses being misused for the purposes of money laundering or terrorism financing.

The AML/CTF Act is risk-based. It requires regulated entities who provide certain financial or gambling services (designated services) to fulfil requirements relating the identification of customers before the service is provided and the reporting of certain transactions (eg suspicious matters, transactions over a certain threshold value and international funds transfer instructions). The AML/CTF Act places financial institutions under considerable responsibility with regard to AML/CTF programs. Financial institutions must develop their own programs based on their own perceptions of their level of risk of being the target of criminal and terrorist activities. Section 6 of the AML/CTF Act lists services that are classed as designated services and these services include designated remittance arrangements.

Section 10 of the AML/CTF Act defines a designated remittance arrangement as one where both the person who accepts the money or property, and the person who makes the money or property available under the remittance arrangement, are not authorised deposit-taking institutions, banks, building societies, credit unions or persons specified in the AML/CTF rules. This is a broad definition that covers both trade and money based remittance activities.

Under the AML/CTF Act, PoDRS must register with AUSTRAC (which places them on the PoDRS register), implement customer identification procedures, put in place AML/CTF programs, report to AUSTRAC annually regarding their compliance with the AML/CTF Act and undertake ongoing customer due diligence (OCDD). These requirements apply to principals and may also apply to those who are acting as the agent of a principal, because under the AML/CTF Act, all are potentially providing a designated service. Section 37 provides that applicable identification procedures may be carried out by the agent of a reporting entity and the reporting entity can rely upon its agent to perform this function and can use this identification to fulfil reporting obligations regarding customer identification. These requirements have been introduced in stages and the last of them relating to OCDD went into effect in December 2008.

In December 2009, AUSTRAC announced that it was considering amending the rules made under the AML/CTF Act to allow reporting entities that are either a representative or sub-representative of a money transfer service business, and who provide a registrable designated remittance service through that provider, to form a designated business group. A designated business is defined under the AML/CTF Act as a group where two or more businesses join together to share obligations under the AML/CTF Act. These obligations can include the maintenance of a joint AML/CTF program (AUSTRAC 2009c).

Under the AML/CTF Act, PoDRS are the only providers of designated services that have to register with AUSTRAC. However, the registration requirements are modest and basically only involve name and address (although they have to submit reports on various kinds of transactions; other designated service providers also have to do this). The aim behind the registration requirement is simply to identify who is a 'player in the market' and to bring Australia into line with FATF guidelines.

There is the potential for the new requirements for PoDRS to cause confusion, particularly among those providing alternative remittance, as distinct from the major corporate remitters. First, many PoDRS do not realise that the requirement to register with AUSTRAC and provide an annual compliance report to AUSTRAC are quite separate to any reporting requirements relating to individual transactions. Second, many PoDRS may well have no knowledge of money laundering or terrorist financing issues and thus have no basis upon which to gauge their exposure to these risks. Therefore, they would find it very difficult to devise an AML/CTF program.

One solution may be for principals to draft AML/CTF programs and provide them to their agents, but this would nevertheless incur expense for all parties. It might also be difficult for a principal who has a large number of agents spread over a wide area (possibly a number of states) to devise an AML/CTF program which would address every issue faced by each agent, so to some extent, individual agents would still have to estimate their own level of risk. From a principal's perspective, there is also the issue of how to ensure that each of their agents has registered with AUSTRAC and adopted an AML/CTF program.

The AML/CTF regime places ARS providers under greater 'know your customer' (KYC) obligations and these obligations are crucial to the AML/CTF regime. Yet many ARS customers are wary of customer identification requirements (often due to their cultural background) and are physically located some distance from their ARS provider (which makes customer identification difficult even if the customer is cooperative). The consultations demonstrated that at least some customers contact their ARS provider by telephone or electronically. ARS providers can use third-party database services to try to identify their customers, but these services can be expensive, particularly for a small operator.

The fact that for many PoDRS the provision of ARS is very much a secondary business (which may be seen as a community service rather than a money-making venture) means that the increased cost of compliance may lead to many ARS providers abandoning the practice. This possibility will increase if they are struggling with language issues and finding it difficult to understand, as well as expensive to meet, their new obligations (AUSTRAC personal communication 25 February 2008).

There is some support within regulatory and law enforcement bodies in Australia for increased regulation in the form of measures such as licensing and 'fit and proper person' tests. However, it would involve a much higher degree of government involvement in the regulation of ARS and would potentially be both expensive as well as divisive. Government would also potentially be placed under pressure by ARS providers and users to help meet the extra expense. In a sense, a licensing regime and a 'fit and proper person' test would be more of the same sort of regulation that has already begun with registration and would involve the same sort of risks. ARS has survived many attempts at regulation and the experience of jurisdictions such as India confirms this. The feedback from community participants suggests that they would not appreciate a non-consultative, heavy-handed approach to regulation and may well support ARS providers who respond to such regulation by going 'underground'.

In 2007–08, AUSTRAC published a number of electronic resources on its website to assist remitters. These include a guidance note, a Public Legal Interpretation, an e-learning module and PowerPoint presentations aimed at both principal remitters and their agents. AUSTRAC has also conducted 81 training and awareness sessions aimed at remitters (AUSTRAC 2008a).

In its supervision strategy of 2009–10, AUSTRAC comments that the MSB 'is known to be prone to [money laundering/terrorism financing] activity, though the likelihood of individual businesses being targeted for [money laundering/terrorism financing] is moderated when sufficient programs and controls are in place' (AUSTRAC 2009b: 12). Although AUSTRAC and other organisations have produced typologies that demonstrate that the MSB sector has been involved to some extent in money laundering (and to a lesser extent in terrorism financing), it is not clear why AUSTRAC would suggest that the money business sector is 'prone' to such activity.

AUSTRAC notes that the sector is a mixture of high-risk/moderate likelihood of being abused for money laundering and terrorism financing activities and states that it intends to focus its activities on major remitter's networks such as Australia Post and Western Union and foreign exchange dealers such as American Express and Travelex. This seems to be on the basis that this will enable AUSTRAC to cover the majority of reporting entities in the sector.

With regard to unaffiliated entities (which would include many ethnic-based alternative remittance providers), AUSTRAC noted during consultations that it has experienced difficulty identifying and locating such bodies, who are not subject to licensing, have no industry association and may experience substantial language barriers in dealing with AUSTRAC, who attempts to deal with this part of the MSB sector through targeting and representative sampling.

With regard to the impact of the AML/CTF legislation, AUSTRAC notes that many businesses in the sector do not have AML/CTF programs or adequate customer identification programs and do not conduct adequate risk assessments (AUSTRAC 2009b).

On 4 November 2009, AUSTRAC issued its first remedial direction to an ARS provider. This arose as a result of non-compliance with AML/CTF legislation by failing to have an effective AML/CTF program in place. Under the terms of the remedial direction, the non-compliant provider is now required to submit to AUSTRAC an AML/CTF program that assesses its exposure to AML/CTF risks and, in doing so, takes account of issues such as the types of customers dealt with, the services offered, its methods of delivering these services and the foreign jurisdictions it deals with in the course of its business. The remedial direction stipulated that the provider is to perform background checks on staff and train staff regarding relevant AML/CTF risks and that the identification and verification requirements (AUSTRAC 2009d).

On 18 December 2009, AUSTRAC advised that it was considering introducing a rule which would allow the AUSTRAC chief executive officer (CEO) to remove or to refuse to enter into the PoDRS register a person's name and registrable details if the AUSTRAC CEO has formed the opinion that having this information on the register would constitute an unacceptable money laundering or terrorism risk. If introduced, this rule would apply to individuals, body corporates, trusts and partnerships and any representatives of those persons.

This rule would also apply to a person in respect of whom an order had been made under s 19B of the Crimes Act 1914 (Cth) or under a corresponding provision of a state, territory or foreign country in relation to the offence. This means that when a person or a representative is charged before a court with an offence mentioned in these rules and the court is satisfied, in respect of that charge, that the charge is proved, but does not proceed to convicting the person, the person is deemed to have been convicted of the offence.

Under the proposed rule, the AUSTRAC CEO would have to provide a written notice to the person within seven days advising of this refusal or removal. A person must be advised that they have 28 days to make a submission regarding the decision. Then AUSTRAC must have regard to any such submission and can discuss it with any appropriate person in order to ascertain the truth of the matter (AUSTRAC 2009e).

Attitudes towards Australian regulation—results of consultations

User perspective

Samoan/Vietnamese/Indian communities

With regard to the Samoan, Vietnamese and Indian communities, awareness of the AML/CTF regulations among ARS users appeared to be low. None of the Samoan or Vietnamese consumers were aware of the government regulations and none asked remittance providers (either corporate or alternative remitters) if they were registered with AUSTRAC.

Some Indian consumers were aware of the regulations, although there was an assumption that there would be regulations, as 'there has to be safeguards in place' (Indian ARS user personal communication 2008). For example, while a few had asked the provider about their registration, most of the Indian consumers had not, primarily because there was an assumption that the providers would be registered. Some indicated that they did not ask because:

  • they received a recommendation from a friend;
  • because they received a receipt with an Australian Company Number; or
  • because the organisation was reputable and well-advertised, therefore alleviating the need to ask about registration.

Despite the limited awareness of government regulations, there were some concerns expressed about potential problems if providers were not registered. All of the Indian ARS users said that they would not use a provider who was not registered, even though most had not asked their provider if they were registered. There were concerns among these users that there would be risks in transferring money with an unregistered provider, as users would not know where the money was going and the provider would not be accountable. Comments from ARS users included:

I only use a proper registered provider, not some small dark service in the back corner of a shop.

I wouldn't take that risk, I want to be in safe hands (ARS users personal communications 2008).

Similarly, most of the Samoan respondents felt that it would be problematic if the provider was not registered, although none of the Samoan consumers were aware of the regulations or had asked their providers if they were registered. Using an unregistered provider was seen to be risky (especially for large sums of money) and offered limited protection, as providers would not be accountable and it would be difficult to claim money back if it went missing. It was also considered that having unregistered providers would make it difficult for government to monitor their activities.

Vietnamese ARS users considered that it would be a problem if a provider was not registered if the transfer money was lost and had a preference to 'deal with a legitimate provider for peace of mind and tax purposes' (Vietnamese ARS user personal communication 2008). Again, these results have to be considered within the context of limited levels of awareness of the regulations among these participants.

In terms of the impact of government regulations on consumer behaviour, researchers found this issue was difficult to explore due to limited awareness of the regulatory environment. However, based on feedback during the discussion of the impact of regulations, it appeared there was an assumption that there were regulations in place and these offer protection to consumers. The fact that current regulation is focused on AML/CTF issues, not consumer protection, was not widely appreciated.

Filipino community

With regard to the Filipino community, a number of findings emerged regarding the perspective of community members who use ARS. One ARS user commented:

The use of alternative remittance systems within the Filipino community can be done by phone, cash or the internet. What is lacking in the process is the 100 point check. The providers should be using the same systems as the banks but most of them are not. You can go to a provider and give false information about yourself because you are only interested in the money reaching its final destination (Filipino ARS user personal communication 2008).

Discussions with leaders representing the community indicated that the quality of the alternative remittance system broke down because of the users (presumably those users who are trying to use ARS arrangements to avoid reporting transactions) or 'sub-agents' who remained largely unaccountable due to their unofficial status. It is important to note that while this might be the case for the majority of agents, participants noted that there are a small number of providers who require that their agents are also registered and follow required processes. ARS user comments included:

[About] 99.9% of the community know about alternative remittance providers. What is needed is to build the knowledge base of service users.

Providers are frustrated because it is impossible to access information from sub-agents who don't collect information from a customer.

Education about AUSTRAC is crucial for the community. Is there a logo that can be promoted to our people so they can easily identify when they are using a safe process? (Filipino ARS users personal communications 2008).

Community leaders also expressed concern around the fact that many businesses operating in Australia and the Philippines also use ARS as a cheaper option for transferring monies and that there was no process in place to differentiate between private and business-based transfers. One participant commented:

Because businesses are using the process, the amounts transferred will be much higher. This is not money being sent by the community for the community in the Philippines (Filipino ARS user personal communication 2008).

Feedback aimed at identifying reasons for low levels of registration with AUSTRAC indicated that compliance requirements were prohibitive for many of the providers who only operated small businesses and some users were aware of this.

Many of the providers in our community cannot afford to buy the software that is required in registration. Is there an opportunity for AUSTRAC to subsidise or provide this? (Filipino ARS user personal communication 2008).

These concerns were also echoed by providers who explained that the amount of paperwork involved was not something that they could realistically produce as a small business. There were also difficulties in attempting to implement databases that were not compliant with those used overseas.

Community leaders explained that there were also a small number of Filipino banks operating in Australia that offered the option of a dual bank account that could be accessed both here and overseas. While this was not commonly known among community members, it was unlikely that community members would make use of the option due to costs involved. One participant commented that '[a]ny bank account in the Philippines attracts a documentary tax so people are reluctant to use these' (Filipino ARS user personal communication 2008).

The majority of community members involved in consultations commented that they had never experienced difficulties or lost money by using ARS providers. Consultations with community leaders, however, did highlight situations where losses had occurred. One example involved the use of internet-based services where an individual had accessed another person's bank account and transferred a large amount of money overseas. As no identification processes were in place, it was not possible to trace who had accessed the account and transferred money.

In another example, a provider told of a client who had, on a previous occasion, accepted an offer from the daughter of a friend to take her money to an ARS provider to send overseas. The daughter explained that she was an agent for the company. The money never arrived at its intended destination and when the woman contacted her friend to find out what had happened she was told that the daughter had moved interstate and had left no contact details. When she contacted the provider, they had not heard of her.

One participant commented:

The biggest problem we encounter is people using agents. They are the middle man and are unlikely to be registered. If the client contacts the agency to find out where their money is there is no way to trace it. It is sometimes impossible to find the agent (Filipino ARS provider personal communication 2008).

Community members suggested that information about unreliable providers be effectively circulated by word of mouth and through community newspapers so the community is largely able to avoid using them.

There is an organisation that we are tending to avoid because we don't think the money is going directly where we want it. This firm has been operating for a long time but we are finding the process is not what it should be (Filipino ARS user personal communication 2008).

However, they also expressed an unwillingness to seek information around the credibility of agents or ARS providers they used.

Sometimes we know the person but we don't feel we can ask if they are registered because it might offend them. It is a matter of trust. We are not culturally open to asking questions. We just want to know that the money will get through (Filipino ARS user personal communication 2008).

Analysis of these comments suggests a need to correctly identify a legitimate ARS provider or their agent. The comments do not relate to the alternative remittance system itself. The comments suggest that for cultural reasons, it is not always easy to challenge a person purporting to be a remittance provider.

Somali community

Discussions with Somali community leaders highlighted that a key concern about the current regime related to being held accountable for the misuse of money sent overseas for legitimate purposes.

We have had many women in our community contacting us worried about being impacted by situations where they have unwittingly sent money to family members who are involved in terrorist activities (Somali community leader personal communication 2008).

This issue was also a concern for community members involved in raising funds to support charitable organisations overseas that may be involved in illegal activity.

While many of the older, more established ethnic communities in Australia have access to local branches of their home country banks and can use these to easily transfer money, new emerging communities are largely limited to the use of ARS until trustworthy branches are established in Australia. (Stakeholder roundtable Somali and Filipino communities 6 June 2007). In contrast to the Filipino community, the Somali community were generally more aware of the requirement for remittance providers to be registered and were also more likely to ensure they used registered providers. They were also more likely to report any misuse of monies by ARS providers. Somali ARS users commented:

We know who the registered providers are—we use these ones. I would report anyone doing the wrong thing if I had evidence.

I did not hear any misuse but I would warn him then if he fails, I would report him to the relevant authority (Somali ARS users personal communication 2008).

Many of the responses provided by the Somali community suggested that they had become much more diligent in ensuring they used legitimate processes and systems following the impact international events have had on the community in recent years.

Provider perspective

Indian/Samoan/Vietnamese ARS providers

Most Indian, Samoan and Vietnamese providers felt that community members did not monitor providers in any way and that most would not be aware of the regulations in place for providers. However, a few felt that there was an informal approach to monitoring through word of mouth. Also, it was felt that consumers conduct business with people they trust, which alleviates any concerns, rather than being aware of and receiving confidence through government regulations.

Among providers, awareness of the regulations was very high and all except one provider was registered with the government. The one provider who was not registered said that this was because money transfers were a small part of the business and they were registered as a grocery business.

There were discussions about the regulations that related to reporting suspicious transactions to the government and asking customers to provide identification. With regard to identification, most providers felt comfortable with the regulation and many said that they were already doing this. There were some who mentioned that they only do this when people are transferring large amounts and one who said that they would start asking for identification from then on. Another said that while they ask for identification, they do not always pursue it, as they are concerned that if it is too difficult for customers the business would lose them.

Several concerns were raised by providers regarding suspicious transaction reporting. While the consensus generally was that this is an appropriate regulation, quite a few were concerned about the potential repercussions for their business and their safety. Comments included:

I'd be concerned about the consequences for the family grocery store if real criminal elements were involved.

I'd be too scared of reporting suspicious customers to the government (ARS providers personal communications 2008).

An important finding of the fieldwork was that many Samoan, Indian and Vietnamese ARS providers did not feel that that there were any advantages to being registered with the government. Where advantages were identified, these tended to focus on the benefits of abiding by Australian laws and 'doing the right thing', the legitimacy of the business as a result of registration and the protection registration provides the business. It was clear that, for a few providers, there were minimal perceived benefits, but that registration was seen as compulsory in order for the business to operate.

Most of the providers found it easier to articulate disadvantages of the regulations and these primarily focused on the paperwork associated with the regulations. There were several criticisms of the amount of paperwork involved, the frequency and complexity of the reporting, and the time implications for the business. Nevertheless, some providers did not feel that registration had any disadvantages and that it was expected in the current climate. One ARS provider commented:

No disadvantages. The way the world is going it is better to be registered and watched. If you have nothing to hide you have nothing to worry about (ARS provider personal communication 2008).

Providers made several requests for simple reporting that would not be required too often. Several providers said that they reported every fortnight, with some requesting a quarterly reporting framework. Internet/online reporting was preferred by about half of the providers, while others requested the ability to report via telephone, or for computer training to be provided by the government.

The researchers explored opportunities for encouraging business registrations, although it is worth noting that few providers identified potential strategies. Some discussed the need to advertise the advantages that registration offered business providers, although the research results suggested that this may be challenging, given that most registered providers were unable to identify advantages. Motivation tended to be the belief that registration is compulsory and therefore important in ensuring the business is abiding by Australian laws.

The implication of this finding was that this could be a key message when promoting the benefits of registration to providers. The results also indicate that there are opportunities for promoting a wider range of benefits to already registered businesses to reinforce this behaviour (of staying registered).

Filipino ARS providers

The majority of registered ARS providers within the Filipino community spoke positively about the need for improved scrutiny and accountability of providers. A number of providers believed that the registration process required by AUSTRAC had helped improve their operating systems. These were large-scale service providers whose sole business activity revolved around ARS. A common feature of these providers was that they all used the M Llhuillier pawn shops as their remittance distribution outlet in the Philippines. M Llhuillier have over 500 outlets throughout the Philippines, making them easy to access and therefore minimising the need for door-to-door services. One provider commented:

We are a large provider. We transfer between $30,000 and $50,000 every day, so we need to be very confident about who is accessing this at the other end (Filipino ARS provider personal communication 2008).

Providers also commented on the growing need to put a series of checks in place to ensure compliance with registration requirements and to reduce risks of illegal activity. These checks included:

  • requiring existing clients to provide an identification number when calling to arrange a transfer (all clients are issued with an ID number once identification is verified);
  • requiring new clients to provide a range of identification documents. AUSTRAC usually follows up by sending out a brochure to the address provided. AUSTRAC is also able to work out if a false address has been provided if the brochure is returned; and
  • requiring that agents in the Philippines distribute monies directly to the nominated individual.

Somali ARS providers

Some of the challenges ARS providers to the Somalis community face include negative media reports and the intense international scrutiny concerning the illegality of ARS. Providers highlighted that it is important to understand that allegations of terrorist financing and suspicious activity on the part of Somali remittance companies are having significant impact on the morale of remittance providers. It should be noted that some of these concerns have been expressed from within the Somali community itself.

The greatest concern impacting ARS providers at the time of interview related to fraudulent credit card usage. The increased usage of internet-based services is expanding opportunities for illegal activity and providers are seeking ways to prevent this occurring.

One Somali ARS provider stated:

We now ask individuals to provide a current bill so we can double check their identification. If they are fraudulent you know straight away because you can't contact them (Somali ARS provider personal communication 2008).

One provider who offered direct debit services further highlighted risks faced by providers due to the growing demand for internet-based services.

We offer a gateway service which allows customers to directly debit their bank account to send money overseas. One new customer tried to sue this service but we put the transaction on hold until we had verified identification. Westpac contacted us a couple of days later to tell us the money had been stolen as the account had been accessed illegally (Somali ARS provider personal communication 2008).

There is also a view that the continued implication of the Somali remittance sector in illegal activities is likely to ultimately force the sector underground. Respondents reported that it is in the best interests of the remittance companies and the Australian Government entities to work together to provide both a design and framework for a more transparent and accountable financial sector.

Several ARS providers to the Somali diaspora spoke of their respective companies having specific policies related to anti-money laundering, for example, Kaah Express included this in a code of conduct for all their agents. Dahabshiil have a staff manual to make sure that Dahabshiil agents and staff comply with local rules and regulations and apply best practice anti-money laundering international guidelines by ensuring that staff:

  • fully understand the mechanics and methods of money laundering;
  • are aware of the company's anti-money laundering policy and procedures;
  • are aware of their legal obligations in their dealings with customers;
  • are alert to suspicious transactions;
  • report suspicious transactions according to set procedures; and
  • retain appropriate records for the required period.

Legislation and regulations in overseas jurisdictions

A comparative survey of a number of jurisdictions demonstrated that there have been many different national responses to international initiatives regarding value transfer systems and that a number of political, social and economic issues are relevant in the formulation of these responses. The jurisdictions discussed below include the United States, the United Kingdom, Germany, Canada, Hong Kong, Singapore, Vietnam, Samoa, the Philippines, Somalia and India. Some of the crucial features of the regulatory arrangements in these countries relating to ARS are summarised in Table 7 below.

United States

In regulatory terms, the United States responded quickly, and at times in a controversial manner, to the 11 September attacks.

The United States now has a complicated system with regard to MSBs which involves both federal and state regulation, and which has evolved substantially since 2001. The financial intelligence unit of the United States is FinCEN. In 2006, during the course of a mutual evaluation, FATF assessed the United States as being largely compliant with regard to SR VI (FATF 2006a). All MSBs, which includes those who organise cash transfers, who are operating within the United States and are subject to the Bank Secrecy Act 1970 (as amended by the USA Patriot Act 2001), must register with FinCEN. The MSB industry is very diverse and includes money transmitters, currency dealers, cheque cashers, issuers of travellers' cheques, providers of money orders or stored value cards and sellers/redeemers of traveller's cheques. The US Postal Service is classed as an MSB.

Table 7: Overseas jurisdictions regulatory arrangements for ARS
Registration Licensing 'Fit and proper person' test Compulsory AML/CTF program
United States Yes (federal requirement) Yes (substantial state requirements in large majority of states) Not at federal level Yes
Canada Yes No No No
United Kingdom Yes No Yes No
Germany n/a Yes n/a n/a
Singapore n/a Yes (annually) No No
Hong Kong, China Yes No No No
Taiwan n/a Yes n/a n/a
India No Yes No No
Samoa No Yes No No
Vietnam No Yes No No
Philippines Yes No No No
Somalia Yes No No No

n/a: not applicable

Source: APG 2006, 2005a; De Luna-Martinez, Endo & Barbaris 2006; FATF 2008a, 2008b, 2008c; 2007, 2006a

The USA Patriot Act 2001 defined the term MSB to include:

a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial system (United States Patriot Act Title III Subtitle B s 359).

Failure to register is an offence and the registration requirement is policed by the IRS. Legislative requirements include the obligation to keep all records for five years and that the business must maintain an AML/CTF program.

As of 5 April 2006, 24,884 MSBs had registered with FinCEN (FATF 2006a). The total number of MSB's operating within the United States may be as high as 200,000, but some 40,000 of these are US Postal Service offices and many others may be agents of larger MSBs. There are eight major MSBs within the United States and the sector is highly concentrated. FinCEN has suggested that less than 20 percent of MSBs are registered (United States Department of the Treasury 2007).

In 2006, as part of its mutual evaluation, FATF recommended that the IRS devote more resources to monitoring the MSB sector (FATF 2006a). The MSB Working Group, which comprises representatives from IRS, FinCEN, ICE, Treasury, Drug Enforcement Agency (DEA) and FBI, is currently targeting MSBs with possible criminal/terrorist connections and also trying to identify MSBs that have not registered (FATF 2006a).

It is also now a federal requirement that MSBs comply with all relevant state requirements and failure to do so is an offence. Forty-six US states have introduced licensing requirements (FATF 2006a), however, US states differ in their legislative requirements and so different MSBs face different compliance burdens. The burden can be particularly heavy if an MSB operates in more than one state (as a number do) and must meet all the requirements for each of these states. The system can be particularly expensive for small operators and there are suggestions that the MSB has, to a considerable extent, been criminalised because many small MSBs are going underground (Passas 2006). The United States has prosecuted a number of MSBs for not fulfilling licensing requirements, as shown in Table 8.

Table 8: US prosecutions of unlicensed MSB operators 2004 (n)
Fiscal year 2004
Cases 45
Defendants 68
Successful charges 40
Terminated defendant count 40
Guilty 27

Source: FATF 2006a

MSB operators have suggested that one solution to the issue of how MSBs satisfy the regulatory requirements for a large number of states is that the US Government considers a 'federal license' which would allow MSBs to function in all states (Haider 2007).

Companies such as Western Union have also suggested that expecting small remitters or agents to introduce and manage a complicated AML/CTF program is unrealistic and that for smaller bodies, there should be a return to the 'tick and flick' rather than risk-based approach. They emphasise that a risk-based program is not consistent with zero tolerance, since a risk-based approach by definition increases the risk of people making mistakes (Rodriguez 2007). The takeover rate within the MSB industry is very high and there have been cases where an MSB that has been taken over has unwisely relied upon its new partner to satisfy AML/CFT requirements; it is not been clear who has responsibility for ensuring these responsibilities are met (Prakash 2007).

Many US banks ceased dealing with MSBs in the aftermath of the events of 11 September 2001 due to concerns about possible links with terrorism (in particular, they withdrew account facilities from MSBs), although it is possible that, to some extent, this trend is being reversed (Prakash 2007). There is conflicting evidence on the issue, with one report suggesting that in 2009, US banks still viewed some MSBs as risky and were refusing them access to bank accounts (Money Transfer International 2009). Prakash (2007), speaking from a risk consulting perspective, suggested that this was leading to consolidation in the money transmission industry, which implied that banks were more likely to deny access to smaller businesses. Such a development may be unfortunate in that it could provide an incentive for some businesses to go underground.

In the course of its mutual evaluation, FATF noted the FBI finding that MSBs are the third most popular money laundering mechanism they encounter, after formal banking systems and cash businesses (ie businesses specialising in the physical movement of cash). Much of the funds laundered through MSBs are sent to the southwest border of the United States (FATF 2006a).

Major commercial ARS providers have commented that the settlement between Riggs Bank N.A. and FinCEN has had a considerable impact on the remittance industry (FinCEN 2004b; Haider 2007). The Riggs case involved a civil settlement between the bank and FinCEN as a result of a failure by Riggs to implement an effective anti-money laundering program and negligence by the bank with regard to a number of other issues, including reporting requirements and identification of high-risk customers. FinCEN noted that bank personnel who were involved in dealing with MSBs 'were unaware of the factors that typically are associated with suspicious activity and the new BSA requirements for the registration of MSBs' (FinCEN 2004c: 4). Riggs paid US$25m in a civil settlement. There has been concern that the outcome of the Riggs matter has had a negative impact on the number of banks who were prepared to deal with MSBs, although as at 2007, it was possible that this situation was improving (Prakash 2007).

Some aspects of the regulatory position in the United States may have eased over the last two years. The Federal Financial Institutions Examination Council (FFIEC) is a formal inter-agency body that prescribes uniform principles, standards and report forms for the federal examination of financial institutions. The FFIEC manual released in 2007 acknowledged that MSBs can pose a variety of levels of risk depending upon circumstances; the previous edition classified them all as 'high risk' (Rodriguez 2007).

Large commercial MSBs have also expressed concern that the United States' definition of MSB is too broad and that many smaller agents who work for the large commercial MSBs are being placed under unrealistic requirements, particularly when, for the agent, remittance work represents only a small part of their business activities (Haider 2007).

In summary, the US system includes both a system of registration (imposed by a federal regulator) and a further system of licensing for many MSBs and possibly a 'fit and proper person' test for proprietors and owners imposed by a state regulator, but ultimately supported by the federal regulator. The involvement of both federal and state regulators means that not all MSBs in the United States face the same regulatory burden; the level of burden will be determined by the location in which an MSB conducts its business (and if it conducts its business in a number of states, the burden may increase).


The FATF Mutual Evaluation of Canada held in 2008 concluded that Canada's regime regarding money service businesses was not in compliance with SR VI (FATF: 2008a). FATF noted that there was no registration scheme and that MSBs were not required to maintain a list of their agents (FATF 2008a). Subsequent amendments to the Proceeds of Crime (Money Laundering) Terrorist Financing Act 2000 (the PCMLTFA Act) introduced a registration scheme for Canadian MSBs which came into effect on 23 June 2008. This registration scheme does not apply to a person operating an MSB solely as an agent or as a mandatary (ie under the direction of) for another MSB, or if the person carries out MSB activities as part of other activities which are already subject to the PCMLTFA Act and its regulations.

Canadian MSBs are under the jurisdiction of Canada's FIU, the Financial Transactions Reports and Analysis Centre (FINTRAC). Under the PCMLTFA Act, the term MSB is defined broadly to include an entity or individual engaged in foreign exchange dealing, remitting or transmitting funds by any means or through an individual, entity or funds transfer network, or issuing or redeeming money orders, traveller's cheques or similar negotiable interests. Cashing cheques made out to a particular individual or entity is not included in this definition. FINTRAC has estimated that, as at 2009, there are about 700 MSBs in Canada. They are concentrated, as in most jurisdictions, in two major groups—in large companies such as Western Union, or as very small operations. The fact that many MSBs also operate as other businesses and that there is a high turnover in the industry has made it difficult to estimate numbers, although presumably compulsory registration will assist in doing this (FATF 2008a).

United Kingdom

In the United Kingdom, all MSBs are currently subject to the Money Laundering Regulations 2007 (MLR 2007), the Proceeds of Crime Act 2002 and the Terrorism Act 2000. They are regulated by HMRC and in some cases the Financial Services Authority (FSA). Within the United Kingdom, money transfer firms (which are broadly defined in the Money Laundering Regulations to include third-party cheque cashers, change bureaus and money transmitters) are regulated by the FSA if they provide a service that is already regulated by the FSA. In all other circumstances, they are required to register with HMRC, who have responsibility for regulating them.

In the course of its 2007 mutual evaluation of the United Kingdom, FATF advised that United Kingdom is largely compliant with the provision of SR VI but that it needed to consider targeting more resources against smaller MSBs that may be more at risk of money laundering and terrorism financing (FATF 2007). FATF estimated that in 2007, that there were 1,515 money transmitter businesses registered in the United Kingdom (FATF 2007). It noted that the money value transfer sector was the most ethnically diverse in the United Kingdom and there were concerns that not enough resources were being devoted to monitoring it (FATF 2007).

Following the FATF mutual evaluation, the United Kingdom introduced the MLR 2007, which brought into effect the European Union Third Money Laundering Directive. Under the MLR 2007, the United Kingdom also introduced a 'fit and proper person' test for people involved with an MSB. This test applies to a registration applicant, a person who effectively directs the business, a beneficial owner of the business and any nominated officer. A person will fail the test if they have been convicted of an offence under:

  • the Terrorism Act 2000;
  • a number of provisions under the Anti Terrorism, Crime and Security Act 2001;
  • the Terrorism Act 2006;
  • a number of provisions of the Proceeds of Crime Act 2002;
  • the Fraud Act 2006;
  • a number of sections of the Value Added Tax Act of 1994; or
  • have been involved in cheating the public revenue, or are otherwise not a fit and proper person with regard to the risk of money laundering or terrorist financing.

So the test is a broad one, particularly with regard to the last qualification. The relevant fee only has to be paid once; a successful applicant does not have to annually re-take the test.

The United Kingdom also introduced the European Union Payment Regulation, which came into effect on 1 January 2007. The Payment Regulation applies to a natural or legal person within the United Kingdom who is classed under the Payment Regulation as a Payment Service Provider (PSP). A PSP is defined as a natural or legal person who business includes the provision of transfer of funds services (article 2(5) Regulation (EC) No 1781/2006 of the European Parliament and of the Council of 15 November 2006).

This includes MSBs. The Payments Regulation was introduced into the United Kingdom by the Transfer of Funds Regulations, which are administered by HMRC. The Payment Regulation puts PSPs under obligations that can be additional to those imposed by the MLR 2007. Under the Payments Regulation, when PSPs send or receive a transaction, they must ensure that they obtain Complete Information on the Payer (CIP). CIP includes the payer's name, one of a number of possible forms of identification and an account number or unique identifier which enables the transaction to be traced back to the payer. Under the Payments Regulation, CIP records have to be kept for five years. For all transactions over 1,000 Euros that are not made from an account, CIP must be verified on the basis of information provided by an independent source. Customs has advised PSPs that they should obtain CIP for transactions that are under 1,000 Euro's but seem to be linked, as well as for one-off or first time transactions.

The Payments Regulation also has implications for Intermediary Payment Service Providers (ISPI). A natural or legal person is classed as an ISPI if they are involved in the transfer of funds but are not acting as a PSP for payer or payee. An ISPI needs to ensure that all the information that accompanies a transfer stays with that transfer. The Payments Regulation links in with the provisions contained in the MLR 2007 regarding the 'fit and proper person' test. HMRC monitors the circumstances of people who have passed the 'fit and proper person' test and can decide they no longer satisfy the criteria to retain this status. One of the criteria for being considered to be 'fit and proper' is that the person has not consistently failed to meet the requirements of the Payments Regulation.

Concerns have been expressed by the UK Money Transmitters Association (UKMTA) that information gathered as a result of the operation of the Regulation may end up in the hands of foreign law enforcement and intelligence bodies who may use it for corrupt purposes (Vlcek 2006). The UKMTA has also suggested that this level of regulation may drive remitters underground. The UK Department for International Development has suggested that any regulation needs to be risk-based rather than blanket (Vlcek 2006). Currently the UK's regulatory regime regarding ARS is relatively rigorous and also quite complicated.


As at 2005, Germany only allowed money transfer services to be provided by licensed financial institutions. In 2005, there were 39 licensed money transfer companies in Germany and licensed banks were also providing money transfer services (De Luna-Matinez, Endo & Barbaris 2006).

The World Bank noted in its study of the Germany-Serbia remittance corridor that despite the government prohibition on informal remittance, up to 50 percent of the remittance flow between Germany and Serbia used informal methods. Many of these methods seem to centre on cash couriering. The World Bank suggested that there could be a number of reasons for this, including the close proximity of the two countries, the low number of Serbians with bank accounts, the widespread use of cash by Serbians (who are often paid in cash), the limited number of ATMs in Serbia and the fact that of the 39 licensed money transfer companies, only one (Western Union) provided a remittance service to Serbia in 2005 (De Luna-Matinez, Endo & Barbaris 2006).

The World Bank's research into this remittance corridor suggests that prohibition is not an effective strategy and that depending upon the circumstances, people wishing to send remittances cheaply and quickly (and in ways that are culturally relevant) will find an informal channel to do so.


In Singapore, money changing and remittance businesses are regulated under the Monetary Authority of Singapore (Anti Terrorism Measures) Regulations 2002, which are administered by the Monetary Authority of Singapore (MAS). Under these regulations, businesses need to be licensed and the license needs to be annually renewed. MAS issues AML/CTF notices which licensees are obliged to comply with and they maintain a database of principals, directors and shareholders (and their shareholdings). Although MAS has the power to enter premises to see if an unlicensed money changing or remittance business is being operated, this task is usually undertaken by the police. Between 2004 and 31 July 2007, the police had secured 18 convictions against people operating an unlicensed remittance/money changing business. The police also conduct public education programs to educate people regarding their obligations if they join a remittance/money changing business. MAS has fined a number of licensees for not complying with AML/CTF requirements and as at November 2007, two licences had been revoked (FATF 2008b).

Over the last few years, the conditions for granting or renewing a licence have been made more stringent and a number of smaller companies have not renewed their licences. It is not clear how big the unlicensed money changing/remittance sector may be in Singapore, as it has not been the subject of research. In 2008, FATF rated Singapore as largely compliant with SR VI, although it commented that Singapore needed to investigate the ramifications of a possible informal sector and that there needed to be increased legal clarification of requirements relating to CDD and wire transfer information (FATF 2008b).

Hong Kong, China

The Hong Kong remittance sector is very large. Since 2002, all remittance agents and money changers have been obliged under the Organised and Serious Crime Ordinance (OSCO) to register with the Joint Financial Intelligence Unit (JFIU), which is Hong Kong's FIU. All sub-agents must register in their own right. Registration involves the provision of names and all addresses from which a business is being conducted. It is a criminal offence punishable by a fine to operate without a licence and it is a criminal offence punishable by imprisonment to not properly maintain records. The JFIU has provided training and issued explanatory guidelines to ARS providers (FATF 2006c).

Under s 24C of OSCO, remitters must obtain contact details for people undertaking a transaction worth over HK$8,000 and, where the transaction is being conducted face-to-face, must verify these details. Remitters are subject to broad suspicious transaction reporting requirements. The Hong Kong Police do pursue unregistered remitters, basing such investigations on suspicious transaction reports from banks. As of December 2007, police had undertaken 88 successful prosecutions for operating unregistered remitters and have undertaken another 127 prosecutions for failing to keep proper records. A number of banks have severed connections with remittance dealers on the grounds they represent a high risk, which has caused resentment. FATF has ranked 'Hong Kong, China' as being partially compliant with SR VI on the grounds that penalties relating to registration and compliance with record-keeping requirements are disproportionate and that there is too much emphasis on law enforcement action and insufficient emphasis on consistent administrative supervision of the remittance sector (FATF 2006c).


In Taiwan, under Article 3 of the Banking Act (Provision of Domestic and Foreign Remittance Services), only banks are allowed to provide remittance services. Article 29 states that:

Unless otherwise provided by law, any organization other than a Bank shall not Accept Deposits, manage Trust Funds or public property under mandate or handle domestic or foreign remittances.

Under Article 125, a violation of Article 29 attracts substantial penalties, including both imprisonment and criminal fines.

Banks are allowed to establish business partnerships with foreign remittance providers such as Western Union. The foreign remittance agencies, upon obtaining a relevant licence from the Ministry of Economic Affairs, are allowed to provide (electronic) remittance services through their partner banks; KYC and CDD functions are undertaken by the partnering banks. It is generally acknowledged that underground remittance providers exist (typically using jewellery retail businesses and pawn shops as fronts) and they are utilised by individuals with no legal status in the country.


MSBs and exchange houses are licensed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA Act). Once they are licensed, these businesses are considered authorised persons under the FEMA Act. As such, they can receive payments from overseas and hold foreign currency. They are subject to reporting requirements, including suspicious transaction reporting requirements, although RBI has provided little guidance regarding what constitutes such a transaction. These businesses are subject to both annual and random inspections (APG 2005a).

Under the FEMA Act, operating as a money exchanger or as an MSB while unlicensed is a civil offence and can be penalised with a fine. Such unlicensed operations are referred to as hawala/hundi. Under previous legislation, unlicensed operating was treated as a criminal offence and could be punished by imprisonment. Nevertheless, there is a large informal sector in India, although its size is unclear. FEMA Act regulations regarding ARS operators (usually referred to as hawala operators) only apply to those who carry out overseas transactions.

In 2005, APG stated that the illegality of hawala/hundi has made it difficult to estimate the size of the informal sector. It also suggested that the fact that operating an unlicensed hawala business is now only a civil matter may have encouraged the growth of the informal sector.

In the course of a mutual evaluation conducted in 2005, APG recommended that:

  • the running of an illegal money remittance business be re-criminalised;
  • the RBI (and other relevant agencies such as tax and law enforcement) cooperate in order to determine how large the informal sector is and what activities it is involved in;
  • there should be an increase in the level of monitoring of MSBs and exchange houses in order to ensure they comply with FATF's Recommendations and Special Recommendations;
  • there should be more incentives to encourage unlicensed remitters to become licensed and thus join the formal sector;
  • regulatory authorities should conduct education programs within the informal sector regarding regulatory requirements; and
  • domestic hawala systems should be under the same regulatory system as those who accept money from overseas.

In view of these deficiencies in 2005, FATF rated India as only 'partially compliant' with SR VI (APG 2005a).


In 2006, FATF estimated that remittances amounted to about 24 percent of Samoa's 2006 GDP (APG 2006). It also noted that the majority of the population was rural and did not use formal banking services. Money transfer businesses are licensed and regulated by the Central Bank of Samoa under the Exchange Control Regulations 1999. Money transfer businesses are also affected by the operations of the Money Laundering Prevention Act 2007, which sets out the CDD requirements that affect the operations of money transfer businesses. The Central Bank of Samoa contains the country's FIU, which monitors money transfer businesses for AML/CTF compliance. The Samoan Government has been issuing more licences to remittance dealers in order to bring more of the remittance business into the formal sector. Western Union is the biggest remittance operator in Samoa. The FIU has conducted limited onsite inspections and training of money transfer businesses and such activities have concentrated on larger companies. However, there are still informal services provided by grocery stores, hairdressers and taxi services. There has been no assessment regarding the possible size of the informal sector and there is little information regarding possible misuse by criminal or terrorist elements.

In 2006, FATF rated Samoa as 'partially compliant' with SR VI (APG 2006). It suggested that:

  • there be more onsite inspections to ensure compliance, CDD and reporting requirements are met;
  • there be a detailed assessment of the size and activities of the informal sector;
  • there be increased AML/CTF training for the whole of the remittance sector; and
  • the government consider supporting the formation of a remittance agent's association which could assist with increasing compliance within the sector (APG 2006).


The State Bank of Vietnam (SBV) is the financial sector's primary regulator, although the Ministry of Finance also has some influence on the remittance sector. The formal remittance sector has traditionally been dominated by banks and money transfer operators. However, in 2002, SBV began to encourage other companies to provide remittance services. All remitters need to be licensed by SBV. The relevant licensing standards include:

  • a valid contract with an international counterpart regarding remittance arrangements;
  • a feasible business proposal; and
  • a network that can disburse funds rapidly.

Generally, licensed remitters cannot subcontract this activity, but from 2002, commercial banks have been able to delegate disbursement functions to other banks and agents. Non-bank entities who are licensed remitters can use the banking system to disburse funds or can delegate this function to credit institutions. Any credit institution that can operate foreign exchange services can perform remittance services without asking SBV's permission.

It has been suggested that the changes of government policy towards remitters has led to a climate of uncertainty in the sector and that this uncertainty has encouraged the use of informal channels.


The Philippines has adopted a registration system for remittance service providers. As of July 2005, all foreign exchange dealers, money changers and remittance agents are required to be registered with the Bangko Sentral ng Pilipinas (BSP), which considers such registration to be part of KYC compliance procedures. The APG has recently undertaken a mutual evaluation of the Philippines.


ARS is perceived as being crucial to Somalia and has been well-established for some time. In 2004, the SFSA was formed to self regulate the remittance sector (Houssein 2005). Remittance dealers are registered by the Bank of Somaliland but there is no effective regulation of their activities within Somalia, where they are well-organised and capable of reaching most parts of Somalia within 24 hours (Waldo 2006). The SFSA has suggested no regulation is possible until the country is under proper government.

Comparison of regulatory regimes

As demonstrated above, the guidance contained in the FATF Recommendations has attracted considerable academic attention. Research shows that jurisdictions are following the basic model developed by FATF to varying degrees and other models are being explored. The relative newness of these regimes makes it difficult to measure their effectiveness.

The Australian regulatory system has the advantage of being simpler than either the US or UK model. Australian ARS providers do not have to satisfy both Commonwealth and state requirements, so the regulatory requirements are the same irrespective of where in Australia the provider operates. Nor does the Australian regulatory system have to accommodate complex requirements such as those of the European community.

Australia should perhaps consider the possibility of introducing either a licensing and/or a 'fit and proper person' test. However, the introduction of a licensing regime would potentially increase the burden of the regulator and, to be effective, would require a substantial ongoing monitoring program (unless the licence involved a one-off fee, which does not seem to be an effective approach). The introduction of a 'fit and proper person' test may be more effective in keeping undesirable operators out of the industry, but this would involve a substantial regulatory commitment. The UK approach means that both owners and operators are subject to the test and they can be barred from operating an MSB if they have been convicted of certain offences; however, the test only has to be done once. It is not clear how a change in a person's circumstances could be monitored. There is also the issue of how stores of data relating to registration, licensing or 'fit and proper persons' tests can be kept up to date.

Available evidence would suggest that many jurisdictions are also attempting to establish at least some level of contact with remittance providers. However, there are few indications of attempts to make contact with the communities that use remittance systems, although the AIC consultations strongly suggest that such approaches may be worthwhile. A vulnerability for Australia, which has been noted in the AUSTRAC supervision strategy 2009–10, is that many remittance businesses do not have AML/CTF programs, do not conduct proper risk assessments and do not have adequate customer identification procedures. It may be unrealistic to expect that small alternative remittance businesses would have the resources or the knowledge to adopt such initiatives, which not only requires substantial investment in areas such as staff training, but also may well increase costs. An approach which might be suitable for formal financial institutions or corporate remitters may not necessarily work well for a different kind of business.

The costs of regulation

The consultations did not provide details regarding how much it cost a provider of alternative remittance to comply with regulations. In view of the relatively recent commencement of the legislation, it is possible that many ARS providers have not yet finalised their arrangements or are uncertain how to proceed. The costs of compliance may also be a matter of commercial sensitivity in some cases.

One commentator reviewed a number of attempts to estimate compliance costs for private industry and the public cost of regulatory regimes and noted that the cost of compliance may exceed any financial benefit gained (Sproat 2007). This commentator referred to UK Treasury concerns that the costs of the MLRs introduced into the United Kingdom in 2001 were disproportionally borne by the smaller alternative remittance dealers because, as a result of the MLRs, they would have to introduce new record keeping and training. It was also estimated that the overall additional annual cost of the MLRs to the financial industry would be between £5,175,000 and £6,875,000.

If Sproat (2007) is correct, although the costs of regulation are extremely hard to estimate, they are likely to impact more heavily on smaller organisations, particularly those that do not necessarily generate high profits.

The impact of changing technology on alternative remittance services

FATF noted in 2006 that new payment methods (NPM) were both extending old methods of payment and introducing new ones (FATF 2006b). For example, until recently, movement of funds via the internet usually occurred between banks accounts. However, non-bank institutions such as PAYPAL now provide this service and traditional bank accounts need not be involved. It further noted that it is not always easy to identify NPMs and that some participants in the FATF 2004–05 Typologies Exercise commented that NPMs resembled ARS but that they deserve separate study (FATF 2006b).

FATF has identified that the most common NPMs are electronic and include pre-paid cards, SVCs, payment by mobile phone and internet payments (FATF 2006b). These payment methods tend to operate across a number of jurisdictions, which means that it is not always clear which regulatory body has responsibility for them. Furthermore, the nature of the technology means that the identity of the user is not always apparent (FATF 2006b). FATF has commented that there is a legitimate use for all these NPMs—for instance they can move money very quickly to areas affected by natural disaster—and that the 40 Recommendations and Nine Special Recommendations provide a basic framework for addressing AML/CTF posed by this new technology. For some jurisdictions, such as Somalia, which have suffered great damage to their financial and government infrastructure, NPMs (particularly the internet) may be the most reliable way to move money. FATF recommended that the 2006 NPM findings be updated in due course and that more guidance be provided to jurisdictions where possible (FATF 2006b).

As an example of how jurisdictions are currently addressing the issue of NPMs, a person in the United States who acts solely as an issuer, seller or redeemer of stored value is not required to register as an MSB unless they take part in other activities that would lead them to be classed as an MSB. The US Treasury can investigate providers who are based outside the United States (FATF 2006b).

In Australia, those who provide NPMs will fall within the provisions of the AML/CTF Act and therefore be captured as reporting entities of the AML/CTF Act if they are providing a designated service under s 6 of the Act. In this case, they will have to abide by the reporting requirements set out under the Act and also put in place an AML/CTF program. The fieldwork conducted in all five communities has demonstrated that these NPMs are relevant to Australia and are increasingly being used.

Research regarding Filipino and Somali users demonstrated that some corporate providers have established a range of partnerships to improve service and this has helped them attract large client bases. Card-based innovations do not require people to open and maintain bank accounts and are therefore apparently more cost effective. An example is that Visa offers four products for money transfers and has links with banks, microfinance institutions and retail outlets. It is not clear whether alternative remittance providers use membership cards in the same way that corporate remitters are, but such innovations could have a considerable impact on the internal workings of the remittance industry.

The use of mobile phones is a major issue for the remittance industry. Mobile phones are cheaper to use than wire transfers and physically safer than delivering cash to a person's house (an important consideration in countries like the Philippines; Hancox 2008). Companies such as Western Union and Dahabshiil are exploring the use of mobile phones. The basic arrangement is that a recipient receives a text message informing them a transfer has arrived in their electronic wallet; the recipient can withdraw cash from a licensed outlet, spend it or transfer it electronically (Barham 2008). The licensed outlet can take the form of an agent, who will presumably require identification which may be a code word or number.

The UK Department for International Development (DFID) has emphasised that any regulation of this area needs to take into account that clients are typically low income, may have limited access to remote documentation and that the retail agents the clients deal with may be unsophisticated and in remote areas (CGAP 2008). They further emphasised that in applying FATF guidance, many national regulators may fail to take advantage of the fact that FATF itself emphasised that a regulatory regime should be tailored to take into account a jurisdiction's particular interests (CGAP 2008). DFID quotes, with approval, the Filipino approach to this use of mobile phones.

In the Philippines, retail agents can perform CDD and KYC procedures as long as they meet a number of criteria. These criteria include that the agent is registered with the Central Bank of the Philippines, arranges for staff to undertake a day's training with the Philippines AML Council, ensures that any first-time customer produces identification (which involves producing government-issued identification), maintains records for five years and reports suspicious transactions (CGAP 2008). However, systems such as the Philippines are not foolproof. Training is generally only available in Manilla, which in itself may pose logistical and financial problems for many agents (Barham 2008).

The introduction of mobile phones into the remittance industry took place several years ago and the use of such devices is still expanding. The use of new technologies is of ongoing interest.


ARS is probably becoming less frequently used as ethnic communities become more integrated into the economic structure of local jurisdictions. It has been suggested that the Italian community used ARS when large scale Italian immigration to Australia began after World War II, but that use decreased as Italian banks (which have gained acceptance) opened branches in Australia. However, acceptance may not happen immediately and such a process can be profoundly influenced by the regulatory behaviour of host countries and countries of origin. An additional factor is the extent to which migrants keep their economic ties with their country of origin; as they integrate, transfers 'home' may decrease, but this depends on many factors, including the state of affairs in the country of origin.

There has been a steady rise in the amount of ARS regulation regarding AML/CTF issues throughout the world, but the regulation has not been uniform in character. Jurisdictions such as the United States and the United Kingdom have introduced onerous regulatory regimes involving measures such as licensing and 'fit and proper' tests, whereas jurisdictions such as Australia and Canada have introduced registration systems that only involve the provision of limited information by ARS providers. The emphasis has been on addressing concerns relating to issues such as terrorism, rather than taking into account the needs of the communities who use ARS.

Those who do use ARS (or corporate remitters such as Western Union), often have very little or no knowledge regarding whether there is any regulatory regime in place and what relevance it may have to protecting their interests. There is an assumption that some sort of regime must be in place and that it presumably provides some level of protection to users of the ARS system. The consultations provided some evidence of support for regulation (at least in principle) and there was no evidence among ARS users of hostility towards the idea of regulation as such. There was also a strong emphasis on the importance of complying with Australian law. It is clear that ethnic communities do not wish to be cheated and are prepared to cooperate with measures that lessen the chance of this happening.

The Filipino community expressed concern that no distinction was being drawn between the use of ARS for business and personal purposes. Not all ethnic communities use ARS for business purposes. The distinction between personal and business use of ARS is not always easy to draw; for instance, funds may be used to help with a family business in the country of origin.

The Somali community, in particular, expressed concern that the new AML/CTF regime may criminalise many who are sending money overseas to relatives and/or organisations who may be involved in criminal or terrorist activity without the knowledge of community members in Australia. This concern would also be relevant regarding the implementation of FATF recommendations for charities.

There was concern around the activities of 'sub-agents' and a general perception that they were not registered (although they are, in fact, legally obliged to register in most cases). This is an issue for both major corporate remitters and for large ethnic remittance companies, many of whom use a large number of agents. It is possible there can be a number of layers of agents between the agent or sub-agent ARS provider who operates at street level and the remittance company management. The management is responsible for ensuring that sub-agents are registered, aware of their reporting responsibilities and have a suitable AML/CTF program in place. The last two requirements in particular could represent a substantial challenge, particularly as many of the requirements are new and unfamiliar.

The historical background and circumstances of a community are relevant to how the users of ARS perceive the ARS systems and attempts to regulate it. The Somali community demonstrated a relatively high level of knowledge of the current regulatory regime and a preference for the continuance of an open ARS system, which they saw as possibly the only method of sending money/value to their country of origin. The Somali community also expressed concern about the possible liability for people who send money overseas under anti-terrorism funding legislation. The Somali remittance companies who took part in the consultations emphasised the care they take to ensure they comply with all regulatory requirements. Other communities did not demonstrate the same level of concern regarding issues such as the implications of terrorism funding laws, no doubt because their countries of origin do not face the same internal difficulties.

Communities expressed interest in having more contact with AUSTRAC in its role as regulator and they suggested that such contact needed to be undertaken in ways that were sensitive to the needs of the particular community in question, especially regarding issues such as language. This may present an opportunity for AUSTRAC to engage with the communities and to provide guidance in regulatory requirements that apply to ARS.

For providers of ARS, there was a relatively high level of knowledge of regulatory requirements. There was at least some perception that community trust was a more important factor in a particular ARS provider attracting customers than whether they complied with regulatory requirements. Many ARS providers expressed dissatisfaction with the level of paperwork required by regulators, but Filipino providers commented that increasing use of technology means that they need to exercise more care in identifying customers anyway.

The impact of historical background was as relevant to the perception of providers of the remittance industry as it was to perception of users. It was also relevant to their perspective of regulation. ARS providers who service the Somali community emphasised the important role that ARS plays for many Somalis. They also expressed concern that recent comments regarding the possible involvement of the Somali community in terrorist-funding activities is affecting provider 'morale' and that if it continued, then the Somali ARS system might be driven underground. As mentioned earlier, it should be noted that some of these concerns have come from within the community itself.

Communities are supportive of prudential regulatory systems that protect their interests. It may be profitable in the long run to talk to communities (if necessary in their own language) in order to explain the rationale behind regulation and the benefits that accrue from it. The communities can then influence the providers. Such community consultations may allow for a regulatory impetus to flow upwards from the community rather than being imposed by government. In a sense, it may be a form of co-regulation; the communities who use alternative remittance could take more responsibility for ensuring all participants comply with relevant laws. The evidence suggests that such consultation may also be the best method of encouraging recalcitrant ARS providers to fulfil regulatory requirements. It should be noted that communities are not likely to support initiatives that involve substantial increases in ARS provider costs (which are likely to be passed on to customers) unless they can be convinced that the new regulatory regime does, in fact, enhance the alternative remittance process. This issue may be of particular relevance to the Somali community, which is served by large, well-run alternative remitters who already appear to go to considerable effort to abide by all legal requirements.

The current Australian regulatory regime with its emphasis on AML/CTF issues may run the risk of penalising the innocent ARS providers and the communities who use them, without providing any substantive deterrent to abuse of the ARS system from a consumer protection perspective. A registration system can be bypassed by an individual organisation registering under a new name. The consultations suggested that there is support from a number of communities for effective regulation and regulators may find it beneficial to take advantage of this. The communities studied expressed support for regulatory activity but were also critical of regulatory attempts, to date, to make effective contact with communities who use ARS. Although the current regulatory arrangements in Australia relating to ARS have limited objectives (ie identifying who is an active member of the system), there is a real possibility that these objectives are not being met. The emphasis on registration may confuse or alienate the innocent and have very little impact on the guilty, who will have few scruples in registering under a new name or not registering at all.

A more rigorous regulatory system involving initiatives such as licensing and 'fit and proper person' tests will involve substantial expense (particularly if the intention is to regularly review licences and hold 'fit and proper person' tests at set intervals. Such a regulatory system may place the regulator at greater risk of liability. There is also the concern that the increased expense involved in putting in place such a system may be passed onto ARS providers and their customers. This risks further alienating ethnic communities who see ARS as a legitimate activity that addresses inadequacies and excessive expense in the formal financial structure, and driving ARS providers who cannot afford extra regulatory costs either out of the industry or underground. This last issue may be particularly relevant for those ARS providers who do not provide a remittance service as a full-time occupation.

Users were concerned by the possibilities of being cheated or having their funds misused (which may expose users to legal liability). Community members commented that they were supportive of several different regulatory approaches. Their support for a potentially punitive approach is symbolised by their desire for a mechanism through which they could report ARS providers who were not acting in compliance with current requirements, although such a mechanism would probably have to allow for anonymous complaints. However, communities also expressed strong support for ARS and were sympathetic to ARS providers who were genuinely struggling to satisfy regulatory requirements, particularly if the difficulty related to the cost of compliance. They saw a role for government in providing not only more information to both users and providers of ARS, but also more tangible support, such as information technology assistance.

In summary, any regulatory arrangement has to satisfy a number of interests if it hopes to be effective. The current emphasis on the introduction of AML/CTF programs, a more thorough approach to customer identification and monitoring, and the application of risk management may be too much for many ARS providers to accommodate. It also runs the risk of not satisfying consumer protection concerns. A more community-based approach with an emphasis on mechanisms for easy, anonymous reporting of wrongdoing may produce better long-term results in terms of risk minimisation.