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Strategies to enhance compliance

The results of the community consultations suggested that increased involvement of communities would be highly beneficial both in terms of discouraging criminal and terrorist penetration of ARS networks and lessening the likelihood of the alienation of ARS providers and the communities that use their services.

The community perspective

Filipino/Somali communities

The Filipino and Somali communities provided a number of suggestions on how to improve the regulation of ARS. First, they emphasised that it is important that communities were easily able to access alternative remittance systems so they could support families overseas. Second, that regulations should not make things difficult or impossible for people who need to use ARS. They noted that there were many examples where community members had tried to support each other to establish a business by all lending money (through unofficial processes) and this had subsequently led to individuals being identified by police and interrogated about where the money came from. These communities expressed support for the improvement of the cultural knowledge levels of regulatory and law enforcement bodies that may come into contact with the various financial practices used by particular communities.

The communities also emphasised that if there was an expectation on the part of government for communities to make more use of formal banking institutions, there needed to be more work done on improving bank systems. In their view, such improvement would require major reforms around issues such as costs and service provision.

The communities suggested that ARS providers needed to be more aware of not forwarding money to suspicious groups and should be held accountable for the quality of their services. Also, that there needs to be an inbuilt, user-friendly complaint-making process. It was emphasised that there would need to be provision for people to use such a process anonymously.

Vietnamese/Indian/Samoan communities

The Vietnamese, Indian and Samoan communities expressed concern regarding the operation of the ARS system. They suggested there was a lack of transparency in how ARS transactions took place from a user perspective. They believed that, at the time of interview, there was considerable guesswork from customers in terms of how an actual ARS transaction occurred and this created an environment where customers were potentially more vulnerable to abuse and unaware of all the risks involved in conducting transactions. Therefore, the communities suggested that more general education of users is needed in this area. The communities also noted that there may be opportunities to develop the membership card system used by some ARS providers so that it could assist in regulating the ARS environment, while also giving users a sense of trust and security.

The comments suggested that the community had a considerable interest in both the protection and the regulation of the ARS system and there would be support for AUSTRAC becoming more familiar with the ARS process (if necessary with community assistance) and gaining a greater understanding of how it is used by specific communities.

The alternative remittance service provider perspective

Filipino/Somali providers

Filipino and Somali alternative remittance providers made the following suggestions concerning both the ARS system and possible future activities that AUSTRAC could consider. In their view, remittance companies generally complied with Australia's rules and regulations. However, some remitters acknowledged the need for more proactive plans to identify suspicious transactions and money laundering schemes as those practices invariably impacted upon the reputation of ARS providers as a whole. The Filipino and Somali communities advocated the development of a central data system that could assist all providers to identify elements of bad practice within the remittances.

They suggested that there was a need for better support by AUSTRAC in purchasing, training and use of software packages that may improve recording of transactions and also assist in the development of better risk management programs. They also emphasised that any information campaign should focus on the business-related and economic benefits of providers being registered, that such campaigns should involve law enforcement agencies and recognise that alternative remittance, in and of itself, is not illegal.

It would be good if not only communit[ies] were targeted [with] information, but you also focused on government officials. They know so little about the practice and assume that it's informal, backwards and illegal. I don't know many businesses that have tried to operate in the context of war and survived economically, but that's exactly what we are required to do (ARS provider personal communication 2008).

ARS providers suggested that organising a roundtable involving representatives from the regulator would be helpful in generating preventative strategies but that such a roundtable would need to consider how such preventative strategies could be developed without inadvertently generating negativity concerning ARS.

One of the problems with your research is every time this happens, the communities panic and they think that there is a problem and the government is investigating illegal activity (ARS provider personal communication 2008).

Vietnamese/Samoan/Indian providers

Vietnamese, Samoan and Indian providers interviewed for this study provided a number of comments regarding the current regulatory system. There appeared to be a lack of consistency in how transactions were being conducted. For example, not all providers were asking for identification; some transactions were being conducted by telephone; and how (and which) agents were contacted differed somewhat by community. While this did not appear to be a major issue for the providers who were interviewed (ie it did not appear that there was illegal behaviour taking place among the individuals and organisations that participated in this research), it did create an ARS environment that was more difficult to regulate.

The providers found it very difficult to articulate the benefits that registration offered. As a result, they suggested that it would be beneficial to articulate more clearly any benefits from registration, with a particular emphasis that registration promotes a competitive advantage. They suggested that this message should also identify opportunities for the providers to promote the registration to customers and enhance the level of trust within the marketplace.

The Samoan, Vietnamese and Indian providers suggested that the two key motivators for registration, at present, were the desire to abide by Australian laws and the belief that it was compulsory for the business to operate. In promoting the benefits of registration to providers who are currently not registered, they suggested that there should be an emphasis on the importance of registration for abiding by Australian laws. They believed such an approach would appeal to providers who were at the time unregistered because they were unaware of the regulations.

The ARS providers noted that there were opportunities to provide training for ARS providers on the benefits of working with the AUSTRAC system. Some of the ARS providers expressed concern with the extent of reporting required, in terms of complexity, frequency and time taken. They suggested that it would be beneficial to provide assistance to business regarding successfully meeting reporting requirements.

Finally, the ARS providers suggested that if the government was keen to educate both providers and users about the current system and how to minimise the risks of misuse, it would be important to utilise word of mouth, which at the time of interview was a critical information tool in the ARS environment. ARS providers emphasised that they were interested in a regulatory system that was cheap, intelligible and applied to all who provide ARS services.

Community and provider comments regarding future regulatory directions

Both ARS users and ARS providers commented on the directions regulation should take in the future. These suggestions included:

  • lowering the cost of formal transfer services to improve and streamline financial laws and regulatory systems which would then open up the market to more providers and promote competition;
  • acknowledgement that competition and an increased number of service providers eventually help lower costs and improve the quality and range of transfer services available to migrants;
  • simplification of the paperwork and other procedures required of migrants to use formal remittance services; participants suggested that part of the reason why many migrants choose to use private money transfer companies like Western Union is because their money transfer procedures are simple;
  • improved data collection and research on remittances;
  • centralised data collection and reporting mechanisms that help to more accurately track remittance transfers, at least those which flow through banks and other formal financial institutions;
  • enhancement of policies and programs to facilitate the development impact of remittances; and
  • consultation with communities and providers by governments, either directly or through larger-scale workshops and conferences.

The consultants suggested that technological change is having on impact on the practice of remittance. Remittances are now sent through electronic transfer processes that operate through a combination of messaging and inter-bank clearing processes. The use of mobile phones is also having a major impact on how remittance work is carried out.

The role of communities in regulating alternative remittance services

The involvement of the communities who use ARS in regulation would be an effective way of changing provider behaviour. Comments from the Filipino and Somali communities, and the ARS providers who service those communities, suggested that it was community pressure that would enforce change among providers. One ARS provider commented with regard to distribution of information and education to the communities generally:

You could focus on providers, but the real emphasis should be on the community. They are a very powerful force. If they think you are not doing the right thing by them, then they will make sure that everyone in the community knows about this. This then means that the business will eventually dry up. The problem is when it's not about the quality of the service, but the fact that that person hasn't registered. So you really do need to start with the community (ARS user personal communication 2008).

Another ARS provider commented:

If you could show these providers who haven't registered that the community is becoming more aware of the law, then it's easier to be saying to them that it makes good business sense to comply with the new rules and regulations (ARS provider personal communication 2008).

There was limited awareness among consumers of government regulations and the potential level of security it provides. While there was an assumption that there were regulations in place, and that these offer protection to consumers, users suggested it was important that they were educated about the regulations and the need to ensure the provider they use was registered (encouraging a call-to-action for users to check the level of registration with their current providers). They suggested that it would also be beneficial to provide information on the safeguards that regulation provides. While there was little concern among users with regard to individual ARS transactions, the results from ARS providers suggested that they were very responsive to consumer needs. Therefore, having informed consumers that deliberately choose registered providers may well increase the level of registration.

Government initiatives

In 2005, the UK Department of International Development began setting up Send Money Home websites for a number of communities. These websites enable those who wish to send a remittance to compare the rates of various remittance companies. In 2008, DFID claimed that the cost of sending £100 to countries affected by this program had fallen by an average of 2.5 percent since 2005 and that remittance costs for the British Indian community (the United Kingdom's biggest ethnic minority) had fallen by over 20 percent. Vlcek (2008) suggested that users will still prefer to use the cheapest possible service and that government attempts to channel finances into more expensive and monitored channels represents an infringement on civil liberties. He also suggested that such initiatives are not likely to be effective in stopping remittance funds being used for terrorist purposes when such acts are funded locally (Vlcek 2008). This last point is hard to deny, but the commentator does not address the issue of whether such initiatives may provide a deterrent when money is being sent between jurisdictions for the purpose of funding terrorism.

At an international level, AusAID and NZAid (acting through a London-based consultant, Developing Markets Associates Ltd), are currently involved in an initiative that aims to lessen the cost of sending remittances throughout the Pacific region (Rishworth 2009). The rationale behind the project is that remittance costs in the Pacific are seen as being high (approximately 13% compared to a world average of 10%). It should be noted that even if these figures are accurate, they are higher than the commission charged by many alternative remittance providers (which range from 1% to 6%).

Initiatives such as the AusAID and NZAid project may be relevant to the Pacific because of the high level use of formal remitters and the relative lack of competition (Shaw & Eversole 2007). However, they are less likely to be relevant where there is a high level of use of alternative remittance and a considerable degree of competition; for many people who use alternative remittance, such projects are still likely to be too expensive and possibly too slow and formal in their style of operation. In a sense, they may go against the basic desire of the remitter to ensure as much of the money as possible goes to the recipient and as little as possible goes to the agent, whatever form that agent may take.

One possible government initiative that may be of assistance to ARS users is making publicly available a copy of the PoDRS Register. This would allow ARS users to choose ARS providers who were properly registered and would provide an incentive for ARS providers to make the effort to register. However, such an initiative has limitations. Assuming privacy considerations could be satisfied, it would require a policy decision as to how much responsibility the body providing the list would have to take to ensure that the list remained accurate. The fluid nature of the industry and the large number of providers (particularly sole traders) would possibly make it difficult to ensure that the list remained current. Such a list would serve the interests of a regulator in encouraging registration as a PoDRS but it may not do much to address the consumer protection issues raised by users unless it is linked to a complaints mechanism. The use of such a complaints mechanism to affect decisions regarding the PoDRS Register could in turn raise natural justice issues. The organisation responsible for the list would need to make at least a certain level of contact with users to ensure that ARS users were aware of the existence of the Register. There may also need to be consideration of whether such a Register would need to be made available in a variety of languages.

International developments have led to a far greater interest in the practice of alternative remittance and much of this is based on the belief that various aspects of alternative remittance make it vulnerable to use by criminal or terrorist elements. As a result, jurisdictions have reacted with a variety of regulatory regimes, although research suggests that the guidelines produced by FATF have had a profound impact on the actions of many governments and the regimes that are being introduced are very much affected by these guidelines. Australia has introduced the 2006 legislation at least in part to ensure that it fulfils the requirements set out in the FATF guidelines. The FATF guidelines are in fact very broad but they do place an emphasis on action by government and on a perceived need to increase the similarity of the regulation of an increasing number of financial sectors through the application of the FATF 40 Recommendations and Special Recommendations. The differences between these sectors make this approach problematic. The FATF guidelines regarding the application of a risk-based approach by MSBs demonstrates that FATF appreciates that the same approach cannot always be applied to all participants in a particular sector when the participants differ substantially in size and sophistication.

This report was based on a small study of community members and remittance provides drawn from five Australian ethnic communities so its findings must therefore be treated with some caution. However, it was apparent that the ARS users interviewed had reservations about the current ARS system (although their concerns tended to relate more to commercial issues such as the problem of resources being diverted overseas), but they supported remittance in general, and ARS in particular, because they saw it as fulfilling a legitimate need which the formal financial sector does not yet fully satisfy.

Many users have little knowledge of how the ARS system works and what sort of regulatory system was currently in place for ARS, although generally they assumed there was regulatory system protecting their interests and lessening the chance of ARS users being cheated. This lack of knowledge concerned at least some ARS users, who expressed a strong interest in obtaining more information on the regulatory system currently in place. This was linked to concerns that people sending money overseas (either through corporate remitters or ARS) might be at risk of prosecution for assisting terrorist organisations. Although users had experienced very little difficulty with using ARS at a personal level, they had concerns regarding the impact of possible misbehaviour by some ARS providers and ARS providers resent those providers who do not comply with relevant regulations.

Communities and ARS providers were interested in greater education regarding any possible advantages provided by the current regulatory system, both for ARS providers and users. The challenge lies in making effective contact with ethnic communities, as many ethnic communities may be wary of direct contact with government, and such contact may need to be established through intermediaries such as consultants who are familiar with the customs and languages of the ethnic communities in question. This may be an expensive process, but introducing the regulatory machinery to administer a licensing and/or 'fit and proper person' test would not be inexpensive either. Such consultations may represent an opportunity to involve communities in the regulation of ARS providers. The fact that there is support for a reporting mechanism shows that communities have a pragmatic interest in ensuring they are not cheated. The provision of simple reporting mechanisms would also assist regulators and law enforcement in more efficiently targeting those ARS providers whom they suspect of wrongdoing.

Such initiatives may, to some extent, allow for communities to take part in the co-regulation of alternative remittance, although the extent of such involvement might well vary substantially between communities. It is possible that communities who rely most heavily on alternative remittance channels because their country of origin cannot support financial structures might be the most interested in being involved in such regulation precisely because they have the most to lose if the alternative remittance system is compromised.

There is currently an environment of mistrust regarding ARS. This mistrust is demonstrated by regulators, law enforcement agencies and, it would seem, by numbers of ARS users who only have a limited knowledge of the system which is currently moving their remittances. Nor do the ARS providers who are part of larger organisations always seem to understand how the ARS system works beyond the immediate transactions in which they are personally involved.

This report notes that there are a number of concerns regarding alternative remittance that need to be addressed. Some of these concerns relate to the issue of how to determine the most effective method of regulating remittance providers of all kinds, with a particular emphasis on alternative remittance providers. This report shows that the communities who use alternative remittance were supportive of regulation and interested in consultation on what form such regulation should take. They wished to protect the system and ensure they were not at risk from it.

Regulators and law enforcement have a legitimate interest in determining to what extent alternative remittance can be linked to illegality. However, many communities who use alternative remittance were concerned that the practice was being unfairly targeted. A complaints mechanism would allow the community a role in policing alternative remittance and enabling such a mechanism to be anonymous would address community concerns regarding possible reprisals from those who are the subject of reports. A complaints mechanism has the potential to allow regulators and law enforcement greater access to community information regarding abuse of alternative remittance.

A possible initiative flowing from the Australian requirement for registration is the possibility that a list of registered PoDRS could be made publicly available. However, this proposal does have practical difficulties. Leaving aside privacy issues, the fluid nature of the industry and the possibility of substantial language barriers would make it very difficult to keep such a list up to date. Consultations suggest that many ARS users might be interested in consulting such a list.

There has been considerable international support for the long term goal of transferring as much of the remittance industry as possible to the formal sector. Although, such a goal is likely to be impractical without substantial government support for the formal sector and even then, unsuccessful governments could attempt to close down the alternative remittance industry altogether. But history suggests it is very resilient and that such an approach would alienate many communities and do considerable harm to the innocent. The evidence relating to links between various forms of criminality and alternative remittance is fragmentary and would not justify such an approach. The reality may be that alternative remittance will remain in operation as long as it fulfils certain needs and that a regulatory structure needs to both accommodate the large proportion of transactions that are innocent and the relatively small number of transactions (which may involve substantial sums of money) that can be linked to illegal activity.

In view of the nature of the remittance industry, a top-down imposition of regulation is likely to have limited success, particularly with regard to smaller businesses. In dealing with such businesses, a more consultative and community-based approach is likely to prove more effective in the long run in increasing levels of compliance and lessening risk.

Potential directions for future research

The research undertaken for this report would suggest that there are a number of issues relating to ARS that require clarification. These include:

  • physical behaviour associated with the use of ARS that may be misinterpreted by regulators or law enforcement. This behaviour can take many forms. The physical operation of an ARS can lead to people congregating near it, including young people who may be there to provide assistance to older people. The physical presence of large numbers of people can lead to a number of negative interpretations, including drug selling. Testing this perception may be useful.
  • financial behaviour associated with the use of ARS that may be subject to misinterpretation. It would appear to be common for people to pool money so that it can be sent to the country of origin to help with a festival or with a community project or to provide assistance due to natural disaster. The funds in question may be sent by one individual, which can arouse suspicions against that individual.
  • to what extent is ARS used for transactions that are purely commercial in nature as distinct from transactions that are commercial in nature but that take place between family members?;
  • what are the factors that lead to ethnic communities and individuals within such communities choosing between the use of corporate remittance and alternative remittance? Is concern over misuse of the system a major factor in the decision? The material derived from these consultations would suggest that security is a factor in the making of this decision, although very few of the participants reported any problems in dealing with the ARS system and the corporate remittance sector may be more expensive, slower (depending on agent availability and less culturally sensitive than the ARS sector);
  • what is the significance of issues relating to trust and ethnicity when members of ethnic communities use corporate remitters?
  • how do principal remitter (or super agents) interact with agents (both with corporate remitters and ARS), particularly with regard to the provision of training regarding AML and CTF issues?
  • how vulnerable is the corporate remittance sector to misuse, particularly due to the use by major corporate remitters of large numbers of agents and sub-agents?
  • what is the impact of new technology on alternative remittance with particular reference to the possible resultant decline in the use of agents and sub-agents, and the role of mobile phones?
  • to what extent can ethnic communities be involved in determining the nature of a regulatory system, and could they have a role in enforcing a regulatory system?;
  • to what extent are regulators aware of the nature of the ethnic communities that generate the demand for ARS?
  • To what extent are the same ARS providers simultaneously meeting the needs of both illegitimate and legitimate users of ARS?