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Taking It to the Streets

Despite the growth of formal transfer mechanisms such as Western Union and ATMs, substantial amounts of remittances continue to flow through informal (and sometimes underground) channels, outside the purview of government supervision and regulation. These transfer mechanisms — known as Informal Value Transfer Systems (IVTS) — go back centuries, particularly in Asia. Some examples are ...

By Devesh Kapur, the Starr Foundation professor of South Asian studies at the School of Advanced International Studies at Johns Hopkins University, and John McHale

November 2, 2009, 5:34 PM

Despite the growth of formal transfer mechanisms such as Western Union and ATMs, substantial amounts of remittances continue to flow through informal (and sometimes underground) channels, outside the purview of government supervision and regulation. These transfer mechanisms -- known as Informal Value Transfer Systems (IVTS) -- go back centuries, particularly in Asia. Some examples are known as hawala (Middle East, Afghanistan, Pakistan), hundi (India), fei ch'ien (China), phoe kuan (Thailand), hui (Vietnam), and encomenderos and "Black Market Peso Exchange" (South America). Relying on rudimentary, low-cost technologies, these networks may transfer tens of billions of dollars or more around the world each year, offering speed, easy access, low costs, and anonymity. An estimated $200 to $500 million was sent back home to Somalia in 2000 through IVTS (compared to $60 million in foreign aid). Basically, the sender gives money to an IVTS agent (usually in an ethnic neighborhood), who calls or faxes instructions to his counterpart in the region where the money is to be sent. The counterpart makes the payment within a few hours. Settlements are made either with a transfer in the opposite direction, by private couriers, or through periodic wire transfers. Another method of balancing the books is to under-invoice goods shipped abroad, so that the receiver can resell the products at a higher market price.

Despite the growth of formal transfer mechanisms such as Western Union and ATMs, substantial amounts of remittances continue to flow through informal (and sometimes underground) channels, outside the purview of government supervision and regulation. These transfer mechanisms — known as Informal Value Transfer Systems (IVTS) — go back centuries, particularly in Asia. Some examples are known as hawala (Middle East, Afghanistan, Pakistan), hundi (India), fei ch’ien (China), phoe kuan (Thailand), hui (Vietnam), and encomenderos and "Black Market Peso Exchange" (South America). Relying on rudimentary, low-cost technologies, these networks may transfer tens of billions of dollars or more around the world each year, offering speed, easy access, low costs, and anonymity. An estimated $200 to $500 million was sent back home to Somalia in 2000 through IVTS (compared to $60 million in foreign aid). Basically, the sender gives money to an IVTS agent (usually in an ethnic neighborhood), who calls or faxes instructions to his counterpart in the region where the money is to be sent. The counterpart makes the payment within a few hours. Settlements are made either with a transfer in the opposite direction, by private couriers, or through periodic wire transfers. Another method of balancing the books is to under-invoice goods shipped abroad, so that the receiver can resell the products at a higher market price.

Following the terrorist attacks on September 11, 2001, Western governments and the media portrayed these informal transfer mechanisms as shadowy networks for funding terrorism. To be sure, these services are sometimes associated with all sorts of criminal activities including bribery, drug trafficking, tax evasion, payments for smuggling illegal migrants, and the black market trade in human organs. But, as a study conducted for the Dutch Ministry of Justice concluded, "IVTS are by no means infested or controlled by criminals… [many] resort to IVTS simply to transfer money to their relatives because they follow cultural traditions or services are faster, cheaper, less bureaucratic, and more convenient than any other alternative."

And the perpetrators of the September 11 terrorist attacks? The hijackers received most of their funds through formal networks such as credit cards, ATMs, and wire transfers.

Devesh Kapur is the Starr Foundation professor of South Asian studies at the School of Advanced International Studies at Johns Hopkins University.