## Work of the IMF in Informal Funds Transfer Systems

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### Background
- The First International Conference on Hawala was hosted by the government of the United Arab Emirates under the Central Bank of the U.A.E. in May 2002 and produced the Abu Dhabi Declaration on Hawala.
- The IMF and the World Bank began a research project in 2002; results were published in early 2003 as Informal Funds Transfer Systems: An Analysis of the Informal Hawala System (IMF Occasional Paper No. 222).
- Key findings from that analysis:
  - In countries where financial capacity is limited, IFT systems fill a critical gap.
  - IFT systems can have economic implications; where large volumes are channeled through such systems, they could have macroeconomic consequences.
  - Characteristics such as anonymity and lack of official scrutiny make IFT systems susceptible to money laundering and terrorist financing.
- The IMF is compiling additional information on IFT systems to advise countries on how to upgrade and enhance regulatory and supervisory frameworks.

### IMF Goals
- The Second International Hawala Conference was used to document regulatory practices and procedures adopted by various countries and to begin developing a statement of good regulatory practices for IFT systems.
- The IMF will develop operational guidance on regulating the informal sector to inform discussions with members and to guide technical assistance and advice.
- Relevant international standards and documents cited as part of the policy framework:
  - The Abu Dhabi Declaration on Hawala (May 2002).
  - FATF’s 40 recommendations plus the 8 special recommendations (including Special Recommendation VI on alternative remittance systems).
  - FATF documents: Interpretative Note to Special Recommendation VI: Alternative Remittance Systems (February 2003) and Combating the Abuse of Alternative Remittance Systems: International Best Practices (June 2003).
  - Asia/Pacific Group on Money Laundering implementation package for regulation of alternative remittance systems.
- The IMF emphasizes tailoring implementation of international standards to local circumstances and the need for consultation and cooperation with countries.

### Perspective on Regulation
- Factors the international community should reflect on when designing regulatory and supervisory systems:
  - Regulatory measures should be appropriate and commensurate to the risks; quantification of risks is difficult given limited knowledge of IFT systems.
  - Recognize remittances’ importance to migrant workers and that IFT systems provide income in some countries.
  - Avoid overregulation that could drive IFT providers further underground; regulations should be incentive-compatible and developed with private-sector engagement.
  - Need for information to design supervisory and regulatory practices that consider local circumstances; existing national frameworks can generate useful data.
  - Regulation alone is not a panacea; multiple approaches, including promoting the formal sector in fund transfers, are required.
  - Special difficulties exist in implementing effective regulation in conflict-afflicted countries.

### Structure of the Conference Panels
- Panels included an internationally diverse mix: standard setters, international organizations, hawala remitting and receiving countries, academia, law enforcement, and the private sector.
- Panels and perspectives:
  - Recipient-country panels: focused on foreign exchange management, capital movements, and formal financial sector quality as influences on regulatory attitudes toward IFT systems.
  - Remitting-country panels: emphasized concerns about criminal misuse and terrorist financing where financial sectors are developed and foreign exchange policies are liberal.
  - Law enforcement and private-sector panels: law enforcement described the extent of criminal use and effects of regulation; private sector provided insights on commercial effects and potential for business associations to represent hawaladars’ collective views.

### Elements That Will Need to Be Considered
- Licensing or registration requirements:
  - Questions on rationale for registration versus licensing or prohibition, and practical experiences comparing regimes.
- Due diligence of owners and managers:
  - Need for fit-and-proper tests and discussion on minimum elements that could apply across diverse country circumstances; role of registration in due diligence.
- Implementation of anti–money laundering and counterterrorist financing regulations:
  - Identification of practical approaches for customer identification, record keeping, and suspicious transaction reporting, including possible phased or “second best” approaches while capacity develops.
- Compliance monitoring and sanctions:
  - Experiences with continuous versus reactive compliance monitoring, institutional location of compliance monitoring (central bank, supervisory body, law enforcement), self-regulation, risk-based supervision, and the effects of sanctions on driving transactions underground.
- Consumer protection:
  - Public sector obligations once IFT systems are regulated; transparency requirements regarding lists of licensed/registered IFT systems, fees, and exchange rates.
- Awareness-raising and training:
  - Experiences in building acceptance of regulatory frameworks and creating implementation capacity.

### Next Steps and Operational Work
- The IMF has begun developing operational guidance on supervising and regulating IFT systems and will continue to collaborate with regulatory agencies and the private sector to gather information and identify good practices.
- The IMF will examine specific problems facing developing countries in complying with supervisory and regulatory requirements to combat money laundering and the financing of terrorism.
- The IMF intends to present study results and seek consensus on operational guidance at a Third International Conference on Hawala.

*Source: R. Barry Johnston, "Work of the IMF in Informal Funds Transfer Systems," proceedings of the Second International Conference on Hawala (2005).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/2005/hawala/_hawala.pdf_