Informal and Formal Money Transfer Networks: Financial Service or Financial Crime?
| Pages | 330-337 |
| DOI | https://doi.org/10.1108/eb027315 |
| Date | 01 April 2002 |
| Published date | 01 April 2002 |
| Author | Shahid Nawaz,Roddy McKinnon,Robert Webb |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 5 No. 4
Informal and Formal Money Transfer Networks:
Financial Service or Financial Crime?
Shahid Nawaz, Roddy McKinnon and Robert Webb
INTRODUCTION
Prior to the events of 11th September, 2001, inter-
national cooperation in the field of global financial
crime prevention was already well established.
Prompted by separate initiatives led by the United
Nations Organisation and the Basel Committee in
the late 1980s, the creation in 1989 of the Financial
Action Task Force on Money Laundering (FATF)
by the G7 countries set in place an international
body to coordinate anti-money laundering measures
across 26 countries and jurisdictions. Subsequently,
and prompted by the creation of the FATF, other
regional interstate organisations in western and east-
ern Europe, across the Americas and the Caribbean,
and also in Asia, have drafted similar anti-money
laundering standards for their respective countries.1
In turn, these interstate regulatory initiatives have
been complemented by parallel business-led 'volun-
tary' initiatives, such as the example of the Wolfsberg
Anti-Money Laundering Principles designed to
promote greater transparency across the banking
sector.2
The core policy objectives of the FATF and the
subsequent regional offshoots and business-led initia-
tives has been to improve the effectiveness of criminal
justice systems, devise efficient financial system regu-
lations and follow these with effective law enforce-
ment in order to combat money laundering
activities. However, combating increasingly trans-
national money laundering activities presents signifi-
cant regulatory and law enforcement challenges. As
Moulette has reported, citing figures from the IMF,
'the scale of money laundering worldwide could be
somewhere between 2 per cent and 5 per cent of
world GDP'.3 This equates to a figure somewhere
between US$500bn and US$1.5trn.
In spite of this ongoing coordinated activity4 the
attacks on the World Trade Centre and the Pentagon
have led the FATF to focus more actively its attention
upon previously tolerated, if not legally sanctioned
and controlled, informal financial services 'net-
works'. Emerging evidence indicates that informal
financial services networks have played an instrumen-
tal role in the international movement of terrorist
finances.5 In particular, attention is now being
focused upon what we refer to in this paper as
money transfer networks (MTNs). Despite the
often longstanding historic basis of many of these
types of networks, MTNs have attracted only limited
academic, and even less political, interest in the West
prior to the declaration of 'war on terrorism'.
Typically, the most often discussed 'type' of
MTNs is informal money transfer networks
(IMTNs). As the term informal infers, the financial
operations conducted by IMTNs, and one of their
primary advantages, is that they operate predomi-
nantly beyond the regulatory oversight of national
and international financial system regulatory bodies.
Despite the attention being paid to informal
MTNs, and to the South Asian variant of the
hawala in particular, MTNs also play an important
role in formal financial systems in developed and
developing country markets.
Formal money transfer networks (FMTNs), such
as correspondent bank networks, fulfil an important
financial intermediary role within the international
banking system, especially in relation to foreign
exchange movements.6 However, the formal nature
of some MTNs has proven insufficient to isolate
these specific networks from a degree of criticism
more commonly reserved for unregulated financial
services practices. Due to the fungibility of finance,
it is now more readily accepted that a significant pro-
portion of the money circulating within FMTNs
could, in all probability, have entered the financial
system, first, via unregulated and largely anonymous
sources within IMTNs. As Johnson states, 'corre-
spondent banking arrangements allow the transfer
of both illegally and legally derived money from
the unregulated to the regulated financial institutions,
thus allowing funds in through the backdoor of the
regulated institutions to commence or continue the
laundering process.'7 Moreover, and a practice ideally
suited to the individual, as well as the state, sponsor-
ship of terrorist activities, 'clean' funds may be chan-
nelled out of the backdoor as easily as illegal funds can
be brought in. Accordingly, the financial flows
within and between FMTNs and IMTNs are neither
Journal of Money Laundering Control
Vol.
5, No. 4, 2002. pp. 330-337
© Henry Stewart Publications
ISSN 1368-5201
Page 330
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