Informal Hawala Remittance System Huge, Competitive, and Dangerous

ACORN International Remittances


New Orleans Yesterday on the ACORN International website (, we released the third of our investigative, research reports in connection with our Remittance Justice Campaign.  The bottom line is that the amounts of informal transfers are huge and underestimated.  They are wildly cheaper by many orders of magnitude (0.25% to 1.25% compared to World Bank 10% and our earlier survey of 22%).  They are most unregulated because the system often lacks a paper trail, also allowing easy access for money laundering and terrorism.

The hawala system proves that money can be transferred cheaply and efficiently between immigrant families and migrant workers back home.  This failure of regulation is predatory and dangerous.  We argue the case for reform and demand change.  See the whole report below:


The Demand for Alternative Mechanisms for Remittance Transfers from Immigrant Families and Migrant Workers

Campaign for Remittance Justice Update

In December of 2010, ACORN International’s opening report of the remittance campaign, Past Time for Remittance Justice, exposed the trials and tribulations of migrants around the world who pay exorbitantly high fees to send small amounts of their hard-earned money back to their home countries to support their families. The message was clear: the high costs charged by money transfer organizations were predatory and no one was taking the plight of the remitting migrant worker seriously. When ACORN International’s second report, Looking the Other Way: The Absence of Remittance Regulation, was made public, sadly not much had changed.

Our calls for regulation and doing away with exorbitant fees are only being seriously engaged at the provincial and federal levels in Canada, and even there the response remains grossly inadequate.  Elsewhere in the world, the financial community, aided and abetted by the responsible national banking authorities and their global counterparts, continues to ignore this scandal.  This is easy for them to do. This is a crisis for poor people, immigrants, and migrants, not a crisis for bankers and governments. In other words, regardless of their responsibilities to protect and serve, the people in a position to remedy the situation have no interest and are feeling no pain.

In both of these reports, ACORN noted that alternatives to formal restraint or regulation of fees and predatory practices were being sought every day by victims of the system, and in the absence of real progress, people would be voting with their money for different systems throughout the world.  Change will come here.  The party will not last forever.

Informal Money Transfer Systems

Today the largest informal money transfer system is likely “hawala.”  ‘Hawala’ is a term that is regionally-specific to the Middle East, but similar systems exist elsewhere under different names (such as ‘hundi’ in Pakistan and India and ‘fei ch’ien’ in China). Together they all fall under the technical, World Bank-like title of ‘Informal Money Transfer Systems’ (IMTS). Since hawala is the most popular IMTS, and the one that has gotten the most publicity, this report will refer to IMTS as ‘hawala’ with the understanding that it is interchangeable with other regional-specific versions.

Before discussing more about the size, scope and importance of hawala, we will examine more closely how hawala works using the following example:
A migrant worker in country A wishes to send money home to his family in country B. He has no bank account and is not an excellent speaker of country A’s language thus he finds dealing with any bureaucracy extremely intimidating. In his local ethnic paper, written in his own language (and perhaps even own dialect if he’s lucky), he finds an advertisement for cheap money transfers back to country B through a small local business. The worker goes and meets hawaladar A, the owner of that business, to whom he gives $150 to send to his family. Hawaladar A is an importer of handicrafts from country B and thus he has many business contacts there, one of which will be referred to as hawaladar B. After receiving the migrant worker’s money, charging him a commission between .25% and 1.25% and giving him an ID number that can be used to pick up money in country B, hawaladar A rings up hawaladar B and informs him of the transaction. Within 24 hours the migrant worker’s family can go to hawaladar B in country B and pick up the amount transferred by the worker.
What is important to note is that this entire transaction has taken place without any physical movement of funds. The only debt that exists is the one between the two hawaladars. Sometimes this debt will be settled via a formal bank transfer or perhaps hawaladar B owes hawaladar A money and this is a settling of that debt. More likely, however, both hawaladars are in an import-export relationship and by over/under invoicing for goods shipped between countries they can settle their debts through manipulation of their balance sheets.

We could substitute a thousand other examples from neighbours to personal business acquaintances or family friends and relatives. This example highlights many of the attractive features of IMTS; It’s cheaper, faster, and often more accessible than formal systems which the World Bank claims cost an average 10% worldwide (as compared to .25%-1.25% of the informal sector and the over 20% found through ACORN International’s own surveys), and it often takes several days for transactions to go through.[2] However, it is also very important to note that no paper trail is left and the balance-book manipulation makes the transaction untraceable and therefore illegal in many countries, including India where it is widely used.

So How Important is the Informal Sector Anyway?

In Past Time for Remittance Justice, ACORN International estimated that if quantified, volumes of money going through hawala (and other equivalent informal money transfer systems around the world) may add 20-40% to the value of worldwide remittances. Having looked further into informal money transfer systems, we now have reason to believe that this amount may be much larger. Official figures, such as those referenced by national governments and the World Bank among others, do not take informal money transfers into account when quantifying remittances. Even academic attempts to measure the size of hawala (and other equivalent mechanisms) admit that the best that can be done is to simulate rather than estimate. From our example above it becomes very clear why such difficulties exist. The most reliable estimation that our research has come across is a 2002 estimate of the United Nations Department of Economic and Social Affairs (DESA) that $100-$300 billion flow through Informal Money Transfer Systems each year.[3] In 2010, the World Bank estimated that global remittance flows would reach $440 billion by the end of the year, $325 billion of that going to developing countries.[4] If both of these estimates are valid then the importance of the informal sector is much greater than we had anticipated. Rather than 20-40% of formal remittance figures, it could be anywhere from 25-75%.

$440 billion in remittances and transfers is a huge amount, but the importance of this figure is dwarfed by something that the banking authorities and others are missing. When we take estimates of informal remittance flows into account, the real values of remittances worldwide can be conservatively calculated to be at least $550 billion and more aggressively to be $770 billion. When we apply the .25%-1.25% range of fees charged by the informal sector, the $44 billion in fees paid on remittances, using the 10% figure used by the World Bank as a global average, increases as well. At the lower fee level of .25% the range in additional money is anywhere from $275 million to $825 million. At the higher level of 1.25% this range increases to be $1.4 billion to $4.4 billion. We can now see that by quantifying informal remittances and their additional costs, the $44 billion could be increased by up to 10% and we start knocking at the door of $50 billion in fees collected for various forms of transfers.

A senior economist in the World Bank, when fielding our queries on informal remittances, admitted that he was not able to come up with a ballpark figure though he suspected that numbers had decreased since 2003, largely due to impacts of the recession. Regardless, he maintained that informal flows were still significant and categorically confirmed that hawala and other informal systems are not included in any of the World Bank estimates on remittances which are the gold standard in this area of inquiry.  While it may be impossible to accurately measure the use of informal money transfer systems, one thing is extremely clear: the informal sector is an extremely popular way to send money around the globe.

Security Concerns

The same characteristics that make hawala and other IMTS attractive to migrants looking for a quick, easy and cheap alternative to formal Money Transfer Organizations have also been flagged as conducive to money laundering and terrorism financing. In the wake of September 11th, IMTS, especially hawala due to its Middle Eastern origin, were considered security threats. Most of the literature on hawala is from this period where international bodies and national governments sought to work together to combat such threats through the attempted regulation of hawala.[5] However, as the United Nations DESA points out, while hawala is an attractive medium for illegal transactions, it is also extremely important to many migrants around the globe who are using it for perfectly legal means.[6] For this reason it is important that any attempts to combat terrorism and crime through the hawala system take the importance of legal activities carried out through the hawala system into account.  Paradoxically, the global and developed world concerns for increased security in these times has not tempted them to trifle with the more than $40 billion in transfer fees in the formal section in order to compete with the hawala system or create a more efficient system for immigrants, migrants and others.

The anonymity and absence of a paper trail that are hallmarks of the hawala system are enough to cause great concern to national security. It is also enough for ACORN International to remain wary, despite all the benefits the hawala system presents to migrant workers. Just as we can never quantify the volumes of remittances that flow through these informal channels, we will never be able to know when, and how often, the system breaks down to the misfortune of migrant workers and their families. Even though anecdotal evidence leads us to believe that hawaladars are typically honest, since their customers would “vote with their feet” presumably, with any system as opaque and off-the-record as hawala, one must always remain vigilant.

It is here that ACORN International and national security workers find common ground: the desire to bring hawala and similar systems into the open.  Given the World Bank’s only argument for reducing the fees to G8 targeted 5% by 2014 is “competition,” moving the informal system towards the formal would finally introduce real competition rather than the nodding and yawning between banks and MTOs that exists now.  In a joint World Bank-IMF paper, the recommendation was made that hawala operations existing parallel to the formal remittance channels be brought into light ‘without altering their specific nature’.[7] This paper cannot ignore one of the most important points about hawala: it is an extremely attractive and efficient option for remitting money!

Glimmers of Hope

One country that has had great success in formalizing remittances is the Philippines. Their official remittance figures show $3 billion having been remitted in January and February of this year (2011) alone. This is a 6.2% increase from the same period last year.[8] Following from the discussion above, official statistics do not necessarily reflect the total flow of remittances into a country due to the non-quantifiable nature of informal remittances. The increases seen in the Philippines have been greatly influenced by their pro-remittance policies. ACORN International has found that the Philippine government now trains migrant workers in the smartest ways to send remittances home before they leave the country for work. The Banker’s Association of the Philippines has even encouraged banks to innovate and replicate the advantages of the informal sector. One company, SwiftCash (UK) in cooperation with a Philippine bank has offered another incentive not to use informal channels by using the receipt from the transaction to enter the customer in a raffle where a multitude of prizes can  be won ranging from a sack of rice to medical services (For an example visit:

Bringing the informal money transfer systems into the light is advantageous for many:

  • Migrants will enjoy greater transparency and protection through the documentation of their transactions;
  • National Security Workers will be able to target illicit operations occurring in the informal sector without the worry of severely damaging the financial life-lines migrant workers send to their families;
  • Governments of the remittance receiving country will benefit from the knowledge of the true capital flows in their economies and thus will better be able to construct economic policy.

Learning Lessons

While hawala operations often occur illegally and without documentation, we can learn from them how to best serve migrant workers and immigrant families. Perhaps the biggest lesson to be learned from hawaladars is that overhead costs to send remittances need not be large at all as ACORN International has consistently argued.  The reason why a hawaladar can charge only .25%-1.25% to send a remittance is because it does not cost much to carry out the transaction! Many banks have high overhead costs (for example, heavy-duty safes, large, expensive buildings and highly trained and paid staff), but all a hawaladar needs is some form of communication (often a telephone). He or she doesn’t even need an official location for hawala as many hawaladars are already business owners with small shops.  If your average small business owner can operate a small scale remittance business and charge less than 2% in fees then it further drives the point home that it is completely indefensible for organizations that enjoy economies of scope and scale to charge fees that are much higher.

Logically in a computerized and electronic world, the same hawala principle of cash received in one place and cash turned over in another would work easily within different branches of the same bank, different offices of Western Union, MoneyGram, and other MTOs, and even between banks in the developed world and their correspondent banks in the developing world.  In fact for all we know similar adjustments may be already happening between a Citibank and a Banamex for example and simply adjusted with real dollars or pesos on a quarterly or annual basis and done as entries on accounting ledgers at other times.

Recently for example, ACORN International’s own US-based bank ran a test run on its international transfer system and inadvertently used our “live” account number and moved unimaginable (to us!) sums between our account supposedly and our payees.  The bank was apologetic of course, since it was their error, and furthermore they needed our help to potentially recover their money.  In difficult cases like those in India and Kenya, they sent electron “messages,” as our banker described it to the recipient bank where our payee had an account saying that the XX amount was mistakenly sent, and asking for it to be routinely transferred back.  We all fretted for a day or two, and our bank was less than thrilled with how quickly their correspondent bank was able to assist them when it seemed to be taking too long in Nairobi, but it worked out well for our bank, no harm, no foul.  We cannot have a hawala system for banks managed digitally and electronically, and a paper, cash, hope and a prayer system for immigrant families and migrant workers, but that is exactly what “look the other way” national banking regulators and “everything my way” financial institutions are maintaining today.

Other Alternatives to Money Transfer Organizations

Besides hawala, ACORN International has identified several other methods that can be used to remit money abroad and avoid the predatory money transfer organizations.

If the migrant worker has a bank account, he or she may be able to send an extra debit card to his/her family that can be used at any ATM to access the bank account from anywhere in the world. However, this is not a satisfactory scalable solution because many migrants do not have bank accounts. Even if they do, the ATM withdrawal fee (which can be several US dollars) and exchange rate used by the banks will greatly diminish the value of the funds that will actually be available to the family. Not all banks will agree to provide an extra ATM or debit card and thus this solution only works for a small percentage of migrants.

If a bank does not allow one to obtain an extra card then services such as Ikobo ( that enable you to send a Visa pre-paid card to your family can be used instead of a debit or ATM card from your bank. However, there is a $500 daily limit on withdrawals and each time you withdraw there is a $2.25 ATM fee charged. You also have to physically send the card to your family which represents yet another cost.

Services such as PayPal have also been cited as good ways to send money over the internet across borders. However, the problems with PayPal include the cumbersome nature of its operation (ACORN International staff still don’t completely understand the ins and outs of it, and we use it!) and the necessity of having either a bank account or a credit card. To compound the problems of using PayPal, a recent study has shown that migrant workers tend not to have the level of technological literacy necessary to utilise such tools.[9] Add all of these problems to the well publicized capriciousness involved in PayPal opening and closing accounts, and even though the company estimates it may move $3 billion by the end of 2012, this service is not ready for prime time for migrants and immigrants yet.

And the Campaign Pushes On…

Overall, while there are formal alternatives to Money Transfer Organizations, none of them really fit the needs of migrant workers.

It is obvious to us that the potential for low-cost, accessible solutions are available, but up to now the formal sector obviously has not felt the need to develop them (and with charges on global remittances exceeding $44 billion USD it is easy to see why they face no pressure to feel otherwise!)

We have seen both the formal and informal alternatives to using banks and Money Transfer Organizations to remit money and our argument remains strong: The only true solution today is regulation and cost cutting. We have seen that both are possible and there is no defensible reason to continue brushing the plight of the migrant worker aside.

There can no longer be any doubts about the importance of remittances worldwide and the severe injustices that migrant workers face every time they attempt to send their hard-earned money home to their families. With this report we have repeated the irrefutable case that costs do not have to be as high as they are. All the pieces of the puzzle are exist to create a better alternative for immigrant families and migrant workers and their families.

ACORN International is committed and determined to put these pieces together.  It is past time for the world financial community and governmental banking systems to join us!

[1] This is the third report ACORN International has issued as part of its Remittance Justice Campaign.  This report  and the earlier two reports are all available at  For more information contact

[2] World Bank Global Remittances Working Group (

[3] United Nations Department of Economic and Social Affairs (

[4] World Bank (,,contentMDK:22757744~pagePK:64257043~piPK:437376~theSitePK:4607,00.html)

[5] Interpol (;
Financial Action Task Force ( and (;
US Department of Justice (;
West African Institute for Financial and Economic Management (WAIFEM) (

[6] World Bank (,,contentMDK:22757744~pagePK:64257043~piPK:437376~theSitePK:4607,00.html)

[7] Joint World Bank – IMF Commissioned Paper (

[8]The Philippine Star (

[9] Orozco, Burgess and Ascoli, 2010