APEC ARS Working Group Report

Informal Funds Transfer Systems in the APEC Region: Initial Findings and a Framework for Further Analysis

Prepared for APEC Finance Ministers and Deputies Meeting September 1-5, 2003

Phuket, Thailand

IBRD 32660

80° 100° 120° 140° 160° 180° 160° 140° 12 0° 100° 80° EAST ASIA AND THE PACIFIC FORMAL WORKER RUSSIAN FEDERATION REMITTANCE FLOWS Hudson 60° 60° Sea of Bering Bay IN THE APEC REGION Okhotsk Sea CANADA APEC MEMBERS

MEXICO TOTAL WORKER REMITTANCES AND 8,896,000,000 COMPENSATION OF EMPLOYEES RECEIVED FROM IMF BALANCE OF PAYMENTS DATA* REP. OF KOREA REMITTANCE FLOWS (RECIPIENTS): US $584 mn PHILIPPINES UNITED MEXICO ° ° 40 STATES 40 MALAYSIA CHINA CHINA REP. OF JAPAN US $1,209 mn KOREA UNITED STATES VIETNAM US $2,380 mn INDONESIA ATLANTIC THAILAND OCEAN REPUBLIC OF KOREA CHINA

HONG MEXICO CANADA 20° KONG MEXICO 20° UNITED STATES THAILAND US $9,920 mn HONG KONG US $1,252 mn THAILAND VIETNAM PHILIPPINES Caribbean Sea PHILIPPINES Gulf of NEW ZEALAND US $6,357 mn Mexico AUSTRALIA BRUNEI PERU MALAYSIA MALAYSIA US $1,156 mn CHILE 0° 0° SINGAPORE PACIFIC OCEAN INTERNATIONAL BOUNDARIES INDONESIA PAPUA NEW GUINEA INDONESIA PERU Coral US $1,046 mn PERU *The numbers on this map refer to the Sea US $716 mn workers' remittances credit and compensation ofof employeesPayments Statistics figures from Yearbook, all countries. 2002 The source of the numerical data is the IMF Balance ° INDIAN ° 20 20 (See Annex II). AUSTRALIA CHILE OCEAN For the amount of outgoing remittance flows please AUSTRALIA refer to the APEC Economy Profiles in Annex I. US $466 mn

Tasman Sea NEW 40° ZEALAND 40° NEW ZEALAND US $216 mn

0 1000 2000 Kilometers

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information 0 1000 2000 Miles shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any (Scale at the equator) endorsement or acceptance of such boundaries.

80° 100° 120° 140° 160° 180° 160° 140° 12 0° 100° 80°

AUGUST 2003

Informal Funds Transfer Systems in the APEC Region: Initial Findings and a Framework for Further Analysis

Note: The following document represents the views and conclusions of the World Bank research team that was primarily responsible for producing this report. Even though the members of the Asia Pacific Economic Cooperation (APEC) aided in the production of the document, the report has not yet been endorsed by the APEC Finance Ministers and Deputies Meeting.

FINAL DRAFT

Prepared for the meeting of the Asia-Pacific Economic Cooperation (APEC) Finance Ministers and Deputies, September 1-5, 2003. This draft report benefited from input provided by the ADB, including the use of an excerpt from a study of remittance flows into the Philippines, and comments from the IMF.

ACKNOWLEDGMENTS

The APEC Working Group provided consistent support throughout the drafting process, and the following individuals contributed especially valuable insights: Mahdi Mohd Ariffin, Salvador Bonilla, Audrey Chia Yen Ching, Sheridan Evans, Raul Gomez- Roman, Pedro Hernandez-Coss, Ahmad Hidayat, Shin In-Sik, Syurkani Ishak-Kasim, Alberto Islas, Ou Yun Jun, Ren Lie, Juan Bosco Marti, Hajime Misono, Lee Boon Ngiap, Lois Quinn, Kristina Rai, Geetha Rao, Gilles René, Woon Hooi Shyen, Sunittra Sittisettapong, Weerachat Sribunma, Ketsuda Supradi, John Thomas, Alfie Ulloa, Somrasri Yupho, and Andres Zetina. The team appreciates the comments and support provided by World Bank, IMF and ADB colleagues: Richard Adams, Khun Aei, Nagavalli Annamalai, Amar Bhattacharya, Maud Julie Bokkering, Pierre Laurent Chatain, Joaquin Cottani, Alain Damais, Nicolas De la Riva, Jose De Luna, Vie Tuan Dinh, Ejaz Ghani, Theodore Greenberg, Isabel Guerrero, Joseph Halligan, Eric Haythorne, George H. Hoezoo, Bert Hofman, Martin Josefsson, Jacob Kolster, Mark LaPrairie, Jeffrey Lecksell, Samuel Maimbo, Kazi Matin, Lloyd McKay, Kevin Mellyn, Bess Michael, Takashi Miyahara, Herbert Morais, Motoo Noguchi, Larry Promisel, Martin Rama, Dilip Ratha, James Seward, Vicky Tan, Thang- Long Ton, James Villafuerte, and Margery Waxman. The core team of the World Bank was integrated by Oriana Bolvaran, Nicolas Carter, Inken Hoepner, Maria Orellano, Jonathan Parnes, Juri Sekiguchi, Sanjay Sinha, Paolo Ugolini, and Raul Hernandez-Coss, as team leader. We are grateful to the following organizations for their cooperation in researching aspects of the report: Banamex, Bank of America, Banorte, Bansefi, Celent Communications, US Bank, US Federal Reserve Bank, Wells Fargo, and Western Union.

CONTENTS

Page

Executive Summary i Map: Formal Worker Remittance Flows in the APEC Region iv Abbreviations and Acronyms vi Introduction 1 I. Overview: Perspectives on Informal Funds Transfer Systems 3 A. Formal Funds Transfer (FFT) Systems 3 B. APEC’s Goals, IFT Systems, and Abuse of Financial Systems 10 II. Initiatives: Understanding the Funds Transfer Market Through Micro-Level Policies and Market Products 14 A. Bilateral Initiatives to Strengthen Remittance Services in the Formal Sector 14 B. Private Sector Initiatives to Improve Remittance Services 16 C. The Need for a Comprehensive Framework 22 III. Framework and Preliminary Application 23 A. Developing a Framework 23 B. Diagramming the Framework 32 C. Applying the Framework 33 IV. Conclusions and Policy Recommendations 37 A. Assessing the Framework: Benefits and Limitations 37 B. Main Findings from the Framework 37 C. Recommendations and Policy Guidance 40 Bibliography 42 Annex I: APEC Economy Profiles 47 Annex II: Six APEC Economy Reports 73 Annex III: Excerpt of The Philippines Case Study 97

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Informal Funds Transfer (IFT) Systems in the APEC Region: Initial Findings and a Framework for Further Analysis

Executive Summary

Objectives and Scope of the Asia-Pacific Economic Cooperation (APEC) Alternative Remittance Systems (ARS) Working Group Report

This report has three objectives: (1) to equip individual APEC economies with a basic uniform framework with which to perform in-depth analysis of money flows through ARS; (2) to provide a first indication of the direction and volume of such flows to and from APEC economies, which can serve as a basis for future action; (3) and to highlight the benefits of formal money remittance channels and provide policy recommendations on how to encourage greater flows of funds through such channels.

The report is an initial attempt to address ARS, called informal funds transfer (IFT) systems throughout the report, and should not be seen as a comprehensive finished tool. It is a modest contribution to the international discussion of IFT systems and the efforts of the APEC ARS Working Group. Private-sector entities and some governments have made strides in understanding the IFT phenomenon and addressing the market in funds transfers through new products and micro-level policies. However, governments have been prevented from formulating more effective macro-level policies because of the lack of comprehensive reliable information about IFT systems operating on a regional scale.

Development of a Framework for IFT Systems Analysis

The comprehensive framework presented in this report is an initial attempt to gauge the wider scope of IFT activity from a quantitative and qualitative perspective, providing governments with a means to gather the information they will need to address the IFT phenomenon in an organized uniform fashion. From a quantitative perspective, Part 1 (Quantitative Economic Analysis) of the framework demonstrates the need for a process to estimate the magnitude of IFT flows between economies based on indirect estimation from various data sources. The framework assumes that migrant workers’ remittances are a major component of IFT flows. From a qualitative perspective, Part 2 (Qualitative Incentives Analysis) of the framework analyzes IFT channels by identifying the perceived incentives—personal, economic, and customer- service related—that influence a money remitter when deciding how to send funds. This portion of the analysis suggests that if incentives, tailored to the cultural and economic nuances of a particular jurisdiction, can be offered by the formal financial sector and aided by supportive policies from the government, migrants will move from informal to formal systems. It should be acknowledged that legitimate IFT flows are composed of more than just workers’ remittances. Although some of these IFT components are addressed in the

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framework, they are not the focus of this report. The framework addresses these topics indirectly by examining perceived incentives to use IFT systems.

Applying the Framework

This report applies the framework to all APEC members. Preliminary profiles for each APEC member demonstrate how each element of the framework can be fleshed out and which elements require further investigation. The framework is hindered, however, by a lack of reliable data for many APEC economies. The general observations in the profiles will need to be enhanced by detailed economy-focused case studies based on the framework proposed in this report.

Key Findings

When applied to economies with a reasonable amount of available data, the framework produces a descriptive analysis of the funds transfer systems at work in a particular economy, both quantitatively and qualitatively. The framework was applied to six selected economies because of available data reflecting significant migrant worker movement (sending, receiving, or both) and remittances. The economies are Indonesia, Malaysia, Mexico, the Philippines, Thailand, and Vietnam. 1) Filtering the “Unidentified” Gap: By indirect estimation, Part 1 of the framework reveals the existence of unidentified flows. This gap in recording needs to be further filtered to separate informal flows from formal flows that somehow are escaping recording. This filtering process can be aided by: o Improving the transparency of balance of payment statistics for each economy and detailing the components that make up the reported figures, in particular estimates of workers’ remittances flows; o Conducting household surveys (in sending and receiving economies) to improve our understanding of remittance issues—among them the amount of the average remittance and the channels used by remitters. 2) Accurately Mapping First/Last Mile Issues and Perceived Incentives: Part 2 of the framework offers an overview of the first and last steps in the remittance process, as well as the perceived incentives that affect a remitter’s decision to use formal or informal channels/intermediaries. These issues need to be detailed for each particular economy to produce an accurate profile of the incentives at work. This can be achieved by: o Conducting economy-focused studies, based on the framework in this report, that provide details about the channels and incentives operating in a particular nation or bilateral relationship; o Including questions that probe the perceived incentives that influence particular households, when conducting household surveys. 3) Banking for the Unbanked: Banking for the “unbanked”—the many who lack ready access to banking services—is the key factor in any effort to bring about a shift from informal to formal financial systems. In many places, IFT

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systems flourish because formal financial institutions are weak, inaccessible, or nonexistent. Spreading financial networks into rural areas and reaching out to the financially disenfranchised will increase the use of formal systems. Governments should engage the private sector to build up financial infrastructure, while educating and acclimating migrant workers and their families to the benefits and processes of formal financial institutions.

Policy Recommendations and Conclusions

IFT systems in the APEC region should be further researched. Economy-specific studies should be guided by three core objectives: 1) To devise ways to better record formal flows of migrant workers’ remittances and to track IFT activity, 2) To understand the local and regional factors that most affect perceived incentives to remit through formal or informal systems, and 3) To continue efforts to provide banking services to those who lack them. To implement this set of principles, the following actions are recommended: · Improve the accuracy of recording mechanisms for transactions conducted by FFT systems. · Promote cooperation among government regulatory agencies, such as financial intelligence units (FIUs), to track IFT systems (monitor their activity, main flows, and economic impacts) and prevent their abuse for criminal activities such as money laundering and terrorist financing, while ensuring that FFT systems comply with international best practices. · Review government policies and regulations with a view toward generating private-sector involvement and intra-government cooperation to harmonize efforts to create efficient and competitive funds transfer systems. · Promote clearing house systems between banks. · Initiate bilateral governmental cooperation on IFT systems. · Develop new market products and mechanisms that make it possible for migrant workers and other users of IFT systems to access and use formal financial institutions, particularly banks. · Develop the financial system, particularly in rural areas, so that it offers a wide range of services, including international funds transfers. · Consult with other economies and international financial institutions about the role each might play in expanding financial sector development.

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MAP

FORMAL WORKER REMITTANCE FLOWS IN THE APEC REGION

Flows of remittances from migrant workers in the APEC region are complex. The arrows on the map indicate the direction of known formal remittance flows, with the arrows originating in the remittance sending country and ending in the remittance receiving country. The amounts received by each country in workers’ remittances and compensation of employees are based on data from the IMF Balance of Payments Statistics Yearbook, 2002.

Although not a comprehensive diagram of remittance flows, the map gives an idea of their complexity. More information about the relationships between APEC economies is provided in Annex I.

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Abbreviations and Acronyms

ADB – Asian Development Bank ADI – Authorized deposit taking institution AML – Anti-money laundering APEC – Asia-Pacific Economic Cooperation APG – Asia/Pacific Groups on Money Laundering ARS – Alternative remittance systems ASEM – Asia Europe Meeting ATM – Automated teller machine BOP – Balance of Payments CFT – Combating the Financing of Terrorism CIC – Consular Identification Card DFI – Development financing institution FATF – Financial Action Task Force on Money Laundering FFT – Formal funds transfer FIU – Financial Intelligence Unit GDF – Global Development Finance IADB – Inter-American Development Bank ICBA – Independent Community Bankers of America IFT – Informal funds transfer ILO – International Labour Organization IMF – International Monetary Fund IMF BOP – IMF Balance of Payments IOM – International Organization for Migration LSMS – Living Standard Measurement Survey MIF – Multilateral Investment Fund MTO – Money Transfer Operator OECD – Organisation for Economic Co-operation and Development OFW – Overseas Filipino worker PNB – Philippines National Bank ROSCA – Rotating savings and credit association TT – Telegraph transfer

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INFORMAL FUNDS TRANSFER (IFT) SYSTEMS IN THE APEC REGION: INITIAL FINDINGS AND A FRAMEWORK FOR FURTHER ANALYSIS

INTRODUCTION

Context

In September 2002, the APEC Finance Ministers established a Working Group on Alternative Remittance Systems (ARS) to examine the economic, structural, and regulatory factors that encourage the use of ARS in the APEC economies, particularly for money laundering and terrorist financing.1 Research on the subject thus far is limited to a few economies and cannot be used to draw general principles. APEC’s goals in regards to ARS are to learn more about the choice of remittance service providers (formal vs. informal), to encourage flows of remittances through formal channels, and to further APEC’s strategy of encouraging good corporate and economic governance. This report aims to provide APEC with a framework for evaluating ARS processes, both quantitative and qualitative, and their impact in the APEC region. By revealing the perceived incentives that make ARS attractive and identifying policies to encourage remittance through formal financial institutions, the report also provides the basis for more detailed studies of ARS.

Complexity of the Topic

Ample anecdotal evidence illuminates the main features of ARS, but researchers need data to extend their discussion of the topic. Anecdotal evidence is easily manipulated to suggest one or another policy, and an honest assessment of international ARS will require more than simply comparing stories. A quantitative evaluation of estimates of ARS flows, coupled with a qualitative description of ARS activity derived from reliable reports, provides the rounded assessment of ARS activity needed to guide future research and policy efforts. Because ARS activity is as unregulated as it is extensive, researchers so far have relied on unofficial estimates and anecdotal evidence to provide a rough idea of the magnitude of the activity. Aware of the many uncertainties associated with the task of mapping the unknown, the authors of this report have noted many of the obstacles involved in the undertaking. The framework proposed in this report, as well as the report’s findings and recommendations, are intended as a first step in what could—and should—become a more extensive and comprehensive examination of the dimensions and impact of the international ARS phenomenon. 2 Some researchers have already completed or begun detailed regional

1 APEC 2002. 2 The September 11 attacks, Security Council Resolution 1373, and the Special Recommendations on Terrorist Financing of the international Financial Action Task Force against Money Laundering (FATF) provide the impetus for renewed international efforts to examine ARS from a regulatory and security perspective. FATF, the Asia/Pacific Groups on Money Laundering (APG), INTERPOL, and the Commonwealth Secretariat have looked into ARS on a global scale for several years. Their contributions must not be understated. Quantitative economic studies on funds transfers have tended to address international ARS as a secondary matter, focusing either on migrant workers’ international remittances through formal institutions or on small-scale regional ARS - 1 - assessments of funds transfers, focusing on a particular population or economy. 3 Such studies will fill in the details of the outline offered in this report. Presently, the most reliable sources of data and information on funds transfers are studies of workers’ remittances made through formal financial institutions. These much-quoted studies indicate that such remittances make up a substantial portion of all international money transfers. They are a logical starting point for a quantitative estimation of ARS. It should be noted, however, that ARS activity is not limited to workers’ remittances. Other key aspects of ARS include money laundering, international transfers of gold, and small-business transactions.

Objectives and Scope of This Report

There are three main objectives for this report: 1) To equip individual APEC economies with a basic uniform framework for estimating remittances so they can begin to investigate ARS flows in detail; 2) To provide a first indication of the direction and volume of ARS flows from and to APEC economies, which can serve as a basis for future action; and 3) To highlight the benefits of formal money remittance channels and provide policy recommendations on how to encourage greater flows of funds through such channels. The remainder of this paper is divided into four sections. Section I provides a brief overview and general introduction to ARS from a theoretical perspective. Section II reviews initial practical attempts to address ARS through bilateral initiatives between economies and efforts within the formal financial sector to foster competition with ARS. Section III develops and describes an operational framework for analyzing the magnitude and impact of ARS, and applies this framework to available data on the volumes and directions of remittance flows between nations. Finally, Section IV combines the findings of the previous sections and provides a preliminary assessment of the framework, and offers tentative policy recommendations to effect a shift from ARS to the formal financial sector, and suggestions for future action.

activity in one economy or population. In a sense, a discussion of both the quantitative and qualitative aspects of international ARS is unique. 3 See, for example: Maimbo 2003; El-Qorochi, Maimbo, and Wilson 2003; Pohit and Taneja 2000; Mellyn 2003. - 2 -

I. OVERVIEW : PERSPECTIVES ON INFORMAL FUNDS TRANSFER SYSTEMS

A. DEFINITION AND CHARACTERISTICS OF IFT SYSTEMS AND FORMAL FUNDS TRANSFER (FFT) SYSTEMS

Definition

Alternative remittance systems (ARS) is the term used by the Financial Action Task Force on Money Laundering (FATF) 4 to describe financial services that transfer value or funds from one geographic location to another, usually outside the regulated financial sector.5 Such transfers go by many names—some of the most popular are region-specific names such as hawala, hundi and padala. A recent study done jointly by the World Bank and the International Monetary Fund uses the term informal funds transfer (IFT) systems 6 in analyzing the hawala system of the Middle East and South Asia. The study characterizes IFT systems as financial systems that exist “in the absence of, or parallel to, conventional banking channels,” or formal funds transfer (FFT) systems7. For the purpose of this report, the term “informal funds transfer systems” is most accurate because, in some places, IFT systems are the most widely used method of transferring funds. It would be misleading to characterize them as “alternative” systems.

BOX 1: THE COMPLEXITY OF DEFINITIONS

Funds transfer systems may be characterized by different criteria depending on the perspective of the analyst. As the international standard setter on anti-money laundering and combating the financing of terrorism (AML/CFT), FATF generally describes “formal” funds transfer systems as those included in the regulated financial system, leaving all other methods in the “informal” category.8 a. “Formal” vs. “informal”: Formal systems are characterized by participation in the regulated financial sector (under FATF’s description). Such participation means that the institution involved in money transfer is supervised by government agencies and laws that determine their creation, characteristics, operations, and closure. Formal systems typically include banks and credit unions, money transfer operators (MTOs) and other wire transfer services, and postal services. Informal systems encompass everything else—ethnic stores, travel agencies, moneychangers, hawala-type systems, courier services, hand-delivery, and so on.

4 FATF-style Regional Bodies (FSRBs) are important in the promotion and implementation of AML/CFT standards in their respective regions. They encourage implementation and enforcement of FATF’s recommendations, administer mutual evaluations of their memb ers, and provide information to their members about money laundering developments in their typology reports. The FSRBs for the APEC region are Asia/Pacific Group on Money Laundering (APG), Caribbean Financial Action Task Force (CFATF), and Financial Action Task Force on Money Laundering in South America (GAFISUD). For more information, see Schott 2003. 5 FATF 2003a. 6 El-Qorochi, Maimbo, and Wilson 2003. 7 Ibid. Throughout this report, a funds transfer may be referred to as a “money transfer” or a “remittance.” In all cases, the transfers are international. The person sending the money may be called a “money remitter” or “sender,” while the person on the receiving end of the transfer is simply the “recipient.” 8 FATF 2003a.

- 3 - b. “Legal” vs. “illegal”: A funds transfer system’s legal status depends on the laws in effect in the jurisdiction(s) in which it operates. Legal systems typically include all FFT systems in the regulated financial sector. Other funds transfer systems may or may not be legal in a particular jurisdiction. Some jurisdictions, by electing not to regulate or sanction various forms of funds transfer, effectively recognize or tolerate those forms. Where people have devised and used methods to transfer money that are simply ignored by the law, the funds transfer systems operate openly, without a prescriptive or prohibitive legal status. c. Licensing and registration9: According to FATF’s Special Recommendation VI, all funds transfer systems (formal and informal) should be licensed or registered with governing authorities. Of course, mere licensing or registration does not mean that a system is supervised in the same way as institutions in the regulated financial sector. According to the June 2003 International Best Practices Paper, licensing implies that the regulatory body has inspected and sanctioned the particular operator to conduct such a business, while registration simply means that the operator has been entered into the regulator’s list of operators.

Further complicating attempts to categorize funds transfer systems is the fact that FFT systems may use the services of IFT systems, and vice-versa. This often means that legally operating services conduct illegal transactions, and vice-versa, somewhere along the path of a money transfer.

Although their historical origin and development depend largely on regional and cultural nuances, most IFT systems share some operational attributes. Ultimately, IFT systems are characterized by a “netting” or “book transfer” method to convey or transfer value without directly transferring currency. 10 A typical, three-stage IFT transaction involves a sender, who initiates the transaction, an intermediary or channel that facilitates the transaction, and a recipient, who ultimately receives the funds.11 To continue to operate successfully, IFT intermediaries must maintain the trust of customers and other intermediaries. For this reason, and because of the informal nature of many IFT systems, bonds of kinship or familial association often exist among IFT intermediaries. IFT systems show many variations. One of the most significant is the method of settlement between intermediaries. An intermediary may use legal transactions, transactions that violate or circumvent laws (sometimes laws related to capital movements or exchange rates), or a blend of the two in the course of operations.12 Some intermediaries rely on networks of personal contacts, while others settle balances through the accounts of a sister company with branches and outlets overseas.13 Variations also appear in the flow of money. Economies do not remit funds in equal proportion. Certain economies are known as “sending” economies; others as “recipient” economies.14 The uses of IFT systems may be legitimate or illegitimate—an important distinction because a transfer may have implications for financial development and security. Legitimate IFT flows include the remittances of migrant workers, small personal remittances (where the transaction is legal), small-business transactions (where the transaction is legal), or sending aid to war-torn jurisdictions with weak financial institutions. Illegitimate IFT flows include money laundering, terrorist financing, evading controls on capital and foreign exchange, and

9 FATF 2001. 10 FATF 2000. 11 El-Qorochi, Maimbo, and Wilson 2003. 12 Ibid. 13 FATF 2000. 14 In the same way that “senders” and “recipients” are generalized to explain IFT systems transactions, economies can be generally described as “sending” economies and “recipient” economies based on the trend of flows of formal remittances. See Orozco 2003b.

- 4 - smuggling of goods and gold.15 Research indicates that remittance flows likely comprise the largest component of IFT flows.16

Characteristics of Formal Funds Transfer Systems

FFT systems include members of the regulated financial sector such as banks, credit unions, money transfer operators (MTOs), credit and debit card companies, and postal administrations. Laws or regulations govern all these systems in one way or another. In accordance with international standards set by FATF and by the Basel Committee on Banking Supervision17, economies must ensure that their financial institutions have appropriate customer identification, record keeping, ongoing monitoring of accounts and transactions, and due diligence procedures18 in place. Customer identification requirements, also known as “know-your-customer” (KYC)19 policies, help financial institutions detect, deter, and prevent money laundering and terrorist financing; they also promote good business, governance and risk management among financial institutions, help maintain the integrity of the financial system, reduce incidence of fraud, and protect the reputation of the financial organization against the negative effect of association with criminals. The vast global marketplace for FFT systems is difficult to reduce to general trends or statistics. Different regions have different practices that depend on custom, level of government regulation, costs of money transfer through different institutions, competition for money transfer services, and other factors. 1. Banks and Credit Unions: Sending money through banking institutions, where such services are available, is often the least expensive method of formal remittance.20 A study by the Inter-American Development Bank on international worker remittances (IADB study)21 showed that the mean cost of sending $200 through a bank was less than other FFT systems. This average, however, may not be true of banks everywhere. Banks that have the lowest remittance cost typically engage in competitive and innovative practices to win over money- remitting clients. Banks also offer various methods of money transfer that can become more expensive depending on the speed of the transfer (overnight, one day, one week). The cost of remittance through banks also depends on the level of government regulation of the FFT system in a particular region, as well as the level of competition among market participants.

15 El-Qorochi, Maimbo, and Wilson 2003. 16 This research is further discussed in the section of this report entitled “Global Indicators of the Magnitude and Nature of IFT Systems.” 17 See Basel Committee on Banking Supervision 1997, principle 15. The Core Principles for Effective Banking Supervision and Customer Due Diligence for Banks are accessible at http://www.bis.org/publ/bcbs30.pdf. 18 The Basel Committee on Banking Supervision (2001) has stated, “Supervisors around the world are increasingly recognizing the importance of ensuring that their banks have adequate controls and procedures in place so that they know the customers with whom they are dealing. Adequate due diligence on new and existing customers is a key part of these controls.” Accessible at http://www.bis.org/publ/bcbs85.pdf. 19 Principle 15 of the Core Principles for Effective Banking Supervision and Customer Due Diligence for Banks (Basel Committee on Banking Supervision 1997) states, “Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict ‘know-your-customer’ rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.” 20 Only a handful of banks provide modern, competitively priced, and timely remittance services. In the United States, such services are available only at specific banks in a few cities and are often available only to specific designations (such as Mexico). Most banks continue to offer only traditional wire services, which are expensive and slow. 21 Orozco 2003. - 5 -

Banks may not deliver services in rural or underdeveloped areas, where bank penetration is often limited. 2. Money Transfer Operators (MTOs): MTOs include large companies such as Western Union and MoneyGram, as well as smaller companies. Unlike banks, MTOs specialize in money transfers. They are popular because of the speed of their service (transferred funds are often available to the recipient within hours) and convenience as the sender need not have an account with the MTO in order to use its services. Although MTOs are one of the most expensive forms of money transmittance, according to the IADB study, they have dominated the market in many regions by focusing on customer service and convenience at both ends of the transfer process.22 They maintain easily accessible business locations in sending and recipient economies. Moreover, they offer a transparent pricing structure that certain banks may not provide, making their services more appealing to some customers, particularly those with lower incomes. 3. Debit and Credit Card Companies: Credit and debit card companies are starting to fill a niche in the money remittance market. They use a variety of techniques to reach potential money-remitting customers—among them Internet services and mass mailing of ATM-style card offers.23 An important goal of these companies is to multiply their points of presence, by partnering with non-financial businesses, to increase money-remitting outlets in recipient economies.24 4. Postal Administrations: Some postal systems have become involved in money transfer services. 25 One example is the Dinero Seguro system of the U.S. Postal Service. 26 Post offices can use their network of package delivery services to transfer money through arrangements with other countries’ post offices. Many postal administrations offer postal money orders, which may be available in physical or electronic form. In some economies, however, the postal service is not trusted by senders or recipients.27

Forms of Informal Money Transfer

The following categories of money transfer are more complicated. They do not generally fall into the realm of the regulated financial sector and, as a result, are not included in FATF’s definition of FFT systems. Nevertheless, they remain popular methods of money transfer in many jurisdictions. The presence and activity of these transfer methods indicate that the division between formal and informal systems is not a strict dichotomy—there are blending degrees of formality. 1. Ethnic Stores: These are smaller businesses that engage in MTO-like practices by transferring small amounts to specific regions. The IADB study indicates that ethnic stores may account for as much as 30 percent of the FFT market. However, competition with larger, more established MTOs jeopardizes these small businesses, as does competition with

22 The MTO share of the market in flows to Mexico has reportedly fallen, with banks actively introducing new remittance products to serve the Mexican–U.S. funds transfer market. 23 See Section II 24 See Section II 25 Malaysia includes in its records for workers’ remittances transfers made through post offices. See annex I. 26 The Black Market Peso Exchange is the largest money laundering system in the Western Hemisphere. Colombian narcotics traffickers are its primary users, repatriating up to $5 billion annually to Colombia. Office of Enforcement 2001. 27 Criminal organizations and corruption interfere with money transfers to Mexico. In the two years preceding1998, the U.S. Postal Office received claims for lost transfers amounting to $12.3 million. Economic and Social Research Council 2003. - 6 -

IFT systems that do not spend resources on legal and regulatory compliance. The legal status of money-remitting ethnic stores varies from jurisdiction to jurisdiction. 2. Hand Delivery: A typical system of funds transfer, and the most difficult to quantify, is hand delivery. Hand delivery can occur personally or through a courier system. This activity is loosely regulated by customs laws that cap the amount of money that individuals may bring into an economic jurisdiction. By eliminating the middleman, hand delivery is often beneficial for small personal remittances. However, the cost of travel and limits on the amounts that may be carried without customs declaration ($10,000 into the United States28) can make the method inefficient, especially if the sender wishes to transfer large sums. Hand delivery can also be risky—couriers may be robbed, lose their baggage, or disappear with the funds they are transporting.

Global Indicators of the Magnitude and Nature of IFT Systems

The dearth of reliable statistical information on IFT systems is universally acknowledged. The fact that IFT activity is both global and unregulated makes it difficult to measure. At present, the main global indicators used to assess the scope of IFT and FFT systems are remittances by migrant workers, believed to be the major component of aggregated global remittances. The IADB study29 estimated formal worker remittance flows for 2002 at approximately $80 billion. By region, Latin America and the Caribbean accounted for 31 percent of receipts; South Asia, 20 percent; Middle East and North Africa, 18 percent; East Asia and the Pacific, 14 percent; Europe and Central Asia, 13 percent; and Sub-Saharan Africa, 5 percent. Sixteen economies30 receive 75 percent of the world’s formal remittance flow, and three of the top four recipient economies are APEC members (Mexico, Philippines, China). The United States, also an APEC member, and Saudi Arabia are the world’s top two remittance-sending economies.31 Since 1995 the United States has far outpaced Saudi Arabia in sending remittances, a trend traceable to labor conditions in the two countries. By 1995, for example, the U.S. technology industry was growing rapidly, creating a demand for migrant workers with technology skills. At the same time, Saudi Arabia’s oil industry, its top source of jobs for migrant workers, began to level off. 32 Formal worker remittances also appear to be the most stable form of capital flow to developing countries, outstripping official development assistance in total in many economies. Consequently, economies are increasingly interested in worker remittances.

28 “The intentional transportation into or out of the United States of large amounts of currency or monetary reporting provisions of subchapter II of chapter 53 of title 31, United States Code, is the equivalent of, and creates the same harm as, the smuggling of goods.” In response to the movement of large quantities of currency in bulk from, to, and though airports, border crossings, and other ports of entry where currency can be smuggled out of the United States and placed in a foreign financial institution or sold on the black market, the United States has criminalized this activity. “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,” U.S. Patriot Act, Sec. 371(4). 29 Orozco 2003. 30 The 16 economies are Bangladesh, China, Dominican Republic, Egypt, El Salvador, Greece, India, Jordan, Mexico, Morocco, Nigeria, Philippines, Portugal, Spain, Turkey, and Yemen. 31 Ratha 2003. 32 The figure for remittances from the United States is inflated when transfers originating in a foreign economy pass through U.S. financial institutions on their way to another economy. Such funds transfers are compiled in the U.S. statistic, although the funds originated elsewhere. Even so, the amount remitted from the United States is substantial. - 7 -

Analysts have attributed the stability of worker remittance flows to four factors: (a) strength of financial infrastructure; (b) good investment climate; (c) ease of international travel; and (d) easier labor mobility. 33 Most of the current literature on IFT systems relies on case studies or anecdotal evidence that sometimes provide conflicting accounts and rarely extend beyond a single region. Several researchers have proposed models for computing the value or magnitude of IFT flows.34 Others have attempted rough estimates of the magnitude of IFT. Some analysts estimate that remittances through IFT systems are roughly equal to formal remittances. If this is true, then formal and informal flows would have been approximately $160 billion in 2002.35 Others have estimated global IFT flows at between $100 billion to $300 billion. 36 A case study done in 2000 indicated that IFT systems comprised about 15 percent of small-scale trade between India and Bangladesh. 37 Anecdotal evidence from Pakistan points to the tripling of remittances through FFT systems since the September 11, 2001 terrorist attacks in the United States, an enormous increase that may well be due to security measures taken since September 2001 to crack down on IFT systems.38 If these assessments are at all accurate, they show that flows of money through IFT systems, regionally and globally, are quite substantial. They also indicate that assessments and estimates of the practice can be quite disparate.

Implications of IFT Systems

IFT systems have various uses, legitimate and illegitimate. Their potential for abuse has drawn attention to the role they actually play in economic systems around the world. And their impact on global funds transfers has critical policy implications that may be addressed from several points of view. Economic Issues A paper by the International Labour Office (ILO) indicates that remittances raise a number of important macroeconomic policy issues. How can governments increase remittance flows? Can remittances be channeled into investments other than personal investments and consumption? 39 On these matters, analysts are divided. Some argue that remittances are an untamable part of international economics. Attempts to manipulate them for the purposes of development will be ineffective. Others note that households are more likely to channel remittance money into investments than any other form of household income. They also point out that remittances are widely used for small- scale investments (such as housing) and, in some areas, pooled for village development projects. Because it touches on some fundamental questions—among them labor migration, education policy, and immigration—the debate over remittances promises to continue for some time.40

33 Ratha 2003. 34 For example see Appendix II of El-Qorochi, Maimbo, and Wilson, 2003. 35 Economist Richard Adams gave this estimate at a World Bank seminar on migrant labor remittances, May 21, 2003. 36 Buencamino and Gorbunov 2002. 37 Pohit and Taneja 2000. 38 Development Economics Prospects Group 2003. 39 Puri and Ritzema 1999. 40 For in-depth research and analysis on these topics please refer to the studies and initiatives cited in the paragraph on the World Bank included in this report under “IFT Work by Other Organizations.” - 8 -

A recent paper on the topic argues that the policy issues posed by migration run directly into more fundamental issues of the nature of development; the authors urge international organizations to formulate specific policies toward remittance flows.41 Meanwhile, private businesses are learning how to get a bigger share of the sizeable and largely untapped remittance market. Banks and businesses are devising ways to win over clients by tailoring deals and incentives that make remitting easy, convenient, and beneficial. 42 First Data, the parent corporation of Western Union, has prepared an investment strategy to saturate the Asian region with money-remittance outlets.43 Similar investment strategies are bound to follow from banks, card companies, and other MTOs. Legal and Regulatory Issues IFT systems can have severe legal and regulatory ramifications. Nations differ in their policies toward transfer systems. Some have outlawed IFT activity, allowing only a limited category of regulated financial institutions, such as banks, to conduct remittance business.44 Others have passed legislation that requires money transferors to register with the government and to adhere to certain regulations.45 Still others have liberalized the money transfer market so that formal institutions compete freely with informal ones, relying on market dynamics to develop and govern funds transfer activity. Some informal money-transfer markets appear to operate successfully in a self-regulating fashion. 46 However, IFT systems have been identified by FATF as a potential method of money laundering and terrorist financing. 47 According to FATF, some IFT systems, like the Black Market Peso Exchange, sprang directly from efforts to circumvent regulatory controls so that proceeds from narcotics trafficking could be laundered, exchanged, and transferred without detection. 48 Other illegitimate uses of IFT systems include smuggling, evading capital/exchange controls, circumventing customs, and tax evasion. APEC has taken an interest in IFT systems because of their relation to economic cooperation between APEC members and to efforts to combat money laundering and terrorist financing. Negligent or corrupt institutional frameworks for fighting money laundering and terrorist financing aid criminals and those who finance terrorism. The global agenda to curb AML/CFT requires cooperation among international bodies. The World Bank and the IMF are integral parts of this international effort; they have taken an interest in the regulatory aspect of funds transfers because of their impact on international economic stability and financial-market integrity.

41 Ellerman 2003. 42 Orozco 2003. 43 First Data 2003. 44 See annex I. 45 FATF Special Recommendation VI (FATF 2001) calls upon all jurisdictions to require all money remitting agents to register with the government, adhere to know-your-customer rules, and report suspicious transactions. 46 Maimbo 2003. 47 FATF 2000. 48 Ibid. - 9 -

Box 2: Abuse of IFT systems for AML/CFT A Reason to Shift from IFT systems to FFT systems Although most users of IFT systems are legitimate, the anonymity and secrecy of IFT systems are attractive to individuals and groups engaged in illegal activity. IFT systems are a weak link in nations’ defenses against money laundering predicate crimes and terrorist financing. In addition to posing security risks, money laundering and terrorist financing affect the stability, transparency, and efficiency of financial systems, undermining an economy’s potential for sustainable economic growth. Development risks include:

· Reputation Risk: Because banking and financial services depend on a reputation for integrity, criminal involvement can reduce investor confidence and diminish opportunities for growth. · Destabilization of Financial Markets: Illegal funds are an unstable deposit base. · Undermining the Legitimate Private Sector: Local businesses cannot compete with companies that offer services below market rates because their primary income comes from money laundering. · Economic Distortion: Money launderers channel money to sectors in which funds are easily hidden, such as construction and hotels. Their decisions to leave the industry can cause the sectors to collapse and even damage the entire economy. · Loss of Revenue: Money launderers decrease government tax revenues. · Loss of Control of Economic Policy: Money launderers’ investment practices can distort currencies and interest rates. · Risk to Privatization: Criminal organizations have the financial means to outbid legitimate purchasers for formerly state-owned enterprises. · Social Costs: Money laundering enables drug traffickers, smugglers, and other criminals to expand their operations. It also increases government expenditures by increasing the need for law enforcement and health care. Source: Schott, Paul Allan. Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism. Washington, D.C.: World Bank and IMF, 2003.

B. APEC’S GOALS, IFT SYSTEMS , AND ABUSE OF FINANCIAL SYSTEMS

APEC’s work in the area of IFT complements other international efforts to combat terrorist financing and other transnational criminal abuses of financial systems. IFT systems operate in most APEC economies, allowing informal transfers of funds with limited or no record- keeping. 49 Although most IFT transactions are legitimate, the lack of regulation and supervision of IFT systems makes them susceptible to abuse by criminals and terrorists. Previous work on IFT activities has focused more on enforcing anti-money laundering standards than on the economic aspects of IFT. To fill this gap, international financial institutions have begun to study the development impact of IFT systems.50 By explaining why people use IFT systems, research can help policymakers address their effects on the economy.

49 Because several APEC economies outlaw the provision of remittance services by nonfinancial institutions, IFT systems often operate outside the law. See annex I. 50 The ADB’s case study of the Philippines is excerpted in annex III. - 10 -

IFT Work by Other Organizations

1. World Bank: The World Bank became involved in anti-money laundering and combating the financing of terrorism (AML/CFT) shortly after September 11, 2001. Since then, the Bank has built an office for Financial Market Integrity that contributes to global AML/CFT efforts relating to the financial sector. In addition to researching IFT systems as methods of laundering money or financing terrorism, the World Bank has helped develop a comprehensive methodology for assessing national AML/CFT regimes, coordinated technical assistance, and organized regional seminars to increase awareness of the threats posed by money laundering and terrorist financing. The Bank works with other programs, such as the FIRST Initiative 51, to strengthen the world’s financial sectors. It has published research on workers’ remittances as an important source of development finance52; migration, remittances, and brain drain53; and the hawala system. 54 Research on migrant labor remittances is ongoing in Nepal and Africa, and a study of migrant labor remittances in South Asia is planned. 2. International Monetary Fund: In April 2001 the boards of the IMF and the World Bank resolved to enhance the Fund’s contributions to global AML efforts. CFT was added after September 11, 2001. Within the Fund, the Legal Department and the Special Financial Supervisory Issues Division of the Monetary and Financial Systems Department are assessing economies’ AML/CFT systems and delivering technical assistance on various AML/CFT issues. The Fund’s 2003 paper on IFT systems, entitled “Informal Funds Transfer Systems: An Analysis of the Hawala System,” provides insight into the operational characteristics of the IFT systems of the Middle East and South Asia. 3. Asian Development Bank. ADB’s recent study of workers’ remittances as a development tool analyzed the market in funds sent by all residents abroad (not just overseas Filipino workers) to recipients in the Philippines through formal and informal channels. Through its Microfinance Development Strategy, ADB has also worked to increase access to formal financial institutions by low-income individuals throughout Asia. 4. The Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IADB). Since February 2000, the MIF has been studying remittances to Latin America and the Caribbean. It developed a strategy aimed at lowering the cost of sending remittances by promoting competition, financing technology platforms, training, testing new initiatives, and increasing awareness and information. Current technical assistance projects are designed to mobilize savings and leverage remittances for greater impact through greater participation by formal financial institutions; support the development of financial instruments and investment funds that will leverage migrant capital for use in start-ups and other innovative applications; and promote public-private partnerships and links between migrant associations

51 FIRST Initiative is a new US$55 million global fund established to assist low and middle-income countries in strengthening and developing their financial systems. FIRST is a multi-donor joint venture being undertaken by the World Bank, IMF, the UK, Switzerland, Canada, the Netherlands, and Sweden. FIRST issues technical assistance grants (recipients receive advice not funding) aimed at: financial system reform; banking systems and supervision; capital markets, payment systems, corporate governance; accounting and auditing; insolvency regimes; domestic debt markets and management; insurance/ other collective investment schemes, including pensions; market integrity and financial crime (anti-money laundering); financial systems diversification (development of non-bank financial institutions and new market instruments); and such other areas relevant to financial sector integrity and development as may be determined. 52 Ratha 2003. 53 Adams 2003. 54 El Qorchi, Maimbo and Wilson 2003; Maimbo 2003. - 11 - and their communities of origin in order to identify opportunities for productive investments. The MIF is supporting some ten projects in this area and has sponsored eight regional conferences on remittances and their impact on Latin America and the Caribbean. MIF also has committed funds for more than 15 studies for public use. 5. FATF: As the international standard-setter in AML/CFT, FATF addresses ARS in the newest version of its Special Recommendations on Terrorist Financing (Special Recommendation VI). That version, with interpretative notes and a supplement on international best practices, was adopted in June 2003 (box 3). In FATF’s February 2000 report on money laundering typologies, IFT systems were introduced as an area of concern in the wider scope of anti-money laundering efforts. The report discusses some of the general attributes of IFT systems and describes several IFT markets—the Black Market Peso Exchange in the Western Hemisphere, the Hawala system in the Middle East, and IFT systems operating in China and East Asia.

Box 3: FATF’s Special Recommendations on Terrorist Financing Recommendations VI and VII of FATF’s Special Recommendations on Terrorist Financing address alternative remittance systems and wire transfers: VI. Alternative Remittance Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions. VII. Wire Transfers Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Countries should take measures to ensure that financial institutions, including money remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number). The Special Recommendations, combined with the FATF Forty Recommendations on money laundering, set out a basic framework for detection, prevention, and suppression of terrorist financing and terrorist acts. Specifically, the objective of Special Recommendation VI is to increase the transparency of payment flows by ensuring that jurisdictions impose consistent AML/CFT measures on all forms of funds transfer. The Interpretative Note to Special Recommendation VI states: Special Recommendation VI consists of three core elements: a) Jurisdictions should require licensing or registration of persons (natural or legal) that provide money/value transfer services, including through informal systems; b) Jurisdictions should ensure that money/value transmission services, including informal systems…are subject to applicable FATF Forty Recommendations (in particular, Recommendations 10-21 and 26-29) and the Eight Special Recommendations (in particular SR VII); and

c) Jurisdictions should be able to impose sanctions on money/value transfer services, including informal systems, that operate without a license or registration and that fail to comply with relevant FATF Recommendations. Source: FATF GAFI Financial Action Task Force on Money Laundering, 2003. .

- 12 -

6. Asia-Europe Meeting (ASEM): The ASEM dialogue began in 1996 when 25 leaders from the European Community and East Asia met to discuss issues of mutual interest. Since ASEM’s creation, AML/CFT topics have been addressed by the finance ministers of member governments. At a ministerial conference on cooperation for the management of migratory flows between Europe and Asia in 2002, member governments agreed to work together to monitor migration flows between the two regions. 7. The Asia/Pacific Groups on Money Laundering (APG) 55: APG’s Typologies Working Group on Alternative Remittance and Underground Banking Systems (AR/UBS), established in March 1999, examined ARS, underground banking, and their use in money laundering in the Asia/Pacific region. The working group’s October 2001 report suggested regulatory and enforcement strategies in both areas. The group continues to develop strategies for implementing the recommendations of the report. 8. The International Conference on Hawala 56: The Government of the United Arab Emirates brought together experts, representatives of international and regional bodies, regulatory and law enforcement agencies, bankers, and money changers in Abu Dhabi on May 15-16, 2002. During the conference it was noted that the lack of transparency, accountability, and governmental supervision makes Hawala and other ARS vulnerable to abuse by criminal elements. Participants in the conference agreed that countries should adopt FATF’s recommendations and designate competent supervisory authorities.

55 Member jurisdictions are Australia; Bangladesh; Brunei Darussalam; Chinese Taipei; Cook Islands; Fiji; Hong Kong, China; India; Indonesia; Japan; Macua-China; Malaysia; Marshall Islands; Nepal; New Zealand; Niue; Pakistan; Republic of Korea; Palau; Philippines; Samoa; Singapore; Sri Lanka; Thailand; United States and Vanuatu. Observer jurisdictions are: Cambodia, Canada, France, Lao People’s Democratic Republic, Mongolia, Papua New Guinea, Republic of Kiribati, Republic of Maldives, Republic of Nauru, Tonga, Union of Myanmar, United Kingdom and Vietnam. 56 International Conference on Hawala 2002. - 13 -

II. INITIATIVES : UNDERSTANDING THE FUNDS TRANSFER MARKET THROUGH MICRO- LEVEL POLICIES AND MARKET PRODUCTS

Various private sector entities and a handful of governments have implemented new products, incentives, and policies to encourage individuals and institutions to shift from informal to formal remittance systems. The initiatives include card-based programs, international networking initiatives, and banking- and account-based programs. The following section details these initiatives as examples of practical measures taken by businesses, organizations, and governments to meet the remittance needs of migrant workers while regularizing funds transfers.

A. BILATERAL INITIATIVES TO STRENGTHEN REMITTANCE SERVICES IN THE FORMAL SECTOR

Recognizing the need for cooperative measures to manage the flow of remittances, some countries have made bilateral arrangements to improve methods of money transfer. Essentially, these agreements are initial attempts to streamline the remittance process. Following are some examples of the policy initiatives undertaken to promote funds transfer through FFT systems and foster sound economic cooperation.

U.S.-Mexico

Partnership for Prosperity The U.S.-Mexico Partnership for Prosperity, a private-public alliance launched in September 2001, is an action plan to promote economic development in the poorer regions of Mexico and reduce immigration to the United States. One of its goals is to lower the cost of remittances from Mexican migrants to their families.57 According to the U.S. Treasury, Mexican immigrants spent more than $1 billion to send money home in 2001.58 The U.S. Federal Reserve is working to expand its Federal Reserve Automated Clearing House (FedACH) International59 service to support two-way credit transactions between the two countries.60 Beginning in the fourth quarter of 2003, the Federal Reserve and Banco de México, Mexico’s central bank, will allow U.S. banks to send a payment to Mexico for a surcharge of approximately $0.60 per item, plus the standard FedACH domestic processing fees. The service will be offered initially on a limited basis but will open to all banks in the second half of 2004. Lower-cost payments from Mexico to the United States also will be introduced in 2004. The key driver in offering this service is the shared vision of the Mexican and U.S. governments as set forth in the Partnership for Prosperity initiative, which encourages the financial industry to work to lower the cost of remittances sent by Mexican migrants to their families. The clearinghouse system, along with competition among the

57 Information provided by Federal Reserve Bank officials 58 U.S. Department of State 2002. 59 “FedACH International” is a registered Service Mark of the Federal Reserve Banks. All information regarding FedACH was provided by Federal Reserve Bank officials. 60 The Federal Reserve Automated Clearing House (FedACH International) service model was first introduced for transactions to Canada in 1999. (See description of FedACH International in Part B of this section, International Networking Initiatives. The service supports the flow of commercial credit and debit transactions from the United States to Canada. The Federal Reserve Banks offer this service to U.S. banks and originating depository financial institutions for a per-item surcharge of $.039 in addition to standard FedACH domestic processing fees (origination, addenda, and input file processing fees). - 14 - banks should lower fees, ensuring that more money reaches families in Mexico—thereby strengthening both economies.61 Mexican Consular Identification Card (Matrícula Consular)62 Mexican Consular Identification Cards (CICs), issued in the United States since 1871, are similar to other types of identity documents. Consular registration constitutes the official record of individuals living abroad, and the CIC is a legal proof of registration. More than 1.4 million were issued in the United States in 2002. Originally designed to identify people involved in accidents or crimes, CICs are becoming an accepted form of identification for opening U.S. bank accounts—thus introducing migrants to the formal financial sector. Today, 150 financial institutions accept the CIC—including U.S. Bancorp, Wells Fargo, Citibank, and Bank of America—along with growing numbers of state and local governments and agencies.63 Wells Fargo estimates that it has opened 60,000 new accounts since it began accepting CICs in November 2001.64 To get a CIC, Mexican nationals in the United States must provide an original birth certificate, official photo identification acceptable in Mexico or an official U.S. photo identification, and proof of residence within the consular jurisdiction. After the terrorist attacks in the United States on September 11, 2001, the Mexican government took steps to strengthen the security of the CIC. The improved version has nearly a dozen security features designed to deter falsification. 65 The Mexican government is developing an online database that will enable its consulates to verify if applicants have previously received a CIC card from another consulate and to coordinate issuance.66

U.S.-Philippines67

The U.S. Treasury Department and the Philippines Ministry of Finance have created an initiative to reduce the costs of overseas remittance services (through greater competition and efficiency), enhance access to FFT systems, and ensure compliance with AML/CFT standards. In collaboration with the U.S. Federal Deposit Insurance Corporation and the Federal Reserve, the U.S. Treasury Department, will work with Filipino counterparts to correct deficiencies in remittance channels, understand the role of the private sector, strengthen the infrastructure that supports remittances, minimize vulnerabilities in that infrastructure, promote financial literacy, and ensure proper implementation and full compliance with international best practices.

Singapore 68

On June 30, 2003, the Monetary Authority of Singapore announced that it would allow banks subject to branching restrictions to set up new branches specifically to provide remittance and money changing services. When implemented, this new measure will enhance access to

61 Silver 2003. 62 Cuevas 2003. 63 Information provided by officials from Mexico’s Secretaría de Relaciones Exteriores. 64 Officials from Mexico’s Secretaría de Relaciones Exteriores, citing The Washington Post, June 27, 2003. 65 Bair 2002. 66 Information provided by officials from Mexico’s Secretaría de Relaciones Exteriores. 67 U.S. Treasury 2003. 68 Information provided by Singapore government officials. - 15 -

FFT systems in Singapore and provide foreign workers with more choices and increased convenience in remitting funds to their home country.

Latin America-Spain69

In January 2003 the Inter-American Development Bank and Caja de Ahorros y Pensiones de Barcelona (La Caixa), a Spanish savings institution, agreed to cooperate to enhance the development impact of remittances sent from Spain to Latin America and the Caribbean. The IADB’s Multilateral Investment Fund (MIF) aims to reduce the cost of remittances by stimulating competition among service providers, increasing awareness of remittance services, and improving regulatory frameworks for financial services. MIF helps microcredit and savings institutions in Latin America and the Caribbean design remittance-related products and services that encourage development and participation in the formal financial sector.

Malaysia70

In March 2002, a company endorsed by Nepal’s central bank was given permission to organize the collection and remittance of their country’s workers wages through a Malaysian bank to the company’s bank in Nepal. The company’s office in Nepal would then arrange to send the money directly to the respective recipient’s families. This is one method to ensure that the foreign workers use the formal remittance channels.

B. PRIVATE-SECTOR INITIATIVES TO IMPROVE REMITTANCE SERVICES

Alongside effective government regulation, private-sector initiatives—and investments—are key to develop a market in which formal remittance services are competitive, efficient, and widely available. A market that meets those criteria will increase the likelihood that money is held, invested, and transferred through intermediaries that adhere to AML/CFT standards and other financial-sector regulations. The efforts of several companies to capture portions of the remittance market are described below. This section focuses on products and services being offered or introduced in the remittances market. It does not assess those products and services for compliance with international AML/CFT standards and best practices.

Card-Based Innovations

Card-based innovations provide senders and recipients with convenient and affordable remittance services. Because they do not require customers to open and maintain an account, they offer great flexibility. Services offered through ATM machines bring the convenience of ATM service to the remittance market.

MasterCard and Opportunity International71 MasterCard and Opportunity International (OI), a global nonprofit microfinance organization, have developed a co-branded card called the OPPORTUNITYcard. Under a

69 IADB 2003. 70 Information provided by Malaysian officials. 71 Opportunity International 2003. - 16 - pilot project to begin soon between the United States and the Philippines, families and friends will be able to use the card to make transfers across extended distances. According to the OI network’s chief executive officer, reduced funds transfer fees will include a small contribution to the recipient’s local community—assisting education, healthcare, and other social projects. Morgan Beaumont Inc.72 The Morgan Beaumont MoneyCard is a prepaid package of two cards, available for $49.95 in convenience stores and $29.95 on the Internet. No identification is necessary to purchase the cards,73 which can be sent or given to a friend or family member anywhere in the world. Targeted at Hispanic, Asian, and East European immigrant communities in the United States, the MoneyCard can be used to withdraw cash from over 750,000 ATMs and to pay for goods and services at 5.5 million points of sale worldwide. It can be replenished as often as desired. The card also can be used to build credit history.

International Networking Initiatives

Businesses and organizations representing businesses have taken steps to create an international infrastructure dedicated to money-remittance services. Most of the participants are non-account holding institutions, but the similarities end there. The new networking initiatives are making business partners out of companies with widely varying goals. Independent Community Bankers of America (ICBA) and Travelex74 ICBA and Travelex agreed to launch a new money transfer service in July 2002. The program enables ICBA’s member banks to provide remittance services to customers and community members through Travelex’s Worldwide Money Division, which provides Internet-enabled money transfers for about $9.75 Travelex has over 650 retail branches at airports, seaports, rail stations, and tourist and business centers around the world, including locations in the following APEC economies: Australia; Canada; Chile; Hong Kong, China; Mexico; New Zealand; Peru; and the United States. Philippine National Bank (PNB), 7-Eleven, and Citibank 76 Through an agreement with 7-Eleven and Citibank Hong Kong, China, the Philippine National Bank enables overseas Filipino workers (OFWs) to remit money to the Philippines through any of 7-Eleven’s 480 stores in Hong Kong, China, as well as through the eight PNB branches in Hong Kong, China. Additionally, PNB’s Hong Kong , China, remittance unit has teamed up with Indonesia’s Bank Mandiri to provide remittance services to Indonesian workers in Hong Kong, China. PNB hopes to duplicate the arrangement in Singapore and Taiwan. The Federal Reserve Automated Clearing House (FedACH)77 FedACH is a bank-to-bank mechanism developed as part of a family of international electronic funds transfer services that offer financial institutions and their customers access to

72 Bézard 2002. 73 Not having an identification process would be a violation of international best practices according to FATF criteria. 74 ICBA 2002. 75 Bair 2002. 76 Sanchez 2003. 77 Information provided by Federal Reserve Bank officials. - 17 - an efficient and inexpensive means of processing payments in batches between the United States and other economies. First introduced in 1999 for transactions to Canada, FedACH’s international service is slated to expand to include Mexico and five countries in Western Europe.78 FedACH improves upon existing international payment processes and practices by offering shorter end-to-end clearing and settlement processing, and enhancing funds availability to recipients, and certainty with regard to the payment amount (no fees are deducted from the principal). It also offers reliability and stability, an established legal framework and rules, standard formats, and universal access. BOX 4: FEDACH’S INTERNATIONAL MODEL

The FedACH International model enables U.S. banks to originate and receive international transactions. National Automated Clearinghouse Association (NACHA). Cross-border payments are settled in U.S. dollars for the originator and receiver. The model also employs the following features: Gateway Approach. A participant in the national payment system, or another entity acting as an agent for that participant, serves as the gateway into each economy’s banking system, providing access to financial institutions there. FedACH is headquartered at the Federal Reserve Bank of Minneapolis, the gateway operator for the United States. It contracts with a gateway operator in each participating economy. When payments are flowing out from the United States to a foreign gateway operator, the foreign gateway is referred to as the receiving gateway operator. Format Conversion. The foreign gateway operator in Canada and Mexico, or the foreign gateway agent in the case of the transatlantic service, performs the conversion from the NACHA cross-border PBR/CBR79format into the payments format used locally. Foreign Exchange Conversion. The foreign gateway operator or its agent for payments from the United States accepts incoming payments in U.S. dollars and performs the foreign exchange function using competitive rates (for example, an interbank rate), applying basis points to that rate to cover its costs. For transactions to the United States, the gateway operator accepts local currency and performs the necessary exchange into U.S. dollars. Source: Federal Reserve Bank officials. Orient Commercial Joint Stock Bank and First Remit80 Orient Commercial Joint Stock Bank (Oricombank), based in Ho Chi Minh City, has a contract with the United Kingdom’s First Remit to act as a money remittance service agent in Vietnam. First Remit offers services in more than 50 economies worldwide, including the following APEC members: Canada, Chinese Taipei, South Korea, Thailand, and the United States. First Remit transfers money to Oricombank, which remits the money to the beneficiaries in Vietnam at a fee. According to the bank, this fee is about 40 percent lower than fees offered by other remittance services. Western Union81 By some estimates, Western Union has approximately 12 percent of the remittance market. Its network has 165,000 agent locations in 195 countries and territories, including outlets in banks and post offices that make up more than 70 percent of the network. Western Union has

78 The Eurogiro Network A/S (EGN) will provide access to the gateway operator in each economy: BAWAG/P.S.K. Group in Austria, Deutsche Postbank AG in Germany, ING Bank in The Netherlands, Swiss Post–PostFinance in Switzerland, and Girobank PLC in the United Kingdom. 79 PBR/CBR are the NACHA standard entry class codes for cross-border transfers. PBR is a consumer cross- border ACH transaction and CBR is a corporate cross-border ACH transaction. These codes appear in the electronic record format as processing instructions. 80 Information provided by the World Bank Country Office Vietnam. 81 Information provided by Western Union officials. - 18 - relationships with banks or postal services in ten APEC economies. The network allows remitters to transfer money in cash; recipients, who often have no bank account, can pick up their money in cash, in person. The cost of transferring money varies by location. Western Union invests in marketing throughout the world, raising brand awareness among communities of immigrants. Its Loyalty Card Program rewards loyal customers with faster transactions, discounts, and telephone time.82 The company has tested a direct-to-bank service from the United States to Poland that allows a customer to send a transfer from a Western Union location to a recipient’s bank account. It expects to expand the testing to other economies. The company is also experimenting with ATM payouts, at-home delivery, and card services. In addition to its flagship person-to-person money transfer service, Western Union offers consumer-to-business, consumer-to-government, and government-to- consumer cash payment services. In July 2003, Western Union signed a memorandum of understanding for a “strategic partnership” with the Vietnam Bank for Agriculture and Rural Development (VBARD). Under the agreement, Western Union’s services will be offered at all VBARD branches in Vietnam. With 1,660 branches covering rural and remote locations, VBARD maintains the largest branch-banking network in Vietnam. Western Union has signed a similar memorandum of understanding with Industrial and Commercial Bank, which has a network of over 1,300 locations in Vietnam through Asia Commercial Bank, Eden Trading Co., and VP Bank. 83 World Council of Credit Unions’ IRnet84 The World Council of Credit Unions’s International Remittance Network (IRnet) provides money transfers from some 185 credit unions with 800 locations in 35 U.S. states to 42 countries on five continents. Money can be sent to the following APEC economies: Australia, Canada, Chile, Peru, and the Philippines. Using IRnet, up to $1,000 can be sent for $10, available in minutes in El Salvador and Guatemala. Foreign recipients are not charged for the transfers, and exchange rates are disclosed and guaranteed at the time of the transaction. Recipients are introduced into the financial system when they receive their funds at local credit unions.

Banking and Account-Based Programs

New banking and account-based programs are often by-products of the existing banking infrastructure. Banks simply create programs for money remittance that are easily operated through their banking services network. Such programs may require customers to maintain an account; in fact, they are often tied to incentive-based programs designed to encourage money-remitting customers to open accounts. Banco del Ahorro Nacional y Servicios Financieros (BANSEFI)85 The People’s Network (L@Red de la Gente) is a cooperative between a network of credit unions, savings and loans, and other independent financial organizations in Mexico in partnership with BANSEFI. The commercial alliance offers remittance services, as well as other financial services, to people without access to commercial banks. L@Red de la Gente

82 First Data 2003. 83 Information provided by the World Bank Country Office Vietnam. Information provided by the World Bank Country Office Vietnam. 84 Grace 2002. 85 Gavito 2003. - 19 - has 760 branches throughout Mexico. For a fee of $6, account holders can send money to a recipient’s account through numerous companies, including U.S. Bank, Moneygram, and Giromex. Through savings accounts, customers also gain access to other products, such as insurance and home services. Bank of America86 In April 2002 Bank of America launched SafeSend, a card-based money transfer service that operates between the United States and Mexico. Eventually the service will extend to other immigrant communities. Up to $1,500 can be transferred per transaction for $10. The money is available in Mexico in less than six minutes. The recipient receives a money- withdrawal card, which is used with a PIN number at any of the 20,000 ATMs connected to Visa’s PLUS Network. The service is available to any Bank of America customer and to noncustomers holding a Visa or MasterCard debit or credit card. Money can be added to the card on the Internet, by phone, or in person. Although a U.S. Social Security number is listed as a requirement for enrollment in the program, a toll-free number is provided for those who do not have one. 87 Banorte88 Banorte offers Dispersa Envíos, a remittance service between the United States and Mexico. The product supports funds transfers through the Banorte branch network. Utilizing Banorte’s Internet banking system, Banorte works with more than 20 MTOs to process transactions. The service provides payment orders up to 30,000 Mexican Pesos and account- to-account credit transfers. If the beneficiary has a Banorte account, credit is made directly to the account and funds can be accessed at any ATM or point of sale. According to Banorte, the bank offers competitive prices and conditions. Citibank/Banamex89 With Citibank’s c2it service, people can use their bank account or credit card to e-mail cash to more than 100 economies. The service requires an e-mail address and a U.S. based credit card, checking, savings, or money market account linked to the c2it account. The funds can be sent in the form of a check or as a direct deposit. Recipients must have a local bank account to receive the funds. The service costs $10, regardless of the amount sent. The currency exchange rate is set by the c2it service. A U.S. Social Security number is required to enroll in c2it. In Mexico, Banamex has 1,400 branch locations, 84 agents, and 250 franchises that work like a branch window, serving remote locations and offering extended hours of operation. U.S. Bank 90 U.S. Bank offers two remittance services for sending money to family and friends in Mexico: Secure Money Transfer at the ATM and Secure Money Transfer with the People’s Network. For the first service, customers sign up for a Secure Money Transfer ATM card at any of the 2,200 branches of U.S. Bank. They must provide a valid form of identification (U.S. Bank accepts the CIC) as well as name and address of the remittance recipient. The ATM-only card is sent to the recipient in Mexico, who can access funds at any of the 20,000 PLUS

86 Bézard 2002. 87 Bank of America’s SafeSend service is described at http://www.bankofamerica.com/safesend/?lang=en. 88 Information provided by Banorte officials. 89 Interview with Banamex officials. Mexico City, 3 July 2003. 90 Information provided by U.S. Bank officials. - 20 -

Network ATMs in Mexico. The cost for U.S. Bank accountholders is $8 for up to $1,000; non-accountholders pay $10 for up to $1,000. The second remittance service offered by U.S. Bank utilizes The People’s Network (L@ Red de la Gente), which is described above. From any U.S. Bank location customers can send money to 760 People’s Network branches in Mexico. U.S. Bank accountholders can transfer up to $1,000 into a People’s Network account for a fee of $6 or, for $8, transfer up to $1,000 for cash pick-up at a People’s Network branch. Wells Fargo/Bancomer.91 Targeting the U.S.-Mexico remittance market, Wells Fargo offers the InterCuenta Express account, a “sweep account” that transfers funds on a nightly basis to the Bancomer account of a recipient in Mexico. The cost of opening an account is $10, and there is a $10 annual fee. Wells Fargo accepts the Mexican CIC to open accounts. The account-to-account transfer fee is $10 for up to $1,000 per day. Funds can be deposited through a Wells Fargo ATM, over the phone, or online. Recipients can pick up funds at a Bancomer ATM or branch and can use their ATM card for point-of-sale transactions in Mexico Wells Fargo’s Dinero al Instante program enables people in the United States who do not have bank accounts to transmit cash wires to Mexico without opening an account. By providing identification and a confirmation number, the recipient can pick up the funds immediately at some 2,000 Bancomer branches and 200 Tiendas Singer locations, an appliance store that serves as a distribution agent for Bancomer, with longer hours than banks. Again, a flat fee of $10 covers up to $1,000 transferred in a single day. Bumiputra-Commerce Bank Berhad of Malaysia (BCB)92 BCB and PT Bank Niaga of Indonesia (BN) have jointly launched an electronic remittance service in August 2003, that enables beneficiaries to be paid within 24 hours. BN currently has 160 branches throughout Indonesia, and this fast remittance service will be a suitable incentive for Indonesian workers to use this secure formal remittance service provided at a minimal cost of RM20 (US$5.25) for any amount remitted.

Non-APEC Banking Programs 93

State and private banks from India, Portugal, Pakistan, and Morocco have devised programs to capture a share of the remittance market by reaching out to their diaspora communities in other nations. By remitting money and opening accounts through a bank based in their home country, emigrants can offer their family members benefits such as home financing, tax breaks, low-interest loan packages, or even public housing preferences and special preferences to fill quotas in public universities. Other benefits such as expedited passport renewals, preferred traveling accommodations, and favorable exchange rates at banking branches are available for the senders. Bangladesh reported a 22.43 percent increase in formal remittances in the 2002-2003 fiscal year. The increase boosted remittances from $2.5 billion in the previous year to $3.06 billion with Saudi Arabia and the United States. topping the list of sending countries. The surge in formal remittances has been attributed to measures taken by the Bangladesh Bank that encourage expatriates to remit via formal channels instead of remitting through the unauthorized informal hundi system. Some of the steps taken by the Bangladesh Bank

91 Information provided by Wells Fargo officials. 92 Information provided by Malaysian officials. 93 Orozco 2003. - 21 - include expediting remittances for fast delivery and setting up foreign exchange clearance houses abroad to facilitate operations, as well as implementing AML guidelines.94

C. THE NEED FOR A COMPREHENSIVE FRAMEWORK

On a micro-level, private-sector entities and some governments have recognized the IFT phenomenon and become involved in the funds transfer market as detailed above. Other governments have recognized the need to address the IFT issue comprehensively—as a way of formulating development strategies and of monitoring money flows for security purposes. Although it is widely recognized that IFT systems channel large volumes of funds internationally, the magnitude and nature of the channels remain largely obscured. That obscurity has prevented governments from adopting effective policies and regional strategies to regulate IFT systems. The comprehensive framework described in the following section represents an initial attempt to gauge the scope of IFT activity from a quantitative and qualitative perspective, toward the end of providing governments with a means to gather the information they need to address the IFT phenomenon in a consistent, coordinated way.

94 Xinhua News 2003. - 22 -

III. DEVELOPING A FRAMEWORK AND PRELIMINARY APPLICATION

Sections I and II provided an overview of the current state of funds transfer systems. The objective Section III is to contribute to the international discussion on IFT systems by providing a framework for research and analysis that can be applied to all APEC nations. Equipped with such a framework, governments can begin organizing a coordinated regional approach to IFT, while implementing national policies that respond to the true volume and nature of IFT activity. The first piece of the framework is a method of estimating the volume of funds in IFT channels. The second is a means of analyzing the incentives money remitters confront when choosing whether to use formal or informal channels. The focus is on migrant remittances, as these are believed to make up the vast majority of IFT transactions. By better understanding these flows, and by inducing customers to move through formal, rather than informal channels, the remaining IFT transactions can be subjected to greater and more focused scrutiny.

A. DEVELOPING A FRAMEWORK

Most of the attention devoted to IFT systems thus far has been related to policy topics (immigration, brain drain, the effect of remittances on development) or the legal and security implications of transfers (money laundering, terrorist financing). Both approaches assume a strict dichotomy between formal and informal funds transfer systems. While this assumption is true from a regulatory perspective, an economic analysis of money flows blurs the line between them.

The Regulatory Perspective: FFT Systems vs. IFT Systems

IFT and FFT systems are distinguished by whether they operate “formally through the regulated financial system or informally through entities that operate outside the regulated system.”95 Formal systems are those recognized as banking or credit institutions or nonbanking financial institutions specifically included in the formal category, such as MTOs. Essentially, the actors behind the formal systems become “formal” because they are subjected to the banking and credit laws of a particular jurisdiction and thus operate as conventional business agents in a transparent market. IFT providers may or may not register with a supervisory authority, and may or may not comply with regulations. They are generally deemed to operate outside the regulated financial sector. This distinction enables us to better understand transaction-recording practices, both for the sake of regulatory accountability and for recording money flows in macroeconomic terms. FATF recommends that all money remitters, whether they operate formally or informally, should be required to register or be licensed by an authority subject to sanctioning. 96 Enforcing regulations is another matter. Governments may spend years registering and then bringing into compliance every registered money remitter without ensuring that all are actually operating within established regulations. Inadvertently, the process may cause that some parts of the fund transfers conducted by the FFT providers include IFT providers. The

95 FATF 2003a. 96 FATF 2001. - 23 - barrier between formal and informal channels is not a firm one, there are blending degrees of “formality.”

The Economic Perspective: Blending Degrees of Formality

From the perspective of quantitative economic analysis, formal and informal channels blend together. Economic analysis is concerned primarily with determining the direction and magnitude of money flows. For purposes of estimating the aggregate amount of money flows, whether business activity occurs through a regulated or unregulated channel is secondary. A formal system—an FFT system associated with the regulated financial sector— may very well use informal channels to conduct some or even all of its money transfers. Similarly, IFT systems may use formal channels at different stages of the transfer and settlement process. Thus funds transferred through formal channels must be considered when estimating the magnitude, direction and nature IFT flows.

Combining the Economic and Regulatory Perspectives

To begin to grasp the direction, magnitude, and nature of money flows through informal channels, a lesson must be drawn from both the economic and regulatory perspectives. 97 Thus, Part 1 of the framework described in this report proposes a method of estimating the unrecorded flows of money traveling between nations. For this exercise, a quantitative economic analysis in which flows through formal and informal systems are blended is considered. The analysis reveals gaps in data—red flags for further analysis. The gaps may be the result of: (i) Unidentified flows in formal channels; (ii) Inward and outward flows through the formal and informal channels (including legal channels that are not part of the formal channels); (iii) Flows traveling exclusively through informal channels; (iv) Inadequate estimates of total flows (formal and informal). Once total flows are properly estimated and recording errors or omissions in formal flows are corrected, the territory lying between formality and informality can be isolated and examined. In the process, estimates of the amount of money traveling through the informal sector will become far more accurate and reliable. Part 2 of the proposed framework deals with analyzing the qualitative features of the data gap and determining why senders may choose to remit through informal channels. The key task in this exercise is to stand in the shoes of the money sender. What goes through the mind of a money remitter when they decide to send money abroad? What sort of benefits and burdens do they consider? These are the money remitter’s perceived incentives. Regulations and other government behavior toward funds transfers must be considered when analyzing these incentives because they can drastically affect the perceived incentives faced by remitters as they choose their remittance method.

97 An economy should also assess its potential vulnerabilities to various types of crime. - 24 -

The Framework

The framework described above represents a first attempt to apply a uniform methodology for more extensive research that will take into account the particularities of individual APEC economies. It also suggests some general conclusions and policy ideas. Formal cross-border transfers as reported in the IMF’s balance of payments statistics (table 1) provide a good starting point for applying the framework. As we have seen, however, they do not reflect the actual volume of flows between nations via formal and because they do not include informal remittances. Table 1: Formal Cross Border Transfers, 2001 (Millions of U.S. dollars)

Economies Workers’ Compensation of Migrants’ Reported total remittances employees transfers Credit a Debit b Credit Debit Credit Debit Credit Debit Australia — — 466 –549 1,311 –460 1,777 –1,009 Brunei* — — — — — — — — Canada — — — — — — — — Chile — — — –15 — — — –15 China 912 –84 297 –852 — –54 1,209 –990 Chinese — — — — — — — — Taipei* Hong Kong, — — 5 –5 — — 5 –5 China Indonesia 1,046 — — — — — 1,046 — Japan 1,040 –2,090 210 –250 730 –600 1,980 –2,940 Korea 49 –215 535 –53 27 –434 611 –702 Malaysia c 966 –2,606 190 –318 — — 1,156 –2,924 Mexico 8,896 — 1,024 — — — 9,920 — New Zealand 216 –98 — — 818 –377 1,034 –475 Papua New — –10.7 — — 5.9 –5.9 5.9 –16.6 Guinea Peru 716 — — — — –99 716 –99 Philippines 122 –32 6,235 9 –24 6,366 –56 Russia — — 624 –494 417 –908 1,041 –1,402 Singapore — — — — — — — — Thailand — — 1,252 — — — 1,252 — United States — –19,890 2,380 –8,540 — — 2,380 –28,430 Vietnam — — — — — — — —

— Not available a. Credit refers to incoming flows. b. Debit refers to outgoing flows. c. Data from 1998. Note: For a full description of the IMF Balance of Payments and the three components displayed on the table: “workers’ remittances”, “compensation of employees”, “migrant transfers”, see Balance of Payments Textbook, IMF, Washington D.C., 1996; Pp. 77, 91, 93. Source: Balance of Payments Statistics Yearbook. International Monetary Fun d, 2002.

IMF’s balance of payments statistics distinguish between workers’ remittances and compensation of employees. Combined, the two categories make up the “official remittance flows” used as the point of reference for estimating informal flows in Part 1 of the framework. Workers’ remittances include goods or financial instruments transferred by an individual who has been working abroad for at least one year to residents of the economy in which the worker previously resided. - 25 -

Compensation of employees includes salaries and wages, as well as other compensation paid in cash or in kind, earned by nonresident individuals who have performed labor for residents of the economy in which the labor was performed. “Nonresident individuals,” in this sense, is an economic term and not related to legal status. 98 A nonresident is generally described as an individual whose “center of economic interest”99 is located in an economy other than that in which the work is being performed. The two categories differ in important ways. Workers whose transfers are classified as “compensation of employees” stay in the country where they are working for less than a year, whereas those whose transfers are classified as “workers’ remittances” have already been out of their home country for more than a year. The work-period distinction is key in identifying the sender’s “center of economic interest.” The center of economic interest of nonresidents who work in an economy for less than a year remains in their home country, not the economic jurisdiction in which they are performing labor—virtually all of their earnings are transferred back to their center of economic interest. Individuals who expect to work in an economy for more than a year are likely to establish a sense of permanence and longevity, thus building a center of economic interest in the economy where they are working. Consequently, the value transferred back to their home country as “workers’ remittances” is unlikely to encompass all of the earnings or value of the worker, but only a portion sent back to help support family members or other remaining at home. Migrants’ transfers represent the personal net worth transferred by migrants from their economy of origin to the one in which they now reside. They are not transactions between two parties. A migrant is defined as an individual other than a student; medical patient; or diplomatic, military, or similar personnel who moves to a new economy with the expectation of remaining at least one year. Migrants’ transfers are important because they reflect a transfer of value from one economy to another. Because they do not represent transactions, they create no flow in the sense of value transferred through a channel or intermediary. Consequently, the value captured under the rubric of migrants’ transfers is of limited use in analyzing the magnitude and characteristics of channels used by remitters to transfer funds. For that reason, it is omitted from the framework for estimating informal money flows.

Part 1: Quantitative Economic Analysis (Estimating Informal Money Flows)

Part 1 draws on the concept of “indirect estimation,” using triangulation to estimate total flows and, by extrapolating from known formal flows, those in unrecorded channels, including informal channels. The methodology for estimating total flows has been well established by the IMF: While it is difficult—in the absence of data—to estimate [workers remittances], estimates … may be developed via data models.... If the compiler knows the number

98 IMF 1996. P. 15. Examples of nonresident workers include seasonal workers (e.g. Italians residents working in Switzerland during prime tourist periods are “nonresidents” vis -à-vis Switzerland) and border workers (e.g. workers living in Belgium who travel into France daily for their jobs are “nonresidents” vis -à-vis France). 99 Ibid., p. 13. “Center of economic interest” is defined as some location (dwelling, place of production, or other premises within the economic territory of the economy) on, in, or from which the individual engages and intends to continue engaging (either indefinitely or over a finite but lengthy period of time) in economic activities and transactions on a significant scale. - 26 -

of foreign workers in the … economy and can develop (perhaps through a survey) an estimate of average remittances per worker, he could then estimate worker remittance credits by multiplying the number of workers by average remittances.100 Indirect bilateral estimates of informal flows can be derived by subtracting the amount of flows in all formal channels from total flows. Three steps are required: 1. Official Remittance Flows: The first side of the triangle comes from recorded remittance flows. These are the bilateral flows of funds between sending and recipient economies. · Source: Data on official remittance flows are obtained from IMF balance of payments statistics (see table 1). · Problems: Estimates of remittances may not include figures from all FFT systems operating in an economy. The data received by the formal central bank channels must be broken down and detailed to be sure that all operating FFT sources, not just banks and post offices, are included. The necessary breakdown is limited by the fact that many economies do not have mechanisms to record all formal remittances. Recording may also be hindered by the FFT systems themselves, if they use informal channels to conduct business. 2. Derived Workers’ Remittances: The second side of the triangle is provided by estimating actual worker remittances. The estimate is derived from bilateral data on the number of migrant workers abroad, the average wage of migrant workers abroad, and the percentage of wages sent by migrant workers to their home economy. These three amounts, multiplied, give us the derived value of workers’ remittances. Because workers’ remittances are confidently assumed to be the largest component of international funds transfers, this figure is the appropriate one from which to triangulate the third side. · Source: Data on the number of migrant workers comes from several sources, primarily governments and the International Organization for Migration (IOM), the International Labour Office (ILO) and the Organisation for Economic Co-operation and Development (OECD). The sources for estimating the wages of migrant workers and the percentage of wages sent home are surveys, government data, and anecdotal evidence. · Problems: The major problem when using these figures is the discrepancy in estimates—different sources record different amounts. Another problem is the lack of explanation or gradation within a given amount. For example, a source may give only the number of skilled workers abroad. 3. Estimate of Funds in Informal Channels: Calculating the final side of the triangle is simply a matter of subtraction. Official remittances less worker and wage remittances results in an estimate of unrecorded flows traveling through various channels. This unrecorded flow may be composed of a blend of transfers from formal channels that have not been properly identified and transfers from informal channels excluded from recording altogether.

100 IMF 1995, pp. 142-144. - 27 -

Box 5. Preliminary Obstacles to Estimating IFT 1. Blending Degrees of Formality: A multitude of transfer channels, a multitude of actors, and many bilateral relationships make up the formal funds transfer sector. Although FFT actors usually use official channels, they may also use informal or unrecorded channels to conduct business. Because transactions carried out through such channels are not reflected in official statistics, the volume of FFT flows may be seriously underestimated. 2. Incomplete Recording: What information makes up the “formal” data taken from the IMF’s balance of payments statistics? What is recorded as “official” is, in most cases, only what the major banks in each country report to the economy’s central bank (sometimes information about remittances through post offices is also recorded).101 Beyond this, very little is known. According to the research conducted for this report, the information produced by most central banks does not detail all sources of funds. For example, the reported figure may reflect the activity of all FFT actors (banks, postal services, MTOs, credit card companies, and other institutions considered part of the regulated financial sector), or just a few.102 3. FFT Systems Transparency: The fact that a funds transfer agent operates in the formal sector does not necessarily mean that its business operations are transparent. FATF has led the international effort to create standards of transparency for formal financial agents (such as know-your-customer policies and reporting of suspicious transactions). Still, one cannot assume that all FFT systems adhere to local regulations, let alone international best practices. Anecdotal evidence suggests that FFT business activity moves in and out of the informal sector, but nontransparency and gaps in recording prevent authorities from knowing how frequently this occurs. 4. Legal and Administrative Obstacles: Legal and administrative requirements may discourage reporting. Taxes and other constraints on flows may prevent otherwise legitimate transactions from being reported and recorded. In some cases, the trade and capital accounts may include unrecorded flows. For example, an exchange rate control regime may be circumvented by over- and under-invoicing products, thus creating unrecorded flows. Significant “errors and omissions” in the capital account can be indications of unrecorded flows. Consequently, trying to identify “informal remittances” is a daunting task, one that can only be accomplished through a systematic enhancement of information collection throughout the entire balance-of-payments system.

Part 2: Qualitative Incentives Analysis: the First Mile, the Last Mile,103 and the Intermediary

The second part of the framework anticipates the isolation of IFT channels from the general flow of funds in the formal sector, part of which are already recorded in official statistics and part of which remain unrecorded. By identifying perceived incentives that lead people to choose IFT over FFT channels, previously opaque activity becomes clearer. The analysis may be broken down into three stages: (1) the sender’s transaction, or first mile; (2) the recipient’s transaction, or last mile; and (3) the intermediary. 1. The First Mile: Because a sender must initiate every transaction, one of the keys to solving the IFT puzzle is thinking like a sender of informal remittances. Several factors and perceived incentives need to be considered to develop an understanding of the sender’s point of view. Foremost among these are the sender’s perceived

101 For example, balance-of-payments statistics for the recording of “workers’ remittances” for the Philippines incorporates only the banking sector while Malaysia’s includes also postal offices. 102 The IMF Committee on Balance of Payments Statistics, established in 1992, aimed to reduce discrepancy in global balance of payments statistics published by the IMF as well as to foster greater coordination of data collection among economies. IMF Committee of Balance of Payments Statistics 2002. 103 The “First Mile” is a figure of speech used to describe the initial obstacles that a user of a network must overcome in order to benefit from existing network infrastructure. In regard to Funds Transfer Systems, it refers to the obstacles that a remittance-sender faces when trying to gain access to FFTS. Similarly, the “Last Mile” problem refers to the difficulties a remittance recipient faces in accessing transferred funds. - 28 -

incentives in choosing a funds transfer system. The character and intent of the sender also plays an important role. Is the sender a skilled or unskilled worker? Does the sender remit often or infrequently, and in what amounts? Is the sender’s remittance for a legitimate or illegitimate purpose? 2. The Last Mile: Senders will choose to remit in a fashion that makes it possible for the recipient to receive the funds. Thus the features of the recipient economy will loom large in the sender’s decision-making. If, for example, the recipient relative, friend, or acquaintance lives in a rural area with no FFT outlets, the sender may well choose an IFT system, even though he or she may have preferred to use an FFT system. 3. The Intermediary: The nature of the intermediate channels is also an important factor in mapping IFT flows. Since formal and informal channels may blend, a remittance through an FFT system may involve money being sent through an informal network somewhere along the way. IFT intermediaries may settle accounts among themselves through established accounts in formal institutions, such as banks (as happens in Mexico). The behavior of intermediaries is also deeply affected by legal considerations, notably whether their operation is legal or illegal, the level of law enforcement, or whether they are remitting on behalf of criminal customers.

The Perceived Incentives in Choosing a Funds Transfer System

Money remitters choose IFT systems over FFT systems for many reasons, including those set out below. 104 Some incentives may be unique to particular economies or societies and may not be listed here. Others may not apply to a given jurisdiction or funds transfer system. However, at least some of the incentives described below will certainly apply at some point in the decision making process of every sender. Because much will depend on the transactional considerations described above, each jurisdiction must investigate its own landscape in more detail to discover which incentives are most influential. The groupings described below have been constructed for convenience and do not represent a strict division. Many incentives will overlap. Personal Incentives · Anonymity/Secrecy: IFT transactions require no identification, except perhaps a recipient password, and no formal policy governs record-keeping. The anonymity of IFT transactions is a benefit that should not be understated. For example, illegal immigrants may believe that using a formal institution for their remittances poses a risk of discovery and deportation. Migrant workers may find it too difficult and expensive to navigate the bureaucracy so as to obtain official identification. These obstacles are circumvented by using IFT systems. Anonymity also attracts the business of illegal enterprises. As long as criminals profit from illegal activity, they will continue to seek out secret and obscure methods of transferring and laundering money. The absence of record-keeping and the practice of anonymous transfers make IFT systems prime candidates for use by criminal elements. · Cultural Familiarity: IFT systems predate FFT systems in many societies throughout the world. Money remitters may choose IFT systems out of comfortable familiarity. Formal institutions can scare away potential clients, particularly when language or

104 Many of these incentives have been adapted from El-Qorochi, Maimbo, and Wilson, 2003.

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procedures pose obstacles. IFT systems are adapted to the cultures in which they operate. In many cases, migrant workers are husbands and fathers who leave families behind and send money home. If the cultural norm in the home economy expects women to refrain from going out in public alone or interacting with formal institutions, such as banks or MTOs, then senders and recipients may prefer to have a trusted intermediary familiar with the culture deliver the funds directly. · Personal Contacts: IFT systems that cater to particular ethnic groups thrive on networks of personal and family contacts. As a result, remitters may choose to use IFT systems operated by friends or relatives. Or certain IFT channels may become widely recognized or recommended among the members of a particular ethnic community. In such cases, personal connections may outweigh other perceived incentives. Customer Service Incentives · Dispute Resolution: Differences between the customer and intermediary may also be easier to manage through IFT systems that do not have layers of management or bureaucracy. Since IFT intermediaries often rely on trust and reputation to maintain business, they are less likely to make dispute resolutions inconvenient and more likely to do whatever it takes to maintain their good reputation. · Accessibility: FFT agents may be widely available to the sender, but not to the recipient. IFT systems may be better able to reach places where FFT systems have not been established. · Class Discrimination: Unskilled migrant workers may be compelled to use IFT systems because of class division and discrimination. Sometimes formal institutions, such as banks, view servicing lower class workers as detrimental to their prestige. If no one fills the resulting void, remitters may be forced to use informal means. · Versatility/Resilience: IFT systems can survive civil wars and conflicts, economic crises, weak and unreliable financial sectors, economic sanctions, and other events that can affect the formal economy and national infrastructure. Economic Incentives · Speed: According to some estimates, an informal transfer can take as few as six hours between major international cities. If the recipient lives in an underdeveloped rural area, informal transfers can normally be completed within 24 hours.105 · Cost: IFT costs have been estimated at 2-5 percent of the transferred amount. Formal systems range in cost, but even the cheapest formal money remitters struggle to charge a competitive rate. Because IFT systems do not devote resources to regulatory compliance, they generally can charge cheaper rates. This is not the case everywhere, however. In some places, banks and other FFT systems charge competitive prices and offer other incentives and benefits that IFT systems cannot, such as housing preferences or low-rate home financing. Also, anecdotal evidence suggests that some IFT channels will knowingly charge higher rates when making transfers connected to illegal activity since the intermediary is assuming a greater legal risk and knows that the sender will pay more to avoid formal channels.

105 El-Qorochi, Maimbo, and Wilson 2003. - 30 -

· Secondary Benefits: Some institutions have specifically targeted money remittances as a market to be captured. Consequently, they will offer deals and incentives to encourage people to remit through their institutions. Incentives include programs whereby money remitters abroad can confer certain benefits on recipients, and discounts for frequent or large remittances.106 Formal institutions are in a better position than informal actors to develop secondary benefits because they are free to network with other legitimate businesses and government entities. · Legal/Regulatory Environment: Whether IFT systems are legal or illegal can play a significant role in the market. The right laws and regulations, properly enforced, can deter illegitimate IFT activity. Under such circumstances, remitters will perceive a greater risk in using an informal channel, and intermediaries will be more cautious and selective with their customers, resulting in a general depression of the IFT market. Although IFT systems have proved difficult to regulate, some notable successes have drastically altered certain markets107. On the other hand, liberalizing the market and easing regulations may force FFT systems to compete with IFT systems, creating a self-regulating market based on competition. 108

106 Orozco 2003. 107 El-Qorochi, Maimbo, and Wilson 2003. Following a government corruption scandal involving bribes through IFT systems, India explicitly prohibited the practice with some notable success. 108 Ibid. Afghanistan’s money remitters are organized into a self-regulated body similar to a union or fraternity of registered dealers. Formal institutions in The Philippines have adopted many IFT systems -style practices, such as door-to-door service, to compete with informal money remitters. - 31 -

B. DIAGRAMMING THE FRAMEWORK

IFT Flows by the Intent of the Sender

Money Terrorist Gold / Evading Laundering Financing Smuggling Capital/Exchange Illegitimate Flows Controls Aid to Migrant Undeveloped / Small Personal Small-Business Worker War-torn Transfers Transactions Legitimate Flows Remittances Jurisdictions

Different types of flows are identified simp ly Flows are categorized as legitimate for purposes of compiling data and or illegitimate with respect to estimating the magnitude of flows. development and security.

Migrant workers’ remittances are believed to comprise the largest portion of IFT flows.

Part 1: Quantitative Economic Analysis Part 2: Qualitative Incentives Analysis The task is to estimate the volume of migrant workers’ The task is to examine perceived incentives involved in remittances as IFT flows by focusing on numerical data. choosing a funds transfer system at all three stages of a transaction. Part 1: Quantitative Economic Analysis

Total Flows Formal Flows Informal Flows The accuracy of this (# migrants) x (avg. remittance) IMF BOP: “workers’ remittances” estimate depends on + “compensation of employees” accurately gauging total flows and improving MINUS EQUALSSources: MINUS EQUALS Household surveys Sources: formal recording so that Central bank, post offices unidentified formal flows Government data Formal reporting and recording are filtered out of the must improve uniformly to informal est imate. International organizations achieve better accuracy

Part B: Qualitative Incentives Analysis

Sender Transaction: Recipient Transaction: Intermediary / Channel “The First Mile” “The Last Mile” Formal: banks, MTOs, Perceived incentives: Circumstances in the postal services, debit/credit recipient’s location will card companies

Personal affect the sender’s choice Informal: hand delivery Customer service of transfer system (formal (courier), ethnic stores Economic vs. informal).

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C. APPLYING THE FRAMEWORK

Previous sections of this report have detailed some of the obstacles faced in collecting reliable data and statistics. These obstacles will surface in different ways in different economies. However, this report applies the framework to all APEC members by using IMF balance of payments data for its quantitative economic analysis (Part 1 of the framework) and a survey conducted by the APEC ARS Working Group for the qualitative incentives analysis (Part 2 of the framework). Preliminary IFT system profiles for all APEC members (Annex I) show how each element of the framework can be completed and which require further investigation. Although not as detailed as the case studies below, the profiles provide general observations that may be fleshed out in later case studies. Box 6 illustrates how the framework analysis operates when applied to an actual economy (in this case Mexico). Six APEC economies stand out for their significant migrant worker movement—sending, receiving, or both—and also collect enough data to allow for a meaningful application of the framework. Application of the framework generated the following findings for the six countries.

Indonesia

Indonesia is a large labor-exporting economy. Remittance flows to Indonesia have increased steadily since the mid-1990s109—currently they stand at more than $1 billion annually,110 with 70 percent coming from APEC economies. Like the Philippines, it provides orientation programs for departing migrants.111 Because Indonesia is so close to Malaysia, where the average family income is 13 times higher than in Indonesia, many Indonesians have migrated to Malaysia to work. For that reason, the relationship between the two countries deserves special attention, with regard to recording and regularizing remittance flows. Although enough information is available to estimate the average remittance amount, derived figures appear unreliable, thus warranting further investigation, specifically of flows from the Philippines and Malaysia. One type of investigation that could verify remittance averages is household surveys, which presently are not conducted in Indonesia. Much like the Philippines, Indonesia is made up of thousands of islands, making access to formal remittance services inconvenient and impractical. However, Indonesia does have 2,141 rural banks with 2,745 local branches. Although these banks’ services do not include foreign- exchange activities, their presence in rural, often low-income populations demonstrates the potential for the development of FFT infrastructure. Also present in Indonesia are shopkeepers, traders, and “professional” money lenders operating in the informal, unregulated sector.

Malaysia

Malaysia presents an interesting example of an APEC economy with remittance flows that reflect the substantial amount of labor imported from abroad, as opposed to labor exported

109 IOM 2000, p.94. 110 IMF 2002. 111 IOM 2003. - 33 -

Box 6: Illustrating the Framework Analysis

IMF BOP USD$9.8 billion (Credit) The Framework

Migrant Workers 8,227 thousands in the U.S.A. Estimate Informal Abroad Remittances N.A. Part 1. Quantitative Economic Average Annual slightly over USD$300 Remittances Analysis

Estimating Informal Money Flows Mexico The First Mile, the Last Mile and the Intermediary Incentives

Part 2. 695,000 CICs* were issued Anonymity/Cultural Qualitative in 2001 and over 1.4 million Incentive Familiarity: The circulation of in 2002. 150 financial CICs help overcome the formal Analysis The First Mile institutions in the U.S.A. identification obstacle allowing (sender) accept the CIC. Wells Fargo remitters to experience the estimates that it has opened benefits of account-holding 60,000 new accounts since it institutions began accepting them

U.S. Bank customers can send Accessibility: Mexico’s The Last Mile money to 760 People’s increasing network of banks and (recipient) Network branches in Mexico wire services providers means (Bansefi’s network). FFT systems are accessible.

In two years up to 1998, the Reliability: Remittance theft Postal Service received claims from IFT systems is a Intermediary for lost transfers amounting to perceived problem. FFT $12.3 million. Remittance theft channels are preferred secure appears to be work of organized methods of fund transfer. crime. Findings

Worker’s remittances have been The shift may also be growing at over 10% per year. Of This could be interpreted as particular interest is the rapid growth in evidence of Mexico’s rapid attributed to perceived electronic transfers. From a market shift away from money orders incentives affecting Mexican share of 60% in 1998, to almost 90% and into fully banking system remitters. in 2002. transfers * CIC: Consular Identification Cards

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The country records $1 billion in inflows of remittances and $3 billion in outflows.112 Because Malaysia does not keep emigration records or conduct surveys of foreign workers, it is difficult to draw conclusions about labor migration and average remittance data. Disparities appear when data from Malaysia are compared with data from Indonesia, the Philippines, and Vietnam, implying that particular scrutiny must be applied to these bilateral flows. Malaysia does have a highly developed financial sector, with over 26 commercial banks, 11 finance companies, and 14 development-finance institutions. These banks have extensive networks in rural areas and service low-income groups. The commercial banks and Islamic banks offer remittance services, and MTOs such as Western Union and MoneyGram offer remittance services through the commercial banks. IFT activity appears to occur through courier systems and by returning migrant workers converting their wages into gold ornaments and wearing them. Malaysia’s regulations on financial activity require that all financial services and money changers are licensed by the Central Bank; all are subject to reporting requirements and other AML provisions.

Mexico

Mexico is the world’s second largest recipient of remittances, with $9.8 billion in remittances reported in 2002. 113 Remittances are sent mainly from the United States, just one component of the unique relationship between the two countries. Most Mexican migrants in the United States send remittances once or twice a month. 114 In the last few years, the use of IFT systems has been dramatically reduced, generating important lessons that could be shared with other APEC economies. There are several reasons for the shift from informal to formal channels. One is competition in a mature remittance market, with the resulting market-driven fees for remittance services. Another is the issuance of consular identification cards (CICs), which provide irregular migrants with a form of identification acceptable to many U.S. banks. Finally, the growth of financial networks has expanded delivery to remote locations. Application of part 2 of the framework suggests that Mexican migrant workers base their decision on how to remit money on the reliability of the service rather than its cost. Mexico’s close bilateral relationship with the United States has been better documented than most other bilateral relationships between APEC economies.

The Philippines

The Philippines is the world’s third largest recipient of remittances, with 2002 remittances of $6-7 billion. The highly organized labor-exporting industry and the large number of educated Filipino migrant workers have encouraged the growth of relatively transparent systems of funds transfer. The government has established an office to coordinate and manage migrant flows; its “predeparture orientation seminars” include information on remittance services abroad. 115 But because the Philippines is composed of more than 7,000 inhabitable islands, networking and fund delivery are difficult to centralize. By some accounts (based on limited market research), up to 80 percent of the Philippines may be “unbanked,” and thousands of islands rely on independent couriers to deliver remittance funds. The Filipino banking system includes commercial banks, thrifts, private development banks, stock savings and loans, and rural banks.

112 IMF 2002 113 Ratha 2003. 114 University of California-Davis 2002. 115 IOM 2003. - 35 -

Thailand

Remittances to Thailand in 2001 were $1.3 billion, placing the country as one of the top 20 remittance-receiving economies for that year. 116 Outflows total about $400 million. Household surveys show that the average family in Thailand receives $300 per year in “current transfers.” They do not indicate if these transfers are domestic or international, however. Future surveys would be more useful if they distinguished between domestic and overseas transfers. Cross-border remittance services are available through commercial banks, MTOs, and other authorized companies, and the Thai government is committed to improving access to financial services. At present, the bank-to-person ratio outside Bangkok remained 1:23,355 in December 2002. IFT systems operate for those disenfranchised from the formal financial sector, whether from lack of access or lack of creditworthiness.

Vietnam

Vietnam is a net exporter of labor. But because Vietnam’s landscape is mostly rural, only about one-third of all remittances to Vietnam are recorded in IOM estimates. The officially recorded flow of remittances to Vietnam is more than $1 billion per year, implying an annual average remittance of about $400-$500 for each Vietnamese overseas. 117 Household surveys in 1997-98 indicate that the average annual remittance at that time was $700. However, no data for Vietnamese workers in Malaysia was included in the calculation of this average. OECD estimates that more than 2.5 million Vietnamese live overseas, 35 percent in the United States and significant numbers in Korea, Malaysia, and Chinese Taipei. Remittances are transferred to the country through commercial banks (Vietcombank), MTOs (Western Union), and informal channels (mainly hand delivery of cash). Vietnam’s banking sector is relatively undeveloped and does not currently have a comprehensive institutional framework to enforce AML/CFT. However, the government plans to issue a comprehensive anti-money laundering decree in late 2003.

116 Ratha 2003. See Figure 7.3. For this figure, the author ranked the top twenty remittance-receiving countries in nominal terms, as opposed to percentage of GDP. Thailand’s $1.3 billion inflow in worker remittances places it at number eighteen in the world when remittances are categorized in nominal terms. 117 OECD 2002. - 36 -

IV. CONCLUSIONS AND POLICY RECOMMENDATIONS

This section summarizes the findings of this report and offers recommendations and policy guidance for APEC economies wishing to encourage the use of formal remittance systems.

A. ASSESSING THE FRAMEWORK: BENEFITS AND LIMITATIONS

The framework focuses on migrant workers’ remittances as the key component of IFT flow analysis for two reasons: (1) research on economic development, labor migration, and worker remittances has shown that worker remittances are the major component of informal funds transfers and thus a logical starting point for analysis, and (2) the availability of data on the topic is extensive enough to permit effective analysis. The framework reveals the need for APEC economies to understand the magnitude and nature of migrant workers’ remittances. If appropriate incentives are extended by formal sector agents and supported by government, more migrant workers will shift from IFT systems to FFT systems, a result dramatically illustrated in Mexico and reportedly in Vietnam since 2002. Still, it should be acknowledged that worker remittances are not the only component of IFT flows, which also include flows of gold, money laundering, and small-business transactions. Although some of these IFT components are addressed in the framework, they are not the focus of this report. The framework addresses these topics indirectly by examining perceived incentives to use IFT systems and exposing unrecorded flows. By isolating and analyzing workers’ remittances, the framework takes an important step toward shrinking the volume of opaque flows in IFT channels. Isolating workers’ remittances increases the probability that the flows remaining in informal channels are illegal; that is, related to criminal activity such as money laundering, terrorist financing, and smuggling. By drawing legitimate flows into formal remittance systems and thus isolating the illegal flows, law-enforcement agencies can concentrate on critical problems in funds transfer. As illustrated in the Philippines case study, well-targeted enforcement need not interfere with the legitimate remittance activity of migrant workers and its beneficial impact on development.

B. MAIN FINDINGS FROM THE FRAMEWORK

When applied to economies with a reasonable amount of available data, the framework can produce a quantitative and qualitative analysis of a nation’s funds transfer system, as illustrated by the six case studies in annex II. The framework can be strengthened and augmented by considering the following: 1) Filtering the “Unidentified” Gap By indirect estimation, Part 1 of the framework (quantitative economic analysis) reveals an unidentified gap in flows. This gap needs to be further filtered to separate informal flows from formal flows that are escaping recording mechanisms. This filtering process can be aided by: · Improving the transparency of the balance-of-payments statistics reported for each economy and detailing the components that make up the reported number, in particular estimates of workers’ remittances flows. Remittance

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figures should reflect the activity of all FFT systems, not only banks and postal services. · Conducting household surveys (in both sending and receiving economies) that could be used to understand issue related to sending and receiving remittances, including the average amount of the remittance. Information collected by the surveys would include country of origin of the remitter, gender, income, family status, average annual remittance, and number of remittances per year. Improving recording techniques and conducting surveys would also give analysts a better estimate of total flows (formal and informal), which, in turn, would improve the accuracy of informal flow estimates and the filtering process. 2) Accurately Mapping First/Last Mile Issues and Perceived Incentives Part 2 of the framework covers the perceived incentives in the remittance process that affect participants’ decisions to use formal or informal channels. These issues need to be examined for each jurisdiction to assess the actual incentives at work. This can be achieved by: · Conducting economy-focused studies, based on the framework put forth in this report, that provide details about the channels and perceived incentives operating in a particular nation or bilateral relationship. Studies should be conducted among APEC nations themselves with full access to government data and resources to help determine the actual qualitative and quantitative factors involved in a particular jurisdiction’s funds transfer market. (For an example of such a study, see the Phillippines case study in annex III.) · When conducting large-scale household surveys, including questions that assess the perceived incentives at work in particular households. The surveys mentioned previously could be used to gauge the incentives faced by senders and recipients. Understanding the incentives to use IFT or FFT channels in a particular jurisdiction is crucial to understanding how to shift money remitters from informal to formal channels. The following observations were revealed by applying the framework to a limited number of economies: Perceived incentives are shaped by the cultural, social, and economic characteristics of each sending and receiving economy. Understanding the motivation of the sender is of utmost importance in devising ways to increase FFT services, and different societies and jurisdictions are likely to find that remitters are affected by very different incentives. Incentives related to cost, availability, and personal networking may be affected by labor conditions, as in the Philippines, where a well-organized labor-export industry rotates workers in and out of the country under overseas labor contracts. Hand-delivery methods are often employed, as returning workers also courier funds for friends, family, and fellow migrant workers. Price also generally tends to be a major incentive for remitters to send money through IFT channels, although some case studies indicate that cost does not appear to be the primary incentive—remitters are more concerned with the reliability of the channel. Such is the case in Mexico, where remittance theft is a problem. Consequently, remitters to Mexico tend to choose the most reliable channel, regardless of the cost. Legal and regulatory provisions affect the funds transfer market and the perceived incentives faced by senders. Governments must strike an appropriate balance in their level of regulation. Security measures can depress IFT activity, limiting the channels through - 38 - which criminals can remit funds by making it risky for intermediaries to deal with criminal elements. But if these measures are onerous, compliance also could increase the costs of operating an FFT system, creating higher prices and drawing funds away from investment in competitive FFT systems. However, FATF’s minimum compliance recommendations— among them licensing/registering with a designated competent authority, applying know- your-customer policies, and filing suspicious transaction reports—should not create a burden. Authorities may face the challenge of gathering sufficient resources to enforce laws and regulations and to supervise the enlarged scope of the regulated financial sector. Migrant workers’ remittances can be lured into FFT systems through incentives. By identifying the perceived incentives—personal, customer-service, and economic—that influence the choices of participants in the remittance process, governments and financial- service companies can gear their initiatives toward those incentives. Given the proper circumstances in each APEC economy, FFT systems have the potential, through innovation and capital, to compete with IFT systems in the workers’-remittance market. Where concern over migration status once prevented Mexicans from acquiring the identification necessary to use U.S. financial institutions, they now have access to CICs, which provide a valid form of identification that can be acquired without an investigation into immigration status. In Vietnam, a burdensome fiscal and administrative framework stifled formal remittances; modifying that framework has led to an increase in use of FFT systems. In the Philippines, NGOs and other organizations have taken advantage of the nation’s organized labor- exporting industry by participating in predeparture orientation seminars in which departing workers learn how to formally remit funds back home. Private-sector competition and targeted government cooperation can shift the balance of incentives in favor of FFT systems. The key to encouraging use of FFT systems for remittance services is lowering the cost of these services. Once the business opportunity available in workers’ remittances is recognized, businesses will compete for remittance services, naturally creating lower prices. Although new products are difficult to create for low-income groups, and costs for services providers could be high (with minimal possibilities for cross-selling other products), once businesses offer the right products, the repeat business potential of remittances should cause variable costs to decline. Governments can help by improving the infrastructure used to transfer funds between financial institutions at low cost. Automated clearing houses and private settlement and clearing channels with broad participation are examples of the necessary improvements. Governments should facilitate entry to the workers’ remittance market by non-bank financial institutions such as credit unions and microcredit institutions. 3) Banking for the Unbanked Finding banking services for the “unbanked” – the many who lack ready access to banking services - is the key to any effort to bring about a shift from informal to formal financial systems. In many places, IFT systems flourish because financial institutions are weak, inaccessible, or non-existent. Spreading financial networks into rural areas and reaching out to the financially disenfranchised will increase the use of formal systems. Governments should engage the private sector to build up financial infrastructure, while educating and acclimating migrant workers and their families to the benefits and processes of formal financial institutions.

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C. RECOMMENDATIONS AND POLICY GUIDANCE IFT systems in the APEC region should be further researched on an economy-specific level, guided by three core objectives: (1) devising ways to better record remittance flows and track IFT system activity, (2) paying special attention to the particular local/regional factors that most affect perceived incentives to remit through formal or informal systems, and (3) continuing efforts to provide banking services to those who lack them. To implement this set of principles, the following actions are recommended: 1) Recording FFT Systems and Tracking IFT Systems Activities Along with addressing the recording improvements mentioned above in section (B), the following steps are recommended: · Improve the accuracy of recording mechanisms for transactions conducted by FFT systems. Banks, MTOs, postal services, and other FFT systems ought to have clear and uniform guidelines on recording and reporting international transfers. Transfers should be relayed to a central bank, which will collect and report the official data. · Promote cooperation among government regulatory agencies, such as financial intelligence units (FIUs), to track IFT systems (monitor their activity, main flows, and economic impacts) and prevent their abuse for criminal activities such as money laundering and terrorist financing, while ensuring that FFT systems comply with international best practices. Nations should consider the recommendations on AML/CFT of the United Nations and FATF, especially those requiring all funds transfer systems (formal and informal) to be registered or licensed by a government or FIU. 2) Addressing Incentives on a Local/Regional Level · Review government policies and regulations with a view toward generating private-sector involvement and intra-government cooperation to harmonize efforts to create efficient and competitive funds transfer systems. Governments need to balance the benefits and risks involved in regulating or liberalizing the funds transfer market. They should continue to study IFT activity in their economies, even once laws are passed that outlaw IFT systems. · Promote clearing house systems between banks. These systems create international electronic funds transfers that offer financial institutions and their customers an efficient alternative for processing payments between economies. Clearing house systems have the potential to lower costs and increase convenience. · Initiate bilateral governmental cooperation on IFT systems. Each jurisdiction’s regulators can and should cooperate with those of other economies to harmonize efforts and thus facilitate the development of efficient international FFT systems. · Develop new market products and mechanisms that make it possible for migrant workers and other users of IFT systems to access and use formal financial institutions, particularly banks. Access to banks is particularly important in bringing migrants and others into the formal sector. Access can be improved by creating new identification instruments at formal institutions, branching out into

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migrant worker workplaces, training bilingual staff, and creating programs that offer benefits to remitters who use particular institutions. 3) Banking for the Unbanked · Develop the financial system—particularly in rural areas—so that it offers a wide range of services, including international funds transfers. Efforts to develop the financial system should include educating the economically disenfranchised about the benefits and importance of holding accounts in and using formal financial institutions. This may be accomplished by branching out the infrastructure of existing banks or financial institutions into rural communities, creating a rural banking/financial system specifically geared toward rural banking needs, and building on grassroots efforts such as community self-help groups or village resource pools that may already be operating in rural areas. · Consult with other economies and international financial institutions about the role each might play in expanding financial sector development. The necessary consultation and coordination should include parceling out research tasks and allocating resources to continue research and policy development.

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Hispanic vista. “Mexico: NAFTA employment versus Migration to the US”. (Article dated on January 26, 2003). Accessed on August 13 at http://www.hispanicvista.com/html2/012703mex.htm IADB (Inter-American Development Bank). 2003. “IDB and Caixa of Barcelona to Cooperate on Cutting Costs of Remittances Sent by Latin American Migrants.” Press release dated January 23. Accessed at http://www.iadb.org/exr/PRENSA/2003/cp1203e.htm. ICBA (Independent Community Bankers of America). 2002. “ICBA and Travelex to Enter $15 Billion Hispanic International Money-Transfer Market.” Accessed July 17 at http://www.icba.org/sitesearch/sitesearch_pubfr.html. IMF (International Monetary Fund). 1995. Balance of Payments Compilation Guide. Washington, D.C. ———. 1996. Balance of Payments Textbook. Washington, D.C. ———. 2001. Balance of Payments Statistics Yearbook. Washington, D.C. ———. 2002. Balance of Payments Statistics Yearbook. Washington, D.C. IMF Committee on Balance of Payments Statistics.2002. Annual Report. Washington, D.C.: International Monetary Fund. IMF and World Bank. 2002. “Informal Funds Transfer Systems: An Analysis of the Hawala System.” Financial Sector Vice Presidency, World Bank, and Exchange and Monetary Affairs Department, Middle Eastern Department, IMF, Washington, D.C. Institute of Islamic Banking and Insurance. 2003.“What Is Islamic Banking?” Accessed on May 24 at http://www.islamic-banking.com/ibanking/whatib.php. International Conference on Hawala. 2002. “Abu Dhabi Declaration on Hawala.” May 16. IOM (International Organization for Migration). 2003. “Draft: Compendium on Labour Migration Policies and Practices in Major Asian Labour Sending Countries.” Asian Labour Migration Ministerial Consultations. Sri Lanka: IOM, April 2003. ———. 2000. World Migration Report 2000. IOM and United Nations. Lozano-Ascensio, Fernando. 2002. “La migración mexicana, su historia e impacto.” Capitulos no. 65 (May-August). Accessed at http://www.sela.org. Maimbo, Samuel. 2003. “The Money Exchange Dealers of Kabul: An Analysis of the Hawala System in Afghanistan.” Working Paper Series, World Bank, Washington, D.C. Martin, Philip. 1996. “Migrants on the Move in Asia.” Asia-Pacific Issues 29 (December). Mellyn, Kevin. 2003. “Worker Remittances as a Development Tool: Opportunity for the Philippines.” Asian Development Bank, Manila. Meyers, Deborah. 1998. “Migrant Remittances to Latin America: Reviewing the Literature,” Inter- American Dialogue (May 1998): 5. Migration Information Source, 2002. Migration Policy Institute, Washington, D.C. “Country Profiles – Indonesia’s Labor Looks Abroad”, Hugo, Graeme; September 2002. www.migrationinformation.com. “Country Profile – Mexico: A Crucial Crossroads”, Alba, Francisco; July 2002. www.migrationinformation.com.

- 44 -

Monitor, Christian Science. 2003. “Fair Deal for Mexicans in US.” July 24. www.csmonitor.com/2003/0724/p10s02-comv.htm. Morais, Herbert V. 2002. “The War Against Money Laundering, Terrorism, and the Financing of Terrorism.” LAWASIA Journal (Darwin, Australia): 1-30. National Statistics Office (Philippines). 1999. “Technical Notes on the Survey of Overseas Filipinos.” http://www.census.gov.ph/data/technotes/notesof.html. National Statistics Office of Thailand. 2003. http://www.nso.go.th. Nguyen Dang Hong. 2002. “Response to Money Laundering and Terrorist Financing.” Presentation by the Deputy Head, Inspection Department, State Bank of Vietnam, to the regional videoconference on Anti-Money Laundering and Combating the Financing of Terrorism, World Bank/IMF, November 13. Office of Enforcement, U.S. Department of the Treasury. 2001. “The 2001 National Money Laundering Strategy.” Washington, D.C. September. Opportunity International (United Kingdom). 2003. “Global Charity and Global Corporation to Partner to Improve Cross-Border Money Transfer Remittances Which Aid World’s Poorest.” Press release dated May 28 accessed at http://www.opportunity.org.uk/mediainfo/news releases/MasterCard.html. OECD (Organisation for Economic Co-Operation and Development). 1998. Migration and Regional Economic Integration in Asia. Paris. ———. 1999. Labour Migration and the Recent Financial Crisis in Asia: Social Issues/Employment. Paris. ———. 2002. Migration and the Labour Market in Asia: Recent Trends and Policies. Paris. Orozco, Manuel. 2003. “Worker Remittances in an International Scope.” Inter-American Development Bank Research Series, Remittances Project, Washington, D.C. March. Pohit, Sanjib, and Nisha, Taneja.2000. India’s Informal Trade With Bangladesh and Nepal: A Qualitative Assessment. New Delhi: Council for Research on International Economic Relations. Puri, Shivani, and Tineke Ritzema. 1999. “Migrant Worker Remittances, Micro-Finance and the Informal Economy: Prospects and Issues.” Working Paper 21, Enterprise and Cooperative Development Department, Social Finance Unit, International Labour Office, Geneva. July. Ratha, Dilip. 2003. “Worker’s Remittances: An Important and Stable Source of External Development Finance. In Global Development Finance 2003. Washington, D.C.: World Bank. Chapter 7. Sanchez, Elizabeth L. “PNB targets remittance tie-ups with Singapore, Taiwan entities.” Asia Africa Intelligence Wire. 18 June 2003. InfoTrac OneFile Plus. University of Virginia Libraries. Scalabrini Migration Center, 2002. Asian Migration Atlas. http://www.scalabrini.asn.au/atlas/amatlas.htm Schott, Paul Allan. 2003. Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism. Washington, D.C.: World Bank and IMF. Silver, Sara. 2003. “Cost of Sending Dollars to Mexico.” Financial Times, June 11, p 1. Solimano, Andres. 2001. “International Migration and the Global Economic Order: An Overview.” World Bank, Development Research Group, Washington, D.C. November. - 45 -

Stahl, Charles W. 1999. “International Labour Migration in East Asia and Policy Issues.” Paper presented at the symposium on New Trends in Asia Pacific Migration and Consequences for Japan, organized by Waseda University and the Asia–Pacific Migration Research Network. September. Statistics New Zealand. 2003. “External Migration: Permanent and Long-Term.” Accessed on June 16 at http://www.stats.govt.nz/domino/external/web/prod_serv.nsf/092edeb76ed5aa6bcc256afe008 1d84e/ad03420990672c12cc256bba0008a0dc?OpenDocument. Tin Kinh Te Tham Khao. 2003. “Overseas Remittances Prop up Economy.” January 20. University of California-Davis. 2002. Migration News 9(12). Articles on China, Indonesia, Malaysia, the Philippines, and Thailand accessed at http://migration.ucdavis.edu/mn/Archive_MN/dec_2002-14mn.html U.S. Census Bureau. 2003. Accessed on April 29 at http://www.migrationinformation.com/GlobalData/countrydata/data.cfm. U.S. Department of State. 2002. “U.S.-Mexico Partnership for Prosperity” (press release). Washington, D.C. March 22. U.S. Department of the Treasury. 2003. “FinCEN Advisory: Informal Value Transfer Systems.” Financial Crimes Enforcement Network, Washington, D.C. March. U.S. Treasury. 2003. “U.S. Strengthening Remittance Channels to the Philippines” (press release). Washington, D.C. May 20. Vietnam Panorama. 2003. “Vietnam to Issue Money Laundering Decree in Q2.” April 24. http://www.vietnampanorama.com/mainpage.asp Western Union. “Vietnam.” Accessed on June 3, 2003 at http://www.westernunion.com/info/intlCountryInfoIndex.asp?country=VN Xinhua News Agency. 2003. “Remittances to Bangladesh reach record high in fiscal 2002-2003.” August 21. World Bank, Financial Sector East Asia and Pacific Region. 2002. “Banking Sector Review, Vietnam.” June. http://www.worldbank.org.vn/publication/Banking%2003.pdf

- 46 - ANNEX I ANNEX I—APEC ECONOMY PROFILES

ANNEX I contains a set of profiles for each Asia-Pacific Economic Cooperation (APEC) member economy on Informal Funds Transfer (IFT) systems. These profiles offer a general overview of the framework analysis for each country. Input from the APEC Alternative Remittance Systems (ARS) Working Group has been incorporated into the profile. Each profile has two parts.

PART 1. QUANTITATIVE ECONOMIC ANALYSIS (ESTIMATING INFORMAL MONEY FLOWS)

The first part of the framework (Part 1. Quantitative Economic Analysis: Estimating Informal Money Flows) relies on data that has been released by member governments and other international organizations. It has five boxes.

Box One

This section (“Formal Worker Remittance Flows”), uses data from the International Monetary Fund (IMF) Balance of Payments Statistics Yearbook, 2002. Two of the three totals in the yearbook—those for “workers remittances” and “compensation of employees”—are provided for each country. The third total is mentioned when the economy has a significant number of “migrant transfers”. All data refer for 2001 unless otherwise noted. Please refer to Table 1 in the text for definitions of the three components of cross-border transfers and the complete set of IMF BOP data.

Box Two

Information regarding migration flows comes from a number of sources, including: · Solimano, Andres. “International Migration and the Global Economic Order: An Overview.” November, 2001; · International Organization for Migration. “Draft: Compendium on Labour Migration Policies and Practices in Major Asian Labour Sending Countries.” Asian Labour Migration Ministerial Consultations. Sri Lanka: IOM, April 2003; · International Organization for Migration. World Migration Report 2000. IOM and United Nations, 2000; · Various publications of the Organisation for Economic Co-operation and Development (OECD); and · and various country sources. It is important to note that the header for step two depends on the nature of migration flows for each particular country. Two separate headings are used for labor exporter and importer economies: “Number of Migrant Workers Abroad,” and “Number of Immigrant Workers,” respectively. Nations that play dual roles as importers and exporters of labor have both headings displayed. It is also important to emphasize the difference between the number and flow of migrants, and note that the former is used in as many cases as possible.

- 47 - ANNEX I Box Three

Information for this box (“Average Annual Remittance per Worker”) is presently available for only a few economies. For economies where relevant information is missing, this step will be left blank.

Boxes Four and Five

Calculations for these steps (“Total Estimated Annual Remittances” and “Estimated Informal Remittances”) rely on information from the previous three steps.

PART 2. QUALITATIVE INCENTIVES ANALYSIS (THE FIRST MILE, THE LAST MILE, AND THE INTERMEDIARY)

The second component of the framework (Part 2. Qualitative Incentives Analysis: “The First Mile, the Last Mile, and the Intermediaries) uses data from the APEC Alternative Remittance Systems Survey, which was circulated among members of the APEC Working Group. This table includes bulleted points about the actors, channels, and regulations that affect remittance flows at the first and last mile. It also includes a list of perceived incentives that affect the actors’ decisions to use the formal or informal systems in each economy. (See example on the next page.)

- 48 - ANNEX I SAMPLE APEC ECONOMY

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Number of Average Total Data Gap— Transfers Immigrant Migrant Annual Estimated Estimated or Workers Remittance Annual Informal Migrant Abroad per Worker Remittances Remittances Workers (Formal and Informal) IMF BOP Total Total

Credit Debit

Millions of U.S. Dollars Thousands Thousands Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors

For example:

· Low-income individuals have access to financial institutions primarily through mutual Channels savings banks, credit unions, and community credit cooperatives. · Rural banking is extensively offered by all types of banks.

For example: Regulatory · The “X&Y” Act mandates the punishment of any individual who remits outside of the legal channels.

Incentives* for Using IFT Systems

Last Mile Problem For example: Actors · Geography and economic status are often barriers to gaining access to formal financial institutions. For example:

Channels · A small number of remittances are made in cash when residents return on vacation from abroad and visit their relatives back home.

Regulatory

* “Incentives” in the profile frames should be understood as “perceived incentives” described throughout this report.

- 49 - ANNEX I AUSTRALIA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Annual Total Estimated Data Gap— Transfers Immigrant Remittance per Annual Estimated Workers 118 Worker Remittances Informal (Formal and Remittances Informal) IMF BOP119 Total 3,908.2 Credit 466 U.K. 1,072.5 Debit 549 New N.A. N.A. N.A. Zealand 291.4 Vietnam 151.1 Other 2,393.2

Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile Problem · The informal financial system is used by tourists, ethnic communities, and low- Actors income individuals. · Formal banking is offered by 50 banks, 18 building societies, and more than 200 credit unions. · Low-income individuals have access to banking services with lower fees. · In rural areas, 29 Authorized Deposit Taking Institutions (ADIs) have 342 branches. Of these, 158 are full service branches. Channels · The Australian government created a Rural Transaction Center Program to establish better transaction services in rural communities. · Remittance services are offered by banks, credit unions, money-changers, Western Union, and Australian Post. · Remittances in the informal sector are offered by ethnic storeowners. Clients can often access these services using the Internet. · Banks and similar deposit-taking institutions are regulated by the Australian Prudential Regulatory Authority (APRA). · The clearing and payments system for banking transactions (Australian Payments Regulatory Clearing Association (APCA)) is regulated by the Reserve Bank of Australia (RBA). · Informal and formal transfer operators which cn be classified as a ‘cash dealer’ under the Financial Transaction Reports Act 1988, must report remittances in excess of $10,000 AUD, suspect transactions and international fund transfers to AUSTRAC120. · Informal remittance services are more conveniently available for rural individuals. Incentives for Using IFT · The informal funds transfer system is faster and cheaper. Systems · A remitter can send money anonymously, send value in goods rather than cash, and avoid currency controls. Last Mile See profiles for remittance recipient countries. Problem

118 Figure refers to total number of foreign born in 1996 cited in Solimano, 2001. 119 Australia has incoming and outgoing flows of migrant transfers. The recorded credit is 1,311million and the debit is -460million. IMF 2002. 120 The Australian Transaction Reports and Analysis Center (AUSTRAC) is Australia’s anti-money laundering regulator.

- 50 - ANNEX I BRUNEI DARUSSALAM

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross- Number of Number of Average Total Estimated Data Gap— Border Immigrant Migrant Annual Annual Estimated Transfers Workers121 Workers Remittance Remittances Informal Abroad per Worker (Formal and Remittances Informal)

IMF BOP Total N.A. Total N.A.

Credit N.A. Malaysia N.A. Debit N.A. Philippines N.A. N.A. N.A. N.A.

Millions of U.S. Thousands Thousand Dollars s Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors N.A

Channels N.A

Regulatory N.A

Incentives for Using IFT N.A Systems

Last Mile Problem

Actors N.A

Channels N.A

Regulatory N.A

121 IOM 2000.

- 51 - ANNEX I CANADA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Data Gap— Transfers Immigrant Annual Estimated Estimated Workers 122 Remittance Annual Informal per Worker Remittances Remittances (Formal and Informal) IMF BOP Total 4,971.1 Credit N.A. U.K. 655.5 Debit N.A. USA 244.7 N.A. N.A. N.A. Hong Kong, China 241.1 China 231.1 Philippines 184.6 Other 3414.1 Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis · For a number of Canadians, economic status can be a barrier to gaining access to First Mile formal basic financial services. Problem Actors · Immigrant communities are users of informal funds transfer systems. · Canada’s 14 domestic banks, 33 foreign subsidiaries, and 20 foreign banks have more than 8,000 branches and 18,000 automated teller machines (ATMs). · There are 2,000 credit unions with more than 3,600 locations and 3,900 ATM machines throughout the nation. Channels · Bank services and ATM machines are available in rural areas. People can use the Internet and telephone to access these services . · The Large Value Transfer System (LVTS) is also used for international electronic funds transactions. Nonbank financial institutions, like money service businesses, are also available for remittances. · The Canadian Payments Association (CPA) was created by federal statute to operate Canada’s national and clearing settlement systems. Regulatory · The Proceeds of Crime (Money Laundering) and Terrorist Financing Act requires all money service businesses to implement certain record keeping, reporting, and client identification standards · Informal remittance services are faster and cheaper than through regulated Incentives for systems. Using IFT · There is a lack of reliable and safe financial systems in the home country. Systems · Informal channels can reach individuals everywhere in the home country. · Informal remittance occurs in a number of immigrant communities. · See profiles for remittance recipient countries. Last Mile Problem

122 Figure refers to total number of foreign born in 1996 in Solimano, 2001.

- 52 - ANNEX I CHILE

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Estimated Data Gap— Transfers Migrant Workers Annual Annual Estimated Abroad Re mittance Remittances Informal per Worker (Formal and Remittances Informal) IMF BOP Total N.A. Credit N.A. Debit -15. N.A. N.A. N.A.

Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile See profiles for remittance sending countries. Problem · Informal remittance channels, like private couriers and money exchange agencies, Incentives for are often used for small transfers because they are cheap, convenient, and less Using IFT bureaucratic. Systems

Last Mile Problem Actors · Immigrants from neighboring countries. · There is no official distinction between rural and urban banks–both provide the same services to their customers. · Bank subsidiaries provide financial services to low-income communities, but in practice, low-income individuals make little use of the banking system. · Financial services are offered by informal institutions, such as department stores, Channels stockbrokers, and foreign exchange agents. · Banks complete international money transfers through corresponding branches abroad, primarily those in New York City. · Customers with large transfers more often seek the formal system because of its credibility and formality. · Banks are regulated by the Superintendence of Banks and Financial Institutions (SBFI). · Foreign exchange operations by banks are governed by the Central Bank of Chile Regulatory and its Compendium of Foreign Exchange Regulations, the Superintendence of Securities and Insurance, the Internal Revenue Service, and SBIF. · All transfers completed through the formal market are reported to the Central Bank.

- 53 - ANNEX I CHINA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Data Gap— Transfers Migrant Workers Annual Estimated Estimated Abroad123 Remittance Annual Informal per Worker Remittances Remittances (Formal and Informal) IMF BOP124 Total N.A. Credit 1,209 Singapore N.A. Debit - 936 Rep. Korea N.A. N.A. N.A. N.A. Hong Kong, China N.A. Chinese Taipei N.A. Japan N.A. Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile See profiles for remittance sending countries. Problem · Re mitters can avoid foreign exchange controls and evade taxation through the Incentives for informal remittance market. Using IFT · Anonymity allows the easy and safe transfer of illegal funds. Systems · The informal system is simple, convenient, and cheap to use. · Remitters maintain a strong trust in the informal system. Last Mile Problem

Actors N.A. · Rural Credit Cooperatives, Credit Unions, and Rural Commercial Banks provide services in rural communities. · Low-income individuals have access to the same financial institutions as other Channels individuals. · Formal remittances flow through the international clearing and settlement system. · Underground money-changers offer an informal remittance service and smuggle money in and out of China. · All institutions that provide legal remittance services must be authorized by the People’s Bank of China. · Remittances and other fund transfers are supervised by the People’s Bank of Regulatory China. · China is cracking down on illegal transfers and underground money-changers, and some illegal entities have been closed.

123 OECD 1999. 124 Figures for 2001 from IMF 2002.

- 54 - ANNEX I CHINESE TAIPEI

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross- Number of Number of Average Annual Total Data Gap- Border Immigrant Migrant Remittance per Estimated Estimated Transfers Workers125 Workers Worker Annual Informal Abroad (MWA) Remittances Remittances (Formal and Infor mal) IMF BOP Total N.A. Total N.A.

Credit N.A. Thailand 143.0 China N.A. Debit N.A. Philippine 108.0 Vietnam N.A. N.A. N.A. N.A. s New Zealand N.A. Millions of U.S. Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors N.A. · The formal financial sector includes commercial banks, trust and investment companies, financial holding companies, credit cooperatives, credit departments of farmers’ and fishermen’s associations, trust enterprises, credit card companies, and financial information service businesses. · Rural individuals have access to financial services through the 278 credit departments Channels of farmers’ and fishermen’s associations and 37 credit cooperatives. · No special financial services are offered to low-income individuals; however, most have access to formal financial institutions. · Formal remittance services are offered primarily by banks and postal banking systems. · According to Chinese Taipei, there is no evidence that can prove the existence of informal remittance services. · Only banks are allowed to offer international remittance services. Regulatory · Informal remittances are considered illegal under the Banking Law in Chinese Taipei. Incentives for Using IFT N.A. Systems

Last Mile Problem

Actors N.A.

Channels · Formal remittance flows entering Chinese Taipei must go through authorized banks.

Regulatory N.A.

125 Figures from 1997 from IOM 2000.

- 55 - ANNEX I HONG KONG, CHINA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Data Gap— Transfers Immigrant Annual Estimated Estimated Workers 126 Remittance Annual Informal per Worker Remittances Remittances (Formal and Informal) IMF BOP Total N.A. Credit 5 China N.A. Debit 5 Philippines N.A. N.A. N.A. N.A. Indonesia N.A. Thailand N.A. U.K. N.A. Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

· In Hong Kong, China there is no rural banking sector and no specialized financial First Mile services available to low-income groups, as it is very convenient for those who Problem live in rural areas and for those low income groups to use normal banking system. There is no need for existence of rural banks and specialized financial services for the low income groups in Hong Kong, China. Actors N.A. · As of end October 2003, Hong Kong, China has 133 licensed banks, 41 restricted license banks, and 40 deposit taking companies. These institutions have 1,326 local branches. · These banks, along with Western Union and MoneyGram, offer remittance services. Channels · In October 2003, there were 1,065 money-changers and remitting agents registered with the police. A number of money-changers also offer remittance services. · The informal remittance system is small, most of the remittance agents use counter-balance method in their operation and there is no actual money transfer in their operation. · Remittance agents are regulated by the Organized and Serious Crimes Ordinance. · Remittance agents must register with the Commissioner of Police in Hong Kong, Regulatory China for customers remitting more than HK$20,000 and keep records for six years. · Police and Customs officials investigate potentially illegal remittance channels. Incentives for Using IFT N.A. Systems

Last Mile See profiles for remittance recipient countries. Problem

126 OECD 1998.

- 56 - ANNEX I INDONESIA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Annual Total Data Gap— Transfers Migrant Workers Remittance per Estimated Estimated Abroad Worker Annual Informal Remittances Remittances (Formal and Informal) IMF BOP127 Total N.A. Credit 1,046 Malaysia 1,376.0. Debit N.A. Chinese N.A. N.A. N.A. Taipei 90.0. USA 100.0 Singapore 70.0 Australia N.A. Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile See profiles for remittance sending countries. Problem

Incentives for Using IFT N.A. Systems · Indonesia has 2,141 rural banks with 2,745 local branches, but they fail to offer Last Mile many services, including exchange activities. Problem

Actors N.A. · Rural banks, credit agencies, and formal nonbank institutions offer financial services to low-income individuals. · Formal remittances can be completed through correspondent banking, remittance companies, or a bank’s internal system. Channels · There are 2,000 money-changer branches throughout Indonesia offering foreign exchange services and the sale of travelers checks. · Informal rotating saving and credit associations (ROSCAs) are widespread throughout Indonesia. There are also more than 50,000 community self help groups capable of completing financial services. · At time of survey, members of the banking community were undergoing talks in Regulatory regards to developing a Funds Transfer Act.

127 Figures for 2001 from IMF 2002.

- 57 - ANNEX I JAPAN

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Estimated Data Gap— Transfers Immigrant Annual Annual Estimated Workers128 Remittance Remittances Informal per Worker (Formal and Remittances Informal) IMF BOP Total 1,482.7 Credit 1,250 Rep. Korea 645.4 Debit -2,340 China 252.2 N.A. N.A. N.A. Philippines 93.3 USA 43.7 Peru 40.4 Other 407.7 Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors N.A. · Japan has about 2,245 rural banks including regional banks, shinkin banks (credit associations), credit cooperatives, agricultural cooperatives, and others. Japanese rural banks provide the same remittance services as city banks. · Low-income individuals have access to banks only where settlements are completed by fund transfer, rather than by check. · Formal remittance services are only provided by licensed banks and are sent Channels using SWIFT to foreign banks which have a correspondent agreement with the domestic bank. · Underground banks provide international remittance services. These banks are usually organized by foreigners to transfer illegal funds. · Foreign exchange services are provided at hotels, travel agencies, and souvenir shops. These businesses are not allowed to perform remittance services and must identify their customer and report any suspicious transfers. · Foreign remittance business is only allowed through licensed banks. · Foreign exchange business requires no licenses. Regulatory · Banks are subject to measures completed by Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). · No informal remittance system is recognized by the government. Underground banks are small and remittance by such banks is subject to criminal sanction. Incentives for Using IFT N.A. Systems

Last Mile See profiles for remittance recipient countries. Problem

128 Figure refers to total number of foreign born in 1997, cited in Solimano, 2001.

- 58 - ANNEX I REPUBLIC OF KOREA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross- Number of Number of Average Total Data Border Immigrant Migrant Annual Estimated Gap— Transfers Workers129 Workers Remittance Annual Estimated Abroad per Worker Remittances Informal (Formal and Remittance Informal) s

IMF Total 324.9 Total N.A. BOP130 Credit 584 China 93.1 USA 826.0 Debit -268 USA 27.9 Japan 645.4 N.A. N.A. N.A. Philippines 27.0 Russian Chinese Fed. N.A. Taipei 23.2 China N.A. Japan 13.7 Millions of U.S. Thousands Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile Problem Actors N.A. Channels · The Republic of Korea has 9 nationwide banks, 6 regional banks, and 50 foreign bank branch offices. In addition, there are 1,024 money-changers. · Low-income individuals have access to financial institutions primarily through mutual savings banks, credit unions, and community credit cooperatives. · Formal international remittances are performed by foreign exchange banks. · Informal remittance systems operate through the manipulation of invoices, trade disguised as legitimate business transactions, smuggling resources, or the import and export of means of payment by using cash. Regulatory · The Foreign Exchange Act mandates the punishment of any individual who remits outside of the legal channels. · Money-changers must keep record of transactions, have the customer fill out the Foreign Exchange Sales Application and provide identification, and check whether a specific currency transfer is to be immediately reported.

Incentives for

Using IFT N.A. Systems

Last Mile See profiles for remittance recipient countries. Problem

129 Figures for 1997 from OECD, 1999. 130 Figures for 2001 from IMF 2002.

- 59 - ANNEX I MALAYSIA (I)

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Estimated Data Gap— Transfers Immigrant Annual Annual Estimated Workers131 Remittance Remittances Informal per Worker (Formal and Remittances Informal) IMF BOP132 Total 808.1 Credit 1,156 Indonesia 595.0 Debit -2,924 Philippines 15.4 N.A. N.A. N.A. Thailand 6.5 Other 191.2

Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile Problem Actors · Foreign workers use IFT systems. · Malaysia has more than 26 commercial banks (13 are foreign- owned), 11 finance companies, and 14 development financing institutions (DFIs). · The National Savings Banks (NSB) has 442 branches nationwide and the Post Office (POS) has 645 offices. Both offer basic remittance services. · Full remittance services are offered by commercial and Islamic banks, the National Savings Bank, the post office, while Western Union, and MoneyGram services are available thorugh the commercial banks. · These financial institutions are accessible to both low- and high-income individuals nationwide. · Many banks seek out foreign workers as customers by going to their place of Channels employment. · Informal remittance systems are not officially recognized, but do exist. They function through physical carrying of cash within permitted limits or by wearing gold jewelry. · Permission can be given to a company, subject to endorsement of the receiving economy’s central bank, to organize the collection and remittance of that economy’s workers’ salaries through a Malaysian bank to the company’s bank in the receiving economy. Money is then forwarded to recipient families. Through this method, workers use formal channels, and the receiving economy’s central bank receives foreign currency. Currently, this arrangement is in place with Nepal, and similar arrangements may be considered.

131 Figures from OECD 2002. 132 Figures for 1998 from IMF 2002.

- 60 - ANNEX I

MALAYSIA (II)

· Nonresident inbound/outbound travelers are not required to declare in detail, on the Embarkation Form, foreign currency in amounts less than the equivalent of US$2,500. · Resident and nonresident travelers, both inbound and outbound, require prior approval to carry any amount in excess of RM1,000 · Money-changers are licensed under the Money-Changing Act of 1998, which comes within the purview of the Central Bank.. · Remittance services by moneychangers are prohibited by the Money Changing Regulatory Act 1998 and punishable by a fine of RM100,000 and/or a jail sentence of up to five years. · Only authorized dealers (commercial banks and Islamic banks) are permitted to provide remittance services pursuant to the Exchange Control Act of 1953. Contravention is punishable by a RM10,000 fine and/or a jail term of up to three years. The NSB and POS have specific authorization to offer remittance services. · The Central Bank of Malaysia must approve all electronic funds transfer systems. · Avoid detection for remitters without valid work permits Incentives for Using IFT Systems · Since branching network of financial institutions are extensive and cover rural Last Mile areas, there is little incentive to use the informal system.. Problem

- 61 - ANNEX I MEXICO

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Annual Total Estimated Data Gap— Transfers Migrant Workers Remittance per Annual Estimated Abroad133 Worker Remittances Informal (Formal and Remittances Informal) IMF BOP134 Total 9,000 Credit 9,920 USA 8,277 Other 723 N.A. Debit N.A. N.A.

Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile See profiles for remittance sending countries. Problem · Fear of being discovered and deported by authorities may dis suade some illegal Incentives for immigrants from using formal channels. Using IFT Systems · Convenience, location and accessibility of informal intermediaries are important factors for Mexicans sending cash through them. Last Mile Problem · Families of foreign workers and families of second-generation immigrants Actors (children of initial immigrant parents) use informal remittance systems. · The formal banking sector includes commercial banks, development banks, and limited-scope financial institutions. · Financiera Rural is a development bank that specifically deals with the needs of the rural sector. Currently, about 726 private and public companies provide financial services to rural communities. · The Popular Savings and Credit Law created a bank to offer services directly to low-income individuals. Another bank, Banco Azteca, was created more recently Channels by the government to provide some of the same services. · Formal remittances can be completed through commercial banks, commercial establishments, post- offices, money order, and the Mexican Telegraph System. · Most Mexican immigrants in the United States remit through electronic transfers, money orders, telegraph and postal drafts, mail, and checks. · The National Plan on Social Development for 2001-2006 works to expand financial services and increase the availability of remittance services for all Mexicans. · Remittances go through the formal financial system, so they are regulated by the Regulatory same laws that govern bank operations. · Mexican Central Bank regulations require money transfer operators to register .

133 Figures for 2002 from Alba, 2003. 134 Figures for 2001. Credit figure from IMF 2002. Debit figure from Banco de Mexico 2002.

- 62 - ANNEX I NEW ZEALAND

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross- Number of Number of Average Total Estimated Data Gap— Border Immigrant Migrant Annual Annual Remittances Estimated Transfers Workers135 Workers Remittance (Formal and Informal Abroad per Worker Informal) Remittances IMF Total N.A. Total N.A. BOP136 Credit 216 U.K. and Australia N.A. Ireland 178.2 Debit –98 Australia 56.3 N.A. N.A. N.A. China 39.0 Rep. Korea 17.9 USA 13.3 Millions of U.S. Thousands Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile · No specialized financial services are offered to low-income individuals. Problem

Actors · Ethnic communities use the IFT system. · The 18 registered banks of Ne w Zealand hold more than 95 percent of all financial system deposits and take on more than 95 percent of all financial lending. · There is no bank specifically designed to work in rural communities; however, four of the registered banks have rural lending portfolios. · Remittances are sent in the formal system through payment systems, clearing arrangements with registered banks, credit cards, automatic payments, automatic debit, Channels checks, and Western Union. · Ethnic money transfer networks make arrangements with the banking system to send remittances. · Money-changers work in the retail/tourism sector. · Ethnic communities often pool their resources to avoid the costs of sending remittances. These groups also have access to other informal remittance channels. · Money-changers are not licensed or registered, but must abide by the Financial Transactions Reporting Act. · Finance companies, building societies, and credit unions are not subject to licensing and Regulatory supervision. · Remittance agents are currently not subject to specific regulations; however, at the time of this survey, the Reserve Bank of New Zealand had plans to obtain powers in order to regulate these systems. · Alternative channels offer speedy, cheap, and simple services. Incentives for Using IFT · There is a general lack of trust in the formal remittance systems. Systems · Familiarity with ethnic networks makes them more attractive.

Last Mile See profiles for remittance recipient countries. Problem

135 Statistics New Zealand 2003. 136 Figures for 2001 from IMF 2002.

- 63 - ANNEX I PAPUA NEW GUINEA

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Number of Average Total Data Gap— Transfers Immigrant Migrant Annual Estimated Estimated Workers Workers Remittance Annual Informal Abroad per Worker Remittances Remittances (Formal and Informal) IMF BOP137 Total N.A. Total N.A.

Credit N.A. Debit -10.7 N.A. N.A. N.A.

Millions of U.S. Thousands Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors N.A

Channels N.A

Regulatory N.A

Incentives for Using IFT N.A Systems

Last Mile Problem

Actors N.A

Channels N.A

Regulatory N.A

137 Figures for 2001 from IMF 2002.

- 64 - ANNEX I PERU

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Data Gap— Transfers Migrant Workers Annual Estimate d Estimated Abroad Remittance Annual Informal per Worker Remittances Remittances (Formal and Informal) IMF BOP138 Total N.A. Credit 716 USA N.A. Debit N.A. Costa Rica N.A. N.A. N.A. N.A. Argentina N.A. Chile N.A.

Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile See profiles for remittance sending countries. Problem

Incentives for N.A Using IFT Systems

Last Mile Problem

Actors N.A

Channels N.A

Regulatory N.A

138 Peru has outgoing flows of migrant transfers. The recorded debit is –99 million. IMF 2002.

- 65 - ANNEX I THE PHILIPPINES

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Total Estimated Data Gap— Transfers Migrant Workers Annual Annual Estimated Abroad139 Remittance Remittances Informal per Worker (Formal and Remittances Informal) IMF-BOP140 Total 7,403 Credit 6,357 USA 2,503 Debit -32 Canada 363.7 N.A. N.A. N.A. Japan 240.5 Malaysia 226.5 Australia 206.8 Other 3862.5

Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile See profiles for remittance sending countries. Problem · Informal remittance services are faster and cheaper than the formal sector. Incentives for · Ethnic connections attract people to informal businesses. Using IFT Systems · Businesses that offer informal remittance services have more flexible hours and are often physically closer to customers. Last Mile · There are thousands of islands that make the delivery of remittances by formal Problem channels difficult. Actors N.A. · In September 2002, there were 1,921 rural banks in the Philippines. · Five Filipino banks are involved with remittances. They use electronic credit, SWIFT messages, and TTs to complete transfers. Channels · Money-changers are common in the Philippines and are often affiliated with or subsidiaries of banks. · Door-to-door couriers offer remittance services (padala system). They also offer direct credit to the peso. · Banks and nonbank financial institutions. These institutions are registered with the Central Bank of the Philippines and the Securities Exchange Commission. Banks include commercial banks, thrifts, private development banks, stock Regulatory savings and loans, and rural banks. Services include demand drafts, letters of credit, deposits, foreign exchange transactions, gold/silver bullion trade, treasury functions, and lending.

139 IOM 2003. 140 Figures for 2001 from IMF 2002.

- 66 - ANNEX I RUSSIAN FEDERATION

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross- Number of Number of Average Total Estimated Data Gap— Border Immigrant Migrant Annual Annual Estimated Transfers Workers141 Workers Remittance Remittances Informal Abroad per Worker (Formal and Remittances Informal) IMF BOP Total N.A. Total N.A

Credit 624 Germany N.A. Debit -494 Israel N.A. N.A. N.A. N.A. USA N.A. Millions of U.S. Thousands Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile Problem · Immigrants from Asian countries often use the hawala system to remit money to their home Actors countries. · The Russian Federation has a two-level banking system, comprised of the Central Bank of the Russian Federation and credit organizations. · In 2002, more than 1,870 credit unions were officially registered in the Russian Federation. 1,330 of them were permitted to carry out banking operations, and 830 were licensed banks allowed to complete business in foreign currencies. · 660 of the credit organizations are concentrated in Moscow. Some banks have a wide network Channels of branches throughout the country. · There are no specialized services available to low-income individuals. · Remittance services are available through credit organizations and post offices. As a result of lax regulations on remittance services, the use of the informal remittance sector is not very popular. · International remittance organizations, like Western Union, MoneyGram, and Unistream, are expanding services throughout the Russian Federation. · Capital account operations in foreign currencies must be approved by the Central Bank of the Russian Federation. · Legal financial institutions are not allowed to use informal systems to remit money; however, Regulatory alternative remittance systems are not prohibited directly in Russian legislation. · Both foreign and Russian citizens can remit up to $10,000. Up to $3,000 can be remitted without being reported to any authority. · The Committee on Financial Monitoring has the right to freeze any suspicious remittances. · Remitters in Russia can evade law enforcement by transferring money anonymously through Incentives for the informal remittance channels. Using IFT Systems

Last Mile See profiles for remittance recipient countries. Problem

141 Figures for 1997 from OECD 1999.

- 67 - ANNEX I SINGAPORE

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Annual Total Data Gap— Transfers Immigrant Remittance per Estimated Estimated Workers142 Worker Annual Informal Remittances Remittances (Formal and Informal) IMF BOP Total 633.2 Credit N.A. Malaysia N.A. Debit N.A. Thailand N.A. N.A. N.A. N.A. Indonesia N.A. Philippines N.A. Hong Kong, China N.A. Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile Problem Actors N.A. Channels · Singapore has 27 full banks, 39 wholesale banks, and 50 offshore banks. · Many of these banks, together with 109 licensed remittance agents, offer remittance services. · On June 30, 2003, the Monetary Authority of Singapore (MAS) announced it would allow banks that are otherwise subject to branching restrictions, to set up additional outlets specifically to provide remittance and money-changing services. · Eight major banks of Singapore have a Basic Bank Account package to provide low-income individuals access to basic banking services at affordable rates. · International remittances are sent through banks (using travelers checks, demand drafts, checks, ATMs, and telegraph transfers or TTs) and licensed remittance businesses. Regulatory · All money-changers and remittance agents are licensed and supervised by the MAS. It is an offense for a person to conduct a money-changing or remittance business without a valid license. · Suspected illegal remittance operators are investigated by the relevant enforcement agencies, with enforcement actions against those found guilty. · All licensees are required to comply with their licensing conditions and MAS Guidelines on Prevention of Money Laundering. Licensees are required, among other things, to maintain records of transactions for at least six years. · Informal remittance services may be faster, cheaper, available outside of Incentives for normal business hours, and offer better exchange rates. Using IFT Systems · Remitters using informal channels can send money anonymously.

Last Mile See profiles for remittance recipient countries. Problem

142 IOM 2000.

- 68 - ANNEX I THAILAND (I)

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Number of Average Total Data Gap— Transfers Immigrant Migrant Workers Annual Estimated Estimated Workers143 Abroad 144 Remittance Annual Informal per Worker Remittances Remittances (Formal and Informal) IMF BOP145 Total 77.7 Total 500.0

Credit 1,252 Myanmar 5.1 Chinese Taipei 112.4 Debit N.A. Brunei N.A. N.A. N.A. Darussalam 12.4 Japan 30.3 Hong Kong, China 8.1 Singapore 61.0 Other 275.8 Millions of U.S. Thousands Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile Problem · Low-income, rural individuals with little access to formal financial institutions, as a Actors result of location or poor collateral or credit, use IFT systems. · At the end of 2002, there were 3,668 branches of commercial banks with 2,569 located outside of Bangkok. · The new Financial Master Plan hopes to create more points of access throughout rural and urban areas by using nonbank financial institutions to fill the gap. · Micro-banking agencies offer services to low-income individuals. Channels · International remittances can be completed through commercial banks, authorized money transfer agents, or authorized companies. Banks and companies use SWIFT and MoneyGram to transfer money internationally. · Western Union is also present throughout Thailand. · Informal remittance services are offered through the black market and couriers. · Outgoing transfers are limited to $2,000 a day per person. Larger transfers must be completed through commercial banks. · Both remitting agents and banks must report remittance transfers to the Bank of Thailand. Regulatory · The Bank of Thailand, Anti-Money Laundering Office, Ministry of Finance, and Royal Thai Police all work to prevent informal, illegal remittances. · The amount of registered capital required to register as a money transfer agent was lowered in order to attract more businesses to the formal sector. · Money-changers can enter the formal system by obtaining a license from the Ministry of Finance through the Bank of Thailand.

143 National Statistics Office of Thailand, accessed at www.nso.go.th. 144 Data for 1999, National Statistics Office of Thailand, accessed at www.nso.go.th. 145 Figures for 2001 from IM F 2002.

- 69 - ANNEX I THAILAND (II)

· Individuals have little access to the formal sector in rural communities. Incentives for Using IFT · Informal remittance channels offer faster and cheaper services. Systems · Remitters can avoid the rules and regulations attached to the formal system of remittances. · Rural communities generally lack access to formal financial services. Last Mile Problem

Actors N.A.

Channels N.A.

Regulatory N.A.

- 70 - ANNEX I UNITED STATES

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Average Annual Total Data Gap— Transfers Immigrant Remittance per Estimated Estimated Workers146 Worker Annual Informal Remittances Remittances (Formal and Informal) IMF BOP147 Total 29,904 Credit N.A. Mexico 8,277 Debit -19,890 Philippines 1,273 N.A. N.A. N.A. China 947 Rep. Korea 826 Vietnam 756 Canada 740 Other 17,085 Millions of U.S. Dollars Thousands Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors N.A. · The United States has more than 8,000 commercial banks, 1,500 savings and loans associations, and 10,000 credit unions. · Rural banking is extensively offered by all types of banks. · Services to low-income individuals include revolving loan funds, community development corporations, and credit unions specifically designed to deal with low-income groups. Channels · Remittances can be sent through commercial banks, Western Union and MoneyGram, postal money orders, or the Clearing House Interbank Payments System (CHIPS). · Money-changers also offer remittance services. · Informal remittances are available through courier services, ethnic stores, mom and pop stores, and other retail shops. · Most regulations on money transfers concern consumer protection and are Regulatory created by the state governments. · Remitters are familiar with the informal system, and it is easy to use. · Informal remittance agents offer lower rates, longer business hours, and a Incentives for wider range of services. Using IFT · Language barriers often prevent foreigners from using formal banking Systems institutions. · Informal remittance channels can reach rural areas that formal remittance agencies might not be able to. Last Mile See profiles for remittance recipient countries. Problem

146 Figures refer to total number of foreign born from 2001. U.S. Census Bureau 2003 147 Figures for 2001 from IMF 2002.

- 71 - ANNEX I VIETNAM

Part 1. Quantitative Economic Analysis 1 2 3 4 5 Cross-Border Number of Number of Average Total Data Gap— Transfers Immigrant Migrant Annual Estimated Estimated Workers Workers Remittance Annual Informal Abroad per Remittances Remittances Worker (Formal and Informal) IMF BOP Total N.A. Total N.A.

Credit N.A. China N.A. USA 756 States Debit N.A. Hong Kong, France N.A. N.A. N.A. N.A. China N.A. Chinese Australia 151.1 Taipei N.A. Canada N.A. Rep. Korea N.A. Thailand N.A. Millions of U.S. Thousands Thousands Dollars Part 2. Qualitative Incentives Analysis

First Mile Problem

Actors N.A. · Vietnam has a relatively underdeveloped banking sector, dominated by the state- owned commercial banks · Many citizens continue to use informal methods of financial investments, like family borrowing, nonbank money lenders, etc. Channels · Remittances are offered through official channels, such as commercial banks (Vietcombank) and money transfer operators (Western Union). · Remittance services are available through unofficial channels, primarily hand delivery without declaration at customs.

· Vietnam does not have a comprehensive institutional framework to enforce AML/CFT. Regulatory · The government, however, plans to finalize comprehensive AML/CFT legislation by the end of 2003.

Incentives for Using IFT See profiles for remittance recipient countries. Systems

Last Mile Problem

Actors N.A.

Channels N.A.

Regulatory N.A.

- 72 - ANNEX II

ANNEX II—SIX APEC ECONOMY REPORTS

ANNEX II contains in-depth analyses for the six Asia-Pacific Economic Cooperation (APEC) member economies (out of twenty-one) chosen based on data availability. The following member economies have been selected to illustrate the proposed framework and its implementation: Indonesia The Philippines Malaysia Thailand Mexico Vietnam

For each of the six member economies, this annex: · Analyzes the figures for migrant worker flows suggested by various data sources; · Discusses the aggregate data available on remittances–starting with the International Monetary Fund Balance of Payments (IMF BOP) data and supplemented by other national and international information; · Considers the information available, typically from the Living Standards Measurement Survey (LSMS) or household surveys, on the average size of remittances; and · Integrates all this data to determine which bilateral flows are known and which are both large and unknown–thus suggesting priority areas for further work. The analyses are based on data that are publicly available, both from country sources and from third-party documents.

- 73 - ANNEX II

Indonesia

Part 1. Quantitative Economic Analysis a. Estimates of Remittance Flows Official Data on Inflows The officially recorded remittances of Indonesia exceed $1 billion annually.148 These are derived from statistics provided by the commercial banking system in Indonesia as well as the post office. They include both transfers and employee compensation. 149 Seventy percent of these flows are recorded as coming from APEC economies.150

Table 1: Rough estimates of migrants and annual remittances151

Numbers Remittances Partner Economy (000) ($ millions) Average ($)

Malaysia 1,376.0 325.2 236 Hong Kong, China 40.0 157.4 3,935 Singapore 70.0 85.7 1,224 Chinese Taipei 90.0 208.2 2,313 Republic of Korea 11.7 51.2 4,376 Japan 3.2 34.3 10,570 Philippines 26.0 0.3 12 Brunei Darussalam 2.4 17.7 7,296 Saudi Arabia 425.0 356.8 840 United States 100.0 20.9 4,785 Sources: Numbers: Migration Policy Institute, 2000; Remittances: OECD, Migration and the Labour Market in Asia: Recent Trends and Policies, 2002.

Table 1 shows rough estimates of the annual bilateral remittance flows from partner economies, and the implied average remittance.152 The calculated153 average remittances from Malaysia ($236) and the Philippines ($12) appear too low even taking into account the low paying jobs in Malaysia and probable migrant wages in the Philippines, where family incomes are 4.5 times higher than in Indonesia.154 By way of

148 IMF 2001, Line 2391. 149 IMF 2001, p. 233. 150 OECD 2002. 151 “Nongovernmental organizations believe that the actual number of migrant workers is closer to five million many of whom are working overseas illegally. The government estimates that migrant workers now contribute $3 billion in remittances to the economy every year.” Economist Intelligence Unit 2003. 152 Calculated by divid ing total remittances by the numbers of migrants in the partner economy. In such populations there will be migrants who do not remit; thus the average of those who do remit would be higher, but that figure not calculable from these data. 153 Calculated by dividing the remittance by the number of migrants. 154 Asian Demographics Ltd., 2002.

- 74 - ANNEX II comparison, the average remittance from Saudi Arabia–where Indonesians occupy low- paid “domestic” jobs–is $840. The suggestion that further investigation of the flows from the Philippines and Malaysia to Indonesia appears to be warranted. b. Estimates of the Number of Migrants

Indonesian Workers Abroad

In 2001, Indonesia’s population was 213 million. 155 Indonesia is generally considered to be a labor-surplus country whose workers perform predominately unskilled work abroad. It is also a country whose registered migrants are typically women, working as domestics. It is estimated that the total number of Indonesian migrants is over 2 million persons, 60 percent of whom are in Malaysia; and 80 percent of the total are in APEC member economies, with most of the remainder in the Arabian Gulf States.156 The presence of large numbers of Indonesian migrant workers in Malaysia may be problematic since the vast majority seem to be illegal migrants157 employed in low- paying, low-status jobs on construction sites and plantations. Indonesia and Malaysia are in close proximity, but the average family income is 13 times higher in Malaysia than in Indonesia.158 This particular bilateral relationship, therefore, requires attention—with a view to recording and regularizing remittance flows. c. Evidence from Surveys

Indonesia presently does not use household surveys that could verify the remittance averages. However, interviews with Indonesian officials indicate that Indonesian migrants tend to live very frugally, typically remitting over two-thirds of their earnings.159

Part 2. Qualitative Incentives Analysis

The following preliminary analysis has been conducted using information provided by the member economies themselves through the APEC Alternative Remittance Systems (ARS) Working Group Survey. Described below is an overview of the nation’s particular landscape with regards to first/last mile problems, formal/informal channels, and key regulatory provisions concerning fund transfers.

First/Last Mile Problems

The biggest issue facing Indonesia is the vast and complicated geography of the country. Indonesia, like the Philippines, is made up of thousands of islands making it difficult to create institutional networks and facilitate travel, particularly in smaller less

155 World Bank data for 2000. 156 Migration Policy Institute, 2000, viewed at www.migrationinformation.com. 157 There was a legal flow of 160,000 per year during the 1998–2002 period. Even if these contract workers stayed for three years, they would still make up about a third of the stock of migrant workers. OECD 2002. There was a legal flow of 160,000 per year during the 1998-2002 period. Even if these contract workers. 158 Asian Demographics Ltd., 2002. 159 Information received from Bank of Indonesia officials.

- 75 - ANNEX II developed islands. As a result, gaining access to formal remittance services can be inconvenient and impractical. Indonesia has 2,141 rural banks with 2,745 local branches, but they fail to offer many services, including exchange activities.

Channels

The formal financial sector can be divided into commercial banks, which offer a full range of services and access the central bank clearing system, and rural banks, which offer limited services, excluding foreign exchange activities. Commercial banks include regional development banks owned by the provincial governments, state- owned banks, private national banks, and foreign and joint-venture banks. Rural banking institutions include Bank Rankyat Indonesia and village banking & credit agencies. Low- income groups also have access to formal financial services via non-banking channels such as fund/credit institutions, pawnshops, and savings/credit cooperatives. Domestic money transfers occur through automated teller machines (ATMs), bank transfers, and post offices, which are utilized by the rural unbanked population. Cross-border remittance services can be done by correspondent banking, remittance companies, and through the bank’s internal system. Around 2,000 money-changers operate throughout Indonesia offering foreign exchange services and buying traveler’s checks, but their correspondence with foreign banking services is limited by the law. Informal funds transfer (IFT) systems also operate on a widespread but unquantified scale. These outlets service low-income rural populations and offer a wide range of financial services. Shopkeepers, traders, and “professional” moneylenders operate in the informal unregulated sector. There are also more than 50,000 community self help groups capable of arranging financial services.

Regulatory Provisions

The formal financial sector is regulated and supervised by the Bank of Indonesia, the country’s central bank. Money-changers are prohibited from maintaining correspondence with foreign banks to instruct payment abroad. At the time of the ARS survey, members of the banking community were undergoing talks in regards to developing a Funds Transfer Act.

- 76 - ANNEX II

Malaysia

Part 1. Quantitative Economic Analysis a. Estimates of Remittance Flows

Official Data on Inflows

Although Malaysia is primarily a sender of remittances, IMF data indicates that the economy receives about a $1 billion inflow from employee compensation and workers’ remittances.160 These data, derived solely from the Central Bank and the post office, imply that the average inward remittance is over $3,000 per annum and that there are many more Malaysians working abroad than the official estimates.

Official Data on Outflows

IMF data also shows a more significant outflow of $3 billion, which could represent a similarly large average transfer of $1,000 per annum. As the Indonesian data, with an average of less than a quarter of this figure, implies the disparity seems to indicate that there are many more foreign workers in Malaysia than officially estimated.161 Since anecdotal evidence suggests that irregular migrants tend to use informal channels, the actual flow of remittances is potentially much greater.162 In order to draw some coherent conclusions concerning remittance data and labor migration in Malaysia, the data needs to be revisited and reviewed more carefully. b. Estimates of the Number of Migrants

Malaysian Workers Abroad

Malaysia, a country with a population of 23.3 million, 163 is an interesting example of an APEC economy with remittance flows that reflect the substantial amount of labor imported from abroad, as opposed to labor exported. 164 The Malaysian government estimates that 300,000 of its workers go abroad (about three percent of a 10- million person labor force), two-thirds of whom are in Singapore.165

160 IMF 2002. 161 This conclusion holds even if the employee compensation data are excluded. 162 It is assumed that irregular workers do not have access to formal—and thus recorded–—remittance systems that would not jeopardize their continued stay in Malaysia. 163 World Bank data, 2000. 164 Stahl (1999) reports 300,000 Malaysians working outside of the country and 1.2 million East Asians working in Malaysia. In addition, OECD (2002, p. 288) estimates 200,000 Malaysians working outside the country and 1.6 million foreign workers in Malaysia. 165 Stahl 1999.

- 77 - ANNEX II

Foreign Workers in Malaysia

The average family income is substantially higher in Malaysia than in neighboring countries166 and Malaysia tends to bring in foreign workers for the jobs for which there is an insufficient number of Malaysians.167 Nevertheless, the economic slowdown and concomitant loss of jobs has created pressure on the government to better manage the inflow of foreign workers.168 There are about 800,000 officially registered foreign workers in Malaysia. A recent census recorded one million foreign immigrants in the economically active age group,169 for example, those who are of working age, whether employed or not. Of the registered foreign workers, 74 percent (or 592,000) are Indonesian. 170 Indonesian data (see below) imply, however, that more than twice of that number of Indonesians are actually working in Malaysia.171 Similarly, official estimates172 from Malaysia indicate that less than 25,000 Filipinos work in Malaysia, while data from the Philippines imply that the number is about seven times higher.173 This information illustrates the disparity existing in the APEC region for migration data. These gaps in data should be further analyzed, since they may reveal important pieces of information regarding money remittances and fund transfer systems associated with the labor migration phenomenon. c. Evidence from Surveys

Inferring Remittances from the Data

There are no surveys of foreign workers presently used in Malaysia. In 1999-2001, more than 100,000 illegal migrants were apprehended, and for every 100,000 illegal immigrants discovered, officials estimate that 100,000-200,000 illegal immigrants remain at-large.174 Data from Vietnam, the Philippines, and Indonesia - all support the conclusion of significant undercounting of migrant workers in Malaysia. Bilateral flows between Malaysia and Thailand, Malaysia and Vietnam, and Malaysia and Indonesia require particular scrutiny on a priority basis.

Part 2. Qualitative Incentives Analysis

Malaysia provided much of the following information through the APEC ARS Working Group Survey.

166 Average family income in Malaysia is 2.5 to 3 times that of Thailand and the Philippines, and 13.5 times that of Indonesia, according to Asian Demographics Ltd (2002). 167 OECD 2002, p. 328. These include highly skilled jobs as well as low-skill, low-paying jobs. 168 Ibid, p. 327. 169 Ibid, p. 328. 170 Ibid, table 3.2, p. 346, 171 Migration Policy Institute. www.migrationinformation.com, 2000. 172 OECD 2002. 173 Philippines National Statistics Office 1999. 174 OECD 2002, p. 331.

- 78 - ANNEX II

First/Last Mile Problems

Malaysia has a well-developed and diversified financial sector. Since it is situated in close proximity to Indonesia, the Philippines, Thailand, and many other high money- remitting and labor-exporting countries, it is an important nexus in the larger picture of fund transfers in the region. Because of its financial stability and high family income, as compared to surrounding nations, Malaysia also attracts a high volume of foreign workers, who are most likely the main actors involved in money remittance.

Channels

Malaysia’s formal sector has more than 26 commercial banks (13 of which are foreign-owned), 11 finance companies, and 14 development financing institutions (DFIs). These banks have extensive networks into the rural areas and provide a wide range of financial services including savings, domestic and international fund transfers, and ATM services (over 594 nationwide). Less affluent segments of the population are serviced by these institutions as well as by cooperative societies. Remittance services are offered by commercial and Islamic banks.175 The National Savings Bank and the post office engage in limited remittance services. Other cross- border remittances are conducted via telegraphic transfers and demand draft. Money Transfer Operators (MTOs) services, such as Western Union and MoneyGram, are available through commercial banks in Malaysia. Some domestic banks actively seek foreign workers as customers by going to their place of employment. Over 700 licensed money-changers also operate in Malaysia, but do not officially provide money remittance services. Informal fund transfers appear to exist in two forms: by the physical transport of cash across the border through courier systems or by the wearing of gold ornaments by returning migrant workers. Information on informal remittance systems other than hand-delivered courier services is vague.

Regulatory Provisions

Malaysia has a substantial body of regulatory provisions with regards to financial activity, reflecting its highly developed financial sector. All operating financial services and money-changers are required to be licensed by the Central Bank and are subjected to reporting requirements and other anti-money laundering provisions. Furthermore, Malaysia’s central bank, Bank Negara Malaysia, must approve all electronic fund transfer services in the formal financial sector. Criminal sanctions apply to illegitimate financial activity, particularly with regards to money-changers. Money-changers who are unlicensed under the Money-Changing Act of 1998 face fines and/or imprisonment, and, as of January 15, 2003, unlicensed money-changing activity was further criminalized under an Anti-Money Laundering Act.

175 Islamic banks do not practice riba (charging interest) on loans to their customers. This practice is deemed illegal by Islamic law. Institute of Islamic Banking and Insurance 2003.

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While all illegal or unauthorized remittances are subject to fines and penalties, money- changers are specifically prohibited from engaging in any remittance services.

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Mexico

Part 1. Quantitative Economic Analysis a. Estimates of Remittance Flows

Official Data on Inflows

The Mexican Central Bank recorded $9.8 billion in total remittances received in 2002, 176 making Mexico the world’s second largest remittance recipient.177 These are considered to be quite accurate estimates, because the Bank of Mexico obtains the data from enterprises that directly provide fund transfer services.178 Workers’ remittances have grown over 10 percent per year,179 having been less than $4 billion in 1995,180 and have superseded Mexico’s revenue from tourism since 2001.181 Of particular interest is the rapid growth in electronic transfers—from a growth rate of 60% in 1998, to almost 90% in 2002. This growth could be interpreted as an evidence of Mexico’s rapid shift away from money orders to a fully formal banking system.182 The shift may also be attributed to perceived incentives affecting Mexican remitters discussed further in Part 2. According to Mexico’s Central Bank, the $9.8 billion was transferred in 30 million separate transactions, with an average electronic remittance of slightly over $300.183 All electronic transfers used the formal channels, including both banks and MTOs. Later, formal providers pay recipients through bank branches or through businesses, department stores, or drug stores, among others. Following this chain, most of the transfers of remittances from the United States to Mexico are provided by electronic transfers through formal channels and only require businesses that are not specialized in remittances for the delivery of funds. The latter is because of the insufficient capacity for bank networks to cover the extensive regional scope needed for the delivery of funds.184 Some studies suggest that most Mexican migrants in the United States send remittances as frequently as once or twice a month. 185 This implies that not all migrants send money home. A study of individual transactions during 2002186 indicated that Mexican migrants in the United States sent 22 percent of their income home and that the average monthly remittance was $378, again implying that only 20 percent of

176 Banco de México 2002, table A61. Banco de México reportedly obtains its data from enterprises that provide fund transfer services (IMF 2002, pp. 295–96). 177 Orozco 2003. 178 IMF 2002, pp. 295-6. 179 Including the effect of Mexico’s crisis in 1995. 180 IMF 2002, p. 574. 181 Aregional 2003. According to the same source, if the tendency continues, workers’ remittances will surpass the amount of foreign direct investment (FDI) at the end of 2003. 182 Banco de México 2002. The share of money orders in 2002 was 7 percent, that of other means 3.4 percent. 183 Ibid. 184 According to interviews with Central Bank officials, July, 2003. 185 University of California-Davis. 2002. 186 Orozco 2003.

- 81 - ANNEX II migrants remit.187 According to some analysts, in 2001 recipient families received an average of $9,032.188 b. Estimates of the Number of Migrants

Mexican Workers Abroad

Mexico has a population of 104 million, 189 and 8-9 million Mexicans (about 8 percent of the population) are living in the United States.190 U.S. Census Bureau data for 1960 to 2000 show a fifteen-fold increase in the number of Mexican nationals living in the United States during those 40 years.191 (See figure 1.) Mexican authorities estimate that 3-3.5 million are in the United States illegally, while the U.S. Census Bureau suggests that the number of illegal Mexicans in the United States may be as high as 4.7 million. 192 Another 700,000 Mexican migrants are spread out in other economies— 400,000 are believed to be in the Canadian agriculture sector193. In contrast, the foreign- born population of Mexico, from places other than the United States and Europe, amounts to little more than 100,000 persons.194 Figure 1. Mexican Population in the United States (thousands)

10,000 8771 8,000

6,000 4298 4,000 2199 2,000 576 760 - 1960 1970 1980 1990 2000

Source: U.S. Census Bureau, 2002.

187 $378 per month implies $4,500 per year. If such people were the only remitters, the $9.8 billion would involve 2.2 million of the 8-9 million migrants. 188 Aregional 2003. 189 CONAPO estimate for mid-2003. 190 Migration Information Source, Mexican country profile, 2002. 191 Data from U.S. Census Bureau, cited in Lozano-Ascensio 2002. 192 Ibid. 193 Hispanic Vista 2003. 194 Migration Information Source, Mexican country profile, 2002.

- 82 - ANNEX II c. Evidence from Surveys A sample survey of migrants returning from the United States in the 1990s indicated that over 85 percent were male and 80 percent had less than a high-school education with an average of 35.195

Part 2. Qualitative Incentives Analysis

The close bilateral relationship between Mexico and the United States has made available significant amounts of ready data to survey the activity in fund transfer channels. Coupled with information provided by Mexico in the APEC Working Group Survey, the following is a condensed preliminary analysis of Mexico’s remittance landscape. First/Last Mile Problems One of the difficulties faced in Mexico is developing competition in the formal sector to generate better remittance services. Most MTOs operating in Mexico provide services with increasing competition and need to expand services at lower prices. Western Union continues to control the largest market share of remittances between the United States and Mexico. Migrants send money back home with a monthly average of $378 by MoneyGram196. See the selected list below as a sample of remittance fees for sending $200 to Mexico:

Table 2: Remittance fees for sending $200 from the United States to Mexico

Service Cost

Bank of America – Safe Send from the United States $10 International Remittance Network (IR Net) from US $10 US Postal Service – Dinero Seguro $12 Three MoneyGram products · Banamex in pesos $10 · 10 minute service $20 · Banamex instant $20 Western Union (24-72 hours) $10-$14.99 BANSEFI – L@Red de la Gente $6 Wells Fargo Bank – Intercuenta Express (Bancomer) $13.41 Citibank/Banamex $5

Source: Interviews with Mexican remittance providers, 2003.

Interception of money transfers by criminals also appears to be a problem. In two years up to 1998, the post office received claims for lost transfers amounting to $12.3

195 University of California-Davis 2002. 196 Economic and Social Research Council 2003.

- 83 - ANNEX II million. Theft occurs at both ends of post office remittance deliveries from trucks, post offices, and airports, in ways suggesting that remittance theft may be attributed to organized criminal enterprises.197 The perceived unreliability of the postal service resulting from these sorts of thefts has likely contributed to the recent increase in the volume of electronic remittances. Mexican remitters appear willing to pay higher rates to transfer money electronically through banks and MTOs to ensure that the funds are actually delivered. Most remittances are made by foreign workers or second-generation immigrant families living in the United States. The legal status of a worker in the United States often affects what sort of fund transfer system is utilized. An important factor in the regularization of migrant remittances has been the Consular Identification Card (CIC), or matricula consular, issued by the Mexican Government. This card allows irregular migrants a form of identity acceptable to the banking systems of the United States and Mexico. Although the CIC has existed since 1871, its use accelerated rapidly in the late 1990s. About 425,000 were issued in both 1997 and 1998, 500,000 in both 1999 and 2000, 695,000 in 2001, and over 1.4 million in 2002.198 Bilingual services are crucial in encouraging immigrants to use formal banking institutions. Bilingual staff can provide the necessary link to migrant communities and facilitate financial education. Hispanic immigrants have different savings practices, which often include in-home savings as opposed to saving in banking institutions. This is because of trust issues, in addition to the practice of not saving for retirement, due to the custom of children providing for elderly parents. Additionally, financial concepts such as credit, interest, and retirement savings are difficult to translate.199 Therefore, educating immigrants on financial terms, concepts, product options and features, and fee structures is an important aspect of financial assimilation. In addition, the formal, physical appearance of banking institutions often intimidates immigrants who are not familiar with banks. Therefore, it has been recommended that institutions have a more familiar feel in terms of size and appearance. Bank of America and Wells Fargo have made several branches more accommodating for families and decorated them in festive, Latin American colors.200 Finally, understanding the importance of family and community in Hispanic culture is key and can be used in marketing strategies. The largest concentration of Mexican immigrants in the United States are in California, Arizona, New Mexico, and Texas; followed by Florida, Nevada, Colorado, and Illinois. According to the Mexican Ministry of Economy, the top ten U.S. markets for remittances to Mexico are Los Angeles (15 percent), New York (5.5 percent), Dallas (4.8 percent), San Francisco (4.4 percent), Chicago (4.1 percent), Atlanta (3.7 percent), Phoenix (3.7 percent), Houston (3.4 percent), Raleigh-Durham (2.5 percent), and Denver (2.1 percent).201

197 Ibid. 198 University of California-Davis 2002. 199 Cuevas 2003. 200 Bair 2002. 201 Cuevas 2003.

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Mexican nationals living in the United States tend to come from particular places in Mexico and disperse in the United States. Mexican migrants in the United States tend to come mainly from ten Mexican states.202 Since these ten states represent the main areas where most remittances are delivered, most “last-mile” problems are likely to occur in these areas. According to Mexico’s 2000 Census, there are 199,369 localities in the country 90 percent of which have less than 500 inhabitants; therefore, these conditions limit not only the efforts of the government to provide public services but also constrain the expansion of the formal financial sector. Though this report is not aimed at analyzing the developmental impact of remittances, it has been noted that remittances do not necessarily lead to significant productive investment. Additionally, it has been reported that temporary migration deprives households in Mexico of necessary labor, disrupts household and community relations, and limits access to services.203 Recently, however, the increase in workers' remittance flows has been singled out by the government as one of the possible explanations why poverty indices have significantly improved in recent years despite lackluster growth in Mexico.

Channels

Formal remittances can be completed through commercial banks, commercial establishments, post offices, money order, and the Mexican Telegraph System. Most Mexican immigrants in the United States remit through electronic transfers, money orders, telegraph and postal drafts, mail, and checks. Debit card money transfers occur through systems like Visa Wire (“Giro”), where remitters and recipients can access money through established bank accounts simply through the use of their respective debit cards without any intermediary transfer. “Giro Telegrafico” is a wire service running throughout rural and urban Mexico. This service uses an intermediary, which notifies a recipient within one to two days that funds are available to be picked up at a particular location. The formal banking sector is composed of commercial banks, development banks, and limited financial scope institutions. The Financiera Rural is a development bank that specifically deals with the needs of the rural sector. Currently, about 726 private entities and four public institutions provide financial services to rural communities. The Popular Savings and Credit Law created a bank to offer services directly to low income individuals (Banco Nacional de Servicios Financieros, BANSEFI). Money exchange companies exist as an auxiliary credit activity. The “Popular Banking System” consists of an estimated 657 intermediaries, providing financial services to over 2.6 million people around Mexico, with assets over 17.8 billion pesos. 4.9 percent of the intermediaries are credit unions, 1.7 percent are savings and loan associations, 23.9 percent are cooperative associations, 31.9 percent are solidarity savings institutions, and an estimated 37.6 percent are popular savings entities. The market has enormous potential, as formal financial intermediaries only serve 35 percent of the economically active population. 204 The National Plan on Social Development for 2001-2006 works to

202 The ten states are Michoacán, Jalisco, Guanajuato, Estado de México, Puebla, México City, Veracruz, Guerrero, Oaxaca and Hidalgo. 203 Guigale, Lafourcade, and Nguyen. 2001. 204 Gavito 2003.

- 85 - ANNEX II expand financial services and increase the availability of remittance services for all Mexicans. It is acknowledged that the family remittances market can operate through cash, in- kind, and check transfers. Such flows made up about two percent of the money remittance shipments in 2002. Mexican immigrants appear to prefer electronic transfers because of the speed and security of these systems. An unquantified amount of money is remitted by hand deliveries from people traveling to and from Mexico. It is common knowledge that many illegal immigrants in the United States avoid formal financial institutions due to fear of being discovered and deported by authorities. It must follow that this class of remitters may utilize informal anonymous methods when they transfer funds.

Regulatory Provisions

Since remittances go through formal financial systems, they are regulated by the same laws that govern bank operations. Article 2 of the Banking Law sets out the guidelines and criteria for banking and credit activity. Article 31 of the Law gives Banco de Mexico authority to regulate money transfer services. In 1991, the business of providing electronic transaction services gained importance when amendments to the legal framework regulating Mexico’s stock exchange allowed the creation of commercial enterprises that offer these services. Money-changing activity is regulated by Article 81 of the Law of Organizations and Credit Auxiliary Activities.

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The Philippines

Part 1. Quantitative Economic Analysis

The Philippines is the world’s third highest remittance recipient economy in the world. The officially reported remittances for 2002 were $7.2 billion. 205 Both the government and private sector have collaborated to create a highly organized labor export industry. Consequently, overseas worker remittances are a key part of the Filipino economy and an area of great interest to the government and private sector. The Philippines case study entitled Worker Remittances as a Development Tool: Opportunity for the Philippines is an important prototype for the sort of in-depth economy analyses that each economy may perform based on the general framework described in this report. It contains the key components for analyzing remittance flows in the Filipino economy. For a discussion and analysis of the factors involved in estimating remittance flows for the Philippines, refer to the excerpts of the Philippines case study included as Annex III.

Part 2. Qualitative Incentives Analysis

The following preliminary analysis has been conducted using information provided by the Philippines through the APEC ARS Working Group Survey, as well as through an in- depth study of the particular characteristics of Filipino remittance activity.206 First/Last Mile Problems The Philippines, like Indonesia, has a geography that makes networking and fund delivery difficult to centralize. One study based on limited market research indicates that up to 80 percent of the Philippines may be “unbanked,”207 and thousands of islands are connected by independent couriers. The Philippines also has a large well-organized labor exporting industry that streamlines opportunities for cross-border money remittance services. Furthermore, the Philippines has “liberalized” its financial services sector, resulting in a marketplace atmosphere where formal financial institutions compete freely with “informal” ones.

Channels

The Filipino banking system includes commercial banks, thrifts, private development banks, stock savings and loans, and rural banks. These institutions offer a number of financial services. Operating networks of rural banks increased to almost 2,000 as of September 2002. Special services are provided to low- income groups, particularly those involved in agriculture. Loans are offered to farmers and small- and medium-size businesses via micro-finance and development banks. Commercial banks tend to crowd out smaller rural banks, which might be better equipped to reach low-income, rural individuals. Many rural banks, in fact, have no overseas

205 IMF 2002. 206 Mellyn 2003. 207 Ibid.

- 87 - ANNEX II connections.208 Money-changers are common in the Philippines and are often affiliated with or are subsidiaries of banks. Five Filipino banks are involved in cross-border remittances.209 They use electronic credit, SWIFT messages, and telegraph transfers (TTs) to complete transfers. Those involved in the labor-export industry also reach potential money-remitting clients through “orientation” seminars. These seminars educate and instruct workers going overseas on a number of issues, including channels to remit money back home. “Informal” money remitters operate openly in the padala system. This system is based on personal couriers who deliver money door-to-door and offer direct credit to peso or conversion of foreign exchange to pesos for the account of the beneficiary. This personalized system thrives on faster, cheaper service that operates within flexible hours and close proximity to service providers. Formal institutions, such as banks, often engage in similar practices or may use elements of the padala system to perform remittance services by themselves.

Regulatory Provisions

As stated above, the Philippines has a liberalized money remittance market, so informal systems operate freely and openly. Banks and non-bank financial institutions are registered with the Filipino Central Bank and Securities Exchange Commission. Also, the predominant cash economy and informal-style remitting systems that operate in the Philippines create difficulty for authorities to impose regulatory controls or recording mechanisms.

208 Economic Resource Center for Overseas Filipinos and the Mindanao Land Foundation 2002.

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Thailand

Part 1. Quantitative Economic Analysis a. Estimates of Remittance Flows

Official Data on Inflows

Data from Thailand’s Ministry of Labor show about $1.4 billion in migrant transfer payments from Thai employees abroad. 210 These are based on formal exchange records supplemented by reports from commercial banks on activity in nonresident baht accounts. The provenance of the data could imply that they are for the formal sector only and may in fact understate the actual remittances of migrant workers. A better breakdown of origins of the data needs to be made to be sure that the official statistic is an accurate reflection of transfers from migrant workers. Because some Thai workers abroad send money home through ethnic stores,211 some remittances may be escaping official recording mechanisms. According to officials, the government will attempt to expand the recording system to cover remittances fully. Thai workers going abroad are already required to open a bank account so that transfers can be captured through the banking system. Government officials indicate that hand delivery of cash only occurs in cases when workers return home on vacation or permanently.

Official Data on Outflows

It is estimated that the annual outflow of remittances by foreign workers in Thailand is about $400 million. 212 Wage data imply that the typical earnings of low status jobs in Thailand is about 3,000 baht per month–or $900 per year.213 However, other data indicate that low-skill labor pays closer to $500 per year.214 Research should focus on discovering what percentage of these wages are sent home by workers living in Thailand. Under the Exchange Control Act, the cash carry amount is limited to less than $12,000. b. Estimates of the Number of Migrants

Thai Workers Abroad

Thailand, a country of 61 million, 215 is estimated to have as many as 500,000 workers abroad. 216 The official record from the Ministry of Labor shows that, in 2003,

210 IMF 2002, lines 2310 and 2390. 211 Hewison 2003. The small sample size in Hewison’s study raises doubt about the numerical reliability. Nevertheless, the study indicates that workers do in fact remit through informal channels such as ethnic stores and tailor shops. 212 IMF 2002, line 3390. 213 According to Thai official’s Thai labor force surveys for 1989–2000, in agriculture the average was 3,000 baht; at 40 baht per dollar this would be equivalent to $900 per year. 214 $34–45 per month. See University of California-Davis 2002. 215 World Bank data, 2000. 216 Data from Stahl 1999. The top 10 countries account for 400,000 migrants. Martin (1996) estimated 500,000 Thai workers abroad. Data for the year 2000 from Thailand’s Ministry of Labor and Social

- 89 - ANNEX II the number of Thai workers who went abroad was about 360,040. Some 112,381 Thais work in Chinese Taipei and 61,008 in Singapore respectively. Close to 50,000 work in the Arabian Gulf. Other concentrations are found in Malaysia, Singapore, Brunei Darussalam, and Japan. 217 An overwhelming 85 percent of overseas Thai workers are male; 70 percent have only a primary school education. 218 Income from Thais working abroad and remitted through formal systems is reported in Table 3.

Table 3: Remittances from Thais Working Abroad

Year Income (Millions of Baht per year*) 1996 45,780 1997 51,910 1998 58,845 1999 56,910 2000 67,936 2001 55,152 2002 59,240 Source: Ministry of Labour, July 22, 2003.* US$1=42 Baht (2002).

Foreign Workers in Thailand

Thailand is host to more than 250,000 resident aliens, 80 percent of whom are Chinese.219 A significant worker population from neighboring countries, such as Cambodia, the Lao People’s Democratic Republic, and Myanmar, is largely unrecorded. An official data source shows the number of Burmese workers in Thailand as 340,029, with another 69,310 from Laos and Cambodia. c. Evidence from Surveys

Inferring Remittances from the Data

Household surveys for Thailand indicate that the average family receives about $25 per month ($300 per year) in “current transfers” but do not indicate whether the source is domestic or from overseas.220 If total inflows for all 17 million households were from abroad, remittances could be as much as $5 billion. Given that transfers to families are largely domestic in most countries, the $2 billion figure recorded in the IMF

Welfare cite 350,000 overseas workers “located” by the ministry. An often-cited example is that of the 20,000 Thai agricultural workers in Israel who, over the past decade, have taken jobs formerly performed by Palestinians. 217 Stahl 1999. 218 IOM 2003. p. 94. 219 Data for 1999 from Thailand’s statistical office were derived from information provided by the Royal Thai Police. The same data show less than 5,000 registered aliens from other neighboring countries. These data thus imply a large number of illegal workers. 220 Data for 1999 from Thailand’s statistical office, table 11.4.

- 90 - ANNEX II

BOP data, which would reflect only a portion of the “current transfers,” may provide a more accurate assessment of overseas worker flows. A clearer determination may be made by distinguishing between domestic and overseas transfers in household surveys.

Part 2. Qualitative Incentives Analysis

The following preliminary analysis has been conducted using information provided by the Thai government, directly and through the APEC ARS Working Group Survey.

First/Last Mile Problems

The Thai government is committed to continuously improving access to financial services to ensure that optimum coverage is achieved. Recent efforts to provide coverage to rural areas have enabled more registered migrant workers to transfer money to bank branches close to their residence, yet additional efforts can still be made to continue improving the financial sector.

Channels

In December 2002, there were a total of 3,668 banking branches throughout the nation, most of which were concentrated in Bangkok where there is an approximately 1:9,100 bank-to-person ratio. Outside of Bangkok, formal banking channels are far more sparse—with a bank-to-person ratio of 1:23,355. Nevertheless, according to official data, nearly every district has at least one bank. Thailand’s main banking system consists of commercial banks and state-owned specialized financial institutions, such as the Government Savings Bank, SME Bank, Export-Import Bank of Thailand, Bank for Agriculture and Agricultural Cooperatives (BAAC), Government Housing Bank, and the Industrial Finance Corporation of Thailand, which targets sectors that cannot access regular commercial banks. Low-income groups have access to micro-banking activities through specialized state-owned institutions, such as the BAAC, and the Government Savings Bank. Cross-border remittance services are available in three ways: commercial banks, authorized companies, or MTOs. Commercial banks and authorized companies perform fund transfers through international networks like SWIFT. MTOs such as Western Union also operate in Thailand. Informal systems also operate for those disenfranchised from the formal financial system, either by lack of access or lack of creditworthiness. Informal systems operate in a number of ways including courier systems, booking methods whereby coupons are reimbursed for cash equivalent, or black-market loans and exchanges. Informal systems have wider availability in rural areas and have advantages in terms of speed, cost, and circumventing burdensome regulatory controls.

Regulatory Provisions

Under Thailand’s Exchange Control Act B.E.2485 (1992) and Ministerial Regulation no.13, all legal entities that provide services for the transmission of

- 91 - ANNEX II money must be approved by the Minister of Finance upon recommendation of the Bank of Thailand. Persons or legal entities that carry out this service illegally are subject to criminal sanctions. If the Bank of Thailand finds that persons or legal entities fail to comply with the law, the case is sent to the Royal Thai Police for further investigation. Transfer across national borders can be made in three ways: through commercial banks, authorized companies, and money transfers agents. Each method is subjected to specific rules, regulations, and documentary requirements. Moreover, commercial banks, authorized companies, and money transfers agents are required to send details of all transactions to the Bank of Thailand. Several organizations monitor and restrict illegal remittance activities—among them the Bank of Thailand, the Anti-Money Laundering Office, the Ministry of Finance, and the Royal Thai Police. Laws and other measures have been adopted to curb illegal activities. For example, the amount of registered capital required that money changers must have has been reduced in order to encourage them to license their business. Thailand is also engaged in a number of programs to educate formal institutions on legal issues and examine the practices of informal agents to combat illegal activities.

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Vietnam

Part 1. Quantitative Economic Analysis a. Estimates of Remittance Flows

Official Data on Inflows

Balance of payment statistics (for 2000) indicate that over $1 billion may be flowing into Vietnam each year. This implies a remittance of about $400-500 per migrant based on the estimated number of migrants (see next section). The IMF yearbook does not indicate the extent of coverage of the official statistics.221 The origin of the funds should be broken down in detail to determine how $1 billion was calculated. Data for 2002 indicates a sharp increase with over $2 billion in official remittances. However, that figure could be doubled if “undeclared funds” are included.222 This new information could imply as much as $2,000 per migrant each year. Such a sum appears high in comparison to other labor-exporting countries. It may indicate that the number of Vietnamese migrants is larger than the estimated 2.5 million. It is estimated that the money remitted through unofficial channels, specifically hand delivery, could range from $2.5 to $4 billion. 223 The State Bank of Vietnam estimates that more than half of the money remitted to Vietnam is done unofficially, possibly due to cheaper cost and confidentiality. 224 Figure 2: IMF Private Transfer Estimates for Vietnam

2,500

2,000

1,500

1,000 USD (Thousands) 500

0 1998 1999 2000 2001 2002E 2003P 2004P 2005P Years

Source: IMF June 2003.

221 IMF 2002. 222 Far Eastern Economic Review, January 9, 2003. 223 According to information received from the financial sector specialist in the World Bank’s Vietnam country office. 224 Ibid.

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b. Estimates of the Number of Migrants

Private money can be remitted to Vietnam from two main sources: (1) Vietnamese living overseas; and (2) Vietnamese workers abroad through labor exports.

Vietnamese Workers Abroad

Vietnam’s role in migration is mainly that of a labor exporter. It is a largely rural country of 78.5 million people 225 with little skilled labor (fewer than one percent of migrants are classified as skilled). It is estimated that there are more than 2.5 million Vietnamese migrants in more than 100 economies; 35 percent are in the United States and close to half reside in countries of the Organisation for Economic Co-operation and Development (OECD). Based on OECD sources, it should be possible to track these bilateral flows from the financial statistics of partner economies. The remaining 50 percent are mainly in China, Thailand, Chinese Taipei, and Malaysia.226 Data are not available on the bilateral remittance flows from Malaysia, a country in close proximity to Vietnam. Given the nature of jobs227 in Malaysia taken by irregular migrants, it might be expected that some of these migrants would be Vietnamese. Roughly 300,000 overseas Vietnamese have professional occupations, with experience in developed scientific industries such as information and technology, biological technology and producing new materials. Such knowledge skills hold great potential for Vietnam to develop various aspects of the whole economy. 228 c. Evidence from Surveys

Inferring Remittances from the Data

Vietnam does have data from household surveys that can be used to estimate per capita flows. A Living Standards Measurement Survey (LSMS)229 was conducted in 1997-1998. It showed that the average remittance at that time was $700.230 Making a rough comparison, the implication is that only about two-thirds of the flows–primarily

225 World Bank data, 2000. 226 OECD. 2002. 227 “Foreign workers are allowed to work at the top level of the occupational hierarchy where local expertise is not available and at the very bottom, in jobs shunned by Malaysians.” OECD, 2002, p. 328. 228 Information provided by the World Bank country office in Hanoi. “Overseas remittances prop up economy.” Tin Kinh Te Tham Khao. January 20, 2003. 229 Household surveys conducted in the World Bank’s Living Standards Measurement Study (LSMS) are used to study and understand poverty in developing countries. Although tailored to fit the distinct characteristics and demographics of individual countries, the surveys often include migration and remittance information. 230 Intertemporal comparisons using these data need to be interpreted with care. The Vietnamese currency has been sharply devalued over the past ten years, making the average foreign worker’s earnings much more important in the family budget.

- 94 - ANNEX II those coming from OECD countries–were being recorded.231 Economy-specific data in the LSMS indicate that remittances from Chinese Taipei and Hong Kong, China were close to the per capita averages, whereas the numbers for China and Thailand were closer to $200 per annum. 232 There are no data for Vietnamese in Malaysia in the LSMS.233 Other data imply that the average Vietnamese worker abroad earns $4,800 per year234–suggesting a fairly high remittance rate. This, however, also includes the large settled communities in OECD countries, whose remittance rates would be expected to be significantly lower. Thus, the contract worker’s share remitted home may be even higher.

Part 2. Qualitative Incentives Analysis

The preliminary incentives analysis for Vietnam was aided by information from Vietnam country economists as well as other sources, such as the APEC ARS Working Group Survey. Money remittances are transferred to the country through official channels as well as unofficial channels. Official channels, such as commercial banks like Vietcombank or money transfer operators like Western Union, have a large number of outlets throughout Vietnam. 235 Unofficial channels are mainly composed of hand delivery of cash from people visiting the country that enter with or without customs declaration. Vietnam still has a relatively underdeveloped banking sector, dominated by state- owned commercial banks, but the Vietnamese government has been reasonably successful in recent years, restoring public confidence in the banking sector through the reform process and bank modernization. Despite the rapid monetization of the economy, many citizens still appear to use informal methods of financing investments (borrowing from family members, non-bank money lenders, etc.). Other evidence of the presence of this informal banking system, especially in rural areas, is that remittances are often transferred through various informal channels, including hand delivery of cash. 236 Vietnam does not currently have a comprehensive institutional framework to enforce AML/CFT. 237 However, the government plans to issue a comprehensive anti- money laundering decree in late-2003. According to reports, the draft decree outlines activities that will be monitored, such as money or stock transactions valued at over VND 500 million (US$32,500) for individuals or VND 1 billion (US$65,000) for firms over

231 But IOM estimates indicate that Vietnam’s mostly rural landscape means only about one-third of all remittances to Vietnam are recorded. 232 These data need to be interpreted with caution–the number of respondents naming these two countries was very small. 233 Results of World Bank Living Standards Measurement Survey conducted in Vietnam in 1992. 234 OECD. 2002. 235 Western Union has 1,422 locations in Vietnam as of July 31, 2003, according to the Western Union website, http://www.westernunion.com/info/intlCountryInfoIndex.asp?country=VN . 236 World Bank 2002. 237 Ibid.

- 95 - ANNEX II the course of a month, inactive accounts, erratic foreign exchange trading or transfer activities, and other suspicious transactions.238 The international donor community is actively assisting the Government of Vietnam in developing the legal and regulatory framework for anti-money laundering and creating a financial intelligence unit to monitor and enforce regulatory compliance. Such regulations and enforcement will have to be implemented very carefully to avoid creating a deterrent effect on the public in utilizing the formal banking system. In the interim, Vietnam does have a number of legal provisions that are aimed at detecting and enforcing financing generated from illegal activities, such as Article 154 and 251 of the criminal code, Article 19 of the Law on Credit Institutions, and Decrees 64/2001/ND-CP and 63/1998/ND-CP.239 However, these measures do not constitute an effective AML regime and the move to develop comprehensive AML regulations. The enforcement mechanism indicates an increased awareness of the possibility of using the financial system to facilitate illegal activities, including corruption, tax evasion, and criminal activities.240

238 Based on news information provided by the World Bank Country Office Vietnam. (“Vietnam to Issue Money Laundering Decree in Q2,” Labor, April 18, 2003). 239 Nguyen 2002. 240 News reports indicate that the government has uncovered instance of activities considered to be money laundering, including a mo bile phone smuggling operation that allegedly used a bank to launder $I1 million out of Vietnam. Based on news information provided by the World Bank Country Office Vietnam. (“Vietnam to Issue Money Laundering Decree in Q2,” Labor, April 18, 2003, and Young People, April 17, 2003).

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ANNEX III—EXCERPT OF THE PHILIPPINES CASE STUDY

Annex III contains Sections II to V excerpted from the case study of the Philippines prepared by the Asian Development Bank. This study provides an example of the in- depth analysis that each economy should perform based on the framework presented in this report. Source: Mellyn, Kevin. 2003. “Worker Remittances as a Development Tool: Opportunity for the Philippines.” Manila, Philippines: Asian Development Bank.

II. OVERVIEW OF REMITTANCE MARKET IN THE PHILIPPINES

A. Market Definition

30. For the purposes of this report, the remittance market represents the total funds sent by individuals resident abroad to recipients in the Philippines through both formal (i.e., banking system) and informal (i.e., “ARS”) channels. Therefore, our focus is much broader than the remittances of overseas Filipino workers (OFWs). At the same time, we are looking at what in payments system terminology is call “person-to-person” payments, so we have not for example looked at U.S. social security or military pensions to Philippine residents.

B. Market Size Estimates

31. Official Bangko Sentral ng Pilipinas (BSP) data (see Exhibit 1) indicates a remittance flow of about $6.9 billion in 2002, fully $3.6 billion of which came from the United States and Canada. These numbers are not more than a compilation of returns from the commercial banks of their remittance activity.

32. The data is misleading on two accounts:

The stock of overseas resident Filipinos, including emigrants, OFWs and illegal aliens, is in the range of 7.5 million individually. Even an average remittance of $100 ten times a year would exceed the official numbers. Since data from the National Money Transfer Association in the United States indicates the average value of a remittance to the Philippines is $397, it is reasonable to assume a conservative average remittance of $200 ten times a year or even an average of $300 per remittance (on a par with Mexico, a much lower paid group than Filipinos on average).

These estimates would establish a range of $14 billion to $21 billion for total market size.

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The second flaw in the data is that virtually all U.S. dollar remittances flow through the U.S. banking system because both Philippine banks and Saudi Arabian and other Gulf State banks hold their principal U.S. dollar nostro accounts in New York. The size of the OFW deployment in the Middle East and its average earnings suggest that the United States and Middle East each account for about one third of remittances.

C. Market Segmentation

33. In contrast to the Latin American situation, where the remitting community abroad consists overwhelmingly of poorly educated unskilled workers in low wage jobs in the United States and Europe, the Philippine diaspora is demographically and geographically complex.

34. Philippine educational standards are high relative to Mexico and Central America, and there is a formal OFW program to assist Filipinos seeking work abroad and look after their welfare and that of their dependents at home. These factors are almost totally absent in Latin America.

35. As a result, Filipinos working abroad have a wide range of skills and include a high percentage (35 percent) of professional and technical workers on one end of the spectrum and a correspondingly large segment of service workers, including mainly female domestics on the other (see Exhibit 2). Philippine ship manning agencies have also created a large “sea-based” segment ranging from stewards to skilled seamen and officers. Large numbers of Filipinos serve in the U.S. armed forces. This results in a very wide range of income and remittance potential, as well as mobility to travel to and from the Philippines (and with it the potential for a high percentage of hand carried remittances).

36. This means that any valid study of remittance behavior must be segment specific, at a minimum distinguishing between:

(i) professionals/ paraprofessionals; (ii) technical and clerical workers; (iii) skilled production workers; (iv) industrial, construction, and agricultural laborers; (v) service workers and domestics; and (vi) mariners.

37. The Philippine diaspora covers 140 or so countries. Filipinos are present in significant numbers in North America, Europe, the Middle East, and both high income and developing Asian countries.

38. Stock estimates of Filipinos overseas (see Exhibit 3) show the largest group (3.4 million or 47 percent) to be in the United States or its trust territories in the Pacific. However, the vast majority of Filipinos in the United States are permanent residents,

- 98 - ANNEX III about 2 million legal and 1.2 million of irregular status. As a group, they are less likely to be supporting dependents in the Philippines than OFWs. OFWs, on the other hand, largely work abroad on renewable contracts for fixed periods precisely to support their families or accumulate capital, especially in the form of housing. Many of them deploy to countries like Saudi Arabia and the UAE where permanent emigration is scarcely an option for most Filipinos (see Exhibit 4).

39. This suggests that segmentation needs to be overlaid with geographical distribution to generate valid insights into remittances behavior.

D. Formal and Informal Channels

40. Formal banking channels account for a far larger share of Filipino remittances than in the case of Latin America largely due to the long standing involvement of the Philippine National Bank (PNB) and more recent market entry by other commercial banks. At worst case, they account for a third of the real potential market and may account for half.

41. However, reducing the informal share of remittances has tremendous financial leverage simply because of the scale of the flows. The presence of thousands of money changers and large scale mall chain involvement in changing foreign currency into pesos suggest that a very large flow of remittances come into the country as cash in U.S. dollars or Japanese yen. It seems likely that much of this cash is brought or sent home through informal channels though accurate estimations are not available.

E. Competition and Prices

42. The formal (bank channel) Philippine remittance market is highly competitive and reasonably priced by Latin American standards, but there is substantial scope for improvement. Philippine bank charges range from around $5 (book transfer within one bank, foreign account to local branch account) to $16 on the high end, which can include door-to-door courier delivery. Manuel Orozco of Inter-American Dialog has done studies for the MIF suggesting total end-to-end charges to send $200 from the United States through a Philippine bank average around 8 percent.

43. Interestingly, PNB believes the service is underpriced relative to their costs (which they admit to not knowing in any detail) and have added $1 to the average transactions. The market has followed suit.

44. There is evidence of cartel-like behavior in the bank remittance market, with 90 percent of bank transactions in six major institutions, 30 percent in PNB alone. The recently formed association of bank remittance offices may actually facilitate collusive pricing behavior.

45. At the same time, the sheer size of the market continues to attract new entrants including: banks (Union Bank, Planters Development Bank, Standard Chartered); card companies (Visa); the Postal Savings Bank in association with its parent, the Philippine

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Postal Services, the Rural Bankers Association; and various entrepreneurs and NGOs (Opportunity International in association with MasterCard). Many of these initiatives are still in the planning stage or are seeking funding.

46. Despite the above competitive situation, non-banks and informal channels remain robust and anecdotal evidence suggests that they may be expanding their share of the market.

47. For example, Western Union has in five years captured a market share estimated as high as 20 percent of wire transfers using 5,200 outlets (including bank branches where banks use them as an overseas “tie-up” or front-end).

48. LBC and other, mainly small, courier and logistics company transport packets of cash back to the Philippines from markets like Hong Kong, China; Singapore; and the Gulf where there are large concentrations of OFWs. These services are cheap (as little as $3.00) and considered acceptably reliable by remitters.

F. Payments System Issues

49. The Philippine authorities doe not try to actively drive efficiencies in the national or Pan-Asian payment system. Payment system development has been, aside from the BSP’s Real Time Gross Settlement interbank system (RTGS) (which by definition is a central bank responsibility) left to the private sector. This is not unique, but does not represent Bank of International Settlement (BIS) Payments Committee best practice. The Philippine Clearing House Corporation is owned by the commercial banks. It facilitates interbank check clearings and has developed a low cost electronic giro or ACH mechanism that can pass peso or dollar interbank payments for a tariff of 2.5 pesos. However, the banks do not in practice use this for low value payments like remittances between banks. They prefer to charge 150 pesos for interbank transfers. There is also limited inter-operability in the three bank-owned automated teller machines (ATM) networks for competitive reasons. Rural banks, Thrift banks and other “grass roots” financial institutions are not fully integrated into the formal payment system but must use the services of commercial banks.

G. Legal and Regulatory Aspects

50. The non-bank courier companies are not regulated, which is in itself a major competitive advantage in terms of cost. They obviously provide no record keeping on know your customer function but operate like bulk mail. Proper reporting requirements (FATF Standards) would eliminate much of their competitive advantage, in cost if not in reach.

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III. EFFICIENCY ISSUES AND CONSTRAINTS IN COUNTRIES: FIRST MILE PROBLEM”SENDING

A. Access to Banking in Sending Countries

51. Access to banking services in sending countries is a serious constraint on the volume of remittances in formal channels and on banks ability to control their costs.

B. Retail Payments Services and Sources in Sending Countries

52. This “First Mile” problem is especially acute in the United States. In fact, there is anecdotal evidence that a substantial number of Philippine residents in the United States still mail checks or postal money orders that take up to a month to clear given the Philippine banks collection and availability practices.

53. The most cost effective means to remit money cross-border is by electronic transfer between financial accounts. This is even more efficient if the accounts are intrabank, especially if there is a single accounting platform. PNB, for example, has such a system and can debit remitters accounts in the United States and credit recipients accounts in the Philippines virtually instantly. It can also receive cash over the counter at branches or its money transfer subsidiary for credit to accounts in the Philippines at a somewhat higher cost due to brick and mortar and personnel costs. However, this is the exception.

C. Limitations to Market Access by Philippine Banks

54. Direct Philippine banking operating presence in key overseas markets is constrained by both regulation and costs to a total of 20 branches and agencies. In addition, PNB has a 30 office money transfer subsidiary.

55. The second most efficient way to remit money is through the international ATM system, where the remitter issues his beneficiary a duplicate foreign bank issued card for use at ATMs in the Philippines. There is anecdotal evidence that this is fairly common if irregular practice.

56. Critically, this method requires that the remitter has a deposit money account or a payment card account. Many Filipinos abroad either lack access to financial accounts (status reasons or because foreign banks do not want them as customers) or bank with institutions that treat foreign remittances as a high cost “exception process” or simply do not offer the service. Total lack of remittance products is especially true across the U.S. banking industry.

D. Correspondents and “Tie-ups”

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57. Any transfer through the U.S. Correspondent banking system are likely to be both costly and subject to “bene deduct” pricing policies where the sending bank splits back- end charges with his correspondent.

58. The net result is that Philippine banks are highly dependent on “tie-ups” with ethnic businesses or correspondent banks whose charges they cannot control for their U.S. business outside or areas where they have brick and mortar.

59. “Tie-ups” in the Gulf include Saudi Arabian money changers and other non banks. Local banks rarely welcome Filipino remittance business, though Arab National Bank has a well priced and efficient “tie-up” with PNB which places its personnel in select branches and uses its own system.

E. Role of Money Transfer Businesses

60. The first mile problem varies greatly by geography and segment, but serves in some degree to explain the robust growth of Western Union and informal channels.

F. Legal and Regulatory Issues

61. Several types of “tie-up” represent potential record keeping and know your customer problems vis-à-vis FATF standard (money changers, ethnic stores, travel agents) even if the money at some point enters the Philippine banking system. Card associations are owned by regulated banks but are not regulated per se. The legal status of dual ATM cards as a payment method is unclear since it does not seem to have ever been contested. There are internet payment schemes such as Ikabo built around the dual ATM card concept. The Ikabo customer transfers money into a U.S. account which can be accessed through a U.S. issued ATM card mailed by the company to a designated recipient in the Philippines. Other internet schemes allow funds to be charged to credit card accounts and withdrawn at ATMs in the Philippines. Although the global card networks are capable of supporting these transactions within their rules the issue of distributing foreign bank issued payment cards in the Philippines appears open. It should be noted, however, that the MIF research indicates this practice is widespread in Latin remittance markets and ATM cards are relatively low cost in terms of interchange fees and foreign exchange spreads are standard and reasonable.

IV. Efficiency Issues and Constraints in the Philippines

A. Unbanked Population Constraints

62. The limited market research shared with us by banks seeking to enter the market and the consultant’s experience in other developing economies indicate that up to 80 percent of Philippine households are “unbanked” meaning they do not hold a deposit money account. Neither the BSP nor the Banker’s Association have any hard data on the banked population though about 16 million households are considered bankable by the card associations.

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63. This is the heart of the “Last Mile Problem” in two ways:

(i) First, the formal banking system is simply a set of deposit monthly accounts from which customers can access cash, and make or receive payments through a variety of access instruments including check, payment cards, and electronic transfers (ACH, GIRO, wire), etc. Households without deposit accounts in the formal system are economically “disenfranchised” because they can neither send nor receive deposit money through the banking system. Remittances are simply a class of person to person payments; and

(ii) Second, the exclusion of the poor from the formal financial system limits their ability to efficiently manage their resources, save and establish sound financial habits. This in turn reinforces their poverty and makes it less likely they can use credit effectively.

64. It should be noted that bank remittance officers estimate that over 80 percent of deploying OFWs open a deposit account during their pre-departure formalities but they are a small fraction of the potential market and anecdotal evidence suggest that most remittances sent to bank accounts are immediately taken out as cash or delivered by courier.

65. The failure of the banking system to develop economically viable means to “bank the unbanked” is a market failure typical of developing economies where banks are narrowly focused on an affluent minority, and corporate and real estate lending.

B. Bank Network Constraints

66. Bank networks (both branches and ATMs) are highly concentrated in Metro-Manila, especially those of the major banks.Some 2,646 of 7,492 banking offices of all types (including, thrift, and rural banks) are in the national capital region as are 2,497 of 4,412 ATMs.

C. Payment System Capillarity Constraints

67. Capillarity is the ability to move deposit money from account to accounts in the banking system. Thrift banks, rural banks and other “grass-roots” financial institutions are poorly integrated into the national and international payments system. There is a general lack of automation and technical capacity. Products beyond simple savings or home finance schemes are limited.

D. The Role of Couriers and Logistical Firms.

68. Even the commercial banks make extensive use of courier firms and logistics companies due to the lack of account holding and capillarity in rural areas. Where the

- 103 - ANNEX III couriers have a front end, as they do in many overseas markets, it makes little sense for remitters to send money through bank channels for end delivery since the bank channel simply adds cost.

E. Financial Literacy and Behavioral Constraints

69. The vast majority of remittances either arrive in cash (banknote) form or are quickly converted into cash for immediate consumption. Not only does this fail to increase the stocks of investable/ loanable funds in the financial system but it fails to increase the financial responsibility and credit worthiness of receiving households. Microfinance organizations sponsored by non-government organizations (NGOs) and financial institutions (FIs) appear focused and small credit rather than savings and dependent on grant finding and below market sources of funds. This all limits the “absorptive capacity” of the Philippine economy to leverage incoming remittances for development. It appears that remittances insofar as they are not used for immediate consumption finance housing or are hoarded outside the formal financial system though this point requires further research.

F. Legal and Regulatory Aspects

70. The persistence of an overwhelmingly cash economy makes it harder to develop effective CTF and AML regime. Regulatory power is not used to provide incentives to financial institutions to reach out to underserved segments.

V. International Payment Systems

A. Deposit Money System

71. There are currently extensive efforts on the part of EU authorities and Euro Bankers Associations (EBA) to reduce the cost of cross-border retail payments within the EU largely through linking up national giro or ACH systems. The U.S. ACH is being linked to Canada’s system and there are plans to extend it to Mexico. The ACH does not support a unique remittance transaction type, but once linked, remitters could simply authorize the beneficiary’s bank in another country to debit his account or if he had the beneficiary’s banking details he could send a direct credit transfer. ACH systems are currently under-utilized for retail payments generally, but recent innovations have allowed check and credit card transactions to be converted to much cheaper ACH transactions at the point of entry into the banking system or even at point of sale. Remittance applications should be explored. The international credit union movement has its own low cost giro called IR net, which is also underleveraged for remittances.

B. Payment Card System

72. Both Visa and MasterCard have ambitious payment system strategies utilizing smart- card technologies and security features originally designed for on-line shopping. Simple prepaid cards, such as those utilized in a PNB Seven-Eleven the up in Hong Kong, China

- 104 - ANNEX III and the United States hold some promises. The important point is that card systems work on interchange commissions which are ad valorem and regime extensive infrastructure (POS devices, ATMs etc.) so they require extensive capital investments to deploy. The IADB’s MIF group has several card-based account pilots that should be monitored closely.

73. It should be borne in mind that funds stored on a prepaid card or chip card are not necessarily liquid reserves for the banking system. They are not necessarily superior to traditional deposit money systems and require high levels of initial investment which may be difficult to justify under local circumstances except in relatively high income economies like Singapore.

C. Postal System

74. The Philippines like the United States is one of the few countries where the post offices is not a major player in the banking system. This is changing with the Postal Savings Bank here determined to enter the remittance business with “cutting edge” technology that may or may not be deployable. More to the point, the International Postal Union supports a low cost remittance system called euro-giro and the U.S. Federal Reserve is building a link to it. The U.S. post office already provides a low cost remittance service for Mexico. A few years ago, several Philippine banks received a request for information from the U.S. post office concerning cooperation in remittances. This is a naturally low cost front end in many sending countries. The Philippine Postal Savings Bank project envisions deploying POS devices and stored value cards in the broader Post Office network and an alliance with the Rural Bankers’ Association but we have not been able to obtain a copy of the business plan of the Canadian software provider who is apparently funding the entire venture.

D. Emerging Technologies

75. Besides various types of so-called “smart cards”, there is extensive interest in using the internet and cell phones to send payments related messages. Cell phones are the most widely deployed electronic channel in the Philippines which is a leading market for low cost text messaging. Text messages can in principle be used to send secure payment instructions nationally and internationally.

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