The Potential Impact of Cryptocurrency on the Remittance Industry
The importance of the potential transformation to the way cross-border money transfers are made cannot be overstated, as remittances are absolutely crucial to the development of countless impoverished countries around the world. These funds are essential for reducing poverty, increasing financial inclusion, and dramatically augmenting the quality of life of its beneficiaries, as well as for aiding the national economies of the countries that the individuals receiving such aid occupy. It has been found that as of late 2016, “Money which migrants send back to developing countries now officially totals approximately $440 billion every year, three times higher than official aid flows, according to the World Bank” (Edwards, 2016). While already staggering, experts believe that these figures could be much higher if not for the prevalence of high transaction fees and a variety of other charges plaguing the money transfer market for those sending funds across international borders.
As matters currently sit, the average cost of sending cross border remittances through private companies such as Western Union, TransferWise, and Money Gram is around 7.5%. To put this in small-scale perspective, for every $100 sent, a fee of $7.50 is charged to the sender. While not a colossal amount of money, these funds do add up when considering the amount of international remittance transfers that are made each year. It is estimated that at least $32 billion in collective remittances do not reach their intended targets each year due to high transactions fees and additional charges. Measures at the international level have been pursued to lower the percentage paid for money transfers, as the World Bank, the United Nations, and other international coalitions are seeking to have the aforementioned 7.5% figure cut down to less than 3%. In doing so, billions of dollars in aid would be gained each year by individuals and countries that have many pressing needs to address.
With the rapid growth of bitcoin and blockchain money transfer technologies sweeping through much of the developed world of late, many in the financial services sector are beginning to open their eyes to the vast possibilities that such technology can create for lesser-developed countries across the globe. However, the de-risking trend that has seen financial institutions doing everything in their power to reduce their risk exposure has exacerbated the difficulties seen in this process. Due to the complex anti-money laundering laws that govern them, as well as the fact that many money transfer operators almost exclusively conduct business with impoverished (and usually high-risk) areas of the world, many financial institutions have shied away from working with money services organizations over the past several years. Unfortunately for those residing in countries that are in dire need of vital funds transfers, the amount of general uncertainty surrounding money transfer technology, coupled with the complexity of the current financial landscape governing digital currency has made the dream of an efficient, modernized cross-border remittance system difficult to envision. However, many believe that should blockchain technology be utilized for remittance, the outcomes could be ultra-beneficial for all parties involved.
The article “5 trends affecting the remittance industry” analyzes many of the benefits of how virtual money and technology platforms can cut costs, increase transparency and save time. The article discusses one digital currency company in general, BitPesa, which currently successfully operates in several prominent parts of Africa including Nigeria, Kenya and Uganda. Using blockchain, Bitpesa promotes transparency and security by maintaining a continuously updating digital ledger of all transactions. It also significantly lowers the cost of sending remittances by cutting out the middleman – the correspondent banks providing transfer services– from the transactions. The article states that “BitPesa is able to receive local currency directly which it then sends in bitcoin to a digital broker who then deposits it as local currency in the receiving country. Regular money transfers would involve at least one deposit within a correspondent bank” (Edwards, 2017). The end result is a cheaper, more efficient transaction (as transaction costs typically run between only 1 and 3 percent and take only one day to process) for individuals sending funds across borders.
The article concludes with a quote from Mohit Davar, the chairman of the International Association of Money Transfer Network, who states his beliefs about what the future could potentially look like in the remittance industry. Davar says that in his opinion, “in the future remittances will be commoditized and become free so nobody makes money on them. The trick will be to monetize the customer through other products such as loans and micro-finance, remittances will just be an anchor product” (Edwards, 2017). We will have to wait and see if Davar’s prophecy comes true, but if it does, it is not outside the realm of possibility to think that the global poverty rates will be on the decline in the coming years.
Western Union Makes AML Changes
On June 12th, prominent American financial services and communications company Western Union (WU) announced the successful implementation of new anti-money laundering recommendations from the Southwest Border AML Alliance, which are set to increase their ability to combat financial crime. The purpose of the Southwest Border Alliance program was to “enhance and better coordinate investigations and prosecutions of money laundering in the Southwest Border Area (the area within 200 miles of the United States/Mexico border on either side of the border which includes all of Arizona” (AZ Attorney General, 2016). By working directly with the attorney general of Arizona’s office, Western Union has been able to set the standard for regulatory compliance within the United States with their development and application of high-quality AML controls and procedures. With increased resources being committed to their fight against financial crime and terrorism financing (an estimated 20% of WU’s workforce is dedicated to compliance functions), Western Union has become one of the leaders for developing “homegrown” technological innovations which include the creation of “custom algorithms to help combat money laundering and terrorist financing via online payments or money orders and for assisting with numerous investigations” (PYMNTS, 2017).
The move towards technology aimed at increasing the ease and reliability of compliance in the United States has been made quite evident over the past three years specifically, and Western Union’s compliance revolution has helped shape the financial services sector within the United States dramatically of late. Western Union’s Chief Compliance Officer (CCO) Jacqueline Molnar believes that by partnering with the attorney general’s office, WU has been able to greatly strengthen their compliance programs, allowing them to better serve and protect their customers and to provide more complete information to law enforcement to aid in their respective investigations.
Results of the 2017 Financial Complexity Report
With countless variations and differing complexities seen in regulatory compliance between jurisdictions abroad, it is often difficult to examine how changes in legislation can affect the financial services sector in different parts of the world. A 2017 report by TMF Group, a multinational professional services firm based in Amsterdam, attempted to do just that however, delving into how regulatory changes can affect compliance in different areas of the world. Coined the Financial Complexity Index of 2017, TMF Group examined 94 jurisdictions in Europe, the Middle East, the Americas, Asia Pacific and Africa by surveying professionals operating in the financial services sector about the regulatory climate in their respective country/region. The findings of the report demonstrated that Turkey has the most complex market for regulatory compliance, with Brazil, Italy, Greece, and Vietnam trailing shortly behind. The contributing factors to Turkey’s high ranking reportedly include difficulties with Turkish language and currency complicating reporting requirements, as well as an abnormally large number of tax rules and frequent regulatory changes.
Unfortunately for Turkey, many analysts believe that these factors will likely keep the country in one of the top spots in this annual ranking for years to come. Brazil, the most complex market in South America, was ranked highly due to its own complex reporting requirements, as well as an aggressive tax enforcement policy, which has “more than 90 taxes, duties and contributions charged by the local authorities” (PYMNTS, 2017).
Investment Fraud Ring Brought to Justice
Five individuals were charged on Tuesday for their respective roles in the operation of an Australian investment fraud group that is thought to have scammed thousands of Australian citizens over the past three years. By offering the elder generation of Australian citizens (those with access to retirement funds) investment returns on market shares that were simply too hard to believe, let alone turn down, the company headed by the five recently-arrested individuals is estimated to have made over $30 million through the scam and the laundering of the funds received from the unknowing victims. Australian authorities are continuing to uncover new information about the fraud ring, and are attempting to follow the money trail to see if any funds can be recovered, as well as if further ties to the ring could be discovered.
The company reportedly operated under 10+ unique names over a three year span, and were “supported by bogus websites containing fake information about the product and companies” themselves, although their professional and legitimate appearance was enough to throw off many of the victims (McElroy, 2017).
Coinspeaker Staff. “What Is Challenging The Money Transfer Industry? – CoinSpeaker.” CoinSpeaker. 14 June 2017. Web.
Edwards, Sophie. “5 Trends Affecting the Remittance Industry.” Devex. 09 Dec. 2016. Web.
McElroy, Nicholas. “Police Bust $30m Gold Coast Fraud Ring They Say Scammed 2000 Aussies.” Gold Coast Bulletin. 13 Jan. 2017. Web.
PYMNTS. “TMF Group IDs Toughest Countries for Compliance.” PYMNTS.com. 13 June 2017. Web.
PYMNTS. “Western Union Completes Compliance Upgrades.” PYMNTS.com. 12 June 2017. Web.
“Southwest Border Anti-Money Laundering Alliance.” Attorney General’s Office – State of Arizona. 01 Sept. 2016. Web.