Informal value transfer system
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An informal value transfer system (IVTS) refers to any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form. Informal value transfers generally take place outside of the conventional banking system through non-bank financial institutions or other business entities whose primary business activity may not be the transmission of money. The IVTS transactions occasionally interconnect with formal banking systems, for example, through the use of bank accounts held by the IVTS operator.
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History of IVTS
IVTS, including so-called alternative remittance and underground banking systems, pre-date western banking systems and existed as far back as 5800 BC. The systems were established originally on the Indian subcontinent in Asia as a means of settling accounts within villages. Their use as global networks for financial transactions spread as expatriates from the original countries settled abroad. Today, IVTS operations are found in most countries. Depending on the ethnic group, IVTS are called by a variety of names including, for example, hawala (Middle East, Afghanistan, Pakistan); hundi (India); fei ch’ien (China); phoe kuan (Thailand); and Black Market Peso Exchange (South America).
Individuals or groups engaged in operating IVTS may do so on a full-time, part-time, or ad hoc basis. They may work independently, or as part of a multi-person network. IVTS are based on trust. Historically, operators have not, as a general rule, misappropriated the funds entrusted to them.
Use of IVTS
IVTS are utilized by a variety of individuals, businesses, and even governments to remit funds domestically and abroad. Expatriates and immigrants often use IVTS to send money back to their families and friends in their home countries. IVTS operations are also used by legitimate companies, traders, and government agencies needing to conduct business in countries with no or inadequate formal financial systems.
In some countries, IVTS-type networks operate in parallel with formal financial institutions or as a substitute or alternative for them. Besides citizens of the US, persons (legally or illegally) residing in the US from foreign countries and individuals living in other nations may prefer or need to use IVTS in lieu of formal financial institutions for various reasons as described below:
- the political instability, inadequate payment systems, and/or an unstable financial sector that exist within a country;
- a lack of easily accessible formal financial institutions in remote areas of some countries;
- transfers that are more efficient, reliable, and cheaper than formal financial institutions. (For example, a wire transfer of funds using banks involves fees charged to the sender and receiver, may take from two to seven days to complete, and may be delayed or lost. Funds moved through IVTS are available within 24 hours, with minimal or no fees charged to the participants.);
- to avoid paying higher foreign exchange rates. (Funds sent through traditional transfers are converted to the currency of the recipient’s country; the fee charged for exchange rate conversion is set by the institution. IVTS operators, who speculate in currency exchange rates, charge lower fees.);
- to avoid paying taxes;
- to ensure anonymity since there may be minimal or no records maintained; in other words, no paper trail exists; or
- to avoid mandatory reporting of large transactions from financial institutions to governments.
Because IVTS provides security, anonymity, and versatility to the user, the systems can be also be used for illegal activities. Following the September 11, 2001 attacks in New York, IVTS have come under increased scrutiny and regulation in many countries.
References
U.S. Dept. of the Treasury March 2003 Advisory (#33) to financial institutions re IVTS. (http://www.fincen.gov/advis33.pdf) Almost all of this article comes from this document.