Rutgers Model United Nations
Republic of Indonesia
Economic and Financial Committee
Informal Value Transfer Systems
Ken Bier and Andy Lang
East Brunswick High School
Informal Value Transfer Systems, or alternative remittance systems, date back as far as
India, 5800 BCE, serving as “settling accounts” within villages (Passas 3). Informal Value
Transfer Systems serve many beneficial purposes, including governmental uses, immigrants
remitting money to their families, and cheaper transfer of currency. These Informal Value
Transfer Systems; however, allow customers to escape taxes, ensure anonymity, and refrain from
leaving documented trailers or passing currency through financial institutions. Such fundamental
practices have developed into unregulated and therefore precarious systems, utilized by the most
simplistic Middle Eastern merchants to possibly terrorist organizations. International action is
necessitated to either completely abolish the vulnerable system or regulate and secure the
validity of the system.
Informal value transfer systems have been utilized for hundreds of years. There are
various forms of IVTS all over the world, including hawala, hundi, fei chien, black market peso
exchange, and several others (Passas 2). Essentially, these systems are used to transfer money
between locations “without leaving a formal paper-trail of the entire transaction or without going
through regulated financial institutions at all” (1). In fact, the money in these informal value
transfer systems do not move directly. Hawala originated in the Middle East before formal
banking systems were created. Fundamentally, a customer in one country can rely on hawala to
transfer money to another country while avoiding government regulations. First, a money
changer (or hawaladar) asks a money changer in another country do dispense the money asked
for. The hawaladar in the receiving country has the money sent to the intended person in that
country.
These systems operate around the globe and function largely on trust between
hawaladars (Vaknin 2). It is estimated that in India alone, $680 billion circulated through hawala
in 1998, approximately the size of Canada’s entire economy (Looney 2). In the United States, up
to $5 million are transferred annually, estimates Pakistani Minister of Finance, Shaukut Aziz
(Vaknin 3). Despite their power in regions of the world, IVTS such as hawala have gained
negative attention in recent years, after the terrorist attacks on the United States of America on
September 11, 2001. It is speculated that portions of the money used to fund the attacks were
possibly obtained through underground fund transfer mechanisms such as hawala, leading to
panic about IVTS (Passas 1). Crimes committed through IVTS include money laundering,
financing terrorism, payments for illegal immigrant welfare, funding of illicit drugs and
weapons, organ smuggling, and tax evasion (2). However, IVTS are generally used for legal and
legitimate transfers of money. Often they are used because duties are not required to send
money. Also, they are fast, reliable ways to do this, and are useful when formal banking systems
are not an option (House 1). Even though IVTS like hawala are informal and sometimes used for
violent actions, they are extremely large and powerful, and strategic approaches must be taken to
oversee their transfers.
Indonesia recognizes the threat of terrorist funding through IVTS and understands what
must be done to stop this. It is recognized as a source of major remittances to other nations
(Yang 3). Also, it is known to receive remittances from other nations too. In total, it is
estimated to receive over $1.5 billion in remittances (Blackwell 39). A recent revelation shows
that there are 2000 money-changer branches in Indonesia (“Informal Funds Transfer Systems in
the APEC Region 57). Though Indonesia has yet to meet the recommendations of the Financial
Action Task Force, it will strive to prevent abuses of IVTS (S/2002/1338 11). In the wake of
the resort car-bombing in Bali by Al Qaeda, and the discovery of Al Qaeda training camps in
Poso, Sulawesi, attempts have been made to crack down on terrorism and arms trade in
Indonesia (14). “In Indonesia, remittances are being carefully examined in relation to [Asian
Development Bank’s] continued support to the country’s anti-money-laundering efforts, and
more broadly in the context of overall financial sector reform.” Thus, with the help of the Asian
Development Bank, Indonesia will help combat crimes such as money-laundering that can be
committed through IVTS. Indonesia is also examining remittances from the country to help
combat money laundering, with the support of the Asian Development Bank (Yang 3). In these
ways, Indoneia is committed to assisting the regulation of informal value transfer systems, to
help combat the funding of terrorism through these systems. Thus, Indonesia pledges to fight
illegal transfers of money, and with the assistance of the Asian Development Bank, will attempt
to deter this crime. Also, it is committed to controlling the funding of terrorism and arms trade
through informal value transfer systems, to prevent attacks like those in Bali. Finally, Indonesia
is willing to analyze its remittances to further stop money laundering. Indonesia also offers
solutions to combat the abuses of informal value transfer systems that fund terrorist activity.
Although terrorist attacks against Indonesia have garnered recent skepticism of Informal
Value Transfer Systems, the country still sympathizes with citizens of less developed countries
who face difficulty through sending money through Formal Value Transfer Systems. As stated in
the Abu Dhabi Declaration on Hawala, participating countries in the United Arab Emirates’
International Conference understood the need to regulate informal remittance systems while
maintaining the systems effectiveness in order to preserve customer’s interests. The Informal
Value Transfer Systems are an effective approach to remittance to inaccessible countries with the
evasion of impeding government regulations. In order to preserve customer interests while
ensuring systemic transparency, government supervision is necessary in several areas of Informal
Value Transfer Systems. Countries should be emphasized to pass legislation requiring
hawaladars and Informal Value Transfer Systems operators to report remittances to the federal
government. Acknowledging the difficulty of contacting the federal government in many
nations, it should be included that hawaldars or operators can relay information regarding
remittances to local governments, who will then send this information to federal governments.
These measures will eradicate the potential of systematic abuse, both financially and for terrorist
profit, the federal governments of these nations must thoroughly confirm the validity of these
remittances. It should also be emphasized that no penalization or disadvantages, such as taxes,
institutional intervention, or the hindrance of formal banking systems, will occur. As Indonesia
does not impose the international community to abolish the Informal Value Transfer Systems,
suspicion over the system has caused the Indonesian government to favor formal remittance
systems. Incentives, rather than forcing citizens to utilize formal remittance systems, are a more
effective approach to dealing with the dangers of Informal Value Transfer Systems. Indonesia,
comprised primarily of conservative Muslims, does not wish to enforce impulsive liberal change.
Lowering taxes, expanding banks to facilitate accessibility, creating government sponsored
alternatives, and speeding up or simplifying the formal process can entice citizens to use formal
remittance systems. As more people switch to using the formal systems, fraudulent abusers and
illegitimate users will be revealed to the federal government. In brief, Indonesia has mixed
feelings over the Informal Value Transfer Systems, feeling it should not be abolished but slightly
monitored for security purposes. Informal Value Transfer Systems provide fast, cheap, and
effective remittance systems for citizens in relatively inaccessible locations. The global
community often neglects unnecessary reforms in accordance to individual nations’ best
interests. These unnecessary reforms also produce more law offenders by criminalizing innocent
customers of Informal Value Transfer Systems. Creating more criminals will complicate the
process of rooting out terrorist organizations by creating a larger pool of criminals. Economist
Richard Cowen writes of another unattended, harmful consequence of government illegalization
of unnecessary practices in his “Iron Law.” Cowen noted that the more intense the government
outlaws regulates these practices, nations have historically responded by producing more potent
systems or forms of these crimes (“Alcohol Prohibition was a Failure”). Cowen notes that in the
American Prohibition, the outlawed alcohol only becomes more potent, addictive, and utilized by
the public. A comprehensive approach to Informal Value Transfer Systems and increase in the
convenience of formal systems is the best possible solution to combating money laundering and
informal system abuse.
Recently funded terrorist attacks against the Republic of Indonesia have galvanized
cynicism regarding Informal Value Transfer Systems. However, Indonesia does not wish to
impose the international community to abolish Informal Value Transfer Systems, for the
people’s interests are imperiled. Increased government supervision on Informal Value Transfer
Systems to monitor terrorist transactions seems at the moment the most feasible solution to
combating these grassroots fundamentalist organizations. An amalgamation of government
inspection and incentive can effectively increase the sue use of formal system and root out the
threat of money laundering of abuse by terrorist organizations.
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