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International Informal Banking Systems Operating in the Greater Toronto Area

PART TWO

COMMUNITY SPECIFIC ANALYSIS

VII. Indian Financial Agents

Approached: 10
Interviewed: 8
Registered: 5
Unregistered: 3
Declined: 2
This community has an additional classification: Business individuals
Approached: 7
Interviewed: 4
Declined: 3

NOTE: As stated previously, terms such as ‘Hawala’, ‘kala or garam paisa’, ‘edihar ka udhar’ were used by some participants during interviews although the interviewer consciously refrained from using any due to the negative connotations attached to them. However, these terms are relevant in the fees charged context. In fact there was a distinction made between ‘white’ hawala (‘safed’ or ‘eik’ number – i.e., white money funds) that refers to the remittances flowing into India, even though these may be earned by individuals that do not have legal status in the country where the funds are earned (i.e., illegal immigrant’s remittances) and ‘black’ hawala (or ‘do numbri’, ‘kala’ or ‘garam paisa‘). This refers to funds flowing out of India and were mentioned, in some cases, to be tax evasion (‘garam’ or ‘hot’) or ‘black money’ funds. It is clarified that black hawala was referred to and explained exclusively by the business individuals.

The additional classification in the Indian community is of ‘business individuals’. The transactions were explained as mis-invoicing (i.e., over or under) and duty draw backs in trade transactions. Although methods used for transacting were noted to be similar to those used by Afghani financial agents (i.e., through trade), however, this community was still distinct (hence a separate classification).

The client base is limited. They cater to themselves and have limited business associates. None advertise or hold themselves out as financial agents and never have in the past. None are immigrants or citizens of Canada. All have multi-jurisdictional business dealings. All have ‘business interests’, or ‘second homes’ in Canada or the United States and/or their children are enrolled in an educational institute in the West (‘over-seas’). It is for the purposes of understanding the flow-of-funds into Canada that this group is essential to the research.

Furthermore, this group of individuals was the most reluctant to discuss business dealings. Confidentiality was assured frequently, and in fact, this was the only group that the interviewer had to give all the documents regarding the call for papers, the response document, ethics review form and approval (reflecting confidentiality), before the interviews. The interviewer’s family background, qualifications, language skills, knowledge of community, social standing or connections did not provide adequate comfort as it did it for the other interviews. Introductions to these individuals were conducted in a social setting (not work, as the others were) although follow-up conversations were in work places or by phone. It should also be clarified (as required by this group), that any and all information given to the interviewer relates to industry practices undertaken by ‘other people’ (not themselves). Lastly, this group was the best educated and established of all interviewed.

None of the following sub-sections are applicable to this group of individuals with the exception of analysis of fees, flow of funds and the transactions process.

A. Destination

The registered financial agents transact ‘with all’ jurisdictions that have a bank or financial firm presence. The unregistered financial agents transact primarily to India (i.e., in-flow of remittances). However, these transfers are not to specific locations (as with the Pakistani financial agents), they are much wider. It was explained that in India, Western Union has developed a business relationship with the postal authority; hence, wherever there is a postal office, Western Union has a presence. This has made transacting (i.e., the final settlement, if not done by reverse process), easy for the financial agents.

Interestingly, none of the financial agents (registered or unregistered), mentioned any problems in dealing with banks or financial firms. Even the unregistered financial agents transact through financial institutions. When questioned as to why the clients do not conduct transactions directly through an institution instead of transacting through the financial agent, various advantages were stated. These included the low cost of transacting, efficiency (no time delay), immigration status, level of education or the home delivery service (pick-up and drop-off) as provided by the financial agents and serves as attractions to the clients.

B. Primary Business and Registration

Three financial agents consider the transfer of funds a primary business. For the rest (registered and unregistered), it is not a primary business but essential to their main business (additional revenue).

Classification of the registered: three financial agents were licensed by the Financial Crimes Enforcement Network in the United States (FinCEN), one was licensed by FinCEN and registered with FINTRAC, and one was registered with FINTRAC and transacted business with the United States through a licensed Money Service Business. And three were ‘considering’ undertaking the registration process with FINTRAC (these have been classified as unregistered). The unregistered financial agents claimed not to be doing business with the United States.

Unregistered financial agents: responding to questions regarding registration, they explained that certain issues have to be resolved. Some claimed that they had not received a compliance questionnaire. However, one mentioned that an associate financial agent in Vancouver B.C. had received a compliance questionnaire a month ago but was not clear about the consequences of the associate complying with the requirements.

Other issues related to the financial agents being in business for a ‘few years’, therefore, when would registration take effect (i.e., Would registration be retro or current? What would happen to past transactions?) There are questions about compliance costs as presently, the cost of doing business has been minimal. After registration, they will have to comply with requirements/processes which will result in a decrease in profit/business. Also, there is a grey area as to what is expected of them apart from the ‘honour system’ of reporting. It was observed that these financial agents did not have the same apprehension as the unregistered Pakistani financial agents. They had the same level of confidence and were equally guarded as the Afghani financial agents but there was no concerns regarding discrimination or exposure and were willing to discuss problems.

C. Record Keeping

Detailed records are maintained by the registered financial agents. As stated previously, the primary method of transacting is through banks or Western Union. Therefore, as per the requirements of the financial firms (that are subject to the governments registration/licensing requirements), record keeping is extensive.

The unregistered financial agents also maintain records, however they do not have any forms filled out or have any declarations/disclaimers signed. They take detailed information mainly for delivery purposes and requests for receipts are not considered offensive. In fact, receipts are given as a matter of process by the registered financial agents. The unregistered financial agents give receipts upon request but the requests are infrequent.

An absence of religion and kinship was observed in this community. It was almost as though the transactions were executed for the purpose of efficiency (i.e., home delivery within 24 hrs) and economic gain by the financial agents. There was also mention of theft/opportunism wherein an unregistered financial agent had stolen funds from Canadian clients, re-located to India and opened a trucking business. Apparently, the Canadian clients have filed law suits against the financial agent for recovery of the funds (in the State of Punjab, India). In such cases, there is little or no recourse available to the clients, and fortunately the incident of theft did not result in the discontinuation of the process (i.e., clients using banks instead). However, it has resulted in the clients using registered financial agents instead, which is safer than using unregistered financial agents, as efficiency and a very basic level of trust, governs these relationships.

The use of nominees is frequent. Immigration issues compel clients to seek out others with legal status to fulfill the information requirements. When questioned about these transactions, a registered financial agent clarified that the ‘out-of-status’ clients name is also checked against the Office of Foreign Asset Control list of the United States Treasury (or OFAC List) before the execution of a transaction although the transaction is executed in the nominee’s name.

D. Fees / Flow of Funds

For funds flowing from Canada or the United States into India (or any recipient jurisdiction), the fee charged is up to 2%. The financial agents also profit from exchange rate spread as the local currency is dispensed in India (Rupees). None of the financial agents mentioned dispensing in US currency, which is interesting considering the presence of a large black market of US dollars and the easy availability of the currency in the black market for a slightly higher fee than given by the banks. No additional fee is charged for pick-up or home delivery of funds, nor is an additional fee charged for transactions executed in the United States.

The registered financial agents also transact business for clients immigrating from India to Canada (i.e., a reverse flow of ‘white’ funds). The fee charged in these transactions is the same (2%) and the documentation is detailed. A registered financial agent mentioned that clients use the financial agents receipt as proof of funds, reflecting the transfer of funds from India to Canada, to get immigration status upon arrival in Canada.

It is relevant to mention that the Indian economy is primarily cash based. Although credit/debit cards are used, the use is limited or sporadic. In some cases, enforcement of corruption/money laundering laws is rigorous. However, there exists a large black market, and this process of transfer of funds, regardless of origin or color, is integrally tied to cash economies.

In the Indian context, the flow of funds is a two-way flow of funds (i.e., in-coming and out-going). The in-flow to India was stated to be of ‘white’ funds (i.e., remittances, gifts, investments, etc.). Out-flow from India in some cases, was explained to be of ‘black’ funds, and the fee charged for these transactions is extremely high because of the risks involved. In these cases, the funds are ‘washed’ (hence converted into ‘white’) and sent back to India to be ‘openly used’. The business individuals mentioned that cost of ‘converting’ the funds into white funds and usable can be up to 12 % of the principal amount.

E. Advertising / Affiliations

The financial agents that consider money transfer a primary business advertise in local ethnic newspapers. It is also noteworthy that the advertisements are not in the English or Hindi language (official languages of India), but are in the local dialects (i.e., in Punjabi and Gujarati) in Canada.

In India, the interviewer found no advertisement and all attempts to contact individuals that were known to conduct transfers in the past, were fruitless. Only licensed institutions advertise as apparently enforcement against trust based transactions is rigorous. (Note: India has set up a special enforcement unit to ‘crack down’ on Hawala transactions in 2004).

The registered financial agents have a large number of ‘locations’ (or sub-agents). One mentioned nine locations in Canada and two in the United States. The smaller have two or three. The unregistered financial agents also have sub-agents working for them.

F. Competition / Collaboration

Fierce competition was observed within the community. The sub-agents work for the larger entities for a salary, not a fee split. And they work by choice, not a business necessity as with the Afghani community. Few instances were mentioned wherein sub-agents developed a client base and ‘branched out’ on their own, competing with the former employer.

An element of cross-ethnic collaboration was also observed. The financial agents employ other ethnic community individuals of Indian origin to increase business. For example, a registered financial agent employed Indian Muslim sub-agents to increase the Muslim client base for funds destined to India and the United Arab Emirates. However, no collaboration was observed between this community and the Pakistani community. (NOTE: This aspect is different from Muslims of Indian origin versus Muslims of Pakistani origin). The Indian financial agents cater to a wide client base. For example, some have Afghani clients for funds destined to Afghanistan and Indian Muslim clients. There was no reluctance in transacting for any other community because transactions are executed primarily for economic gain.

G. Bank Involvement

Involvement of a bank or financial firm is front-ended and direct in most cases for settlement (i.e., wire transfers). None of the financial agents mentioned problems in their dealings with the banks (i.e., shutting of accounts) or undertaking any layering process in executing transactions. Neither was 9/11 mentioned to have had a detrimental or positive effect apart from registration, and this was viewed as a cumbersome but necessary process.

H. Transaction process

The registered financial agents use financial institutions for transactions and settlements. The bank involvement in these cases is front-ended and direct (i.e., wire transfer). For the unregistered financial agents, reverse transactions are usually adequate to settle accounts, and for final settlements (not done through reverse transactions), financial institutions are used (i.e., the involvement is direct wire transfers or ‘gifts’ made to family via banks). It is noteworthy that annual ‘gifts’ are tax exempt in India and there is no limit for the amount of funds sent to family for certain occasions, such as birthdays or New Year’s, hence, the settlement is not problematic.

As stated previously, the business individual interviewed cannot be considered a financial agent in the above stated conventional context. They do not advertise or transact business for clients, they have ‘business associates’, ‘dealings’ and ‘investments’ for themselves. Mostly all transactions are trade based, and detailed documentation or record keeping is integral to business dealings.

Reputation, trust and or fear/threat of lost wealth underscores these transactions. It ensures that transactions are executed efficiently, to the benefit of all interacting parties. Following are a few methods that ‘everyone’ in the industry uses:

Mis-invoicing was stated to be a popular method. Due to the black market and/or cash economy, a lot of ‘black’ funds are accumulated in India. But these funds have limited use - because they cannot be used for investments, large purchases or deposited into bank accounts. To use the funds (i.e., to convert them from unusable ‘black’, to usable ‘white’), trade transactions are undertaken by certain business individuals, transactions are over-invoiced or under-invoiced.

Over-invoiced: The price of goods exported from India is inflated two or three times. The exporter/business person in India bills his business partner (in the other jurisdiction) for the actual amount of the black funds that require conversion. The partner, upon receiving the product, transmits the funds through legitimate channels, minus the fee for conversion of funds. Often the actual transfer of black funds from India to the second jurisdiction (for example, Canada) takes place through the informal process. Thus, the business individual in India successfully converts the ‘black’ funds into ‘white’ funds upon receiving the cheque for the goods shipped from the Canadian entity. These ‘white’ funds can now be used openly as legitimate investments, business purposes or future transactions. Conversion fees paid for these transactions can be up to 12% of the amount of funds converted.

Under-invoiced: Transactions are under-invoiced in an export transaction from India (i.e., goods are exported at a huge discount). When the goods are sold in the destination country (Canada or the United States), a surplus is created for the benefit of the business individual (in India). This surplus is created because the price at which the product is sold in the destination country is its actual value in addition to a profit, as is normal business practice. The ‘quota system’ where a fixed amount of licenses is issued by the government, assists the exporters considerably in this process. These quotas are often limited (i.e., given to a few exporters only) and for a fixed time. Also, it has the effect of undercutting competition in the market to the benefit of the exporter.

The actual effect of the practice is that the process results in the business individual (in India) having surplus ‘white’ funds in another jurisdiction (i.e., the individual having ‘holdings’ or ‘interests’ or ‘nest eggs’ safely away from the domestic governments scrutiny). Real estate investments in Canada, were mentioned as a safe preference for the use of the surplus funds. At times, these funds are sent back to India and used openly as ‘white’ funds. They are also used to fund other transactions or to settle accounts for previous transactions. Bulk goods for sale in dollar stores, fabrics, electronics, tea, furniture, etc, were mentioned as examples of these transactions.

Duty draw backs: Tied to these processes intricately are the duty draw back schemes. There is an exemption of duty (or fee) given by the government for certain items to traders (i.e., exporters, manufacturers, etc) exporting products from India. The government offers exemptions to increase trade, create employment and to increase foreign exchange coming into the country.

Typically, in these transactions, the product is first shipped to a duty-free port such as Dubai or Hong Kong to derive the export duty benefits. Subsequently the same product is shipped to a final or actual jurisdiction from the duty free port (i.e., the jurisdiction that placed the order, which can be Canada or the United States). The transactions are three times beneficial: the duty is exempt, an additional sum given by the government as an incentive (i.e., the draw back of duty) and all in-coming funds are usable openly as white money.

All these processes were self-generating and sustaining. However, the removal of trade barriers, quota systems and opening up of the markets has resulted in these processes suffering a serious set back. But the basic requirement to convert black funds into white is still necessary due to the black market and cash economies. The problem of cash economies is still to be addressed, and until it is, the problem of informal transfer of funds, for the purpose of conversion or just for transfer to use openly, will exist since it is integrally tied to cash economies.