Shadow money transfers

Last month, the Colombo Fraud Bureau raided a clandestine money change bureau in Pettah. This unregistered institution was involved in transactions involving currency remitted from India, Canada, England, Germany, Switzerland and other countries.

The exchange bureau was operating what is known as an Informal Money Transfer Scheme (IMTS), also known as an ‘Undiyal’ (meaning ‘piggy bank’ in Tamil) or a ‘Kalu Kadey’ (‘black market’ in Sinhala) scheme.

In an IMTS, a remitter abroad takes money to the undiyal agent, who charges a transaction fee and contacts a representative in the country of destination, who delivers it to the beneficiary within hours.

Exchange rates

For example someone in Italy, seeking to transfer 500 Euro to their loved ones in Sri Lanka, would pay the money plus a commission of five Euros to the undiyal agent. There would be no other charges at the Sri Lanka end - the five would be the one and only payment.

The main advantage of an IMTS is that no bank account is required at either end. Also, the rates are much cheaper than formal money transfer operations - such as Western Union, Moneygram or Ria; the exchange rates are also more competitive.

What was most astounding about this particular IMTS was the scale of the operation: it had a turnover of Rs 20 billion a year. This figure is higher than the annual budgetary allocation for most government ministries.

A 2005 survey done in Canada by Rudhramoorthy Cheran of York University’s Centre for Refugee Studies and Sharryn Aiken of the law faculty at Queen’s University found 150-200 undiyal outlets in Toronto, each doing approximately CA $ 50,000 of transfers per month.

Legal remittances

This works out at about Rs 12 billion annually, remitted through IMTS from just one immigrant population centre (albeit probably the biggest concentration of Sri Lankans in one place outside the island).

If this figure were to be extrapolated worldwide, the total figure would be closer to Rs 250 billion, over half the figure for legal remittances and approximately five percent of Sri Lanka’s Gross Domestic Product (GDP) and a substantial part of the ‘shadow economy’.

According to Cheran and Aiken, an IMTS uses a variety of methods to move money:

‘Goods swaps are the main form of settling accounts. However, invoice manipulations, the smuggling of currency or commodities, while not acknowledged by the agents, appear to be other mechanisms... cash does not actually cross borders and it never fully enters the conventional banking system.’

Leonides Buencamino and Sergei Gorbunov of the United Nations noted in a 2002 paper that netting operations of transnational corporations follow many of the same principles.

Foreign currency

Certainly, such practices as under-invoicing (importers declaring the value of products as lower than they are in order to avoid duties - as well as to keep part of the value abroad) are part of international trade with which the Sri Lanka Customs are familiar.

Another form of monetary transfer appears to be the direct smuggling abroad of currency notes. Last month, the Customs caught a smuggler with nearly $ 800,000 worth of foreign currency, and this month another with nearly US $ 140,000. This is probably less than the tip of the iceberg.

One could surmise that the IMTS which was raided was certainly not the only one, nor even the biggest. What the figures indicate is the enormous size of the Black Economy in Sri Lanka, of which the IMTS sector is only a part.

Black economy

The ‘shadow economy’ in Sri Lanka (that is the value added of illegal activities such as theft, drugs and prostitution as well as legal but unreported incomes) has been estimated at about 44 percent of the GDP, compared to 15 percent in Australia, 13 percent in New Zealand and 11 percent in Japan (2000-2001 figures).

Granted, the ‘informal sector’ - legal but unreported labour, mainly casual, for family members, friends or based on non-contractual social relations, outside a formal regulatory framework - makes up a large proportion of the ‘shadow economy’.

Even so, the ‘underground economy’ - the generally illegal and criminal part - is still quite hefty. The reduction of transfers done through the IMTS sector would tend to reduce the effectiveness of transfer mechanisms left to the barons of this black economy. How is this to be done?

Policy makers

One of the reasons cited by Cheran and Aiken for the popularity of undiyal schemes was the absence of banks in those parts of the North and East occupied by the Liberation Tigers of Tamil Eelam. Obviously, the rectification of this deficiency should ease matters considerably. In fact, the end of the armed conflict has allowed banks to establish branches in these areas and these have enjoyed the highest rates of business growth in the island. This may explain why more people are now using formal transfer networks than while the conflict was still raging. However, for the formal sector to be able to compete with the IMTS sector, it needs to match the latter’s capabilities with regard to time and (more importantly) cost. Unfortunately, it is the regulatory framework (and the attendant red tape) which makes banks less competitive.

It is necessary for economic policy makers to recognise the vital importance of informal transfers in the economy of Sri Lanka, as well as its potential as a source of income for the government.

Bearing this in mind and taking into account the feasibility of using modern technology to minimise regulatory work, our economic strategists should devise a mechanism specifically intended to make the process of transfer of funds by expatriates as lean and mean as possible. This might involve considerable expenditure at the outset. However, the benefits to be gained are far greater than the costs, and what is lost on the swings can be made up on the roundabout.