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Remittance

Definition

Remittance refers to the transfer of money from one party to another. It is most commonly used to describe funds that are sent by individuals, especially migrant workers, to family members or dependants in another location, often across international borders.

While remittances can occur domestically (within the same country), the term typically emphasises cross-border person-to-person payments of relatively low value. 

Explanation

In financial and payments contexts, remittances are a critical component of global money flows.

They support households, contribute to foreign exchange earnings, and form a significant part of the livelihoods of recipients in many developing countries.

The processes for remittance transfers vary, ranging from bank wire transfers and electronic fund transfers to specialised remittance service providers (RSPs) that facilitate low-value cross-border transactions rapidly and securely. 

Remittances may be categorised as:

  • Cross-border remittances: Transfers between individuals in different countries.
  • Domestic remittances: Transfers within the same country.
  • Inward remittances: Funds received from abroad.
  • Outward remittances: Funds sent from the home country to foreign beneficiaries. 

The methods used to transfer remittances include traditional bank wire transfers, online electronic transfers, and services provided by money transfer operators.

In all cases, the sender typically provides the details of the recipient and pays any associated fees before the transfer is processed. 

Remittance in AML/CFT Frameworks

The remittance sector intersects meaningfully with AML/CFT risk and compliance due to the volume of transactions, the diversity of transfer channels (formal and informal), and the potential for layering illicit funds.

Controls must address person-to-person flows, data collection at onboarding, monitoring of transactional patterns, and reporting obligations by remittance service providers. 

Key AML/CFT considerations include:

  • Customer Due Diligence (CDD): Collection of valid identity information from senders and, where feasible, beneficiaries.
  • Transaction Monitoring: Identification of unusual patterns, such as repeated low-value transfers that may aggregate to large volumes (structuring).
  • Record-keeping: Adequate retention of remittance transaction data to facilitate audits and investigations.
  • Reporting: Suspicious transaction reporting when indicators of money laundering or terrorist financing arise.
  • Regulatory Alignment: Compliance with national AML/CFT laws, including cross-border transfer reporting requirements where applicable. 

Key Components of Remittance Systems

Participants

  • Senders: Individuals who initiate remittance transfers, often migrant workers sending funds to family in another jurisdiction.
  • Beneficiaries: Individuals or entities receiving the remitted funds.
  • Remittance Service Providers (RSPs): Licensed entities, such as banks, money transfer operators, or regulated fintech platforms, that facilitate remittance transactions.
  • Intermediaries and Correspondent Networks: Financial institutions and operators that may route funds internationally in support of remittance flows. 

Process Flow

A typical remittance transfer follows these stages:

  • Initiation: The sender provides instructions and funds to an RSP.
  • Processing: The RSP verifies identity, applies compliance checks, and routes the transfer.
  • Settlement: Funds move across payment networks or correspondent systems to reach the beneficiary’s financial institution.
  • Delivery: The beneficiary receives the funds, either in cash, mobile wallet balance, or bank account credit.

Types of Remittances

  • Inward Remittance: Funds received in a country from senders abroad.
  • Outward Remittance: Funds sent from a country to a foreign destination.
  • One-time vs. Recurring Transfers: Single transfers for specific purposes versus regular scheduled remittances.
  • Formal vs. Informal Routes: Transfers through regulated providers versus non-formal mechanisms such as informal value transfer systems. 

Risks & Red Flags in Remittance Transactions

Remittance channels face specific AML/CFT risks because they can be exploited to mask illicit value movements.

Common risk indicators include:

  • Repeated small transfers structured to evade thresholds.
  • Lack of transparent sender/beneficiary verification.
  • Use of informal remittance networks that operate outside formal banking systems.
  • Unusual destination corridors with weak AML/CFT controls.
  • Frequent cross-border transfers without clear economic purpose. 

Methods & Techniques Associated With Misuse

Criminals may take advantage of remittance systems through:

  • Structuring: Splitting large sums into multiple smaller transactions.
  • Layering: Using remittances in combination with other financial instruments to obscure the source of funds.
  • Informal Value Transfer Systems (IVTS): Operating parallel transfer systems that avoid formal controls. 

Examples and Illustrations

  • Migrant Worker Transfer: An overseas worker sends monthly funds to family back home using a licensed remittance operator.
  • Freelance Payouts: A freelancer receives cross-border payment for services rendered, categorised as a remittance if it meets person-to-person transfer characteristics.
  • Informal Network Use: A diaspora member uses informal channels to send funds, creating AML challenges due to limited oversight. 

Impact on Financial Institutions

Financial institutions handling remittances must:

  • Enhance onboarding CDD processes to include transaction purpose and beneficiary details.
  • Implement monitoring solutions tailored for high-volume, low-value flows.
  • Maintain records for regulatory inspection and audit.
  • Train personnel to recognise remittance-specific AML/CFT typologies.
  • Coordinate with domestic and international regulators on compliance protocols. 

Failure to manage these risks can result in regulatory sanctions, reputational damage, and increased scrutiny from supervisory authorities.

Challenges in Detecting and Preventing Abuse

  • Data Gaps: Limited information on beneficiaries can reduce monitoring effectiveness.
  • High Transaction Volume: Large numbers of low-value transfers can overwhelm rule-based systems.
  • Cross-Border Coordination: Differing AML/CFT standards across jurisdictions complicate compliance.
  • Informal Flows: Tracking informal remittances outside regulated channels remains a persistent challenge.

Regulatory Oversight & Governance Expectations

  • Licensing: RSPs must be authorised and adhere to AML/CFT laws.
  • KYC/EDD: Thorough verification of customer identity and risk profiling is mandatory.
  • Monitoring: Institutions must have real-time monitoring and analytics suitable for remittance patterns.
  • Reporting: Suspicious activities must be reported promptly to financial intelligence units (FIUs).
  • Record-keeping: Retention of transaction records is required for audit and investigation purposes. 

Related Terms

  • Remittance Service Provider (RSP)
  • Informal Value Transfer System (IVTS)
  • Inward Remittance
  • Outward Remittance
  • Electronic Funds Transfer (EFT)
  • Structuring

References

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