Risk Management in the Remittance Industry
Remittances continue to be a vital source of income for millions of poor households in developing countries. Nevertheless, the movement of money across international borders attracts much scrutiny, often for very good reasons. The world faces serious issues related to money laundering and terror financing (ML/TF). Here is an overview of what these risks entail and how the countries of the world manage them.
The need to manage risks continues to drive innovations in the remittance industry. Prime among these are risks related to ML/TF. Risk management strategies commonly involve three approaches, which are avoidance, mitigation, and acceptance. Each country is prone to a unique amount of ML/FT risk, which depends on many factors. Their strategies to secure remittances are accordingly attuned. The registering and licensing of remittance service providers (RSPs) is now a standard practice worldwide. Monitoring, and internal controls are becoming increasingly common. We see anti money laundering and counter financial terrorism regulations taking effect in many regions. These measures help avoid risks at a systemic level.
Some risks are not completely avoidable. This is why mitigation becomes important. Risk mitigation measures involve actions that reduce the potential impact of risks by creating accountability, traceability, and control mechanisms. The Financial Action Task Force (FATF) explains that having electronic databases, photocopies of documents, and even handwritten notes for verification goes a long way. Having the means to authenticate the source and destination of each remittance transfer is a very effective risk mitigation measure. RSPs must be able to maintain updated lists of their agents. It is particularly important to keep track of cash transaction agents. RSPs must have mechanisms to monitor manual and electronic transactions. Most of them now do so using software-based transaction monitoring and pattern recognition algorithms. Remitting banks must validate KYC information prior to crediting the recipients' accounts.
Acceptance neither avoids, nor reduces risks. It simply means that a certain portion of the risk is unmanageable, and therefore must be accepted without any further action. Yet, acceptance is classified as a strategy. This is because even in acceptance there is an understanding of the magnitude of the risk, and its potential impacts. Acceptance is a last resort, employed only when the cost of mitigating or avoiding risks overweighs the cost of the impacts.
Exchange rate fluctuations
The exchange rates of currencies fluctuate without pause. Remittances are inherently sensitive to these fluctuations. Forex markets are influenced by the supply and demand for currencies. Liquidity and other economic factors also have an effect. Expatriates who send money online to their families regularly often keep a close watch on the exchange rates. They stand to lose or gain from these fluctuations. One way to manage exchange rate risks is forward contracts. These contracts eliminate the uncertainty of rate fluctuations by hedging expected future foreign currency transactions. This simply means setting a fixed exchange rate between any two currencies for a future transaction. Doing so leads to transparency. Customers know in advance the rate at which they will transact in the future. It also eliminates the need for customers to continuously watch the exchange rates.
Some countries allow remittance transfers via cryptocurrenices. Cryptocurrency transactions are perceived to carry a high ML/FT risk because of the associated anonymity. However, in some regions governments and crypto exchanges have been able to jointly introduce reliable KYC verification procedures. Customers in these geographies now send remittances at some of the lowest costs globally. However, the trend is yet to catch on worldwide. Many countries still ban crypto transactions outright.
Digital remittance channels including browser-based and mobile-based transfers are considered highly secure. However these too carry some risks. These risks relate to identity theft, impersonation, and the abuse of customer information. Managing mobile-based risks requires innovative technology. The participation and cooperation of all stakeholders is also important. For example, mobile money operators often rely on agents to collect customer KYC information. The thoroughness of these agents in collecting applicants' KYC documents reduces risks, while their speed in doing so ensures rapid market growth. Most RSPs now allow customers to only access very limited services before comprehensive KYC verifications are done.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.