Econ 331 assignment 1 - explain money transfer systems: hawala, chips, swift... PDF

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explain money transfer systems: hawala, chips, swift......

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Econ 331 : Dr. D. Otchere

Money Transfer Systems: Hawala: This money transfer system relies on a network of middlemen who carry out transactions for the buyers and sellers. In this system, no money is physically moved. This system relies heavily on trust and functions by having the details of the transaction size relayed to the people who are involved in the deal. For example, someone in India is trying to send money to someone in Jordan via the Hawala system. The Indian party will find a Hawaladar and give him the Indian rupees in exchange for a code. The Jordanian party will then go to a store and repeat this code to prove that he is the rightful receiver of the funds, and he will then be given the equivalent amount. Hawala is frequently the preferred means of conducting transactions in certain Middle Eastern countries since many of them have corrupt and/or unreliable banks. This system is frequently more reliable than the available financial institutions, and often cheaper. Hawala is illegal in certain countries like India since it can be used to transfer funds to and from terrorist organizations, in turn enabling them funding. The fact that it is illegal can be a problem for small businesses that are forced to accept payments via hawala transfers from customers rather than a legal method of transfer. This network of middlemen requires a system of brokers, referred to as ‘Hawaladars’ who make interest on the transactions they perform. These brokers are meant to ensure the transactions are made on a reliable and timely basis. This money transfer system requires the Hawaladars to keep an informal journal where they record the transactions, which means there is no electronic trail but there is still a paper trail. L.V.T.S: This acronym, which stands for ‘Large Value Transfer System’, is a Canadian money transfer system. This system is used for electronic transfers between financial institutions (FIs) for large sums of money. The L.V.T.S makes and receives its transfer payments in real time, and in Canadian dollars only. This system deals with very large sums of money, with approximately $153 billion Canadian dollars being exchanged on an average business day. Each transfer must be fully backed by collateral, which is to be pledged to the Bank of Canada, to ensure the safety and validity of each transfer. On top of this, the members can each be identified by the Canadian Clearing Code, which starts with a nine-digit code, consisting of the financial institution number trailed by the transit number. This is the system used in Canada for banks to borrow money from the FED or other banks. When these banks borrow via the L.V.T.S they are subject to paying the overnight interest rate. There are currently nearly twenty institutions enrolled in this system. Since this system performs payments online, the transactions made can be recorded, leading to an electronic trail.

S.W.I.F.T: The Society for World Inter-banking Financial Telecommunications began in Belgium in 1973 as a cooperative project of 239 banks. It is a vast messaging network used by banks and other financial institutions to send and receive information such as money transfer instructions. With approximately 10,000 swift members, this transfer system screens and settles around 24 million transactions per day. Each member organization is assigned either an 8 or 11 digit code, which allows them to be identified by the remaining banks. S.W.I.F.T was fully operational in 1974 after its predecessor, TELEX, became outdated. Recently, S.W.I.F.T has been the victim of a handful of security breaches, including one in Ecuador (2015), which resulted in hackers getting away with $9 million and another in Bangladesh (2016) with a theft of $81 million. This has called the security of the system into question, however S.W.I.F.T maintains that their money transfer system is secure, and that the institutions were at fault for the breaches since the hackers got ahold of their codes. This system keeps a record of all transactions and has an electronic trail. C.H.I.P.S: This money transfer system, standing for ‘Clearing House Interbank Payment System’ is the primary clearing house for large bank transactions in the USA. This massive money transfer system makes approximately 250,000 trades every day, worth an estimated $1.5 trillion USD in domestic and cross border transactions. To ensure the security of these exchanges, the C.H.I.P.S system gives each member a 6-digit code, which contains the name, address, account number and routing number of the company. The average transaction made on this platform is approximately $3,000,000 USD. When transactions are made, payments made between trading banks are netted against each other, meaning that only the net of the transactions is finally transferred. This system has a two-step process to conduct a transfer: the first being clearing it, which means to make sure it, is legitimate and confirming with both parties. Following this, the system will make the settlement, which is the actual transfer of funds. Since this system performs payments online, the transactions made can be recorded, leading to an electronic trail. Block-Chain + Cryptocurency system: This money transfer system was popularized by the meteoric rise of Bit coin, litecoin and other cryptos. Cryptocurency offers a new type of money, which has no central bank or governing entity. This means governments would lose a lot of the tools needed to stabilize the economy, such as quantitative easing. The block-chain transfer system uses computers to legitimize past transactions to ensure that current transactions are legitimate, and to prevent additional currency from being added illegitimately. The computers being used to process these bits of data are referred to as nodes. Each node will process a certain number of transactions, which are all encoded in ‘Hash’. It will then either approve or

deny these transactions depending on if the prior transactions add up or not. That way, if someone tries to tamper with the system and receive funds they did not rightfully receive, the nodes will detect an abnormity in the past transactions. After a certain amount of transactions have been analyzed and approved, that chunk of confirmed data is called a block. All of these different nodes churning data to determine the legitimacy of the crypto transactions make up the block-chain. There can also be a situation where one node approves data and another disagrees, a vote is held within the nodes to see where the majority lays. This will then determine weather the transaction is approved or not. The whole system relies on the payments and transfers being recorded in order to legitimize transactions, so yes there is an electronic trail, however it is encoded in ‘Hash’ so it is very difficult to see who made the transactions. This makes it an attractive money-laundering tool.

Sources: https://www.bankofcanada.ca/core-functions/monetary-policy/lvts/

https://en.wikipedia.org/wiki/Hawala https://www.quora.com/How-does-the-Hawala-system-of-transferring-money-work https://en.wikipedia.org/wiki/Society_for_Worldwide_Interbank_Financial_Telecomm unication https://www.investopedia.com/terms/clearing-house-interbank-payments-systemchips.asp https://www.youtube.com/watch?v=kubGCSj5y3k https://www.youtube.com/watch?v=1TZlZkjzajU https://www.youtube.com/watch?v=iwhCbla-6xY https://www.compareremit.com/money-transfer-guide/understanding-moneytransfer-codes/ http://www.collectionscanada.gc.ca/eppparchive/100/201/301/bank_can_review/2006/spring/cover/en/financial/financial_p ay.html#risk...