How combatting illicit financial flows can prevent remittances from helping people during humanitarian crises: a closer look at Afghanistan

Remittances are a lifeline for many people in low- and middle-income countries, playing a particularly important role during conflict-related humanitarian crises by helping those affected by conflict stay on their feet. However, laws countering money laundering and the financing of terrorism during such crises can prevent remittances from reaching those that need them. Using the case of Afghanistan, Mohamed Muse and Rodrigo Mena in this article discuss the links between remittances and such laws and propose a critical research agenda focused on remittances as an important part of humanitarian crisis responses.

Humanitarian crises affect people’s lives in many ways, often leading to abrupt change that can shatter lives and livelihoods due to increased economic disruption, poverty, unemployment, and the reduced provision of services by the state resulting from them (see here, here, and here). In such situations, humanitarian aid is essential for supporting affected people. The assistance of relatives and friends is vital, especially when support networks and humanitarian agencies are not present in those places affected or where their support is limited in terms of coverage, access, or funds.

During crises, it is common to see diaspora mobilising to provide assistance to people living in crises by means of remittances – the transfer of money and other valuable resources to family or friends in crisis-affected contexts. However, laws that prevent money laundering and terrorism financing can prevent remittances from being used effectively as a response mechanism, particularly by forcing banks and other financial entities to stop money transfers to conflict-affected places.

Remittances are an important income for many. When viewing remittances as single transfers made from person to person, they might not seem to have much impact. By considering remittances in their totality, however, a completely different picture emerges. To begin with, they are an important financial inflow in low- and middle-income countries (LMICs), second only to Foreign Direct Investment (FDI).[1] According to the World Bank, total remittances to LMICs in 2021 surpassed USD 600 billion and the forecasted figure for 2023 is even higher. What’s more, these figures only reflect money sent through ‘formally’ regulated systems such as Western Union and MoneyGram. In fact, most remittances travel through informal and group-specific remittance systems such as Hawala,[2] the most known and researched informal remittance system used by Middle Eastern and African communities.

Remittances make a big difference. Remittance-based financial flows contribute to multiple social and economic practices, from national to household levels and processes. For example, through remittances, Somali diaspora have contributed to the “peace reconciliation process” in Somalia by financially supporting conflict resolution processes, for example peace dialogues among the conflicting parties. Remittances also help sustain the livelihoods of recipients in conflict- and crisis-affected regions and can positively improve health, education, and the housing situation of poor people who receive them. They also help “boost the economy” after periods of crisis.

Remittances play an important role before, during, and after humanitarian crises. Importantly, remittances play a crucial role in supporting responses to humanitarian crises in general, including pre-disaster preparedness and post-disaster recovery efforts. Yet despite their importance, multiple regulations and policies limit, constrain, and shape the extent to which remittances can be resorted to during crises.

Laws combatting money laundering and terrorist financing (AML/CTF) are meant to protect illicit financial flows. According to the Financial Action Task Force (FAFT),[3] countries and their financial entities are required to implement and strictly follow AML/CTF regulations. ‘Know your customer’ (KYC) and de-risking practices are two such regulations that directly impact diaspora and their remittances. KYC requires banks and other financial entities to know about their customers before engaging in any financial transactions with them.

De-risking is another approach that banks have to comply with as part of AML/CTF regulations. De-risking requires banks and other financial entities to not engage with ‘high risk and sanctioned destinations’. The former refers to places in which terrorist groups operate, the latter to  entities that are subjected to sanctions mostly by the United States’ Office of Foreign Assets Control (OFAC).[4]

Such regulations are curtailing remittances to Afghanistan. Here, they have created extra layers of challenges for Afghan diaspora and international humanitarian organizations. After the Taliban assumed power in Afghanistan in August 2021, it tumbled deeper into a financial and humanitarian crisis. With the ‘Fall of Kabul’, the country, which had already suffered a range of blows due to the conflict, poverty, and the COVID-19 pandemic, saw its reserves worth USD 7 billion being frozen by OFAC. Similarly, USD 400 million in Afghanistan emergency funds were blocked by the International Monetary Fund, which claimed that it could end up in the hands of Taliban.

Diaspora and their remittances came under global scrutiny as well. With an estimated number of 5.8 million Afghans living abroad, residents of the country received USD 788.9 million in remittances in 2020. This amount only accounts for money transferred via formally recorded channels like Western Union and excludes remittances sent to people in Afghanistan via trust-based channels like Hawala. After the Taliban takeover, many institutions followed a de-risking principle and AML/CTF policies, as a result of which both Western Union and MoneyGram suspended their operations in the country, which made remittances to Afghanistan through formal channels almost impossible. Thus, the trust-based Hawala system, already popular in the country before the current crisis, was increasingly used.[5]

However, Hawala and similar systems have been criticized and are feared to facilitate illicit streams of money, mostly because the transactions cannot be traced, and accountability practices are difficulty to have when the actors involved in the transactions cannot always be identified. Therefore, the enforcement of these global regulatory and supervisory frameworks seeks to protect such systems from harm. Because Afghanistan is on OFAC’s sanctioned countries list, remittances and other financial inflows have become impossible after the ‘Fall of Kabul’ because both humanitarian organizations and financial entities needed to adhere to AML/CTF regulations.

However, to limit and perhaps avoid any further catastrophic humanitarian situation in Afghanistan, OFAC started issuing General Licenses (GL). These licenses made possible humanitarian assistance (GL14) and inflows of personal remittances (GL 16). In this way, innocent Afghans have been able to get much-needed support from their family and friends abroad, as well as from international humanitarian organizations.

There is a need for a critical research agenda on remittances during humanitarian crises. As the case of Afghanistan shows, beyond the well-studied socio-economic role of remittances (see here, here, and here) and their (claimed) use for terrorism and crime, contribution to development, or as an obstacle to integration, they can also play an important role in responding to unfolding humanitarian crises. However, several important knowledge puzzles remain unaddressed and invite the development of a research agenda that can shed light on them, with possible research foci including:

 

1. The role and integration of remittances in formal humanitarian responses.
2. The impact of sanctions on societies affected by humanitarian crises and the challenges that these measures can create.
3. How remittances link with inequality, either reducing them, considering that not everyone has equal access to remittances or networks of people that has migrate and can send money, or their impact in local economies, from inflation or foster businesses.
4. How international humanitarian organizations navigate or address AML/CTF regulations when responding to different humanitarian crises.
5. How remittances are linked to or use cryptocurrencies or blockchain technology, and the implication of this, for example, in terms of the traceability of remittances, speed of the transfers.

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[1] All LMICs including China. When excluding China, remittances form the highest financial inflow to LMICs.

[2] Hawala is an informal value transfer system that is commonly used in the Horn of Africa, the Middle East, Pakistan, and Afghanistan. This transfer system operates outside or in parallel with traditional banking systems and is based on “trust” between those who move value (hawaladars), since no money is involved. Simply put, the sender contacts the hawala agent or hawaladar (Hawaladar A); then, Hawaladar A contacts a local hawaladar agent at the location where the money is to be sent (Hawaladar B) and asks him/her to deliver money to the final recipient. Hawaladar A and B then settle their accounts.

[3] FAFT is inter-governmental agency established in 1898 by group of G7 countries that fights money laundering and terrorism financing through the creation of regulations.

[4] OFAC is part of Treasury Department of US Government. OFAC administers economic sanctions to entities and individuals that are seen to be national security threats.

[5] A report by think tank Samuel Hall for example quips, “Afghan diaspora has been using Hawala extensively for remittances since the first waves of immigration, as most Afghan migrants in Iran and Pakistan did not have access to the banking system”.

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This blog post and research was supported by the European Research Council (ERC) Horizon 2020 programme [Advance grant number 884139].

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