Are Western Union’s controls enough?

November 27, 2009

As the one-year anniversary of the 26/11 terrorist attacks against Mumbai passed yesterday, many questions in India remain unanswered.  Government officials are still prosecuting and arresting those involved, and are still trying to figure out what steps to take to prevent terrorist attacks in the future.

The role of Western Union money wires has come under special scrutiny in India, which receives $50 billion a year in remittances from Indians living in other countries.  Reportedly, Western Union has taken additional steps to verify the identity of those involved on both sides of the transaction.  The Economic Times offers this report:

MUMBAI: The person at the Western Union counter has a delicate job these days. When a burkha-clad lady steps into the agency, likely to collect the money her husband sends on the first Friday of every month from Muscat, she is politely asked to lift her veil just for a second — a standard operating procedure to make sure that the lady behind the veil is the same person whose photo appears on the ID.

“There’s no other way… our agents had to hire lady staff. As a process, photo ID confirmation has to happen at the location,” said an official of Western Union whose network in Italy has been allegedly abused to help Ajmal Kasab [the sole surviving terrorist of the Mumbai attacks]. The firm, best known for its worldwide person-to-person money transfer service, and whose name has occasionally figured in the course of investigations between 9/11 and 26/11, spends $35 million a year to keep its network safe. Still, it’s a challenge.

“We store customer identities for 10 years, but the toughest thing is to spot somebody who has no history… Most of our customers are hardworking people sending money home to their families,” said the WU official. But it’s the friends of Kasab who drew the attention of regulators and law enforcement agencies.

In September 2007, WU hit the headlines after the Reserve Bank of India prohibited its 20-odd agents in the country from spreading their sub-agent network… However, a few months ago, the regulator lifted the ban, allowing the principal agents to hire more sub-agents (In India, WU does not have its own locations but operates through principal agents — large banks and finance companies, which in turn appoint sub-agents. WU lends its technology, brand and marketing support to these outlets).

It’s unclear what prompted RBI to waive the prohibition. “We did it after we were instructed by the government,” said an RBI official. Perhaps, it’s difficult to impose such a prohibition in a country that receives $50 billion a year from its diaspora. But the decision preceded the government’s change of the law to make agencies like WU, Visa and MasterCard more accountable.

What provokes a debate is whether the WU business model, thriving on easy-access, low-transfer fee and handing of cash, is more prone to abuse

Has life changed for the remittance firm post-26/11? WU officials claim that the firm constantly upgrades its systems. “It’s a continuous process,” says one employee. It may not have to once again explain the changes before the Financial Action Task Force (FATF), the Paris-based inter-governmental organisation, whose members are visiting the country this week. However, FATF will hold a string of meetings, beginning next week, with local banks, leading life insurers and financial conglomerates to assess the anti-money laundering system of these institutions.

There are chances that WU could crop up in these discussions. “Several banks want a slice of the WU remittance business, but we have little chance given their limited network abroad, fixed working hours and stodgy, high-cost ways,” admits the compliance chief of a private bank. However, he feels that the changing environment, attack from competitors and demanding regulations could slowly change the way WU and some of the big global remittance firms do business.

When it comes to security measures, more is better.  However, the main problem with money transfers in the world today is not Western Union.  The problem is independent hawaladars like the “Madina Trading Corporation“(covered by this blog earlier in the week) that are permitting absolutely unverified transactions from one jihadist to another in accordance with Islamic law.

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