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Remittances in Colombia:transaction costs and money laundering

Ximena CadenaFedesarrollo

Project LINK conferenceMexico DF, May 2005

Agenda

• Remittances and development• Industrial organization of remittances• Who receives remittances in Colombia?• The risk of money laundering• Transaction costs• Conclusions

Remittances in Colombia

Source: Central Bank of Colombia and author calculations

0

100

200

300

400

500

600

700

800

900

100019

97-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

2002

-III

2003

-I

2003

-III

2004

-I

2004

-III

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%Remittances Anual % Change (rhs)

Source: Author calculations with Superbancaria data

Number of foreign payments

300350400450500550600650700750

Ene-

02

May

-02

Sep-

02

Ene-

03

May

-03

Sep-

03

Ene-

04

May

-04

Sep-

04

Ene-

05

Thou

sand

s of

pay

men

ts

Monthly change average: 0.6%

Transactions amount (USD)

100

120

140

160

180

200

220

Ene-

02

May

-02

Sep-

02

Ene-

03

May

-03

Sep-

03

Ene-

04

May

-04

Sep-

04

Ene-

05

Mill

ions

of

USD

Monthly change average:1.1%

Average remittance value (USD)

240

260

280

300

320

340

360

Ene-

02

Abr

-02

Jul-02

Oct

-02

Ene-

03

Abr

-03

Jul-03

Oct

-03

Ene-

04

Abr

-04

Jul-04

Oct

-04

Ene-

05

Monthly change average: 0.4%

Remittances in LA

Source: Interamerican Development Bank - IADB

3.170

1.360

1.740

5.624

2.548

16.613

2.681

1.134

0 5.000 10.000 15.000 20.000

Colombia

Perú

Ecuador

Brazil

El Salvador

México

Guatemala

Honduras

20032004

US Millons

Remittances growth 04/03

Source: Interamerican Development Bank - IADB

3,4

5,0

5,1

8,2

10,0

18,4

25,2

27,3

31,6

0 5 10 15 20 25 30 35

Colombia

Perú

Ecuador

Brazil

El Salvador

Latin America and the Caribean

México

Guatemala

Honduras

Annual rate of growth (%) 03/04 - Millions of US$

Stable and countercyclical

r - r* - exp (devaluation)

Source: Author calculations - Central Bank and DANE data

-50

-40

-30

-20

-10

0

10

20

30I

1

996

IV 1

996

III

199

7

II

199

8

I 1

999

IV 1

999

III

200

0

II

200

1

I 2

002

IV 2

002

III

200

3

II

200

4

% d

evia

tion

from

tre

nd

-5-4-3-2-1012345

% d

evia

tion

from

tre

nd

Remittances Cycle GDP Cycle (rhs)

-50-40-30-20-10

0102030

I

199

6

IV 1

996

III

199

7

II

199

8

I

199

9

IV 1

999

III

200

0

II

200

1

I

200

2

IV 2

002

III

200

3

II

200

4

Interest Rate Differential Remittances Cycle

Remittances and internationalfinancial markets

1.931.91Durbin Watson

1996:1 – 2004:11996:1 – 2004:1Time period

3233Observations

0.030.005R2

(0.93)-(t statistic)

0.27-Interest rate differential (-1)

-(0.41)(t statistic)

-0.11Interest rate differential

(-0.05)(-0.04)(t statistic)

-0.19-0.15Constant

Equation 2Equation 1Dependent variable:

remittances cycle (HP)

Source: author's estimations

Agenda


The business of remittances

Agent overseas

Agent in Colombia

MONEY TRANSFER ORGANIZATIONS

Money remitters

Tariff+

ER Spread

Gets the money, charges the sender (tariff and exchange rate spread)

Receives and deliver the money. Charge taxes to the recipient

Is the link between two agents

Distributes between the three

Agents in Colombia

• Banks and financial corporations• Exchange houses- casas de cambio

– Non credit or deposit institutions– Main point of remittances arrivals

• Professional exchangers– Money exchange– Deal with cash currencies but not remittances

REM

ITTAN

CES

INTER

MED

IAR

IES

UNAUTHORIZED

Exchange houses are the main point of remittances arrivals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ene-

02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Ene-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Ene-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Exchange houses participation on Total Remittances

Source: Author calculations with Superbancaria data

Agenda


A lot of homes received and will continue to receive remittances

Source: Consumer Confidence Survey Fedesarrollo- Invamer Remittances module Jul-2004

Have you received remittances in the last 12 months?

0

5

10

15

20

25

Total Bogotá Medellín Cali Bquilla High Medium Low

% o

f af

irm

ativ

e an

swer

s

City Social Class

How much do you expect to receive in the next 12 months?

0%

20%

40%

60%

80%

100%

Total Bogotá Medellín Cali Bquilla High Medium Low

More Same Less NA

City Social Class

How much do they receive?

Source: Remittances recepients Survey-Exchange houses

* Centered Average

How much did you get today? (Destination)0 50 100 150 200 250 300 350

Total

Bogotá

Cali

Pereira

Median Average Remittances*

How much did you get today? (Origin)0 50 100 150 200 250 300

Total

USA

España

Otros

Median Average Remittances*

Origin of Colombian remittances

Other countries;

9,3

Holland; 1,4

Venezuela; 1,1

Italy; 4,5

United Kingdom; 6,5

Spain; 10,4 United States; 66,8

Source: Banco de la República.

How much do families receive?% Distribution of received amounts

0

2

4

6

8

10

12

100m

il-15

0mil

151m

il-20

0mil

200m

il-25

0mil

251m

il-30

0mil

300m

il-35

0mil

351m

il-40

0mil

400m

il-50

0mil

500m

il-60

0mil

600m

il-70

0mil

700m

il-80

0mil

800m

il-90

0mil

900m

il-1m

il

1mill

-2m

ill

2mill

-3m

ill

Colombian Pesos


How often do they get them?

When was the last time you received money?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total Bogotá Cali Pereira

One week 15 daysOne month Two monthsThree months Four months5 or 6 months More than 6 monthsNA

When are you expecting to receive money again?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total Bogotá Cali Pereira


Who sends them?

• Most of them went abroad looking for a better job (69%) and ways to help their families with extra money (17%)

0 5 10 15 20 25 30

Brothers/Sisters

Doughters/Sons

Friends

Espouse

Mother/Father

Grandfahter/mother

Other Relatives


What do they use them for?

• Remittances are a gift (71%)

• They are used to afford basic needs

0 20 40 60 80

Food

Apparel

Education

Housing

Health

Debt Payments

Saving

Business

Celebration

Transportation

Others


Agenda


Money laundering throughinternational payments

Source: UIAF

Ilicit money is particioned through money orders

Cost-Benefit Analysis

Regulation and efficiency relation

Effi

cien

cy

Regulation

The Colombian conflict has address the equilibrium to one with more regulation. This could rise the costs

Colombia

LA Average

Anti-laundering regulationGeneral guidelines:• Patriot Act• EOSF (Decreto-Ley 663 of 1993, Leyes 190 of

1995, 365 of 1997 and 526 of 1999)• Adopting sufficient rules to avoid money

laundering is mandatory• External Bulletin 025 of 2003 SIPLA

– Client knowledge– Warning sings – Electronic consolidation of operations– Transactions report (multiple transactions and cash)– Identification of unusual actions– Suspicious operations report (to UIAF)

Anti-laundering regulation

Specific regulations

Source: Bulletin 025/03 Resolution 8/00 JDBR Circular 4004 Superbancaria

NoYesExchange Operations Report

From US 200From US 200Exchange Operations Report

Form US 10.000From US 3.000Checks payments for foreign currency

From US 50.000From US 1.500Multiple Transactions Report

From US 5.000From US 500Cash operations report

Banks and other financial inst.

Exchange houses

Feb, 2005

Agenda


Costs are still low within LA countries

Source: Manuel Orozco (2004)

But they seem to be rising

Source: Authors calculations with Manuel Orozco’s data

Average cost of sending US 200, 250 and 300 for allcompanies

Average Cost

4,2%5,5%

9,7%

2,5%

3,9%

6,0%

6,9%

4,4%2,5%

0%

2%

4%

6%

8%

10%

12%

ER Spread Tariff Total

200220032004

Costs: Standard deviation

1,0%

2,1%2,1%

2,8%

2,2%

0,8%

1,9%1,7%

0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

ER Spread Tariff Total

Costs have decreased from 2002 and the market is less heterogonous

Source: Authors calculations with Manuel Orozco’s data

0%

2%

4%

6%

8%

10%

12%

14%

16%

Firm

1

Firm

2

Firm

3

Firm

4

Firm

5

Firm

6

Firm

7

Firm

8

Firm

a 9

Firm

a 10

2002 2003 2004

Profits and margins of business have decreased

Source: Authors calculations with Superbancaria data

0%

5%

10%

15%

20%

25%

30%

Return/Equity Return/Assets Net Margin Net OperationalMargin

200120022003

Maybe they moved to a less concentrated industry

ROE

2%

7%

12%

17%

22%

27%

32%

37%

42%

>10% (3Agencies)

Entre 4 y 8 % (5Agencies)

<4% (4 Agencies) TOTAL

200120022003

ROA

0%

5%

10%

15%

20%

25%

>10% (3Agencies)

Entre 4 y 8 %(5 Agencies)

<4% (4Agencies)

TOTAL

200120022003

Net Margin

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

17%

>10% (3Agencies)

Entre 4 y 8 %(5 Agencies)

<4% (4Agencies)

TOTAL

200120022003

Market size corresponds to 2001


Net Operational Margin

5%

10%

15%

20%

25%

30%

>10% (3Agencies)

Entre 4 y 8 % (5Agencies)

<4% (4 Agencies) TOTAL

2001

2002

2003

Mostly in commissions

Market size corresponds to 2001


Comissions paticipation on money orders

0%

10%

20%

30%

40%

50%

>10% (3 Agencies) Entre 4 y 8 % (5Agencies)

<4% (4 Agencies)200120022003

Which allowed a reduction in the exchange rate spread

21002200230024002500260027002800290030003100

Ene-

02

May

-02

Sep-

02

Ene-

03

May

-03

Sep-

03

Ene-

04

May

-04

Sep-

04

Ene-

05

TRM Remittances ER


0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

Ene-

02

Jul-0

2

Ene-

03

Jul-0

3

Ene-

04

Jul-0

4

Ene-

05

ER Spread

Effi

cien

cy

Regulation

Colombia

LA average

Exchange houses (70% of remittances)

Professional Exchangers


The regulation has an implicit bias against remittances

Effi

cien

cy

Regulation

Colombia

LA average

Exchange houses (70% of remittances)

And banks

Professional Exchangers


Very recently, after this paper was finished and published, the authorities remove some controls from the exchange houses and reinforce others for the banks, now regulation for remittances is

more symmetrical but the bias continues

Adopting controls in other market segmentsProfessional Exchangers

• Unregulated Market• Have not fulfilled regulations (Bulletin 0170 DIAN)• 3.210 are registered in the Chamber of Commerce• In June 1.500 were punished for not reporting their

operations• Their sales to the IMC were 2.6 times greater in July of

2004 (US$782 millions)• 6/04 Bulletin will require registration for them• The Central Bank won’t receive deposits of foreign

currency from the IMC

Conclusions

• Colombia has one of the lowest costs and is the regional leader in anti- money laundering regulation

• Homes are expecting transfers to rise in part due to costs reductions

• Regulation suggests that money laundering through the remittances mechanism is costly, riskily and highly inefficient

• Remittances should not be restricted, they allow consumption smoothing

• Are private resources, their owners make rational decisions about their most efficient use

• Anti-laundering regulation must focus to other agents of the market

Remittances in Colombia:transaction costs and money laundering

Ximena CadenaFedesarrollo

Project LINK conferenceMexico DF, May 2005

ximena cadena fedesarrollo project link conference mexico ... · ximena cadena fedesarrollo project...

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