An informal value transfer system (IVTS) refers to any system, mechanism, or network of people that receives money

Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form. Informal value transfers generally take place outside of the conventional banking system through non-bank financial institution

Non-bank financial institution

A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...

s or other business

Business

A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

 entities whose primary business activity may not be the transmission of money. The IVTS transactions occasionally interconnect with formal banking systems, for example, through the use of bank account

Bank account

A Bank account is a financial account recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank .-Account types:...

s held by the IVTS operator.

History of IVTS

IVTS, including so-called alternative remittance and underground banking systems, pre-date western banking systems and existed as far back as 5800 BC. The systems were established originally on the Indian subcontinent in Asia as a means of settling accounts

Settlement (finance)

Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....

 within villages. Their use as global networks for financial transactions spread as expatriates from the original countries settled abroad. Today, IVTS operations are found in most countries. Depending on the ethnic group, IVTS are called by a variety of names including, for example, hawala

Hawala

Hawala is an informal value transfer system based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and South Asia...

(Middle East, Afghanistan, Indian Sub-Continent); hundi

Hundi

Hundis were legal financial instruments that evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis...

(India); fei ch’ien (飞钱 or "flying money"; China); phoe kuan (Thailand); and Black Market Peso Exchange (South America).

Individuals or groups engaged in operating IVTS may do so on a full-time, part-time, or ad hoc basis. They may work independently, or as part of a multi-person network. IVTS are based on trust

Trust (sociology)

In a social context, trust has several connotations. Definitions of trust typically refer to a situation characterised by the following aspects: One party is willing to rely on the actions of another party ; the situation is directed to the future. In addition, the trustor abandons control over...

. Historically, operators have not, as a general rule, misappropriated the funds entrusted to them.

How does IVTS work?

The sender gives money to an IVTS agent (usually in an ethnic neighborhood) and his/her counterpart in the receiver region/country acts as deliverer of this money. Sender calls or faxes instructions to his counterpart and the money gets delivered in a matter of few hours. Settlements are
made either with a private courier or wire transfer in the opposite direction. Another method of balancing the books is to under-invoice goods shipped abroad, so that the receiver can resell the products at a higher market price.

Use of IVTS

IVTS are utilized by a variety of individuals, businesses, and even governments to remit funds domestically and abroad. Expatriates and immigrants often use IVTS to send money back to their families and friends in their home countries. IVTS operations are also used by legitimate companies, traders, and government agencies needing to conduct business in countries with no or inadequate formal financial systems.

In some countries, IVTS-type networks operate in parallel with formal financial institutions or as a substitute or alternative for them. Besides citizens of the US, persons (legally or illegally) residing in the US from foreign countries and individuals living in other nations may prefer or need to use IVTS in lieu of formal financial institutions for various reasons as described below:

• the constant change in the political environments, unsatisfiable payment systems, and/or a rapid continuously changing financial sector that exist within a country;
• a lack of easily accessible formal financial institutions in remote areas of some countries;
• transfers that are more efficient, reliable, and cheaper than formal financial institutions. (For example, a wire transfer of funds
  Electronic funds transfer
  Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
  
   using banks involves fees charged to the sender and receiver, may take from two to seven days to complete, and may be delayed or lost. Funds moved through IVTS are available within 24 hours, with minimal or no fees charged to the participants.);
• to avoid paying higher foreign exchange rate
  Exchange rate
  In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
  
  s. (Funds sent through traditional transfers are converted to the currency of the recipient’s country; the fee charged for exchange rate conversion is set by the institution. IVTS operators, who speculate in currency exchange rates, charge lower fees.);
• to avoid paying taxes;
• to ensure anonymity since there may be minimal or no records maintained; in other words, no paper trail exists; or
• to avoid mandatory reporting of large transactions from financial institutions to governments.

Because IVTS provides security, anonymity, and versatility to the user, the systems can be also used for supplying resources for doing illegal activities. Following the September 11, 2001 attacks

September 11, 2001 attacks

The September 11 attacks The September 11 attacks The September 11 attacks (also referred to as September 11, September 11th or 9/119/11 is pronounced "nine eleven". The slash is not part of the pronunciation...

on the United States, IVTS have come under increased scrutiny and regulation in many countries as a result of pressure from the United States.