The Impact of International Informal Banking on Canada:

A Case Study of Tamil Transnational Money Transfer Networks

(Undiyal), Canada/Sri Lanka

A Working Paper, Spring 2005

R. Cheran and Sharryn Aiken1

http://www.apgml. org/frameworks/ docs/8/Canada_ Sri%20Lanka% 20%20ARS% 20study%2
0June%202005. pdf


In the immediate aftermath of the Tsunami that devastated the coastal

regions of Sumatra, Sri Lanka, Thailand, and India, on December 26, 2004,

Sri Lankan community groups in Toronto became active in fundraising for

Tsunami victims. Toronto-based Tamil community organizations and Tamil

media which had been raising money for relief, rehabilitation and

reconstruction over the past 15 years were the first to initiate coordinated

fund raising drives. On December 26, 2004 three community radio stations

and one Tamil TV station launched a live, on air fund raising drive that

for three days and netted $2.5 million CAD.2 An unusual participant in the

drive was an influential informal money transfer agent who was present at

one of the radio stations. The money collected by the radio station was sent

to Sri Lanka every three hours or whenever it reached $50,000. One of the

members of the relief organization that was coordinating the work on the

1 R. Cheran is a Research Associate with York University’s Centre for
Refugee Studies

([email protected] ca); in July 2005 he will be joining the Department of
Sociology and

Anthropology at the University of Windsor as an assistant professor. Sharryn

is an assistant professor with the faculty of law, Queen’s University

([email protected] ca). The authors gratefully acknowledge the research

assistance of Mervyn Mahesan and Senthil Ratnasabapathy as well as helpful

comments provided by Nikos Passas. The generous support of the Law

of Canada and York University’s Nathanson Centre for the Study of Organized

and Corruption made this research possible.

2 The stations were Canadian Tamil Radio (CTR), Canadian Tamil Broadcasting

Corporation (CTBC), Canadian Multicultural Radio (CMR), and Tamil Vision

Incorporated (TVI) – all based in Toronto.


ground in the North-eastern part of Sri Lanka and a Sri Lankan

representative of the Toronto Money transfer agency were also on air via

telephone from Sri Lanka. The money was transferred to the Tsunami

ravaged region instantly. The money transfer agent waived his commission

and he himself contributed an undisclosed amount of money. In contrast,

local people and NGOs on the ground have complained that assistance from

the Government of Sri Lanka has not reached certain parts of the eastern

province for over a month.3 The government of Sri Lanka has allocated SLR

10,000 (USD$100) for each Tsunami victim’s funeral expenses. However, the

banks in the eastern province- a post-conflict zone- were unable to provide

even SLR 5,000 (USD$50) for the victims citing insufficient funds. This

underlines two things: firstly, the enormous importance and impact of

diaspora and transnational communities on the countries of origin;4

the uses of efficient and fast informal money transfer networks.

Transnational and diasporic communities have influenced economic,

political and cultural processes in their countries of origin in significant

They have the potential to influence economies and wealth creation. From

the banking network of the Rothschilds, originating in 18th century Europe,

the more recent Hinduja group, transnational communities have been a

leading player in global transactions. The Rothschild family banks operated

more like an informal bank in the 19th century in the manner they settled

their accounts dealing with money transfer at the end of the year.5 At $450

billion dollars (USD), the annual economic output in the early 1990s of the

million overseas Chinese was estimated to be roughly equal to that of the

3 Mr. Tilak Ranavirajah, Chairperson of the Presidential Task Force for

Management acknowledged at a press conference that 70% of Tsunami affected

people had not received any government aid because of bureaucracy and

of the government relief operations, Associated Press, February 3, 2005 and

Star, February 3, 2005.p.A15.

4 Broadly defined, diasporas constitute people dispersed among diverse

outside their homelands. Transnationalism is the social, economic, political

cultural practices carried out by such populations and they vary over time
and space.

5 Lawrence Malkin and Yuval Elzur, “Terrorism’s Money Trail”, World Policy

Vol.XIX,No.1 (Spring 2002), p.65.


billion people in China itself (Seagrave 1995). The Interpol estimates place

the percentage of informal money transfer business in India at up to 40% of

its GDP (Balauf 2002).

While the political and financial influences of transnational

communities have come under closer scrutiny after September 11, 2001

(9/11), Western governments have not formulated effective policy responses

to the emergence of transnational communities. The conventional approach,

applied somewhat inconsistently, has been to view these communities as

potentially dangerous groups bringing their “homeland conflicts” with them

and therefore a perennial threat to social cohesion in host countries.6

The case of Liban Hussein highlights the flaws of the conventional

approach in the post 9/11 context and the serious consequences that may

arise for individuals. Pursuant to regulations issued by the federal Cabinet

October 2001 and specific provisions in the Anti-Terrorism Act, the Office

the Superintendent of Financial Institutions (OSFI) is responsible for

distributing a consolidated list of named terrorists to financial

These institutions, including banks, federally regulated trust and loan

companies and life insurance companies, are then required to freeze the

assets of anyone whose name is on that list. Few would contest the

desirability of curtailing terrorism by cutting off its money supply but the

system the government enacted is problematic because the lists and

instructions issued to financial institutions by the OSFI encourage racial

profiling (Bahdi 2003: 302). According to a government document, financial

6 For example, Michael Ignatieff has suggested “…Diaspora nationalism is a

dangerous phenomenon because it is easier to hate from a distance: You don’t

to live with the consequences – or the reprisals … Canadians, new and old,
need to

think about what role diasporas play in fanning and financing the hatreds of

outside world. The disturbing possibility is that Canada is not an asylum
from hatred

but an incubator of hatred…… So it is appropriate to say to newcomers: You
do not

have to embrace all our supposed civilities. You can and should keep the
memory of

the injustice you have left firmly in your heart. But the law is law. You
will have to

leave your murderous fantasies of revenge behind.” (Ignatieff 2001)


institutions themselves must make the determination as to whether they are

in possession or control of any property owned or controlled by a listed

(Canada 2002). OSFI advises financial institutions to regard with suspicion

not only people whose names are on the list, but also anyone whose name

resembles the name of a listed person: “… if you have grounds for suspicion

do not rely on different (but similar) spelling as grounds for deciding that

person is not intended to be covered by the list” (OSFI 2004; Bahdi 2003:

302). Commenting on this guideline, Bahdi states:“[b]ank managers and

employees, working under the shadow of risk of financial and criminal

sanction, are thus implicitly encouraged to regard Arabs and Muslims as

especially suspect. In short, race and religion, through the use of names,

becomes a proxy for risk” (Bahdi 2003: 302).

Liban Hussein is a Canadian citizen who ran a money transfer

business to help Somalis send money home to a country where there are few

banks. In November 2001 American authorities placed Hussein on a list of 62

people who allegedly supported terrorism. On the same day the UN Security

Council and the Canadian government adopted the same list. Hussein’s bank

accounts were frozen for seven months, his business was shut down and it

became a crime for anyone to have any financial dealings with him. Although

he was ultimately “delisted” when the Canadian Justice department

acknowledged finding no evidence to link Hussein with terrorist activities,

then Hussein’s personal reputation had been ruined (Dosman 2004).

The remittances sent by transnational communities are the most

stable and second largest capital inflow to developing countries. According

World Bank estimates, remittances to developing countries amounted to $ US

125.8 billion for 2004, an amount that is at least 20% higher than

development aid to these countries (World Bank 2005: 136; Sorenson et al.

2003:288). These remittances are primarily channeled through informal

money transfer networks, rather than official banking systems.


The informal networks have flourished among transnational

communities for various reasons. Often, these communities originated in

impoverished villages or conflict zones in societies characterized by cash

intensive economies. Their points of origins were usually remote areas

without adequate banking facilities. The official banking system is slow and

not responsive to emergencies, while the informal system can deliver money

within hours to the recipient’s household. Preliminary research also

that official banks do not properly disclose the transfer rates and charge a

high percentage of commission (World Bank 2003). Latin American countries

like Mexico have successfully mediated the money transfer system to the

benefit of the senders (Orozco 2000). Migrant workers in the United States

have been able to benefit in this regard. However, a number of countries

mired in internal conflicts and turmoil have yet to organize their banking

systems to facilitate rapid, inexpensive and reliable money transfer

For this reason, the informal banking system dominates the life of several

transnational and diasporic communities. IMTS have been the only channel of

remitting money from the US to a number of African countries including

Somalia.7 Similarly the lack of banking linkages between Australia and

several African countries is the reason for the emergence of IMTS in

Australia. As long as these problems exist, IMTS will continue to be active

many parts of the world. International regulatory bodies such as Financial

Action Task Force on Money Laundering (FATF) has acknowledged that in

certain geographic regions informal money transfer services provide a

“legitimate and efficient service” and “their services are particularly

where access to formal financial sector is difficult or prohibitively


The new economics of migration draws our attention to the household

in conflict zones and other economically impoverished regions as an

7 More recently, the institutionalizatio n and formal operation of remittance

are offering alternatives to informal transfer mechanisms.

8 FATF, “Combating the Abuse of Alternative Remittance Systems”,p.2.

at:<www.fatf. org/eng> accessed on January 28, 2005.


important unit for analyzing the link between poverty, livelihood strategies

and money transfer networks. In this context, remittances are understood as

a way to diversify the household’s income in response to poverty, conflict

and other constraints. 9 Hence, remittances are a critical dimension of a

household livelihood strategy. However, the households are no longer

confined to one geographic location. They have become transnational as

members of the household are scattered in various parts of the world but

linked by transnational practices such as money transfers.

As the power of nation-states weakens as a result of rapid

globalization, and as the power of transnational communities grows, the

of incorporating these communities into theories and practices of

international law, international relations, development policy, foreign

and civil society grows as well.

Informal Money Transfer Systems (IMTS)

Informal money transfer systems are rooted in antiquity and have

been an important remittance system between the global south and global

north. It predates the western banking system. These services operated

primarily to facilitate the transfer of money, value or goods to

distant locations. Ethnic, clan, village, regional, and kinship ties were an

important element in these transfer services. With the intensification of

transnational migration in the latter part of the twentieth century, the

informal system has spread to the cities of the global north. The IMTS are

not generally associated with violence and should not be conflated with

organized crime, gangs and other syndicates. There is no evidence that the

IMTS have become the preferred vehicle for the movement of funds by

contemporary terrorist organizations or criminal networks (Buencamino and

Gorbunov 2002:1).

9 Nicholas Van Hear (2002) examined the role of remittances in sustaining

under strain using Sri Lanka and Ghana as case studies.


It is estimated that more than US$20 billion is sent across the borders

by informal money transfer networks (Simpson 2004:1) In some parts of

South Asia the system is called Hawala and Hundi. Among the Sri Lankan

Tamils it is popularly known as undiyal (literally ‘piggy banking’). In

East Asia the system is known as Fei Ch’ien and Chit. The informal transfer

system operates as an unofficial bank but one that handles only remittances

rather than the usual functions of deposits, savings and lending. Some

scholars argue that the system transfers only the value – not money – and

therefore, it is appropriate to call the system an “Informal Value Transfer

System” (Passas 1999: 11; Jost and Sandhu, 2000:2).10 While it is correct to

say the remittance system is about transferring the value, the users of the

system prefer to identify it as the transfer of money. The Financial Action

Task Force on Money Laundering refers to the informal system as

“Alternative Remittance system” and specifically money or value transfer

services (MVT). MVT is defined as a

[f]inancial service that accepts cash, cheques, other money

instruments or other stores of value in one location and pays a

corresponding sum in cash or other form to a beneficiary in another

location by means of communication, message, transfer or through a

clearing network to which the MVT service belongs (Van Hear 2002).

Research on these systems has been limited. The available studies locate the

system simply in the economic sphere and the post-9/11 criminalization of

the informal money transfer system has added a political dimension. While

these two aspects are important to our understanding of the informal money

transfer system, we argue that the cultural and social dimensions of the

system are equally important. We suggest that a better working definition of

informal money transfer systems is that they are social, cultural and

networks that function primarily outside the formal banking system and are

transnational in operation. This research addresses the Tamil informal money

transfer system, its economic, social and cultural impact on both Canada and

Sri Lanka. Since there have been few studies on informal money transfer

10 See Passas (2003) for a useful discussion of terminology.


systems in Canada, the study of undiyal in Toronto and its distribution

network in Sri Lanka could serve as a useful model for generating

appropriate policy responses to a range of informal banking systems in the

diasporic and transnational context.

Research Methodology

Ethnographic research was conducted in Toronto, Canada, Singapore

and Sri Lanka. In Sri Lanka the research was conducted in the capital city

Colombo, and in the post-conflict zones of Jaffna, Kilinochchi, Mannar and

Trincomalee. In-depth interviews were conducted with fourteen informal

money transfer agents in Toronto. One in-depth interview was conducted

with the president of the Money Changers Association of Singapore in

Singapore in August 2004. Two focus groups for the users of informal money

transfer system were conducted in Sri Lanka (August 2004) and Toronto

(December 2004). The Sri Lankan focus group was conducted in Jaffna.

Three women and six men participated in the group. All of them have

immediate and/or close family members and relatives living in Toronto. Six

men and three women participated in the Toronto focus group. In addition,

one of the authors of this study has been a frequent user of Tamil informal

money transfer system for the past eleven years. Two transactions were

made by the authors during the period of research. It would be appropriate

to mention that the study has benefited from participant observation: one of

the researchers had the opportunity to spend five hours at an informal

money transfer agency in Toronto conducting participant observation.

It was not possible to organize a focus group for informal money

transfer agents in Toronto. As one agent put it, “talking about our business

with other competitors is bad for our business”. Ten informal money transfer

agents refused to be officially interviewed. However, they shared their

and insights with the researchers. One of the reasons these agents cited for

being reluctant or refusing to participate altogether, was that they had


traumatic interrogation experiences when, in the wake of 9/11, Canadian

authorities turned up at their place of business with increasing frequency.

Two of the agents we approached informed us that some of the questions on

the questionnaire were exactly similar to the ones asked by the Canadian



The Community: Sri Lankan Tamils

Sri Lanka is among the top 20 developing countries that receive large

amounts of remittances from its diaspora. It received $1,056-million USD in

2001, through official banking systems. This amounts to 7.0 percent of the

GDP (World Bank 2003). This is important to an economy that has a total

annual GDP of less than US$ 20 billion. There has been no systematic

research on regional or ethnic breakdowns on remittances and modes of

money transfer. Hence it is impossible to calculate what percentage of this

annual remittance is sent by the Tamil diaspora. Remittance data from

official sources are patchy at best. There are no disaggregates in terms of

migrant remittances and refugee or diaspora remittances. The available

information does not include the money sent through informal networks.

There is a crucial need for mapping both the formal remittances as well as

remittances by informal money transfer networks that operate outside

banking systems.

The Sri Lankan Tamil community in Canada is the largest Tamil

diaspora in the world. An estimated 250,000 Tamils live mainly in Toronto.

The majority of them came to Canada as refugees fleeing the civil war in

country. Between 1987- 2001 Sri Lanka was among the top three source

countries for refugee claimants in Canada (Citizenship and Immigration

Canada 2002). Large numbers of Tamils have been granted some form of

residence status in their host country. In Canada, the acceptance rate for

Tamil refugee claimants has been consistently high. This perhaps explains

why Toronto has become the epicenter of Tamil transnationalism (Cheran


2002). Recent research indicates that 49.8% of the population entered

Canada as refugee claimants. Another 32.4% came as family class



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