Remittance flows are vitally important to post-conflict states. In these countries there is often a damaged financial infrastructure, uncertainty or lack of financial laws and regulations, uncertain business norms, and limited private foreign investment. Remittances sent from abroad to these countries are a critical source of capital for development and stability. In many post-conflict nations, remittances exceed all other forms of capital in-flows including official development assistance.
Consumer groups and others have criticized U.S. remittance providers for charging excessive fees and failing to make transparent disclosures. A 2005 report issued by the Appleseed Foundation found that then-existing disclosures made it hard for consumers to understand the full costs of sending a remittance. In 2010 Congress enacted an amendment to the Electronic Funds Transfer Act, requiring U.S. remittance companies to make various disclosures before and after a remittance payment was submitted for transfer. The legislation also included consumer remedies in the event that a remittance is misdirected or late.
Implementation was given at first to the Federal Reserve Board, but transferred to the Consumer Financial Protection Bureau when that agency became operative. The CFPB is given wide latitude to make adjustments and exceptions to the statute, as the agency determines necessary or proper. The development of the final regulation shows that the CFPB made significant improvements to the rule as a result of comments submitted by the financial services industry, consumers, other agencies, and groups representing foreign nationals in the United States. However, the final regulation has one very significant failing: it does not distinguish transfers made to post-conflict nations from transfers made to countries with established and functioning financial regulatory infrastructure. As a result, in many cases it will be difficult, if not impossible, to comply fully with the rule when transfers are sent to war-torn areas.
This problem may be illustrated by the rule's requirement that third-party fees must be disclosed exactly at the time the remittance transfer is made, unless the fee is imposed by the recipient's bank or bank-like institution. This provision fails to appreciate that the very large majority of the population living in post-conflict areas do not have bank accounts.
There is no easy way for a U.S. remittance company to know the fees that may be charged by third parties, since third parties are not working for or affiliated with the remittance provider. If funds are sent to a post-conflict area, fees might be charged by a village council, by a military authority, or by any person who was involved in delivering the funds to the recipient or safeguarding the funds until picked up. Nevertheless, the failure to disclose all such third party fees, with exactitude, constitutes a violation of the regulation.
This requirement also prevents remittance companies from using automated clearing house or wire transfers to effectuate a transfer. ACH and wire transfers route funds through a network of financial institutions, but the exact routing may change with each transfer. Intermediary institutions typically impose a small charge for their role in the transfer. These charges are applied to all transfers, large and small, not just to remittances. Because the amount of the charge cannot be determined with 100% accuracy, the use of the ACH or wire transfers will no longer be possible for remittance providers. Therefore, transfers to post-conflict nations will be limited to "closed networks" in which each intermediary in the transfer is controlled by the parent remittance company.
The rule also fails to consider the importance of mobile money in post-conflict areas. While bank accounts are rare, there is widespread ownership of cell phones and other mobile devices in post-conflict locations. The CFPB did not provide an exception for transfers to these devices. Thus, if the remittance transfer provider cannot determine in advance the exact amount of the fee the cell phone company will charge for accepting funds, the remittance cannot be made.
The CFPB has recognized limited exceptions from its disclosure requirements in special cases. Insured depository institutions are given the temporary authority to disclose reasonable estimates, rather than exact amounts, until July 21, 2015. Another exception is made when a foreign law prohibits the disclosure of the required information. I would urge that the CFPB also permit all remittance providers to use reasonable estimates when the required disclosures cannot be made if economic or political turmoil in the recipient's country make exact disclosures impossible.
Raymond Natter is a partner at Barnett Sivon & Natter, P.C., which represents financial institutions, including those that provide remittance transfers. The views expressed are his own. This post is adapted from the Boston University report "Remittance Flows to Post-Conflict States: Perspectives on Human Security and Development."