Ongoing debate around the Republican tax bill, the so-called “big, beautiful bill,” has focused on its more than $5.6 trillion in tax breaks, mostly going to the super wealthy and large corporations, proposed to be partly paid for by drastic cuts to social programs that provide healthcare, nutrition assistance, and other services for the most vulnerable Americans, including young children.
Among the 1000 or so pages of the megabill, it’s easy to overlook a small section of text on page 991 that would have unexpected and devastating impacts for U.S. efforts to counter illicit finance, in addition to being misguided tax policy. In just a few short paragraphs, the House bill outlines a 3.5 percent tax on money sent from the U.S. to other countries by non-U.S. citizens (outgoing remittances). In the Senate, there is already talk of increasing this remittance tax to 15 percent.
Such a tax would be regressive, targeting working-class immigrant communities, and an administrative nightmare to implement, while raising relatively little in taxes. It would also undermine 25 years of progress in formalizing these financial flows. Since the terrorist attacks of 9/11, a major effort has been made by the United States and by international standards-setting bodies such as the Financial Action Task Force to formalize remittance flows as a means to combat illicit finance. In the United States, as well as globally, these efforts have been highly successful. A 2002 survey of Latin American immigrants in the United States found that 29 percent used informal channels to send money home, such as giving money to travelers or putting cash in the mail. Today, less than 3 percent of U.S.-outbound remittances are sent informally and the remaining 97 percent are sent formally.
From an anti-money laundering and counter terrorism financing (AML/CFT) perspective, the shift to formality is a very good thing. Formal remittances are subject to U.S. AML/CFT laws such as the Bank Secrecy Act and the Patriot Act. This provides vital safeguards. We know who is sending and receiving money (through Know Your Customer protocols, or “KYC”) and we have ways to report suspicious transactions to the government (“SARs”). In addition, the institutions providing these formal remittance services – which include bank and nonbank financial institutions, like remittance companies – are regulated at the federal and state levels. This does not mean that formal remittances are immune to risks associated with AML/CFT; rather, it means that safeguards are in place to address these risks within the formal system.
A major alternative to formal remittance channels is hawala, an informal value transfer system that dates back thousands of years. Hawala, which means “transfer” or “trust,” operates through an international network of brokers and traders who periodically settle financial accounts without money ever touching the formal financial system and without cash ever crossing borders. However, this system provides no AML/CFT safeguards and therefore presents significant risks for governments as well as consumers. Hawala has often been associated with illicit economies in fragile states. In Afghanistan, for example, “the Taliban used hawala to help fund their ultimately successful insurgency,” as well as to launder proceeds from opium trafficking.
Recent risk assessment and strategy documents by the U.S. Treasury point to significant risks associated with informal remittances and/or informal and unlicensed service providers. The most recent U.S. National Risk Assessment for Money Laundering provides a laundry list of informal money transfer cases involving everything from international political corruption, to drug trafficking, fraud and scams of various types, and sanctions evasion. Meanwhile, the National Risk Assessment for Terrorism Financing notes that ISIS “extensively utilize(s)” the hawala system to move funds.
Indeed, as the U.S. Treasury has recently noted, U.S anti-money laundering tools “work best when funds exist within the regulated financial system.” Moreover, Treasury has noted that “increased reliance on unregistered financial mechanisms by customers excluded from the regulated financial system can create a potential profit center for criminals.”
In this regard, the proposed remittance tax poses significant risks that lawmakers may not fully anticipate. Beyond issues of cost, the implementation of such a tax would require that the financial sector collect extensive data on consumers’ immigration status, an unusual move. Similar to the recent Geographic Targeting Order (GTO) requiring extensive personal data for cash transactions above $200 in certain border regions, the proposed change will make some people shy away from formal financial services, whether because they or their family members are undocumented, or simply because they are deterred by the need to document their status. This is also an issue for many American citizens: not everyone has a passport or birth certificate easily on hand.
How many people are we talking about? A 2017 survey of Latino immigrants in five U.S. cities found that deportation is a major fear when deciding which financial services to use. Sixty-four percent of respondents said in the event of a remittance tax, they would change the way they send money home, and among those, 41 percent indicated that they would switch to informal channels rather than reveal immigration information.
Based on very quick, crude, and back-of-the-envelope math: The United States is the largest source of remittances in the world, sending outbound remittances of approximately $200 billion a year as per World Bank data. If 64 percent of people changed how they sent money, and 41 percent of those switched to informal channels, we are looking at potentially $52 billion a year in remittances shifting into unsafe, unlicensed channels that are not subject to AML/CFT safeguards – or to the remittance tax, for that matter. That means that the official estimate from congressional scorekeepers that this tax would raise $26 billion is likely too high.
Not only would this tax not raise much in revenue, it would also continue to weaponize our tax code for immigration enforcement purposes, while presenting unacceptable illicit finance risks.