US remittance tax to revive hawala, hand cartels a financial lifeline

Business Standard

3 days ago

Hidden on page 1,054 of President Donald Trump's 'big, beautiful bill' is a threat to impose a 3.5 per cent tax on all remittance transfers made by non-citizens to accounts outside the country. This is a dangerous, backward-looking provision, and will make Americans less safe without raising much revenue.
It is easy to understand why a measure like this would appeal to the current administration. It makes migrants' lives harder, and that's enough for it to be worth passing into law. And it certainly will create difficulties for millions of legal and illegal immigrants in the US, as well as for their families outside. Mexico's president, Claudia Sheinbaum, has been a vocal opponent, saying — correctly — that this is unjustifiable double taxation.
Her country, the largest destination for such transfers, has a lot to lose. But other countries are also worried. India is the third-largest destination for remittances from the US, receiving about $18 billion in 2024; the Philippines and China aren't far behind, at $14 billion each. According to Capital Economics, US-based remittances support 3 per cent of the Philippines' GDP.
The impact on migration-dependent areas of the world will be severe. For some countries in Central America, national income might fall by almost 1 per cent if this proposal is implemented. Meanwhile, some estimates suggest that even a higher 5 per cent rate would only increase the US' takings by 0.1 per cent.
For the remittance tax's backers, that's beside the point. Vice President JD Vance, when he was still a senator, introduced a similar bill. At that time, he said that 'this legislation is a common-sense solution to disincentivise illegal immigration and reduce the cartels' financial power.'
That argument is exactly backward. What common sense actually tells you is that if less money is available in some of the poorest parts of Central America, it increases the incentives for people there to try and move to the US to join their family members already there.
As for the impact on criminal networks — well, history suggests that they'll welcome this. The world has spent decades trying to make legal transfers cheap and efficient. An additional levy might increase the cost of transferring even small sums four fold. This would reverse all our efforts to force this trade above ground.
If legal transfers are made too expensive, illegal and informal networks take their place. Some people have happily assumed that Bitcoin will fill the gap. But, more likely, there will be a renaissance in simpler, older mechanisms for international transfers.
In South and West Asia, we call these methods 'hawala.' But other parts of the world derived equivalents independently. In China, for example, such mechanisms are called 'fei-ch'ien.'
From a customer's point of view, they're simple to use. All you need to do is find a well-networked trader and give them the cash to be transferred. That person then calls somebody in their clan or village back home, who gives the same amount of cash to the chosen recipient. The two members of the hawala network settle accounts between each other once or twice a year, through smuggling or perhaps through false invoices and shell companies.
Naturally, such informal mechanisms to transfer value can be used not just to evade the remittance excise, but taxes in general. Worse, they are frequently used as conduits for terrorism and drug financing — which is why governments have spent decades trying to stamp them out.
This was hard because, if enough people use these systems, they can be more efficient and cheaper than formal finance. The exchange rates that hawala traders offer are often more attractive, and their fees take less of a bite out of small transactions than many banks do.
In spite of the best efforts of regulators and cops, hawala networks only really shrank when other routes became more competitive. Informal currency traders need a large volume of transactions to be efficient and offer the best rates to their customers, so when their custom shrank, they became less attractive.
It's this self-reinforcing loop that the remittance tax threatens to break. Suddenly, hawala networks — and their equivalents in South and Central America — will become appealing again. And when this method returns to its former prominence, it will become easier to pay those who smuggle opiates or people. And, of course, criminal syndicates of various types will once again step in to run these systems, and profit accordingly. The vice president is, not for the first time, wrong: His administration's remittance tax doesn't attack the cartels, it empowers them.