How US Remittance Tax May Fuel Underground Money Networks

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A new money laundering threat is quietly emerging from the latest US remittance tax policy. With the introduction of a federal excise tax on funds sent abroad, millions may soon turn away from regulated financial channels. This shift risks boosting underground money transfer systems like hawala. Compliance teams now face renewed challenges as illicit financial flows find fresh routes.

How the Remittance Tax Drives Alternative Financial Routes

A new provision embedded within a sweeping US tax bill has triggered serious debate across financial crime and compliance circles. While designed to capture additional revenue, the measure—requiring a 1% excise tax on funds sent overseas by immigrants—may unintentionally breathe new life into alternative money transfer systems outside the regulated financial sector. These informal channels, ranging from hawala to cash couriers and digital peer-to-peer schemes, could see a surge in use, making detection and disruption of illicit finance even more challenging.

Lawmakers adopted the excise tax as part of the “One Big Beautiful Bill,” which combines expiring tax cuts with new spending reductions. The excise tax applies to most outbound remittance flows from the US and will be collected by licensed money transmitters such as Western Union and MoneyGram. The funds are then remitted to the US Treasury. For many immigrant families supporting relatives abroad, this additional cost may seem modest, but its cumulative effect is significant, especially for frequent and lower-value transfers. Historically, any rise in remittance costs tends to shift money flows away from formal channels, and this is where compliance professionals see a mounting risk.

A significant portion of cross-border remittances from the US are destined for countries where traditional banking access is limited or expensive. The World Bank reported that $656 billion in remittances flowed to low and middle-income countries in 2023. These figures underscore the immense scale of the market. With the excise tax now in place, a fraction of these billions could shift to unregulated alternatives, undermining decades of progress in bringing remittances into the financial system’s regulatory perimeter.

Alternative Financial Routes and Illicit Finance

The introduction of a federal remittance tax in the US may inadvertently stimulate the use of alternative financial routes for cross-border money movement. For decades, global efforts have focused on steering remittance flows toward regulated institutions to reduce exposure to money laundering, terrorist financing, and transnational organized crime. Regulatory authorities, particularly after 9/11, reinforced requirements on financial institutions to implement robust customer due diligence, transaction monitoring, and reporting obligations under the Bank Secrecy Act (BSA) and USA PATRIOT Act.

However, these efforts are tested when policy shifts incentivize circumvention of the regulated sector. Hawala, for instance, is a centuries-old informal value transfer system widely used in South Asia, the Middle East, and parts of Africa. Hawala brokers, or hawaladars, operate outside formal banking channels, relying on networks of trust and family connections to move funds. The process leaves limited transactional records, often making it invisible to law enforcement and regulatory authorities.

The resurgence of hawala and similar networks in response to increased costs or perceived risks in the formal sector can significantly erode anti-money laundering (AML) controls. Informal networks are not unique to hawala. Latin America and Africa, for example, have thriving underground remittance operations using local cash couriers, barter, and mobile money systems not always subject to comprehensive AML checks.

The challenge for compliance is clear: when regulated money transmitters become less attractive due to taxation or regulatory friction, customers—especially those with limited financial literacy or documentation—are drawn to familiar and trusted informal options. This weakens the effectiveness of the overall AML/CFT regime and increases the likelihood that criminal proceeds or terrorist funds can be funneled across borders undetected.

The Landscape of Informal Remittance Systems

Hawala is only one piece of a much broader ecosystem of alternative financial routes. Across different regions, numerous informal value transfer systems (IVTS) operate alongside or outside formal channels. Each presents unique challenges to financial integrity and regulatory oversight.

Hawala and Hundi: Popular in South Asia and the Middle East, these systems work on the basis of trust and familial relationships. A sender gives cash to a local hawaladar, who instructs a counterpart in the recipient country to pay out an equivalent amount, minus commission. No funds physically cross borders, and settlements between hawaladars can occur through trade, barter, or even cryptocurrencies.
Cash Couriers and Smurfing: Physical transportation of cash remains a staple of underground financial networks. “Smurfing” involves breaking large sums into smaller amounts to evade reporting thresholds, with individuals or groups carrying cash across borders or depositing funds in small increments.
Trade-Based Money Laundering (TBML): Some alternative routes are disguised as legitimate trade activity. Over- or under-invoicing, phantom shipments, or false documentation enable funds to move internationally under the guise of commerce, bypassing remittance channels altogether.
Mobile Money and Peer-to-Peer Apps: In regions where traditional banks are inaccessible, mobile money providers and digital P2P platforms offer a convenient way to send and receive funds. While many are regulated, the proliferation of small-scale, locally focused apps and networks complicates oversight, particularly when combined with cash-out agents and informal intermediaries.
Charities and NGOs: Illicit funds can also be moved via charities, which sometimes serve as a conduit for humanitarian aid or community support in areas with weak financial infrastructure. The misuse of non-profits for value transfer remains a concern for global regulators.

The common thread among these routes is a reliance on community trust, minimal documentation, and mechanisms designed to stay below the radar of formal institutions. For many users, these routes are not inherently illicit, but their opacity makes them highly vulnerable to abuse.

Regulatory Risks and Compliance Challenges

US financial authorities have consistently recognized the risks associated with alternative financial routes. The Bank Secrecy Act (BSA), Title 31 of the United States Code, and associated regulations require money services businesses (MSBs) to register with the Financial Crimes Enforcement Network (FinCEN), maintain AML programs, report suspicious activities (SARs), and adhere to customer identification requirements.

Hawala and other informal networks, however, often operate without licenses, registration, or regulatory supervision. Law enforcement agencies, including the US Department of Homeland Security and the Drug Enforcement Administration, routinely investigate unlicensed money transmitters, yet prosecutions remain complex due to the informal nature of transactions and the cross-jurisdictional structure of these networks.

Further, the International Financial Action Task Force (FATF) sets global standards for combating money laundering and terrorist financing. FATF Recommendation 14 specifically calls for the licensing or registration of all money/value transfer services and monitoring of their compliance. Countries must ensure that providers of such services are subject to effective systems for monitoring and ensuring compliance with AML/CFT measures.

Despite these frameworks, enforcement gaps persist. Many alternative routes are rooted in diaspora communities with longstanding distrust of banks or authorities. Attempts to criminalize informal value transfer, without providing affordable, accessible formal options, often drive these activities further underground. As a result, regulatory policies that increase the cost or complexity of sending money legally—such as the US remittance excise tax—can undermine financial inclusion and the overall integrity of the AML/CFT regime.

Emerging Digital Alternatives and Risks

While hawala and traditional informal channels remain prevalent, digital innovation is rapidly transforming the landscape of cross-border payments. Cryptocurrencies, blockchain-based remittance platforms, and privacy-focused financial technologies offer new avenues for transferring value without traditional oversight.

Bitcoin, Tether, and other cryptocurrencies are increasingly used by migrant workers and expatriates to bypass banking restrictions, currency controls, or taxes. Peer-to-peer crypto remittance platforms enable near-instant transfers at low cost, but many operate outside the regulated sphere. These platforms often require only minimal identification and can obfuscate transaction trails using mixers, privacy coins, or decentralized exchanges.

The rise of stablecoins pegged to fiat currencies has further accelerated adoption in countries experiencing inflation or currency volatility. While some crypto remittance providers adhere to US and international AML requirements, many are either lightly regulated or based in jurisdictions with limited oversight.

For compliance professionals, this presents a dual challenge: not only must financial institutions enhance their transaction monitoring systems to detect attempts at circumvention, but they must also develop new typologies and red flags for digital and hybrid value transfer methods. This requires ongoing investment in technology, training, and international cooperation.

Policy Implications and the Need for Balanced Regulation

The decision to introduce a remittance excise tax is rooted in fiscal policy objectives, yet it risks undermining AML and financial integrity objectives. Policymakers must weigh the relatively modest revenues from such taxes against the far greater societal costs of driving money flows into opacity.

A successful regulatory framework balances the need for financial inclusion, affordable remittance services, and effective AML/CFT controls. This means not only maintaining strong oversight of MSBs and banks but also actively working to bring informal networks into the regulatory fold. Strategies may include:

Lowering the cost of remittances through competition, technology, and supportive regulatory environments
Expanding financial literacy programs and outreach to diaspora communities to build trust in the formal sector
Strengthening partnerships between law enforcement, financial institutions, and community leaders to detect and disrupt illicit activity in both formal and informal channels
Developing international standards and data-sharing agreements to address cross-border value transfer risks, especially as digital alternatives proliferate

US authorities, including FinCEN and the Internal Revenue Service, will need to monitor the impact of the excise tax closely. Regulatory feedback loops—relying on suspicious activity reports, cross-border transaction analysis, and intelligence from partner jurisdictions—can help identify early shifts toward unregulated alternatives.

Conclusion: Mitigating the Risk of Underground Money Flows

The introduction of an excise tax on remittances by the US may have unintended consequences far beyond its fiscal intent. By increasing the cost of formal money transfer services, the new tax could drive substantial volumes into alternative financial routes—hawala, cash couriers, and emerging digital solutions—that operate beyond the effective reach of AML/CFT controls.

For financial crime professionals, the message is clear: regulatory policy must always account for behavioral responses and system-wide incentives. Reducing formal access to affordable remittance services risks fueling the very illicit finance challenges regulators aim to combat.

A holistic approach—combining strong oversight, supportive policy, and community engagement—is essential to keep money flows transparent, secure, and resilient against criminal abuse.

Source: OCCRP

Some of FinCrime Central’s articles may have been enriched or edited with the help of AI tools. It may contain unintentional errors.

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