U.S. sanctions on money transfer companies will do more harm than good

By David Dorr, Co-Founder at Coro Global Inc.

August 24, 2020

In June, the United States made an addition to its ‘blacklist’ of corporations Americans are banned from doing business with Fincimex, a key operator in sending U.S. remittances to Cuba. 

Fincimex is the primary Cuban partner of money transfer company Western Union, and the sanctions risk further choking the flow of money being sent by U.S. residents to family members back in Cuba. The United States has targeted remittances to the island before, heavily restricting money movements late last year. Remittances from the United States to Cuba are likely worth several billion dollars annually.

Cuba’s not the only country where remittances have suffered under foreign policy decisions by U.S. President Donald Trump’s administration. In October 2019, new U.S. sanctions against Venezuela led money transfer service TransferWise to cut services in the country. 

Sanctions are controversial as it is, but when they target a country’s financial sector, they risk throwing out the baby with the bathwater by hurting everyday citizens rather than zeroing in on government institutions. This is why debilitating financial inclusion in target countries – including access to remittances – is misguided, whereas empowering citizens economically would go a lot further in achieving U.S. foreign policy goals.

Why using remittances as a political tool is dangerous

In general terms, sanctions have been criticized for being ineffective policy tools. By targeting a country’s economy, they can exacerbate the economic distress already being suffered in the country. That affects businesses and individuals rather than just applying pressure to the corrupt government being targeted.

Historically, the U.S. embargo on Cuba was hugely detrimental to the country socio-economically. The impact of U.S. sanctions in Venezuela, another Latin American nation which has been a U.S. target in recent years, is feared to be harming citizens already crippled by astronomic inflation and poverty levels. 

U.S. sanctions on Venezuela seriously impact its citizens’ access to the international and national financial system. U.S. banks get skittish when sanctions are imposed in a country, as their compliance teams are tasked with identifying such risks and reducing them as much as possible. This leads to further exclusion of nationals of that country. Blanket bans by nationality are neither fair nor efficient.

With COVID-19 precipitating a global recession, cutting jobs and destroying tourism, vulnerable countries need remittances more than ever to maintain citizens’ quality of life.

Even the political ramifications of this policy tool can backfire by making citizens of the target country more vulnerable to unfair government systems. Rather than debilitate target governments, sanctions can lead to authoritarian regimes consolidating control over scarcer resources, boosting their economic and social control.

For example, U.S. sanctions against Venezuelan business have contributed to restricted access to U.S. dollars in the country. The Venezuelan government’s control over an “official” exchange rate for U.S. dollars – which makes dollars impossibly cheap compared to the real, “black market rate” – has enabled one of the most lucrative corrupt systems in the country. Those with special access to the government exchange have been able to buy cheap dollars and then exchange them on the black market for monumental returns.

The risk of debilitating remittances abroad is that citizens will be cut off from stabler foreign currencies like the U.S. dollar, enabling governments to further monopolize access to money and financial services. This further restricts citizens’ financial freedom, with little chance of foreign companies providing access to financial services. What’s more, target countries may simply double down and become more hostile towards the United States, while anti-American sentiment among frustrated citizens could rise.

The U.S. should prioritize economic empowerment

A more strategic U.S. approach would be able to apply pressure to these foreign governments, while also empowering and assisting its citizens.

The United States has a right to impose U.S.-dollar related sanctions if it believes its national currency is being used for illegal activity, but these sanctions cannot be too broad. To protect citizens, such sanctions need to be specific, distinguishing between entities that are controlled by corrupt or criminal actors and those that are necessary for the country’s economic future.

In Venezuela and Cuba, when it comes to the financial sector and assets owned by the people, the United States should try to ensure they are placed in legitimate hands rather than asphyxiate them. They will be vital in the future development of the country.

Imagine the benefits of the United States actually using the power of financial entities as a tool. If our administration encouraged U.S. companies to provide banking and money transmission services to target countries, boosting financial inclusion, they would be enabling the citizens themselves to be more autonomous and financially independent from their governments.

The remittance ecosystem urgently needs a disruption

The recent Cuban sanctions also bring home the need to take a hard look at remittances. Remittances make up a huge segment of the GDP of many countries in Latin America, much of which flows in from residents of the United States.

Financial empowerment in countries like Cuba and Venezuela is strongly tied to access to foreign currency like U.S. dollars. We need there to be more options for remittances to flow freely to these countries and connect its citizens to the global economy.

There has been little disruption technologically in the remittance industry because such a large part of the business has typically been in cash. But as smartphone usage rises and internet coverage expands, mobile technology solutions will be the path forward.

One technology that is revolutionizing how money is moved around the world is Distributed Ledger Technology (DLT), a type of technological infrastructure that includes blockchain (which is used by Bitcoin), Hedera hashgraph and other systems. DLT is basically a peer-to-peer network that exists across multiple nodes. This creates a shared database on which information (such as a money transfer) moves across each of the nodes on the network, rather than be controlled by a centralized server.

The fact that with DLT all data is continually stored across the multiple devices on the network, rigidly protects it against cybercrime. Its mechanism also makes it exponentially faster and cheaper than existing technology. Hashgraph technology is on a magnitude many times faster than Visa or Mastercard transactions.

And the point of DLT is to have faster, more secure networks with much greater capacity to keep accurate records. Anyone that has ever lost photos or documents on a computer or mobile phone can relate to how much better they sleep knowing their files are backed up in the cloud. 

DLT effectively supercharges cloud networks. It can turn international transactions from messy relays across multiple banks to smooth, instantaneous processes. Because DLT can create a connected web across banking systems and across borders, moving money becomes as straightforward as an accounting transaction, with minimal “movement” slowing the process down. 

For example, hashgraph can overlay custody accounts across different banks in different countries, meaning that customers can be agnostic as to which specific financial institution they’re in and instead focus on maximizing the benefits of a financial network.

However, it is crucial that financial institutions that deploy DLT be supported by a regulatory framework so that DLT may reach its full potential globally. Systems like Bitcoin are public, permissionless networks that are completely open for anyone to join. But on private, permissioned DLT networks there is an owner exerting authority and controlling who can join.

While the first option is a great concept, it’s unrealistic for international money flows. With global laws on money transmission and anti-money laundering, these kinds of public networks are mostly considered illegal. But regulated financial institutions that use private permissioned networks ensure that the systems comply with local and international norms, which further protects users. Fintech companies are the ones harnessing the power of DLT within legal frameworks that will greatly improve financial inclusion worldwide, and especially in countries with debilitated economic systems.

Remittance systems serve the most socio-economically vulnerable populations in the world. When they are cut off, or are too expensive to use, real-life suffering ensues. By rethinking foreign policy when it comes to the financial sector, but also elevating technological financial solutions that transcend borders, we can hope for a better quality of life for those most in need.

Article by David Dorr, Co-Founder of Coro Global Inc