Page 557 - IOM Law Society Rules Book

fluctuating exchange rate which takes account of the movements in currency over the
period in question. Methods of settlement may vary according to the type of ARS
service or its links to other commercial activities. Whatever method is used, the ARS
service provider also seeks to preserve or enhance profits. Some of the more
common ARS settlement procedures are indicated below.

Transfers through Conventional Banking Systems

The ARS service provider holding funds use wire transfers, the Internet or other
methods of payment to make payment to the account specified by the deficit ARS
provider (who has paid out remittances at the destination). This may be a simple
operation but involves bank fees and exchange rate costs that have to be allowed for
in the costing of the transaction. These payments may be made to an ARS provider
who acts as a clearing agent for the transaction.

Offset of Remittances

Settlement by back to back transfers is a preferred method as it is the easiest and the
most efficient. In this system each ARS provider is the originating ARS for one
transaction and uses the funds to act as the destination ARS for another. No funds
need to be moved and two commissions are shared between the two ARS providers.
This is the principal on which multi-national franchised ARS operations work, but it
is equally the ideal solution for informal systems. This category also includes
manufactured offset of remittances. For example, an ARS operator in a country with
a high level of migrant remittances may pool the proceeds of multiple transactions in
order to use this money to make a single commercial remittance to a third party. This
activity is common between Europe and South Asia, but it is a high risk as a method
of settlement as it may facilitate export and import fraud. The settlement flows will
usually be different from individual customers’ remittances flows. The ARS
provider may pool the cash from the individual remittance transactions, and a large
single transfer may then be made at a later date in order to settle all the previous
remittance transactions. This both limits costs and allows the exploitation of cash
balances and means that settlements cannot necessarily be traced back to the specific
transactions. Unscrupulous ARS providers can use this method to cloak transactions
relating to money laundering or terrorist financing.

Physical Cash Movement

Cash deposits can be a logistical problem for unlicensed or illegal ARS. Cash
couriering and smuggling is a common method of moving value to jurisdictions which
have less experienced banks and cash wholesalers operating. It also allows profits to
be taken on currencies in high demand by ARS providers.

Cash pooling accounts

Cash pooling accounts are a common feature of complex ARS systems. They are
used by multinational ARS providers to reduce the losses of currency exchange.
Equally, they are used by informal ARS providers to facilitate complex settlements
between different countries. The holder of the cash pooling account will have a
series of accounts in different currencies; however, the US dollar has always been the