Can digitalisation help curb hundi transactions?
Hundi transactions are primarily cash-based, making them harder to trace. Transitioning into a cashless society and digitalisation would, in theory, put a dent on this practice, but it might not be enough
An interim government committee recently found that Bangladesh lost an average of $16 billion annually to money laundering during the Awami League regime from 2009 to 2023.
But how could such large amounts of money leave the country unnoticed?
The answer: Hundi, the primarily cash-based secret channel that also accounts for nearly half the remittance inflows to the country. And it is this cash-based nature of hundi that makes it hard to keep track of.
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So, this raises the question: If the country's overall transactions were to be digitalised, enabling traceability for every transaction, could the dominance of hundi be reined in? And how could Bangladesh go about achieving this?
Imposing cash transaction limits and phasing out Tk1,000 notes
Imposing a daily cash withdrawal limit at banks can help deter unusually large or suspicious transactions.
While this approach alone is insufficient to combat hundi operations because its routine transactions are generally of moderate amounts, it would limit the amount of cash available to people.
Hundi operators can also switch to other methods, like using cash directly, but that would not be possible if the society transitioned into a cashless one.
Dr Md Main Uddin, professor and director of the Department of Banking and Insurance at Dhaka University, said "This approach can be effective to help control internal financial flows within the country. Large and suspicious amounts of transactions can be barred with this."
Another thing that should go hand in hand with transaction limits is removal of Tk1,000 notes, making it more difficult to make large cash transactions.
eKYC technology as the watchdog
e-KYC (Electronic Know Your Customer), guidelines for which was released by the Bangladesh Bank in January 2020, is a digital process that verifies a customer's identity using electronic records and biometric data.
It usually involves collecting personal information, such as a National ID (NID) or passport details, and cross-checking it with government databases for authentication. Biometric data like fingerprints or facial recognition are used for added security.
This automated process ensures accuracy, reduces fraud, and enables real-time identity verification for seamless onboarding and financial transactions.
e-KYC can reduce the possibility of using fake identities or anonymous accounts for illegal activities, a common tactic in money laundering.
It also enforces stringent digital verification of users' identities, ensuring transparency and traceability in financial transactions. By linking accounts to national databases like NID, e-KYC reduces anonymity, making it harder for hundi brokers to operate undetected.
Digitalising trade records
One popular method through which money is laundered abroad is trade misinvoicing.
Bringing all export-import transactions under one umbrella can help us track whether traders are importing or exporting according to the Letters of Credit (LCs).
Australia-based applied macroeconomist Jyoti Rahman believes that digitalisation can, in principle, help reveal misinvoicing. "But in practice, digitalisation will not suffice unless corruption in NBR, customs and other agencies are tackled," he noted.
To digitalise export-import, a centralised digital platform can be used that connects banks, customs, and regulators. Requiring electronic LCs on this platform can enable real-time trade tracking, ensuring compliance.
Blockchain technology can improve data security, and clear rules with proper training can help everyone adopt the system. This will reduce fraud, ensure LC terms are followed, and make trade management easier.
Professor Main Uddin believes that through digitalisation, we may be able to reduce hundi, but eliminating it entirely is nearly impossible, as every economy has some level of underground illegal activity.
Dr Selim Raihan, professor at the Department of Economics, Dhaka University, and Executive Director of the South Asian Network on Economic Modelling (SANEM), echoed, "Unless the government can solve the issues of corruption and ease the remittance process of migrant workers, hundi may exist anyway."
But hundi can go digital
In a cashless society, the absence of physical cash can generally restrict the scope of laundering money through underground channels.
"Digitalisation and financial inclusion can help with remittance from undocumented workers," said Jyoti Rahman.
The number of MFS accounts in the country has been steadily growing. According to recently updated data from the Bangladesh Bank, there were 233.7 million MFS accounts as of September 2024.
However, this development has also benefited hundi brokers, transforming it into what is now known as 'digital hundi.'
The widespread MFS agent network, low transaction fees, and not-too-strict KYC compliance make it easier for brokers to collect and distribute funds informally, especially for remittances.
Additionally, due to this 'digitalisation,' there are increased risks of online gambling and illegal transactions. Brokers leverage MFS by creating a seamless system that merges informal practices with formal technologies.
In May this year, the Bangladesh Financial Intelligence Unit (BFIU) suspended a total of 5,029 MFS agents for their alleged involvement in hundi transactions. Transactions of 10,666 agent accounts were blocked for suspected involvement in illegal hundi, betting and cryptocurrency.
Fahim Mashroor, founder and CEO of Bdjobs.com, believes that digitalisation has exacerbated the issue of hundi. "MFS has been a blessing for literally everyone, including hundi brokers! It has made their activities even easier. However, it is equally true that MFS companies have the power to prevent it if they really want," he said.
He further said that MFS are quick to shift the blame onto BFIU, but the primary responsibility for detecting illegal transactions lies with them. "BFIU's role is to investigate specific crimes when they occur."
Strongly criticising the MFS companies, Mashroor said, "It is the responsibility of MFS companies to monitor any suspicious transactions. But they all have completely failed in this regard."
Why is hundi so popular?
Hundi is popular for its simplicity and efficiency. For many Bangladeshi expatriates, especially those in low-income groups, formal financial institutions pose challenges like complex documentation, delays and less favourable exchange rates.
Additionally, undocumented workers have no access to formal channels for sending money.
Professor Main Uddin urges formal channels to provide lucrative offers to compete with hundi.
With a 2.5% government incentive, remittance senders now get up to Tk127.3 per dollar. However, the hundi channel offers Tk128-129 per dollar. In 2022 and 2023, this gap grew to as high as Tk7-8.
