Why is hundi so popular? Is hundi increasing because when sending money home, expatriates want to get a higher rate for the dollar than provided by banking channels, or because it has become necessary to buy and sell dollars informally within the country? The bottom line is demand. Hundi has increased because demand has increased. The dollar rate is not important to those who will carry out money transacts in various ways. The hundi-wallas simply fix the dollar rate according to demand.
The American citizen Forrest Cookson came to Bangladesh in the nineties as a consultant for the financial sector reforms programme. He also became the president of the American Chamber of Commerce. He had done some writing about hundi in 2018. There he had broadly identified five demands for foreign currency in Bangladesh. These were:
1. Under invoicing of imports: USD 10-15 billion per annum and growing.
2. Indian and Sri Lankan nationals working in Bangladesh (largely in the RMG industry) sending funds home: USD 3-4 million per annum.
3. Capital flight by Bangladeshi nationals: USD 1-2 billion per annum.
4. Payment of bills for education and medical care largely in India: USD 1.0 billion per annum
5. Coverage of the trade deficit of the informal trade between India and Bangladesh: USD 1-3 billion per annum.
These demands total USD 16-25 billion per annum, which are transacted through illegal channels. That is why hundi has increased so much.
Largest channel for money laundering
According to the Washington-based Global Financial Integrity (GFI) report, USD 49.65 billion was laundered out of Bangladesh from 2009 to 2014. This money transfer is basically done under the cover of import and export transactions.
Money laundering in the guise of business is the work of the wealthy and influential. Over-invoicing and under-invoicing is the main tool of trading-based money laundering. Over-invoicing entails falsification of the trade documentation, drawing up an invoice with the product price mentioned much higher than the market price, and exporting the product. So the seller gets a higher sum from the buyer and this doesn’t come into the country. That means the importer can illegally launder the money through the exporter in the outside country. Under-invoicing is possible in imports if there is a middle persons involved to contact the buyer and help in the laundering. The main objective is to transfer wealth to a different country.
Under-invoicing means displaying a price lower than actual. This is basically done to evade taxation. If a lower price is shown, the actually amount is sent through hundi to the importer. On 1 December, the governor of Bangladesh Bank gave an example of how an LC was opened to import a USD 100,000 Mercedes Benz with the price shown as just USD 20,000. The remaining amount is sent through hundi.
So is lowering taxes the solution? In the interests of industrialisation, minimum duty is imposed on the import of capital machinery. As very little duty is leveraged from here, there is not much scrutiny during import. Basically this is the most popular method of money laundering for the wealthy.
In 2018 Forrest Cookson wrote that the largest leakage of such money is through the import of power plants for the rental projects. Pre-shipment inspection had been compulsory in Bangladesh for three years. Forrest Cookson wrote that there was widespread under-invoicing, particularly from China (virtually all orders) and India (40-45 per cent of orders).
