Underground and parallel banking systems

Abstract

Introduces the two types of underground banking systems used in Indian and Chinese communities in many parts of the world: hundi or hawala, and chop shop or chitti banking. Explains the terms: hawala means money transfer, chops are seals that facilitate money transactions, and chitti means mark; both types lack the paper trail that characterises conventional banking. Discusses the reasons for the prevalence of these systems: Indian and Chinese settlement abroad, and the strong family ties involved. Relates how underground banking funds are generated in developing economies with exchange controls, and with financial and fiscal rules and regulations; and similarly in the free markets of the developed countries. Shows how underground bankers mop up funds for compensatory payments, the system’s linkages and its relationship to tax havens and money laundering centres. Moves on to how underground banking is being countered in both developed and underdeveloped countries, international cooperation, conjoined underground and conventional banking, funding terrorism through hawala and its linkages with drug trafficking and gold smuggling, and the volume of money transactions by underground bankers.