Weaknesses of Underground Banking Systems

Abstract

The purpose of this paper is to delineate the compliance risks associated with underground banking systems by investigating how underground banking systems, such as hawala and the black market peso exchange, can be utilized to circumvent existing anti-money laundering and anti-terrorism financing measures. Thus, informal interviews were held with 50 presumed criminals who utilize underground banking, and formal interviews were conducted with 50 compliance experts to gain insight into the perspectives of both. The findings of the interviews were analyzed using qualitative content analysis. Thereafter, a questionnaire was distributed to 200 compliance experts within the scope of a quantitative study. It was found that even though underground banking systems are not necessarily used for illegal activities, they are highly suitable for money laundering and terrorism financing purposes and should therefore be prohibited. Although their main purpose is to facilitate money transfers to regions that do not have access to a regular or trustworthy banking system, they are frequently abused by criminals. Despite the rather small sample size and the subjective perspective of a qualitative content analysis, the findings are applicable on a large scale. The study aims to fill the during the literature review identified research gap by illustrating how offenders operate using underground banking systems. Since underground bankers are not subject to the same strict compliance regulations as financial institutions, the risks of underground banking systems significantly outweigh their positive aspects. The majority of the existing literature focuses predominantly on money laundering and terrorism financing prevention mechanisms while thoroughly discussing some underground banking systems and their functions. However, most approaches fail to consider the criminal’s perspective, which represents a major limitation. To successfully prevent money laundering and terrorism financing, compliance officers, legislators, and authorities must be able to reconstruct the actions of offenders. Therefore, it is necessary to consider both perspectives.