Why is Hundi so popular? Is the hundi rising because migrants want to receive a higher rate for the dollar than those offered by banking channels when sending money home, 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 for people who will transact money in various ways. Hundi sellers simply set the dollar rate according to demand.
American citizen Forrest Cookson came to Bangladesh in the nineties as a consultant for the financial sector reform program. He also became president of the American Chamber of Commerce. He had written something about Hundi in 2018. There he broadly identified five demands for foreign exchange in Bangladesh. They were:
1. Under-invoicing of imports: US$ 10-15 billion per year and rising.
2. Indian and Sri Lankan nationals working in Bangladesh (largely in the RMG industry) remit money home: USD 3-4 million per year.
3. Capital flight by Bangladeshi citizens: US$1-2 billion per year.
4. Paying massive education and medical care bills in India: US$1.0 billion per year
5. Coverage of trade deficit of informal trade between India and Bangladesh: US$ 1-3 billion per year.
These demand a total of US$16-25 billion per year, which are transacted through illicit channels. That is why the hundi has increased so much.
The biggest medium of money laundering
According to the Washington-based Global Financial Integrity (GFI) report, US$49.65 billion of money was laundered from Bangladesh from 2009 to 2014. This money transfer is basically done under the guise of import and export transactions.
Money laundering under the guise of business is the work of the rich and influential. Over-invoicing and under-invoicing are the main tools of trade-based money laundering. Over-invoicing involves falsifying trade documentation, creating an invoice with a stated product price that is much higher than the market price, and exporting the product. So the seller gets more amount than the buyer and it does not come into the country. This means that the importer can launder money illegally through the exporter in the foreign country. Under-invoicing in imports is possible if there is an intermediary person involved to contact the buyer and help in laundering. The main objective is to transfer money to another country.
Under-invoicing means displaying a lower price than the actual price. This is basically done to avoid taxation. If lower price is shown, the actual amount is sent to the importer through Hundi. On 1 December, the Governor of Bangladesh Bank gave an example of how an LC was opened to import a Mercedes Benz worth US$100,000, the price of which was shown to be just US$20,000. The remaining amount is sent through Hundi.
So is reducing taxes the solution? In the interest of industrialization, minimum duty is imposed on the import of capital machinery. Since very low duty is charged here, there is not much inspection during import. In fact, this is the most popular method of money laundering for the rich.
In 2018, Forrest Cookson wrote that the biggest leakage of such money is through the import of power plants for rental projects. Pre-shipment inspection for three years was made mandatory in Bangladesh. Forrest Cookson wrote that there was massive under-invoicing, especially from China (almost all orders) and India (40–45 percent of orders).