Nepal Cracks Down on Centuries-Old ‘Hundi’ System Amid Financial Crime concerns
Table of Contents
KATHMANDU, NEPAL – A centuries-old practice of moving money is in the crosshairs of government officials, who say it’s a hotbed for financial crimes.
It’s called the hundi system. This local form of banking, separate from formal financial institutions, relies on middlemen called hundis, who traditionally carried cash from one person to another, no matter how far.
Today, hundis provide an illegal but crucial service for many of the 3.5 million Nepalis who work abroad and need to send remittances home. The hundis collect money in person, transfer it to digital wallets – sometimes illegitimate ones – then invest it, sometimes in cryptocurrency, which is illegal in Nepal, or illicit activities like gold smuggling or drug trafficking. They still deliver money to families, who, instead of paying bank fees, earn interest (typically 5% to 7%) and don’t have to travel to bank branches to collect the money – a meaningful benefit for families in remote regions. These families often rely on subsistence farming or day labor to survive.Every rupee makes a difference.
It’s a black market that the government has long tolerated. Now,government officials aim to dismantle it entirely. Fresh scrutiny began in April, when police arrested 21 people, charging them with a host of financial crimes connected to illegitimate digital wallets, which they say were used to disguise fraudulent activity as remittances.
“These informal operators turn black money into white by paying families of migrant workers with cash sourced from illegal activities like gold smuggling or cryptocurrency,” central Inquiry Bureau spokesman Yubaraj Khadka says. “It is indeed a criminal offense against foreign exchange regulations.”
The hundi system weakens Nepal’s foreign currency reserves, says economist Chandra Mani Adhikari. Still, he acknowledges that it’s more practical than banks for many Nepalis, especially in remote regions.
“Until workers can easily send money home thru formal channels, the hundi system will thrive,” Adhikari says.
A global system
Nepal’s hundi system went global when hundreds of thousands of Nepalis began working abroad in the 1980s. Now, their remittances sent via formal channels amount to more than a quarter of the country’s gross domestic product. That’s not counting illegal hundi transfers.
Legal remittances increased by 16.5% between July 2023 and July 2024,to 1.4 trillion Nepali rupees (about US$10.5 billion). But about 40% of Nepal’s economy is based on informal transactions, according to the central Department of Economics at Tribhuvan University.
The system grew exponentially after Nepal Rastra Bank, Nepal’s central bank, instituted the Integrated Circular for Payment Systems in 2023, which banned remittance transfers within Nepal.
In February, the Financial Action Task force added Nepal to its grey list for the first time as 2014 – marking the country as high-risk while lowering its global economic standing and ability to obtain credit and attract foreign investment. In the decision, the global watchdog and anti-money laundering organization cited Nepal’s overreliance on hundis.
To get off the grey list, Nepal must make tangible progress on seven key reforms – including cracking down on major hundi operators. Crucially, though, the FATF specifies that the reforms must not hinder financial inclusion – an vital characteristic of the hundi system.
Less than two months after the FATF added Nepal to the grey list,police cracked down on a hundi operation and arrested 21 people.
‘We certainly know it is indeed illegal’
Bindeshwar Das
Nepal Cracks Down on Illegal Money Transfers as “Hundi” System Fuels Crime
Nepal is intensifying its efforts to dismantle the “hundi” system – an informal, frequently enough illicit, money transfer network – following the finding of its links to gold smuggling and other criminal activities. The crackdown highlights the challenges of managing remittances, a vital component of Nepal’s economy, and the need for accessible and affordable financial services for its large diaspora workforce.
The Hundi System and Criminal Links
The hundi system operates outside of formal banking channels, allowing Nepalis working abroad to send money home without incurring official fees or scrutiny. while frequently enough used by those lacking bank accounts or facing high transaction costs, it has become a conduit for illegal activities. Recent investigations revealed that funds transferred through hundi were used to finance the smuggling of gold into Nepal,a scheme that has led to multiple arrests.[https://kathmandupost.com/crime/2024/05/23/gold-smuggling-scandal-nepal-police-arrests-more-suspects]
Police recently arrested a man accused of being a key figure in the hundi network, seizing approximately NPR 8.5 million (roughly $62,000 USD) from his posession. He was also barred from seeking work abroad. The man maintains his innocence, claiming he was working in Kuwait during the period the crimes occurred. Authorities have not yet publicly identified those who sent money through the network. [https://kathmandupost.com/national/2024/05/22/gold-smuggling-scandal-nepal-police-arrest-hundi-operator]
“There is no blame on the person who works and sends money to Nepal,” stated police spokesman khadka, emphasizing that the focus is on those facilitating the illegal transactions.
Efforts to Formalize Remittances
Banks, police, and government officials are collaborating to dismantle the hundi system and encourage the use of legal remittance channels. Nepal Rastra Bank, the country’s central bank, has launched a financial literacy campaign on social media to educate migrant workers about the benefits of formal money transfers. [https://www.nrrb.org.np/]
However, reaching Nepal’s vast diaspora presents a significant challenge. The Department of foreign Employment reports that nepalis work in approximately 180 countries,and nearly 6 million Nepalis – around 20% of the population – hold foreign employment labor permits. [https://www.dofe.gov.np/]
Addressing the Root Causes
Economists argue that simply cracking down on hundi is insufficient. “The government needs to overhaul remittance programs,” says economist Adhikari. “One worker may only be able to send the equivalent of a few thousand dollars home,and fees eat up too much of that money.” He advocates for increasing the interest earned on remittances deposited in legitimate banks.
The high cost of formal remittances and limited access to banking services are key drivers of the hundi system’s continued popularity.Shah, a gold chain smuggler operating from Qatar, argues that the formal banking system is inaccessible to many Nepali migrant workers. “The banking system,” he says, “is not for the illiterate and the poor.”
Remittances: A Vital Economic Lifeline
Remittances are a crucial source of income for Nepal, contributing significantly to its GDP. According to the World Bank, remittances accounted for 22.4% of Nepal’s GDP in 2022. [https://www.worldbank.org/en/country/nepal/publication/migration-and-remittances-regular-brief-april-2024] Thus, ensuring safe, affordable, and accessible remittance channels is vital for Nepal’s economic stability and the well-being of its citizens.