Hundi business

LAHORE: Remittances in Pakistan are equivalent or higher to exports, but still a lot of the money reaches our country informally and the foreign exchange is grabbed outside, while an equivalent amount in Pakistani currency is delivered to designated recipients.

The government of Pakistan has taken numerous steps to curb illicit transfers; as it is crucial to combat illicit transfers to maintain financial integrity, prevent money laundering, and counteract criminal activities. It fulfilled all FATF conditions to curb illicit transfers to successfully get itself removed from its grey list.

Many experts still think that illicit transfers are still in vogue in Pakistan though at a lower level. But based on the total number of its overseas workers, they think the remittance should be 40-60 percent higher as many households regularly receive money outside the formal channels through hundi or hawala.

Hundi operates on a trust-based system. A person, often known as a hawala dealer or hundi operator, acts as an intermediary between individuals who want to send money to recipients in different countries. The sender gives money to the hundi operator in one country, along with the recipient’s details and the destination country.

The hundi operator then contacts their counterpart or agent in the destination country and instructs them to give the equivalent amount of money to the intended recipient.

At a later date, the hundi operators settle their balances through various means, such as goods, services, or formal banking channels in larger financial centres.

These operators have enough foreign currencies to facilitate importers in under-invoicing of imports, they provide the needed cash to those travelling abroad at their destination in lieu of cash received in advance in their home country.

If illicit transfers are completely curbed, there would be no under-invoicing in our country and the foreign travels would be curbed to a large extent as businessmen would start travelling alone instead of taking their families along to make their visits business cum pleasure trips.

Since hundi transactions are often conducted outside the purview of formal banking and financial regulations, they lead to potential tax evasion and other illegal activities. Due to the informal nature of hawala, it becomes challenging for governments and financial authorities to monitor and regulate these transactions effectively, which can be exploited for money laundering and other illicit purposes. Since hundi operates on trust, there is a risk of fraud or misuse of funds by unscrupulous hundi operators.

The government of Pakistan must not only establish but also enforce robust regulations and laws related to financial transactions, money laundering, and illicit transfers. It should ensure that financial institutions and businesses comply with these regulations, and impose strict penalties for non-compliance.

Financial institutions and businesses should conduct thorough customer due diligence to understand their clients’ backgrounds and the purpose of their transactions. Enhanced due diligence should be performed for high-risk customers, large transactions, or those from high-risk jurisdictions.

The state must implement sophisticated transaction monitoring systems that can identify suspicious activities, unusual patterns, and potential red flags. These systems can help identify illicit transfers in real-time.

The central bank should strictly enforce the ‘know your customer (KYC)’ procedures to verify the identities of customers and their sources of funds.

This step is essential to prevent anonymous transactions that could facilitate illicit transfers. Step up collaboration and information-sharing among different countries’ regulatory bodies, law enforcement agencies, and financial institutions.

Illicit transfers often involve cross-border transactions, so global cooperation is vital to track and stop them effectively.

The government should take advantage of innovative technologies like blockchain and fintech to enhance transparency and traceability of financial transactions. These technologies can potentially reduce the risk of illicit transfers.

The state must establish mechanisms to protect whistle-blowers who report illicit activities, and strengthen laws that allow for the seizure and confiscation of assets involved in illicit transfers. This acts as a deterrent and also helps recover the proceeds of crime.