An interim government commission recently found that Bangladesh lost an average of $16 billion annually to money laundering between 2009 and 2023.
But how could such large amounts of money leave the country unnoticed?
The answer: Hundi, the mainly cash-based secret channel that also accounts for almost half of the inflow of remittances into the country. And it is this money-based nature of Hundi that makes it difficult to keep track.
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So this begs the question: if the country’s entire transactions were digitized, allowing traceability of every transaction, could Hundi’s dominance be curbed? And how could Bangladesh achieve this?
Imposing limits on cash transactions and phasing out Tk 1,000 notes
Imposing a daily limit on cash withdrawals from banks can help deter unusually large or suspicious transactions.
While this approach alone is not sufficient to combat hundi operations, as the routine transactions generally involve modest amounts, it would limit the amount of cash available to people.
Hundi operators can also switch to other methods such as using cash directly, but that would not be possible if society transitioned to a cashless society.
Dr. Md Main Uddin, professor and director of the Department of Banking and Insurance at Dhaka University, said: “This approach can be effective in helping to control internal financial flows within the country. It can block large and suspicious volumes of transactions.”
Another thing that should go hand in hand with transaction limits is the removal of Tk1,000 notes, making it more difficult to carry out large cash transactions.
eKYC technology as a watchdog
e-KYC (Electronic Know Your Customer), for which guidelines were released by Bangladesh Bank in January 2020, is a digital process that verifies a customer’s identity using electronic data and biometric data.
Typically, this involves collecting personal information, such as National ID (NID) or passport details, and comparing it to government databases for authentication. For extra security, biometric data such as fingerprints or facial recognition are used.
This automated process ensures accuracy, reduces fraud and enables real-time identity verification for seamless onboarding and financial transactions.
e-KYC can reduce the possibility of false identities or anonymous accounts being used for illegal activities, a common tactic in money laundering.
It also enforces strict digital verification of users’ identities, ensuring transparency and traceability in financial transactions. By linking accounts to national databases such as NID, e-KYC reduces anonymity, making it harder for hundi brokers to operate undetected.
Digitizing trade documents
A popular method of laundering money abroad is the misbilling of commercial invoices.
By bringing all export-import transactions under one umbrella, we can track whether traders are importing or exporting as per the Letters of Credit (LCs).
Australia-based applied macroeconomist Jyoti Rahman believes that digitalization could, in principle, help expose misbilling. “But in practice, digitalization will not be enough unless corruption in the NBR, Customs and other agencies is addressed,” he noted.
To digitize export-import, a centralized digital platform can be used that connects banks, customs and regulators. Requiring electronic LCs on this platform can enable real-time tracking of transactions, ensuring compliance.
Blockchain technology can improve data security, and clear rules with the right training can help anyone adopt the system. This will reduce fraud, ensure compliance with LC terms and make trade management easier.
Professor Main Uddin believes that through digitalization we may be able to reduce hundi, but it is virtually impossible to eliminate it completely as every economy has some level of underground illegal activity.
Dr. Selim Raihan, professor at the Department of Economics, University of Dhaka, and executive director of the South Asian Network on Economic Modeling (SANEM), reiterated: “Unless the government can resolve the issues of corruption and facilitate the remittance process of migrant workers, Hundi can exist anyway.”
But Hundi can go digital
In a cashless society, the absence of physical cash can generally limit the scope of money laundering through underground channels.
“Digitalization and financial inclusion can help transfer money from undocumented workers,” says Jyoti Rahman.
The number of MFS accounts in the country is growing steadily. According to recently updated Bangladesh Bank data, there were 233.7 million MFS accounts as of September 2024.
However, this development has also benefited hundi brokers, transforming it into what is now known as ‘digital hundi’.
The widespread network of MFS agents, low transaction fees and not-too-strict KYC compliance make it easier for brokers to collect and distribute money informally, especially for money transfers.
In addition, this ‘digitalization’ increases the risks of online gambling and illegal transactions. Brokers leverage MFS by creating a seamless system that combines informal practices with formal technologies.
In May this year, the Bangladesh Financial Intelligence Unit (BFIU) suspended a total of 5,029 MFS officers for their alleged involvement in hundi transactions. Transactions of 10,666 agent accounts were blocked for suspected involvement in illegal hundi, betting and cryptocurrency.
Fahim Mashroor, founder and CEO of Bdjobs.com, believes that digitalization has exacerbated the issue of hundi. “MFS has been a blessing to literally everyone, including hundi brokers! It has made their operations even easier. However, it is equally true that MFS companies have the power to prevent this if they really want to,” he said.
He further said that MFS has been quick to shift the blame to the BFIU, but the primary responsibility for detecting illegal transactions lies with them. “The role of the BFIU is to investigate specific crimes as they occur.”
Strongly criticizing the MFS companies, Mashroor said, “It is the responsibility of MFS companies to keep an eye on suspicious transactions. But all of them have completely failed in this regard.”
Why is Hundi so popular?
Hundi is popular for its simplicity and efficiency. For many Bangladeshi expats, especially those from low-income groups, formal financial institutions pose challenges such as complex documentation, delays and less favorable exchange rates.
Furthermore, undocumented workers do not have access to formal channels for sending money.
Professor Main Uddin urged formal channels to make lucrative offers to compete with Hundi.
With a 2.5% government incentive, remittance senders will now receive Tk127.3 per dollar. However, Hundi channel offers Tk128-129 per dollar. In 2022 and 2023, this gap grew to as much as Tk7-8.
Ariful Hasan Shuvo. Sketch: TBS
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Ariful Hasan Shuvo. Sketch: TBS