On 5 Kartik 2082, a letterhead of an organization called 'Extremist Group of Nepal' made public a statement threatening to kill 10 people, including the Chief Commissioner of the Commission for the Investigation of Abuse of Authority, Prem Kumar Rai. During the investigation, it was discovered that the then Director General of the Civil Aviation Authority, Pradeep Adhikari, had threatened Prakash Pathak, who was in the Philippines, with 100 million rupees. In addition, the police investigation revealed that Adhikari had sent Pathak 20 million rupees as a ransom to the Philippines through a hundi.  

Hundi transactions are having a serious and multifaceted impact on Nepal's economy. It has also had a very negative impact on the state's revenue system. Since economic transactions outside the formal system remain outside the scope of taxation, the government is losing a large amount of tax and revenue. This has reduced the state's ability to invest in public services, infrastructure development, and social security schemes and increased the illegal flight of capital. In the last week of Jestha 2081, it was revealed that two digital payment companies had made a hundi transaction of nearly one hundred billion rupees in the last two years.  During the investigation into the gold smuggling group, the Central Investigation Bureau of Nepal Police revealed that illegal hundi transactions worth about 70 billion rupees were made through 'Pay Well Nepal' and about 24 billion rupees were made through the 'Sajilo Pay' company. 

According to a study conducted by Pandikar in 2078 during his doctoral research, Nepali workers working in South Korea were found to send about 44 billion rupees to Nepal every year through Hundi. According to the 'Employment Permit System' branch, the official body of the Nepali government that sends workers to South Korea for employment, about 35,000 workers were working in Korea as of 2075. Of these, those who went to industrial work earned a minimum of 200,000 per month and agricultural workers earned a minimum of 150,000 per month. Assuming that such workers save an average of at least Rs 150,000 per month, it would appear that they would save Rs 63 billion per year. But according to Nepal Rastra Bank data, only Rs 18.34 billion entered Nepal from South Korea through remittance companies and the banking system in the fiscal year 2074/75. The difference between the amount entering Nepal through the banking system and the amount earned by the workers was Rs 43.65 billion.

An even more interesting issue is that the Korean government has deported many Nepalis for engaging in hundi transactions in South Korea. One example of this is Alok Baniya, the then treasurer of the Non-Resident Nepali Association in South Korea. He was deported by the Korean government on 8 Ashad 2076 and returned to Nepal on charges of engaging in hundi transactions. These incidents show the horrific use of hundi for the illegal flight of capital from Nepal.

What is hundi?

In general, a hundi is a traditional informal and illegal system of money transfer. Hundi is not considered an alternative payment system, but a complex mechanism for the escape of capital earned through organized crime and corruption. Hundi has some characteristics. It is based on trust and operates in a small network. It is not recognized by the official system of the state. It is not within the scope of taxation. There is no system of regulation for it.

In addition, illegal activities such as illegal capital flight and money laundering are being carried out using hundi. No legal documents are required, service fees are very low, exchange rates are attractive, and services are provided at doorsteps. However, the increasing hundi in Nepal is mainly having a major impact on foreign exchange reserves.

A dangerous route for capital flight

Hundi has become a major means of illegal capital flight. Studies have shown that those who want to illegally take assets abroad from Nepal pay money to Nepali hundi agents and receive the equivalent foreign currency abroad. Capital flight from Nepal through hundi is taking place in various levels and forms. Millions of Nepalis in foreign employment choose hundi instead of formal channels due to its speed and low cost. Businessmen and smuggling groups have been using hundi to make illegal income appear legitimate or to hide assets abroad. On the other hand, businessmen and smuggling groups have been using hundi to make illegal income appear legitimate or to hide assets abroad. In recent years, it has been revealed that hundi is being operated under the guise of the banking system, abusing digital payment systems and wallets. This shows not only the weakness of the regulatory system, but also how deep the misuse of technology is.

As mentioned in the article titled ‘Wealth Laundering: Political Administrative Protection in Major Economic Offenses’ published by the Center for Investigative Journalism in 2076, a United Nations study report has shown that 550 billion rupees have been informally transferred from Nepal to foreign countries through the use of means such as hundi.

How is hundi growing?

The reasons behind the growth of hundi business include the policy weaknesses of the state, institutional inefficiency, and socio-economic realities. The hundi business increases when the formal financial system fails to provide equal services to citizens of all sectors and classes. In the context of a country with high labor migration, the demand for a fast, cheap, and easy way to send money is high. When the formal system cannot meet such demand, hundi flourishes. But no official and detailed details of hundi business are available from any body. According to the data of Nepal Police, 279 people have been arrested with undisclosed cash from the fiscal year 2075/76 to 2081/82. More than 356.441 million rupees have been recovered from them. Nepal Police considers this as hundi transactions. The data of the people arrested with undisclosed cash and the details of the cash for the last seven fiscal years with the Nepal Police can be seen in the table.

The Revenue Investigation Department also investigates and files cases regarding hundi transactions. In the fiscal year 2077/78, the Revenue Investigation Department filed 54 cases against 114 people as defendants on charges of foreign exchange misuse and hundi transactions. In which, it demanded 4.94 billion rupees. Similarly, the department filed cases against 226 people in various district courts in 2076/77 in 147 cases of foreign exchange misuse and hundi. In this process, it demanded 1.22 billion rupees. 77 million rupees. The department had filed a case against eight people in the Dhanusha District Court on 21 Falgun 2075 for embezzling more than Rs 4 billion. A study conducted by Nepal Rastra Bank in 2073 showed that at least 5.9 percent of the remittances entering Nepal from abroad come through hundi. However, both the Nepal Police and the department do not have detailed and integrated details of hundi transactions and cases filed regarding it.

To discourage hundi, the government has taken steps ranging from digitizing the payment system to encouraging remittances to be sent through formal channels. The Rastra Bank has introduced a policy of giving an interest rate of one percent higher than the regular rate for remittances sent through the formal banking system. It has also made arrangements for Nepalis living abroad to invest in the stock market with special priority. The government of Nepal has put forward a plan in the budget for the upcoming fiscal year 2083/84 to make Nepalis, including those who send remittances from abroad, millionaires every day through lottery tickets. But despite government efforts, the hundi business is booming. There are some reasons behind this.

First, the formal banking system is still not easy, accessible and user-friendly for many. For uneducated citizens in rural areas and workers abroad, the banking process is complicated, time-consuming and expensive. They are attracted to hundi due to paperwork, identity verification hassles, service charges and limited banking network.

Second, strict foreign exchange policies are also encouraging hundi. As the government tightens foreign exchange transactions, it has made it difficult to send money abroad through formal channels. Due to which people are resorting to illegal ways to send money easily.

Third, the capacity of regulatory bodies and the weakness of the monitoring system are increasing the hundi business. Modern financial crimes are becoming technology-based. But regulatory mechanisms are not being updated and technology-based at the same pace. Due to extremely limited manpower, technological weaknesses, and lack of coordination, the identification and control of illegal transactions have not been effective. For similar reasons, hundi operators have not experienced the risks.

Fourth, corruption and political patronage seem to have made hundi safe. When there is no impartiality in law enforcement and some individuals or groups receive political or administrative protection, illegal activities are carried out easily and conveniently. This weakens the rule of law and helps promote illegal systems like hundi.

Fifth, the rapid expansion of digital technology has, on the one hand, facilitated financial transactions, but on the other hand, has added various challenges. Although mobile banking, digital wallets, and online transfer systems are increasing, their effective regulation and monitoring have not been developed sufficiently. This has made it difficult to identify illegal transactions using digital means.

Hundi transactions are having a serious and multifaceted impact on Nepal's economy. This has also had a very negative impact on the state's revenue system. As economic transactions outside the formal system remain outside the scope of taxation, the government is losing a large amount of tax and revenue. This has reduced the state's ability to invest in public services, infrastructure development, and social security schemes, and has increased the illegal flight of capital.

Similarly, hundi is facilitating organized crime. For example, hundi was used to threaten CIAA Chief Commissioner Prem Kumar Rai and others. hundi is being used in illegal activities including gold smuggling, human trafficking, drug trafficking, corruption, and money laundering. On the one hand, this is expanding the scope of crime, while on the other hand, it is posing a challenge to law enforcement agencies.

The way forward

Limiting hundi control to legal action and punishment alone cannot provide a long-term solution. The roots of hundi are linked to the economic structure, policy arrangements, and easy and simple access to services. Therefore, the solution also seems to be sought in overall systemic reform. As long as the formal system cannot meet the needs of citizens, illegal alternatives like hundi will continue to be used. Therefore, the following work needs to be done immediately to control hundi.

First, the formal remittance system should be made fast, cheap, simple and accessible. The process of sending money for Nepali workers working abroad should be easy, low-fee and reliable. If the formal channel starts providing cheaper and simpler services than hundi, hundi users will automatically be attracted to the legal system.

Second, there is a need for strong and effective coordination between regulatory and security agencies. In particular, an effective information exchange mechanism, joint surveillance and technological monitoring system should be developed between Nepal Rastra Bank, Nepal Police, and the Money Laundering Control Department.