🔹 Definition
Underground Banking refers to informal, unregulated financial networks that operate outside formal banking channels to transfer money or value across borders or within a jurisdiction. These systems often bypass AML/CFT controls, making them attractive for money laundering, terrorist financing, tax evasion, and other illicit activities.
While some underground banking systems have legitimate cultural or historical roots (e.g., Hawala, Fei Qian, Hundi), their lack of regulatory oversight presents significant compliance and law enforcement risks.
🔹 Frequently Asked Questions (FAQs)
Q1: How does underground banking work?
- A sender gives money to a local agent (broker or remitter) in Country A
- The agent contacts a counterparty agent in Country B
- The recipient collects equivalent funds from the agent in Country B
- No formal wire transfer occurs—settlement is handled via:
- Personal trust and ledgers
- Trade-based settlements or third-party transactions
- Cash couriering or barter arrangements
Q2: How is it different from formal remittance services?
- Unlicensed and unregistered with authorities
- No adherence to KYC, recordkeeping, or reporting obligations
- Anonymity and speed are prioritized
- Often cash-based, with limited audit trails
- Formal Money Services Businesses (MSBs) are regulated and monitored
Q3: What are the risks of underground banking?
- Facilitates laundering of criminal proceeds
- Enables terrorist financing and sanctions evasion
- Circumvents capital controls and tax laws
- Harder for authorities to trace fund flows or identify beneficiaries
- May undermine financial integrity and monetary policy
Q4: Is underground banking always illegal?
- The activity is typically illegal if conducted without a license or registration, especially where required by law
- Some traditional systems may be tolerated in limited cultural contexts, but regulators increasingly treat them as high-risk or unlawful
- In Singapore, operating a money-changing or remittance business without a license is an offence under the Payment Services Act
Q5: How do authorities detect and combat underground banking?
- Surveillance and undercover operations targeting unlicensed remitters
- Monitoring of cash-intensive businesses suspected of fronting informal networks
- Cross-border intelligence sharing and cooperation (e.g., via FATF or Interpol)
- Promotion of financial inclusion and regulated remittance alternatives
- Use of transaction monitoring systems to detect informal settlement patterns
