Why in News?

The Financial Action Task Force (FATF) released a report titled "Investigating Professional Money Laundering, Underground Banking, and the Use of Hawala and Other Similar Service Providers", highlighting how traditional underground banking is transforming into a tech-enabled network — 'digital hawala' — exploited for money laundering and terrorist financing.

Key Findings of the FATF Report

  • Widespread Scale: Nearly 90% of jurisdictions reported presence of underground banking and HOSSPs (Hawala and Other Similar Service Providers); over 80% identified them as major channels for professional money laundering (PML); over 60% flagged them as high-risk in National Risk Assessments.
  • Professionalisation of Money Laundering: PML operates as a specialised, business-like service with hierarchical models, digitised ledgers and professional facilitators (lawyers, accountants, real-estate agents, casino operators).
  • Rise of 'Digital Hawala': Nearly 70% of jurisdictions report use of encrypted apps (WhatsApp, Telegram), virtual assets, stablecoins and AI-based tools for transaction structuring and mule-account sweeping — enabling faster, more anonymous cross-border transfers.
  • Integration with Formal Sector: Criminals use bank accounts, fintech platforms, virtual IBANs and prepaid cards as entry/exit points; underground banking acts as a "hidden settlement layer" behind legitimate financial trails.
  • Diversified Crime Linkages: Used to launder proceeds of cybercrime, fraud, corruption, tax evasion, illegal gambling and human trafficking; HOSSPs remain core to terrorist financing, often co-mingled with genuine diaspora remittances.
  • Regional Patterns:
  • Africa & Asia: integration with mobile-money ecosystems.
  • Middle East: hybrid models combining virtual assets with gold/precious metals.
  • Latin America: Black Market Peso Exchange (BMPE).
  • Global hubs: "outgoing hubs" (Europe, West Africa) vs "incoming hubs" (Asia, Middle East).

Key Terminology

  • Underground Banking: Informal arrangements operating outside/alongside the regulated financial system to transfer, settle or store value; not inherently criminal, but unlicensed operations are criminalised in most countries.
  • HOSSPs: A subset of Money or Value Transfer Services (MVTS) that settle balances on a net basis without physically moving money across borders; licensed HOSSPs operate under FATF Recommendation 14.
  • Digital Hawala: Technological evolution of unlicensed underground banking using digital tools to coordinate and conceal informal value transfers.

India-Specific Case Studies

  • Trade-Based Money Laundering via Shell Companies (2022): Shell firms created with forged/stolen KYC documents used under-invoicing and circular trade through a third country to justify outward remittances.
  • Online Gambling–Hawala Nexus: Illegal gambling networks used UPI, digital wallets and mule accounts; funds moved abroad via hawala and round-tripped into India as purported foreign investment from the UAE.

Challenges in Curbing Hawala

  • Partial Currency Convertibility: Under FEMA 1999, the rupee is fully convertible only for current-account transactions; capital-account restrictions incentivise hawala use.
  • Crypto Layering: Shift from cash couriers to P2P crypto networks and offshore OTC desks; despite VDASPs being brought under PMLA 2002, criminals exploit DeFi, privacy coins and unhosted wallets to evade FIU-IND.
  • Illegal Online Gambling: The Promotion and Regulation of Online Gaming Act, 2025 bans online money games, but enforcement gaps persist.
  • High Remittance Flows: Large inward remittances (Gulf, West) provide cover for illicit funds.
  • Impact on Common People: Innocent accounts may be frozen, causing financial hardship — need for targeted safeguards.

Measures Needed

  • Clear Legal Framework: Register HOSSPs, criminalise unauthorised underground banking, extend AML/CFT to real estate and precious metals.
  • Disrupt the Entire PML Chain: From recruitment to settlement and cash-out; rapid account freezing and asset recovery.
  • Inter-Agency Coordination: Multi-agency task forces (FIU, ED, customs, tax, RBI); matching financial, GST and customs data.
  • Centralised Data & Risk Assessment: Databases of suspicious transactions; treat underground banking as a distinct NRA risk category.
  • Technology & Digital Forensics: Blockchain analytics, AI/ML to trace crypto settlements and mule networks; scrutiny of virtual IBANs and payment gateways.
  • International Cooperation: Harmonised definitions; real-time intelligence via Egmont Group and INTERPOL; joint investigations.
  • Protect Financial Inclusion: Low-cost formal remittance channels, proportionate KYC for low-value transfers, avoid indiscriminate de-risking.

Global Best Practices

  • Sweden: Licensing/registration of money-transfer operators.
  • Belgium: "Barrier Model" to disrupt the entire PML chain.
  • Netherlands: Dedicated Taskforce Underground Banking.
  • Indonesia: Blockchain analytics via PPATK for virtual-asset tracing.

Relevant Indian Legal/Institutional Framework

  • FEMA 1999: Regulates foreign exchange; partial convertibility.
  • PMLA 2002: Anti-money-laundering framework; VDASPs brought under it (2023).
  • FIU-IND: Central national agency for receiving/analysing suspicious transaction reports.
  • PMLA & UAPA: Tools against laundering and terror financing respectively.