Banking beyond the law

A centuries-old network of secret codes and shadowy brokers continues to outpace financial systems controlled by the state

by Miles Kellerman  BIO

The office of a hawala trader in Kandhari Bazaar, Quetta, Pakistan, October 2001. Photo by Vincent Laforet/The New York Times/Headpress

is assistant professor of international organisation and multi-level governance at Leiden University in the Netherlands. He is the author of False Positive, a Substack on finance, crime and geoeconomics.

Edited byCameron Allan McKean

The global financial system is a colossal factory containing an endless web of information assembly lines. Every time you tap your card on a payment terminal, whether it’s for a coffee on the way to work or a new vacuum cleaner, you are sending a new informational signal to that factory. Like raw material, that signal is then loaded on a conveyor belt where it is checked and modified by your bank, the seller’s bank, a payment processor, card network, and other intermediaries as it proceeds. The assembly line may be relatively short for cups of coffee. For more complicated purchases, however, like mortgages and stocks, the transactional chain can become remarkably complex.

But not all transactions take place in this factory. There are, in fact, entirely separate payment networks that operate outside the confines of state-regulated information assembly lines. The Chinese refer to them as feiqian (‘flying money’). Arabic speakers prefer the term hawala, whereas the Indian diaspora operates through a practice called hundi. In English, we have developed an ominous phrase to capture these various informal networks: underground banking.

Such a phrase may evoke images of drug dealers, money launderers and corrupted officials. And, indeed, states have long been concerned about the potential utilisation of these networks for crime and terrorist financing. But numerous scholars have pushed back against this securitised narrative. The political scientist Marieke de Goede, for instance, observes that focusing on criminality in underground banking ignores the tremendous volume of illicit finance passing through the aboveground system. What’s more, the fundamental elements of underground networks – trust, speed, global reach – are precisely what ‘modern’ financial institutions aspire to.

The truth is that there is nothing inherently suspect about underground banking. It is simply another method of transferring money. So why are they controversial? The real answer is not so much about financial crime. It is, instead, about power. Underground banks represent a challenge to states’ control of the global financial system, one that undermines their capacity to surveil our each and every transaction. As a result, those states seek to eliminate informal networks by subjecting them to regulation.

It hasn’t worked. On the contrary, evidence suggests hawala, feiqian and other informal payment networks are alive and well. And, unlike the false promises of bitcoin, they remain the only alternative payment networks that offer a true escape from the information assembly lines of the state-regulated financial system. Do these networks promise a viable alternative? In a world increasingly wary of its economic dependence on the United States, could underground banks offer guidance on the art of decoupling?

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Nobody knows the true scale of this ‘hidden’ financial system. But there is reason to believe that it can be measured in the hundreds of billions of dollars. That volume is primarily driven by those using underground banks to send remittances. Officially recorded remittances from immigrants to their home countries exceeded US $650 billion in 2023. That number does not include the informal money transfers facilitated by underground banks. Studies roughly estimate that these transfers equate to about 35 to 75 per cent of official totals. Extrapolating to present-day figures, that would suggest underground banking networks are facilitating somewhere in the region of $228 to $488 billion of informal remittances per year.

These networks are not a new phenomenon. They have existed for thousands of years and can be traced back to the ancient Silk Road, where they emerged as a solution to the risks of long-distance trade. Islamic texts suggest that the Prophet Muhammad was familiar with the concept of transferring debt in the 7th century. Archaeologists have also found premodern promissory notes across the world – written promises by one party to pay a certain amount of money to another at a pre-specified future date. These include Chinese notes written on scrolls or wood dating back to the 9th century.

A Ming dynasty-era banknote from 1375. Courtesy the British Museum, London

Through a trust-based system of credit, Silk Road brokers facilitated advanced payment by issuing such notes, as well as bills of exchange and other instruments. This obviated the need to carry physical coins across long distances. And it mitigated the danger of travelling for months on end only to find that your customer had disappeared. These credit systems were, in other words, the earliest known forms of trade finance, which disentangled money from its mere physical form. As the historian Dan Du summarises, they allowed Silk Road currencies to ‘“fly” over time and space’.

Such credit systems, though rooted in commercial trade, would slowly become popular for transferring personal remittances. Contemporary underground banks primarily revolve around networks of brokers located in different countries. If you live in a moderately sized city, you are probably not far from a broker. They often operate secretly out of mini-markets or mobile phone stores. Take, for example, the case of an African grocery store in Philadelphia catering to Muslim immigrants. One enterprising law student at the........

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