Authorities discover new changes to old ways of illegally transferring moneyHundi traders are now using Indian shopkeepers along the border to exchange foreign currency for Nepali rupees.
Last month, two Indian nationals were arrested by police for walking into Nepali territory with Rs3.89 million in Nepali currency. The police, suspecting revenue evasion or misappropriation of foreign exchange, handed over the duo—Ritesh Kumar Madhesia and Niraj Agrahari—to the Department of Revenue Investigation, which duly filed a case at the Rupandehi District Court.
During investigation, the department found that the two individuals had been carrying the Nepali currency in order to deposit the money in the name of Nepalis in Nepali banks.
“We uncovered a new hundi method,” said Dirgha Raj Mainali, director-general of the department. “Generally in hundi transfer, money is paid in the destination country but in this case, money was being physically moved to Nepal. The hundi network is now being operated from Indian soil, unlike in the past when such networks were active in Nepal.”
Hundi is an informal system of remittance that is illegal as the money exchange takes place outside of banking channels. Anyone found involved in such transactions is liable to punishment. According to the Foreign Exchange Regulation Act, anyone involved in such transaction will forfeit the money and could be fined up to three-fold the amount illegally transferred, in addition to a jail term not exceeding three years.
Despite these laws, hundi is still widely practised in Nepal. But according to Mainali, traders are resorting to new techniques to transfer large amounts of remittance to Nepal.
In Indian towns along the open border, Nepali currency is widely used and shopkeepers readily accept Nepali money as legal tender. This money, however, needs to return to Nepal. As Nepali currency is not exchangeable in India, it has to be brought back to Nepal physically.
“In this particular case, hundi traders were collecting Nepali currency from Indian shopkeepers who had sold goods to Nepali customers. They then tied up with Nepalis working and studying in India, Australia, Japan, the United Arab Emirates and Israel who need to send money back home on a regular basis,” said Nawaraj Adhikari, information officer at the Butwal-based branch office of the department. Associates of the hundi traders would collect foreign currency from remitters in foreign lands and the traders would then deposit equivalent Nepali currency into the bank accounts of the relatives of those remitters, bypassing the legal banking channel, according to Adhikari.
When the money does not come through formal banking channel, it hurts the country’s foreign exchange reserves, said Adhikari. And maintaining a sizeable foreign exchange reserve is especially important for Nepal, as it is largely an import-based economy.
Depleting forex reserve has been a perennial cause for concern. Nepal’s forex reserve dropped to $9.5 billion last fiscal year, down from $10.08 billion the previous 2017-18 fiscal year, according to Nepal Rastra Bank.
Data from the central bank shows that the country last year received 15 percent of total remittance (around Rs 879 billion) from India. Officials say that if the new hundi practice continues, it could affect the country’s forex reserves.
“The arrest of the duo is just the tip of the iceberg. We don’t know how often and in what proportion this has been happening,” said Adhikari.
Department officials, however, said they were not sure why hundi traders were collecting Nepali currency from Indian markets when it is available in Nepal in abundance.
“One reason could be they want to avoid screening by Nepali authorities for transactions involving large amounts of money,” said Adhikari.
During interrogation, Madhesia and Agrahari said that they were working at the behest of Ashish Madhesia and Mahabir Prasad Sharma, also Indian nationals. Ashish and Mahabir are currently at large and the department has kept the option of filing a supplementary case at the court open, if they are arrested, according to Adhikari.
As per the statements of the arrested duo, they agreed to deposit money in Nepali people’s bank accounts after they were promised a commission of Rs 150 per Rs100,000. So far, the department has not discovered the involvement of any Nepali national in this hundi network.
Department officials said that hundi traders had deposited the money in the names of around 150 people from various districts of the country. The money was deposited at different times in recent months, said officials.
During the investigation process, the department also asked the recipients of the money to appear before its Butwal-based office to record statements. The department recorded statements from around a dozen recipients, said officials.
“According to their statements, they didn’t know how the money was deposited in their accounts. They thought the money was directly transferred into their accounts,” said Adhikari, the information officer.
As the department continues to record statements from other recipients, officials said they would file a supplementary case if any of them were found to be involved in this hundi trading.
Although Nepalis abroad are increasingly using formal channels to send money home in recent years, a significant amount of money still comes through hundi, according to Nepal Rastra Bank. A study conducted by the central bank three years ago among 320 households of 16 districts found that 90.9 percent of Nepalis sent remittance through formal banking and remittance companies. Around 5.9 percent of households surveyed sent money through hundi and the rest via relatives and friends using both formal and informal channels.
Nepalis from South Korea, Australia, India and Western countries often tend to use hundi to send money home, according to the central bank’s survey. In case of South Korea, as many as 70 percent of migrant workers were found to have used hundi to send home money, says the report.
Nepali migrant workers in the Gulf countries and Malaysia mostly employ formal banking channels, the report said.
“There seems to be a strong network of hundi traders in Western countries,” said Nara Bahadur Thapa, a former executive director of Nepal Rastra Bank. “A lack of coordination between Nepali banks and banks in the destination countries, along with the relatively high cost involved in sending money through formal channels, is responsible for the prevalence of hundi and other informal channels to send money to Nepal.”