BURMA: HUNDI MAKES THE WORLD GO ROUND

S E C R E T SECTION 01 OF 03 RANGOON 000859

SIPDIS

STATE FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 07/17/2013
TAGS: EFIN SNAR PTER ECON ETRD BM
SUBJECT: BURMA: HUNDI MAKES THE WORLD GO ROUND

REF: A. RANGOON 846 AND PREVIOUS


B. RANGOON 30

Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D)


1. (S) Summary: In the absence of a reliable method for
remitting foreign exchange, the "hundi" system flourishes in
Burma. The system is used by nearly everyone in the country
who needs to get dollars in or out, from NGOs to military
officers. Though hundi in Burma is undoubtedly used to
facilitate drug trafficking, we've no evidence to date that
it's being used to finance terrorism or anti-American groups
in Burma. End summary.

Never Did Trust Those Banks


2. (U) Though hundi is best known in Burma as a way to send
and receive foreign exchange without dealing with burdensome
and extortionate regulations, the system is also fairly well
established as a way for buyers and sellers to move kyat
around the country. This latter system has been
reinvigorated since the decline of the private banking system
this year.


3. (U) The international hundi system in Burma has been alive
and well since the Socialist era (1962-88) when no private
banking existed, and locals were not allowed to hold any
foreign currency. Burmese working abroad (especially
merchant seamen) availed themselves regularly of hundi as
they were legally obliged to remit their dollars to family
members' accounts at government banks. Account holders could
withdraw the money, but only in kyat at the overvalued
official 6 kyat/dollar rate.


4. (U) The SPDC (nee SLORC) takeover in 1988, ostensibly
ushered in a new era of "market reforms," where private
companies, organizations, and individuals who earned foreign
exchange were allowed to open foreign exchange accounts at
the Myanmar Foreign Trade Bank and the Myanmar Investment and
Commercial Bank. However, in a typically counterintuitive
policy, Burmese nationals were still prohibited from holding
foreign exchange. When the Foreign Exchange Certificate
(FEC) was introduced in 1993, Burmese nationals were allowed
to withdraw their foreign exchange in that form. However, at
market rates the FEC is worth about 10-40 percent less than
the still proscribed greenback. Furthermore, the government
takes an automatic 10 percent tax off the top of any foreign
exchange deposits.

How Does it Work?


5. (SBU) Dealers in transnational hundi operate in a similar
fashion to their American counterparts. A Burmese expatriate
or foreign business person in Rangoon will approach a dealer
to have their dollars transferred to the dealer's counterpart
at the other end of the network. The dealers will arrange
with their counterpart some verification method to ensure the
right person gets the transferred funds. Money arriving in
Burma via hundi is paid out in kyat, at a market-based
exchange rate. The settlement of the dealers' accounts of
either end of the transaction can occur in many ways,
depending on whether the relationship of the dealers is
familial or business.


6. (SBU) Hundi dealers operating in Burma are widespread and
can be part of a large, global, family network or merely a
one-man operation. Local brokers tend to work as money
changers, gold or gem merchants, traders, or travel agents.
Hundi is also run on occasion by individuals out of their
homes. The hundi network in Burma is found primarily in the
Chinatown section of Rangoon, along the Thai and Chinese
borders, and in the country's commercial hub Mandalay. The
system is clearly illegal, violating the government's very
strict foreign exchange control regulations.


7. (SBU) Hundi operators in Burma rely on both direct and
hub-and-spoke transfers of cash, depending on how large their
particular network is. One of the larger family-based
networks has affiliates in Rangoon, Mandalay, Chiang Mai,
Singapore, Taiwan, Hong Kong, Kunming, and San Francisco.
Smaller brokers, or those without ties, will use Bangkok or
Singapore as hubs to get money forwarded all over the world.
Though Burmese migrant workers in the Middle East also use
the hundi system, we've heard no allegations of major hundi
operators in Rangoon with direct ties to those countries.


8. (SBU) Hundi dealers earn fees in three primary ways, and
often in combination. First, they might take a percentage of
the transaction -- usually around 5 to 6 percent. A second
option is for the dealer to offer a skewed exchange rate and
rake in the difference. Finally, the user and dealer might
cut some side business deal.

9. (SBU) Businessmen complain that the Burmese transnational
hundi system is expensive, and not always run by honest
brokers. However, they admit that businesses and individuals
have little choice when they need to get cash overseas.
Since there is no legal recourse if a dealer doesn't hold up
his end of the bargain, hundi dealers are known to abscond
from time to time with the money with which they have been
entrusted. Rumors that a hundi dealer along the Chinese
border had disappeared with millions of dollars worth of Asia
Wealth Bank's (AWB) wealth helped spark the initial run on
that bank, and the subsequent general banking crisis, in
February 2003.


10. (SBU) Dishonesty in the Burmese hundi system is fueled by
a number of country-specific ingredients. First is the
users' lack of legal alternatives to transfer funds overseas.
Second, someone intent on stealing a "shipment" of foreign
exchange in cash poor Burma, would need only one large score
to ensure a comfortable underground retirement. Finally,
Burma's convoluted economic system encourages patronage,
corruption, "working the system," and making a quick buck.
Thus, making a killing in the underground hundi market makes
as much sense to a budding "entrepreneur" as trading in cell
phones or presenting fraudulent import invoices.

Who's Using Hundi?


11. (C) Over the past decade, the expansion of Burma's
international trade, the slow but steady intrickle of
international NGOs and small investors, and the continuing
disincentives to use the formal system have allowed hundi to
flourish. It is impossible to know exactly how much flows in
and out through this illegal, and thus very private, system.
However, we've heard estimates from knowledgeable sources
that from $600-800 million per year comes into the country,
and at least $600 million streams out. This is notable in
contrast to the IMF's CY 2002 estimates of $470 million in
foreign exchange reserves, and $1 billion in total money
supply.

-- Burmese seamen and expatriates use hundi to remit dollars
to their economically ravaged families. It's estimated that
50,000 Burmese are working overseas now (15,000 are seamen).

-- Exporters, faced with a 10 percent tax on export earnings,
often underinvoice and instruct their overseas buyers to
deposit the difference informally into offshore bank accounts
(usually in Singapore). These traders then use the hundi
system to repatriate this money from their offshore accounts
when they need to convert their dollars to kyat.

-- Importers, who must have offsetting export income for all
imports, also often underinvoice to maximize the amount they
can bring in or to avoid customs duties and other taxes. The
importers then settle the difference with their overseas
sellers informally using hundi. It's been alleged that the
government turns a blind eye to this use of hundi for large
corporations involved in priority construction projects.

-- Foreign investors and international NGOs use hundi to get
money into the country, evading the 10 percent tax on foreign
exchange deposited the government banks. By avoiding the
banks, investors and NGOs also evade the requirement of
withdrawing their foreign exchange deposits in FEC. Though
it would be possible for local Muslim charities to use the
hundi system to bring funds into the country, we have no
evidence that they are doing so.
-- Wealthy individuals in Burma use hundi to illegally
expatriate their hidden dollar assets and/or send money to
children living and studying overseas. The student visa
function here is complicated as even the wealthiest
prospective student's ability to pay for schooling often
defies documentation requirements.

Guns, Drugs, and Terror?


12. (C) Because the hundi system in Burma is widespread with
many small-scale operators, it can be easily used for
nefarious purposes. Though authorities keep an eye on the
larger hundi dealers, it is very difficult for them to
consistently crack down on all dealers. There is also the
question of conflict of interest. Military Intelligence (MI)
is charged with keeping an eye on the hundi and black market
currency exchange dealers (usually the same people) to
enforce currency laws, adjust the dollar/kyat exchange rate,
and monitor significant inflows of foreign exchange destined
for anyone affiliated with known insurgents or other
"destructionists." However, these same MI officials are
often making money from this same hundi system, either as
operators or by taking bribes from operators. Furthermore,
MI, and other government officials to the highest levels,
rely on these hundi/currency exchange dealers, just like
everyone else, for their services.


13. (C) We have evidence that the hundi system in Burma is
used to facilitate the narcotics trade. For example, drug
traffickers in Thailand or Hong Kong will send funds via
hundi into Burma to pay the local suppliers or producers.
However, dealers involved in this type of hundi are more
often than not guilty only of a sin of ignorance. Dealers
rarely explore the source of the funds flowing through their
shops or the backgrounds of their customers.


14. (S) We've no evidence that the hundi system here is being
used for external financing of any terrorist network. While
the potential is there should such a network emerge in Burma,
we think the chances are relatively slim. Though MI's
involvement in the hundi system creates a certain amount of
moral hazard, and the risk is always present of an individual
MI officer taking a bribe to turn the other way on a
dangerous transaction, we believe MI's shadowy presence in
hundi, and Burmese people's instinctive fear of MI scrutiny,
would dissuade most provocateurs from trying to funnel in
large sums using hundi. Funding for any potential terrorist
activity is much more likely to come in via courier; also an
easy proposition considering the porous borders, often
outside government control, and notoriously venal customs and
regional military officers.
Martinez