US embassy cable - 03RANGOON859

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, Economy 
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