Underground Banking and Flying Money

What Is Underground Banking

The vast majority of our financial transactions are facilitated by regulated financial institutions (banks, credit card companies, etc.). Each transaction is documented, taxes are collected according to national and local tax laws, ownership of the funds is handed off and documented, and disputes are resolved through legal processes. Underground banking bypasses these formalities. While it is impossible to calculate it is estimated that tens of billions of dollars are transferred to and from every continent each year through underground banking systems.

When financial transactions go underground, documentation often is either nonexistent or cryptically noted by the individuals involved in the transaction. Hawala, an underground banking system used for 90% of transactions in Afghanistan for both illegal and legitimate transactions, provides a good example of how underground banking works.

Let’s say, Farid, living in Kabul, wishes to pay Safia (living in Kandahar) 4500 AFN (about 100 USD). Farid contacts a hawala dealer, Broker A (a hawalandar), hands him 4500 AFN in currency and gives him a password, Safia’s name, and Safia’s contact information. Farid then contacts Safia, tells her a hawalandar will contact her to give her 4500 AFN and tells her the password. A contacts another hawalandar, B, in Kandahar to provide Safia’s contact information and the details of the transaction including the password. B meets Sofia in Kandahar and, if the password is correct, hands her 4500 AFN (perhaps minus a small commission). The entire transaction may take only a few hours. In practice, several trusted hawalandars may be involved in a single transaction.

Now A owes B 4500 AFN. A and B will settle the debt in some agreed-upon manner, often when they next meet in person. The debt is recorded by both A and B. Had Safia been in London rather than Kandahar, Farid would have given hawalandar A AFN and Safia would have received British pounds from hawalandar B converted at official exchange rates.

There are no promissory notes or other legally enforceable documents. The hawala system is based on honor and the benefits of maintaining access to the system. Therefore many hawala networks are made up of extended family members, close-knit religious groups, or close friends. Cultural bonds also help keep the systems reliable. There are, of course, exceptions: recently two men in South Africa suspected of being affiliated with a hawala network were shot (one was killed) possibly over a failure to settle debts.

Because hawala transactions, and similar "Informal Value Transfer System" (IVTS) transfers are not traceable, the system is favored for illegal transactions. As I explain in the next section, things get a bit more complicated when transactions are illicit.

The Dark Side Of Hawala Networks

Illicit transactions demand greater secrecy and obfuscation. In the example above, Farid would use untraceable communications such as an encrypted phone (e.g., Blackphone), encrypted text messages (e.g., Vuvuzela), or an anonymity network (e.g., Tor) to communicate with Sofia. 

Hawala systems are the predominant financial networks used to fund terrorism. Terrorists operate in remote areas, move often, and need to remain invisible to enemies and authorities. There is no other reliable way to send money to any location on the planet within hours. It is believed hawalas were used to fund the tragic events of 9/11/2001.

Certainly the terrorist activities in Syria, Yemen, Iran, Afghanistan
and other areas of conflict could not function without hawalandars or their counterparts; the hawala networks are nearly immune to any attempts to disrupt the flow of illicit funds since they rely on extensive tribal and regional bonds and personal connections, leaving no bread crumbs for authorities to follow. 

In the case of Farid and Sofia, the money Sofia received never left Kabul, and the lingering debt may very well have been settled by trading favors, or perhaps offset by other transactions between A and B at another time and place, or by over-invoicing or under-invoicing one another for unrelated business. Legal banks must move currency (or formal claims on currency) from country to country navigating heavily regulated bureaucracies. An inter-country transfer can take many days and cost far more than an IVTS which does not require any actual movement of currency and can be completed in hours.

Other than old fashioned barter, IVTS transactions occur as deep underground as banking can get.

Flying Money

A system similar to hawala originated in China During the Tang Dynasty around 1500 years ago. Fei-chien (alternatively, fei qian), aka “flying money”, began as a legitimate means of facilitating trade and paying taxes to the Chinese government.

Kai Yuan Tong Bao
The Chinese government found it cumbersome to haul large amounts of cash (predominantly metal coins called Kai Yuan Tong Bao) to pay for goods purchased from across the country. In addition, the coin began to circulate widely in other nearby Asian countries causing such a shortage of copper that statues of Buddha were melted down to produce the coins.  To overcome the inconvenience of cash, the government created certificates to be used to purchase goods for the government. The certificates could then be taken to any of 40 regional government offices and exchanged for coins. 

The certificates were not legal tender but because the government freely redeemed them for a small fee, merchants began to trade them among themselves rather than take the more cumbersome step of acquiring coins. Thus, the Chinese had invented the equivalent of paper money (which, of course, unlike coins could blow away in the wind --hence the term "flying money").

Benefits accrued to the government as well. To pay taxes merchants would hand over the cash from their business activities to provincial memorial courts. The merchant would then receive certificates for the after-tax portion of the revenue. At home, the merchants could exchange the certificates for cash at any of 40 government offices throughout the country.

Over time Chinese workers migrated to other countries where jobs were more plentiful. Many workers abroad would send money to China to help support families at home.

Chinese merchants abroad set up side businesses to execute IVTS transfers. Today such businesses still flourish in Chinese shops and throughout the world's "China towns." The system works much the same way as the hawala system and relies on the close family and cultural bonds of trust.

Cryptocurrencies and Money Laundering

I didn’t include Bitcoins, Ripple, Tron (and more than 1500 competing cryptos in this blog post for two reasons: 1) many cryptocurrencies have become so popular they have been declared “financial instruments” (legally enforceable monetary contracts) in advanced countries and therefore are not part of what I included in my definition of underground banking; and 2) the subject is complicated and would take this blog post down too many unrelated rabbit holes. For the same reasons I didn't include a discussion of the many ingenious ways, money is illegally laundered. Perhaps someday I will be inspired to write about these intriguing topics.

Personal Note: My blog topics are truly unpredictable random musings that have captured my interest for no particular reason other than my ignorance demands an occasional feeding. For example, my wife, Helen, triggered the research for this post by sending me a link to an article about hawala, a word I hadn't previously encountered.

Political Attitudes: Partly Inherited, Partly Free Will

Political Attitudes: Partly Inherited, Partly Free Will

As we age our political attitudes tend to stay within a limited range on the political spectrum. However, some people are far more likely than others to change their political ideology. Research psychologists and political scientists have studied this phenomenon for decades and have concluded that genetic predispositions may be as important as life experiences in determining how frequently and how far we migrate along the political spectrum.

Consider three situations.

1. Almost everyone agrees people should be fair with one another. Differences in opinion surface as specific circumstances are considered. For example, four men meet for the first time over lunch. When the $48 bill comes the first man suggests they each pay $12 and contribute towards the tip. Another suggests they divide the bill according to what each ordered. The first man believes dividing the bill into four equal parts saves time and seems fair. The second believes that it is fair for each pay only for what they ordered since some lunches cost a dollar or two more than others. The definition of fairness is not at issue; the concept of fairness is what differs between the men.

2. Most people accept the founding principle stated in the Declaration of Independence: "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness." Opinions differ about what how equality should be administered. For example, one person feels each family should pay only for what they consume and not pay for what is given to others (“every able-bodied person deserves only what they choose to work for”). A second person thinks of equality as a grand insurance policy into which everyone pays so that when one needs assistance, others will have paid into a pool that results in a more equal lifestyle.

3. Virtually everyone takes precautions to protect their property. Opinions differ about how cautious one should be in specific circumstances. Two women are shopping in Walmart. The first woman places her purse in the shopping basket and turns away to consider some toys for a nephew’s third birthday. The second woman suggests she not leave her purse unattended and stands guard over the purse.

Research suggests these three situations reveal the individual’s likely political attitudes. The first person in both situation 1 and situation 3 most likely is liberal. The first person in situation 2 most likely is conservative.


Before proceeding, I should define conservative versus liberal as discussed in the cited studies and disclose where on the spectrum my own attitudes are today. I do this so you can judge for yourself if I have been successful in keeping my own views at bay.

The most useful description of conservative versus liberal political attitudes I could find is a summary in Student News Daily which compares liberal and conservative attitudes using an alphabetical list of political values. The article aligns nicely with the political ideology results of the Pew Research quiz which I used to reveal my personal place on the spectrum. Currently I, along with 16% of the population, land on "Solid Liberal" even though, as an economist, I am conservative regarding most economic and fiscal issues.

As I aged from my teens into old age, I at one time or another, registered as a Republican, a Democrat, and an Independent. In college, I briefly considered registering Libertarian. My parents were both lifelong Republicans. However, I always voted on issues and candidates, never strictly along party lines.

In what follows I do my best to avoid letting my attitudes influence what is reported and how it is portrayed.

The Role of Genetics.

Pew Research, one of the least biased research organizations I have found, studied data from the Minnesota Twin Family Study (MTFS}. The data included over 1,192 middle-aged identical and fraternal twin pairs raised in the same household by their parents. Each participant was asked, "whether they currently identify themselves as strong conservatives, strong liberals, or somewhere in-between." If fraternal twins have significantly more diverse political attitudes than identical twins, there is a high probability that genetics is more important than environment in shaping those views. 

The study concluded that “slightly more than half (56%) of self-identified political ideology” is derived from genetics. “The second measure of ideology based on 27 questions produced a similar result (genes appeared to explain 58% of the difference between individuals).” The same study “...also found that about half (48%) of the difference in authoritarian versus libertarian beliefs is inherited.”

Pew Research Rating (MEDIA BIAS/FACT CHECK)

Pew Research study also concluded that roughly half of the people’s attitudes similar to the three situations I described above are genetically determined. They cautioned, however, “...when it comes to political attitudes, genes are not destiny.”

Other studies support the role of genetic factors in voting behavior. One study "...points to low levels of the stress hormone cortisol as a strong predictor of actual voting behavior..." Voting is stressful, individuals vary in their stress tolerance in part due to genetic, people with low tolerance of stress have been shown to have a tendency to avoid voting.

We Change As We Age.

If half of our political leanings are strongly influenced by genetics, what affects the other half? Professor Jeffrey Lyons (Boise State University) studied how political attitudes vary as we age from 18 to 50. The results of his research are published in Political Psychology (April 2017). As might be expected, our parents’ beliefs are foremost when we are young and living at home. Parental influence is stronger when political views have a moral component (e.g., religion) and a weaker influence when parents are not emotionally politically engaged.

Personality Differences and Political Attitudes

There is a high correlation between personality traits and political values. [Remember “correlation does not imply causation”.] The following summarizes a number of studies.
  • Conservatives tend to be more fearful, more organized, more comfortable with structure and rules, more suspicious, more cautious, more religious, more respectful of authority, have more group loyalty, and are less tolerant of uncertainty and ambiguity.
  • Liberals tend to be more sexually adventurous, more extroverted, more creative, more concerned with income inequality, more optimistic, more likely to believe vaccines cause autism, more likely to believe in evolution, and have greater empathy for people who struggle financially.
As we live more independently, we are swayed by our friends, our community, our domestic partners, and our professional associates. The more homogeneous is our political and social environment, the more stable are our political views; the more diverse is our political and social environment, the more our political values tend to shift over time despite genetic predispositions.

Gender Equality, A Non-Partisan View

Of course, these studies predate our present political environment. I wish I could travel forward in time a couple decades to see what future researchers will have reported about these subjects during our present political environment.

Whatever are your political attitudes, express them where it counts. The most important impact you can have in our democracy is to vote and contribute all you reasonably can to your desired ends.