ORIGIN OF CHIT SYSTEM
The chit system did not originate with overseas Chinese remittances nor with so-called native banks. Chits are a British colonial invention. The word "chit" itself is the derivative of "chitty", a word of Anglo-Indian origin borrowed from the Hindi chitthi, meaning a mark. From the late seventeenth century, the word crept into the English usage as meaning a note, pass or certificate given to a servant.
The chitty came to China in the nineteenth century by way of British custom. Foreign residents in the treaty ports found handling strings of Chinese cash or silver ingots a major inconvenience
. A system was devised to eliminate this inconvenience.
Harvard University economist Frank King describes this system: "The salary of foreign employees was paid by check drawn on the Chinese compradore, who then held the funds against which the employee wrote 'chits'...memoranda acknowledging debts for retail transactions. These were accepted by the shopkeeper and passed for collection to the firm's compradore." The Chinese underground banking network is active in China, Taiwan, and throughout Southeast Asia.
In August 1984, Lt. General James A. Williams, then Director of the U.S.
Defense Intelligence Agency (DIA), reported to the U.S. Senate, "Some sources have stated their suspicions that this system is being used by criminal elements in Vietnam as a way of transferring funds generated in Vietnam through black market activities to a safe haven outside Vietnam for unspecified future use.
In the opinion of our DIA analysts, such a system may also be used by Soviet Republic of Vietnam (SRV) intelligence and security agencies, possibly in association with criminal elements. This system would result in availability of operational funds for the use of SRV personnel or others, both in the United States and elsewhere.
Such a barter system is not unique to Vietnam. It is quite probable [you have] noted the barter system in use in other countries around the world which have strict prohibitions regarding foreign currency transactions." Money Laundering: Hawala and India In 1994, the U.S. State Department reported that India is increasing in significance from a money laundering perspective.
Raids conducted in August 1992 against a Colombian money launderer working for the Cali and Medellin cocaine cartels revealed that drug money was being deposited in an account in Punjab. A multilateral effort was recently initiated in the United States to target a well known Colombian cocaine kingpin, who has used at least one bank account in India to facilitate the transfer of funds from the U.S.
Although there have been no arrests/prosecutions for money laundering, investigation of a major stock market scandal in Bombay in 1993 and 1994 developed leads indicating possible ties to narcotics-related activities.
In general, India is meeting the goals and objectives of the UN Convention with respect to adopting money laundering legislation, but enforcement measures needs improvement. Money laundering is a crime. Indian banks are required to maintain records on large currency transactions that are over 20,000 rupees (approximately US$800) and to report them to the Central Bank.
However, reliance on manual bookkeeping for some 60,000 branches and loose accounting practices have created abundant opportunities for fraud. The Central Bank created a separate bank supervising board in March 1993 to address the widespread perception that bank supervision is weak and ineffective.
The major difficulty law enforcement agencies face in the successful pursuit of financial investigations is that the Indian asset seizure law is a criminal statute requiring a criminal conviction to effect asset forfeiture.
The law contains so many loopholes and requires so many years to prosecute as a criminal matter that U.S. officials consider it ineffective. In March 1992, duties on imports were reduced, and a variety of currency and foreign exchange requirements were liberalied. Restrictions on gold and silver imports were also relaxed.
In September 1992, the Indian Government announced that foreign institutions would be allowed to invest directly in all stock market instruments, operate foreign currency accounts, and convert funds to rupees at market rates. Hawala, the Indian form of an underground banking system traditional throughout the Middle East and Asia, has links to drug trafficking. With the easing of foreign exchange controls and the unified exchange rate, Hawala activity has apparently slowed.
There has been a 40 percent increase in remittances by nonresident Indians through banking channels. Indian Customs reports a recent increase in large currency importations. Indian law requires declarations for imported currency exceeding US$10,000. However, records are maintained by hand and investigations rarely follow.
While the long-term effects of India's liberalization measures remain to be seen, the Hawala system will continue to be used by persons involved in such illicit activities as tax evasion, drug trafficking, money laundering, political corruption and arms smuggling. Invoice manipulation is pervasive and is used extensively to launder illicit proceeds.
The chit system did not originate with overseas Chinese remittances nor with so-called native banks. Chits are a British colonial invention. The word "chit" itself is the derivative of "chitty", a word of Anglo-Indian origin borrowed from the Hindi chitthi, meaning a mark. From the late seventeenth century, the word crept into the English usage as meaning a note, pass or certificate given to a servant.
The chitty came to China in the nineteenth century by way of British custom. Foreign residents in the treaty ports found handling strings of Chinese cash or silver ingots a major inconvenience
. A system was devised to eliminate this inconvenience.
Harvard University economist Frank King describes this system: "The salary of foreign employees was paid by check drawn on the Chinese compradore, who then held the funds against which the employee wrote 'chits'...memoranda acknowledging debts for retail transactions. These were accepted by the shopkeeper and passed for collection to the firm's compradore." The Chinese underground banking network is active in China, Taiwan, and throughout Southeast Asia.
In August 1984, Lt. General James A. Williams, then Director of the U.S.
Defense Intelligence Agency (DIA), reported to the U.S. Senate, "Some sources have stated their suspicions that this system is being used by criminal elements in Vietnam as a way of transferring funds generated in Vietnam through black market activities to a safe haven outside Vietnam for unspecified future use.
In the opinion of our DIA analysts, such a system may also be used by Soviet Republic of Vietnam (SRV) intelligence and security agencies, possibly in association with criminal elements. This system would result in availability of operational funds for the use of SRV personnel or others, both in the United States and elsewhere.
Such a barter system is not unique to Vietnam. It is quite probable [you have] noted the barter system in use in other countries around the world which have strict prohibitions regarding foreign currency transactions." Money Laundering: Hawala and India In 1994, the U.S. State Department reported that India is increasing in significance from a money laundering perspective.
Raids conducted in August 1992 against a Colombian money launderer working for the Cali and Medellin cocaine cartels revealed that drug money was being deposited in an account in Punjab. A multilateral effort was recently initiated in the United States to target a well known Colombian cocaine kingpin, who has used at least one bank account in India to facilitate the transfer of funds from the U.S.
Although there have been no arrests/prosecutions for money laundering, investigation of a major stock market scandal in Bombay in 1993 and 1994 developed leads indicating possible ties to narcotics-related activities.
In general, India is meeting the goals and objectives of the UN Convention with respect to adopting money laundering legislation, but enforcement measures needs improvement. Money laundering is a crime. Indian banks are required to maintain records on large currency transactions that are over 20,000 rupees (approximately US$800) and to report them to the Central Bank.
However, reliance on manual bookkeeping for some 60,000 branches and loose accounting practices have created abundant opportunities for fraud. The Central Bank created a separate bank supervising board in March 1993 to address the widespread perception that bank supervision is weak and ineffective.
The major difficulty law enforcement agencies face in the successful pursuit of financial investigations is that the Indian asset seizure law is a criminal statute requiring a criminal conviction to effect asset forfeiture.
The law contains so many loopholes and requires so many years to prosecute as a criminal matter that U.S. officials consider it ineffective. In March 1992, duties on imports were reduced, and a variety of currency and foreign exchange requirements were liberalied. Restrictions on gold and silver imports were also relaxed.
In September 1992, the Indian Government announced that foreign institutions would be allowed to invest directly in all stock market instruments, operate foreign currency accounts, and convert funds to rupees at market rates. Hawala, the Indian form of an underground banking system traditional throughout the Middle East and Asia, has links to drug trafficking. With the easing of foreign exchange controls and the unified exchange rate, Hawala activity has apparently slowed.
There has been a 40 percent increase in remittances by nonresident Indians through banking channels. Indian Customs reports a recent increase in large currency importations. Indian law requires declarations for imported currency exceeding US$10,000. However, records are maintained by hand and investigations rarely follow.
While the long-term effects of India's liberalization measures remain to be seen, the Hawala system will continue to be used by persons involved in such illicit activities as tax evasion, drug trafficking, money laundering, political corruption and arms smuggling. Invoice manipulation is pervasive and is used extensively to launder illicit proceeds.