Introduction

How can someone move a million dollars across continents without a single dollar crossing a border? The answer lies in one of the oldest financial networks in history. Here, in this blog post I will take you through this black box, simplify it for you to understand in easy language. Are you intrigued? I am sure you are. Let’s start.

Meet Mr. Xi, who is from Shanghai, China. His son lives in New York City, USA, for his education. He wants to send 1 million dollars to his son there to buy an apartment, but the issue is China has a strict capital control. In simple terms, the government limits how much money individuals can legally move outside the country, for individuals it is $50,000 per year. This means one person can only send or spend a maximum of 50,000 USD abroad each year.

This is a huge bottleneck for Mr. Xi. Enter something called “Flying money (飞钱)”, a Chinese term for informal money transfer, also known as Hawala, Havaleh, Hundi, Undiyal, Phoeichuan in different geographies and different cultures.

Mechanism

Let’s focus on how it actually works. Mr. Xi contacts Broker A and gives him $ 1 million equivalent in Chinese Yuan. In return, Broker A gives a code to Mr. Xi. By providing this code to Broker B in New York, his son gets the $1 million. Broker A and B are in the same network.

Now the question is how this Broker B is getting 1 million dollars? Simply, as Mr. Xi wants to send money to somewhere, there are also people in the USA, who wants to send their money abroad. Important thing is that USA doesn’t have capital controls like China, so why would anyone use this informal method? This is where ill-gotten money comes in.

The Dark side: Settling the scores

Have you heard about Drug cartels of Mexico? For example, Sinaloa cartel, Tijuana cartel. These are the huge illegal business empires, for them moving money is not as easy and their biggest market is the world’s biggest economy, The USA. Now, I want you to imagine yourself in the shoes of drug dealer on the streets of New York (I know it’s uncomfortable but do it for a second). You are selling in millions, but you have to send it back to Mexico to your cartel bosses. So, you contact Broker B and give him 1 million dollars. He gives you the code and another Broker in Mexico, let’s say Broker C hands it over to the cartel bosses upon receiving the code.

No money left the borders, everything got settled inside the border of the three countries. You might ask me, it is still not settled, Broker A is in surplus and Broker C is still in deficit, how are they going to settle this? A good question, the answer lies in global trade.

Broker A is based out of China and Broker C is in Mexico. Trade between China and Mexico is substantial and Mexico generally imports electronics from China. You must be thinking how this relates to our topic. Here is how: Broker A is going to have an electronics company (A front for his Flying money business), an exporter. Broker C would have the same but as an importer. Broker C will place an order for 2 million dollars of goods unofficially to the Broker A. But in official capacity it will be billed as 1 million dollars only. C is going to pay only 1 million dollars and rest of it as his unsettled million dollars which he paid to the cartel boss, and A is receiving 1 million only but earlier he got the surplus from Mr. Xi.

Interconnected world

This is a basic example of how it works. In reality it might be complex. For instance, The Cartel might manage the physical trade directly instead of using a broker. Or they might be involved in other illegal trade of wildlife or endangered species like seahorses (in Chinese medicine seahorse wine is popular tonic) or Totoaba (Swim bladder of totoaba is highly valued in traditional Chinese medicine). They will export this into Chinese market through various means and settle the accounts.

This is how gold mines in Africa, Cartels in Mexico, illegal wildlife trade are connected with each other. Another question would be how they trust each other? What if someone betrays? The answer to that is Chinese diaspora.

An ancient solution

The concept of Feiqian (飞钱) or Flying money, started in China during the early 9th century under the Tang dynasty. The economy was booming, but the currency consisted of heavy copper coins. Carrying massive amounts of metal over thousands of miles was physically exhausting and invited highway robbery. Instead of carrying coins, a merchant in the capital could submit their metal currency to central government. They would receive a paper receipt but only half of it, in return. The other half was couriered to the merchant’s home state. Upon arrival at home, they presented their half to the local treasury. Once the two halves were verified, the merchant received their money.

This concept existed in China for centuries, when Chinese diaspora spread across the world they took it with them. Meanwhile China opened up and became a huge economic powerhouse. Things changed when Chinese government capped the amount an individual took out of country around 2017; they restricted it with more rules. And this Flying money concept took off in modern form. Slowly, organised crime groups started to take services from these Chinese brokers. So here trust factor comes, it might be same clan or family members between trading brokers. This is why these groups became highly efficient and reliable for informal transactions.

We will discuss how these transactions happen in India and how people make their black money, White. See you next time, bye.