Australian Institute of Criminology

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Underground banking link to money laundering

Media Release

18 August 2005

Dr Makkai, the Director of the Australian Institute of Criminology, today released the latest Institute report 'Underground banking: legitimate remittance network or money laundering system?', which describes the use of underground banking, both for transferring legitimate remittances and for its potential exploitation by criminal and terrorist groups.

Underground banking is an informal banking arrangement which runs parallel, but generally independent of, the formal banking system. In 2002 it was estimated that $US80 billion was remitted through the formal banking sector from workers in developed countries to developing countries.

"This report provides a clear overview of how underground banking can be used for both legitimate and illegitimate purposes." Dr Makkai said.

The report recommends that formalising an informal system would be difficult and may have the unintended consequence of driving the whole system further underground making it even more difficult to regulate the system.

Underground banking systems are highly accessible, resilient and versatile and are able to withstand sudden and dramatic economic, political and social upheaval as evidenced by their presence in war-ravaged nations such as Afghanistan, Iraq, Kosovo and Somalia.

The report suggests that the most pragmatic solution to the illegal use of underground banking might entail altering the economic conditions which currently render underground banking a viable alternative to the formal banking sector.

"Reducing the level of underground banking globally and increasing its transparency has become increasingly important. Australia has taken this issue very seriously and as a result has taken a lead role in international efforts to combat money laundering." Dr Makkai said.

An important aspect of dealing with money laundering is to educate both the general public and those involved in banking and cash systems about the risk of illegal transactions or transactions by criminal groups.