On the
Indian sub-continent hundi are sort of like a cross between
IOUs and checks.
Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions. They were used
-
as remittance instruments (to transfer funds from one place to another),
- as credit instruments (to borrow money IOUs),
- for trade transactions (as bills of exchange).
Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Hundis, being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881. Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers.
The problem comes from hundi not being legal tender yet also being widely accepted. Criminals use them because they are tax free, and supposedly much of Bin Laden's funding comes in the form of these notes. Local (otherwise non law-breaking) citizens use hundi because "hundi dealers" give much better exchange rates than most currency exchanges (who charge tax on the exchange).