The Undertown System

"The Undertown System is a mutually beneficial arrangement. They get humans on top to provide for the day-to-day defense while they do their halfling things, and we get a whole other village beneath our villages for scouts and ambushers.
And it's always fun reading reports of what happens when someone actually manages to get into town, only to find booby traps and little arrows coming out of every basement window and rain barrel."
~Margrave Arronax Skinner, Elector of Cambreath
System Rules
A settlement or fortification with an established Undertown has +1 defense, inflicts 1d4 casualties on any enemy that manages to break down the defenses, and can recruit Halfling units. Additionally, Undertowns are often involved in smuggling and black marketeering.

History

During the Ruinous Years, many halfling villages were destroyed, with halfling refugees flooding into human settlements where everything was simply too big for comfort. The devastation had taught the halflings that, even with their skilled partisans for defense, they simply couldn't survive on their own. Halflings weren't hardened for war the way humans were, and they preferred it that way. The debate on what to do with the little guests raged for years. Then, a solution was settled upon.
For the actions of Melani Ghostwise in Year 607, the end of the Ruinous Years, Halflings in Maecodia were given permission to live beneath established human cities and towns, burrowing out neighborhoods and tunnel highways at their leisure and completely under their control.

Execution

As a matter of both law and tradition, halflings own the dirt of human settlements below the level of a stormcellar. Halflings are free to hollow out burrows for themselves under the shelter of human defenses, and such undertowns can set their own rules and laws that suit them. In practice, most undertowns participate in the human elections and share representatives, while picking and choosing which laws they want to honor in their burrows.
In exchange for this protection and real estate, the halflings are asked to participate in the Balatar Militia as partisans, scouts, and auxiliaries.
Their relative freedom from human law means that undertowns (and especially undercities) have a reputation for being black markets.
Additionally, the Halflings carry this symbiotic relationship with the tallfolk to much of the rest of their culture. As such, most settlements have an array of hirelings that seek to sell their services to adventurers and travelers.