The hawala conduit is alive, kicking and set to expand. And hawala operators are laughing their way to the bank with the easing of foreign exchange controls. "Freeing the movement of money will open the floodgates for black money and it will be boom times for hawala operators," admits a senior revenue official involved in the drafting of the Foreign Exchange Management Act (FEMA).
The enactment of the new legislation may perhaps wear a pro-liberalisation and investor-friendly image but certainly fails to address the crucial problem of the transfer of money through hawala channels. The safeguards are close to little. And the scope for malpractice, tremendous.
Investigative agencies estimate that over Rs 10,000 crore is pumped into the financial system annually through hawala channels. The newly-incarnated FEMA, which lacks much of the bark and bite of the law it is to replace, automatically gives big hawala players more space. A study some years back conducted by the then chief economic advisor to the government, Shankar Acharya, made a conservative estimate of 35 to 40 per cent of the Gross Domestic Product (gdp) being circulated as black money.
Following the adoption of FEMA, intelligence reports have indicated that the major hawala operatives in the four metros are looking at smaller feeder towns to expand their sphere of operations. "We have information on this aspect," says an intelligence official.
In fact, an influential lobby within the Enforcement Directorate and Directorate of Revenue Intelligence (DRI) strongly feel that the present liberalised regime - with FEMA in place - will only witness a spurt in hawala transactions as it is now construed as a mere civil offence and not a criminal one.
The reasons are simple to understand. Under the erstwhile Foreign Exchange Regulation Act (FERA), hawala transfers under Sections 9 and 56 were prosecutable offences, carrying a sentence of up to seven years. Though FEMA has retained the clause, there is a big difference. "It is now a civil offence, no criminality is involved and it's not subject to prosecution and imprisonment," says the newly-appointed enforcement director, S.S. Dawra. Thus, a person picked up for a hawala transfer in this 'friendly, liberalised' regime, will have to cough up three times the amount involved (money transferred through hawala) as penalty. "That will not act as a sufficient deterrent," says an enforcement official.
In many ways, investigators liken the civil enactment in FEMA to that of an income-tax evasion. "Sure, you can be raided and arrested. But pay the fines and you are back in business," says a revenue department officer. This lack of deterrence is true of the Money Laundering Act also, which is currently being deliberated by a select committee of the Rajya Sabha and soon to be made law. "The act is criminal in orientation and deals more with the forfeiture of property," says a finance ministry official. Under it, proceeds from crimes relating to the Indian Penal Code, Immoral Trafficking Act, Narcotic Drugs and Psychotropic Substances Act, Arms Act and Prevention of Corruption Act will be seized. "The Money Laundering Act does not address foreign transfers of illegal money," says a Narcotics Control Bureau (NCB) official.
Currently, the money-laundering scenario in the country relates to proceeds of crime, tax-evaded monies and under-invoiced imports being pumped back into the system. "Hawala transfers are the most important ingredient in the money-laundering cycle and there are not enough checks," says an official. In fact, the biggest route used by export houses and businessmen for "legitimising" their money is over-invoicing their products while sending it abroad. "Show that your imports are worth Rs 1 crore, sell it for one-tenth the amount and bring back the sum to the country showing it as payment for exports," says an enforcement official. "You even get incentives as duty drawbacks (export subsidies)."
Recently, a Revenue Intelligence team busted a well-organised bogus export operation. Under this, a firm was exporting rags in the name of quality apparel. It had been going on for over a year. "Ten kilograms of rags, costing just Rs 10, was being sold to a supposed importer in a South Asian country for an astronomical sum of Rs 450 for every kilo," says an official. This money was ploughed back though the normal hawala channel.
Investigations further reveal that the exporter in Delhi was acting as a front for a minister in the BJP-led government. "Some customs officials in Delhi who were in the know of the fraudulent exports were suspended. However, nothing happened to the minister," says the intelligence official.
Another method of operation is to get in touch with a hawala operator who arranges the ill-gotten wealth to be brought back into the country in the form of a donation or gift or who even parks the money in a bank account abroad.
"This is how a corrupt public servant or for that matter any citizen manages to use the hawala route to couch his unaccounted money," says an official. Banks in the United Arab Emirates, especially Dubai, do not need any certification or ask for documents before issuing drafts.
Investigators also point out that hawala operators are used increasingly for those who need to ship out huge amounts abroad while vacationing. "It is all for a fee," says an official. In addition, those involved in narco-trafficking and gun-running also employ the hawala conduit and the dividends are enormous. "The commissions charged by the hawala operators are directly proportionate to the volume of money being transacted," says an NCB official.
That hawala satisfies an entirely different need was not lost on the mandarins in North Block while drawing up FEMA. "Hawala ensures that illegal monies are not recorded and accounted," maintains a DRI officer. Yet, the framers of FEMA believe that the hawala trade will diminish, if not vanish from the scene, with a loosening of foreign exchange controls. The official version for disbanding FERA and ushering in FEMA is that the "terror raj" unleashed by investigative agencies would cease. Fine-tuning the act was also imperative as the earlier act was bulky, rigorous and antiquated in some ways. "Besides, there is less scope for harassment and detention, and it is pro-citizen," says an official in the Department of Economic Affairs (DEA). But there is no credible explanation on how it would bring down or even eliminate the hawala trade. R.S. Sharma, a joint secretary in the DEA, refuses to comment.
A majority of cases handled by the Enforcement Directorate involves hawala transfers. Restrictions under FERA were:
"In the present dispensation, even if the approved purposes are expanded and the ceilings removed, the approved channels will always remain," argues a finance ministry official.
Put simply, all money which seeks to avoid documentation will always be funnelled through hawala. "There is no getting away on that score. And therefore, it was imperative to have stiff legislation," says an investigator.
Pro-liberalisation votaries argue that with the ceilings on foreign exchange removed, like the West, hawala would die a natural death. But in the US, every transaction above $10,000 is recorded and carefully noted by the enforcement agencies. Here, everyone would wish to hide their unaccounted monies. Hawala, it seems, is here to stay.
