Black money is the curse of India shining. A dummy’s guide to informal banking
Source: Times Of India
Khan’s detention has now put the spotlight on the hawala trail. In the last week, at least half-a-dozen Mumbai dealers were raided by revenue intelligence sleuths; more than Rs 60 lakh has been confiscated. Many traders have changed their phone numbers and gone underground.
According to informal Enforcement Directorate estimates “at least 500 hawala dealers are operating in Delhi alone with a similar number in Mumbai, followed by Kolkata, Chennai and Hyderabad — which are significant among cities emerging as major business centres in the country.”
In fact, many believe that with its large transaction values and ability to transfer money rapidly, the hawala network is more widespread than India’s formal financial system. The magnitude of transactions could put some of the world’s biggest banks to shame. The monthly transactions executed by Delhi’s roughly 500 hawala operators is believed to be somewhere around Rs 30,000 crore or Rs 3,60,000 crore per annum. That’s almost as much as the government’s total direct tax collection in 2009-10 or nearly 6% of the country’s GDP that year. And that hypothetical calculation is only for Delhi!
Till a few years ago, New Delhi was the major centre for political hawala deals. But the presence of a multitude of enforcement agencies, forced them to move base to Kolkata. The quantum of money transferred from political bribes can be gauged from the fact that two of every 10 hawala operators are busy helping politicians stash away their ill-gotten wealth.
Whilst on the trail of two such major kickbacks, income tax officials recently discovered Savage Island in New Zealand. On the tiny island, they found that Indians had opened banks with relatively small amounts of capital — sometimes, just Rs 4.5 lakh. The purpose of these banks appeared to be clear — entering into legitimate transactions with other financial institutions across the world. One of the many trails led to a political kickback of more than Rs 7,500 crore, which arrived at one of these Indianowned banks from a tax haven. The money was moved to another bank on Savage Island; eventually both banks were shut down, ending the trail.
Another trail had a major Indian airline receiving money from a clutch of companies in Mauritius. Followed back, the trail led to a bank on Savage Island. The bank in question apparently received its last cheque from another bank on the same island. Before the bank authorities could be tracked down, both banks had ceased to exist.
It was a classic case of the vanished hawala trail. Unsurprisingly, hawala traders are enormously rich. In February 2006, an income tax investigation found that Rs 1,540 crore of unaccounted money had been stashed at the Fatehpuri branch of the Federal Bank in Delhi. Three people, sans business antecedents, were responsible for the entire transaction. These agents were estimated to earn anywhere between Rs 5 and 10 crore each, every year. A similar drive in Maharashtra and Gujarat that year unearthed more than Rs 1,000 crore without any identifiable source. The modus operandi of these hawala dealers was identical. For domestic deals, they created bogus bills and discounted bank drafts on behalf of traders who dealt in cash. Or, they gave loans to industrialists in return for cash, charging them a commission of 1% of the total transaction. In offshore deals, money was delivered to people named by the beneficiary at any location in the world. The commission was a maximum of 2%.
Domestic hawala is small change compared to the big sums that politicians put away offshore. A big chunk of this money is received in tax havens such as the Isle of Man, British Virgin Islands, Switzerland, Dubai etc. The Central Board of Direct Taxes recently concluded a Tax Information Exchange Agreement with at least four offshore jurisdictions famous as tax havens — the Virgin Islands, Isle of Man, Bermuda and the Bahamas. It is trying to sign a similar agreement with 20 others.
