Hawala Operations Rob Nations

Hawala operates in many ways and operators come in many forms. The main objective is to evade tax and launder black money. Such operations are widespread, cutting across borders, and carried out professionally with wealthy clients, consultants and officials, all colluding in corrupt practices. The end result is that they rob nations of precious resources needed for development, but end up funding terror and crime

The service sector contributes about 55% to our GDP and adds to our national wealth. However, there is one service field which robs the nation’s wealth and reduces our GDP. This service area is of ‘entries operations’, also commonly known as ‘hawala operation’. The operators in this fieldwork in an organised and professional manner like in any other field. The only difference is that this activity of hawala operation is illegal and the only objective of this operation is to help clients in evading tax and to help in the laundering of their black money.

Recent income tax search actions in Delhi and some connected areas highlighted the widespread and organised nature of hawala operations in the country. Two young ladies from the Delhi Investigation Directorate had planned these searches, which resulted in the seizure of Rs.67 crores in cash alone, and an overall evaded income of about Rs.900 crores.

Shady shells

The modus operandi was to create shell companies in large numbers, where poor people like servants and drivers were made directors, along with presenting some apparently credible evidence to make these companies look genuine.

These shell companies played multiple roles. If a high income-taxpayer wanted to reduce his income by booking bogus expense, then bogus entries would be made by the operator from one of his shell companies. Similarly, loan entries were made against unaccounted cash for a commission. Cash collected in one shell company was processed as proceeds of some bogus trading activity, while another sister shell company was used to give loan and the desired loan was entered. There were cyclic transactions amongst the shell companies so as to balance the books and to project a picture of genuineness.

The shell companies also showed entries of non-taxable long-term capital gains on the sale of shares if a client desired to enrich his capital. These operators also had a recipe to provide short term capital loss entries if clients wanted to show reduced income. The end result was to reduce the tax income coming to the national kitty and thus a loss to the national wealth.

‘Hawala operators are incredibly ingenious service providers in the illegal game. They wear many hats. They are not mere entry providers but also play the role of a parallel banking channel, with national and international reach’

Widespread malaise

This search was not an isolated incident. Immediately after the Delhi search, there were search actions conducted in Chennai and Madurai, where tax evasion of Rs.1000 crores was detected. These searches detected mixed ingredients of hawala entries and undisclosed investments. The searches revealed that unethically earned income was withdrawn to invest in 800 acres of land in a Singapore company. The tools used were hawala entries, made to make the transactions look true and genuine.

Hawala operators are incredibly ingenious service providers in the illegal game. They wear many hats. They are not mere entry providers but also play the role of a parallel banking channel, with national and international reach. To illustrate, you give them Indian rupees in Mumbai and they can give you foreign currency in Dubai as per your requirement and vice-versa. If you want to escape formal banking channels for various reasons, then hawala operators play the role of money exchangers, providing service at your doorstep.

This robs us of foreign exchange and sometimes is used to fund terrorist activities. Hawala service providers try to ensure that the enforcement authorities are not able to locate the money trail and their clients are protected. Black money goes out of the country through the hawala route. For round-tripping of black money, hawala is a potent tool. Hawala is a dreadful game and both clients and operators can go to jail when caught. The Enforcement Directorate acts as the watchdog, but the game goes on with sinister regularity.

Intelligence for evil

In a normal trade, an entrepreneur gets associates and help from service providers to set up his business or to expand it. In a similar manner, if an entrepreneur or anybody with illegal money decides to hide his unaccounted money or evade tax, he gets associates and professional service for his illegal intention. These service providers, available globally, are very intelligent but operate with evil design.

To illustrate this point, let us take the example of the discovery of the ill-reputed Panama Papers by a group of international journalists. We all know that some were really rich and well-known powerful people, including heads of some countries. They had transferred money from their respective countries to the Panama tax haven for concealed offshore investments in different names. And for this, a reputed law firm based in Panama was the professional help provider. This law firm had specialised in creating offshore entities for concealed investment and this served as an added attraction for the global rich to come to Panama.

Worms within

Another set of service providers are people indulging in economic crime within the system. Unscrupulous officers within banks who work to cheat the banks. Or corrupt officers within tax departments. These are organisation insiders, who join with the economic criminals, and sometimes get victimised. To illustrate, a junior officer of the Punjab National Bank was the main accomplice of Nirav Modi who aided him in robbing the bank of Rs.14,000 crores.

During demonetisation in 2016, some bank officers were caught helping individuals to exchange dead demonetised notes with live notes. In the tax department, a good officer catches a tax evader, while a corrupt officer exonerates him. Sometimes, a corrupt officer in the customs department may close his eyes and allow the smuggled goods to come in without any duty. These isolated wolves play havoc in the system. They are associates and service providers of the evildoers. And by doing this, they betray the organisations that have given them employment.

‘Another set of service providers are people indulging in economic crime within the system. Unscrupulous officers within banks who work to cheat the banks. Or corrupt officers within tax departments. These are organisation insiders, who join with the economic criminals’

Market manipulators

In the capital market, there is another set of specialised service providers, commonly known as market operators. These days the dirty game here has slightly ebbed due to the applicability of long-term capital gains on the sale of shares, but earlier, it used to be rampantly used for money laundering. The modus operandi was to select a set of market operators who make cyclic transactions of sale and purchase of low-value penny stocks till the value goes up, and gullible investors get trapped. These market operators will ask money launderers to purchase penny stock and unload them when the price goes sky high. In the process, money launderers used to earn tax-free capital gains. The market operators used the cash given by the money launders for the cyclic turnover. The entire game goes against the norms of the capital market, but market operators played the game in spite of strict vigilance by SEBI.

It is the will of a person as to which way he chooses to go. Either way, he will get service providers, be his way legal or illegal. In a lawful business, there are honest chartered accountants and advocates who advise you to go the honest way. There are many successful business empires, which have established their credibility and strong brand names going the honest way. These business people are respected in society. There are also plenty of business entities for whom making fast money is the goal, the means to achieve the goal being immaterial. They enjoy breaking laws and evading tax, and here too there are plenty of cunning consultants available to them.

Which way will you go?

Strict laws are important, together with visible deterrent actions to stop people and consultants going the wrong way. But, again, more than the laws, it is the will of a person making money which is more important. It is not possible to initiate legal action against each and every deviant person in a big country like ours. Our people should get awakened and be honest in business as it is all in the service of the nation. Demonetisation was a strict lawful action to curb black money, but it was not very successful, as almost 99% of demonetised money got banked. It failed because of the dishonest intention of individuals who hid the demonetised money in the names of poor people, and through evil service providers.