Print edition : November 19, 2004

The law enforcement agencies discover that Kerala's thriving underground money transfer system received nearly Rs.708 crores through the regular banking channels in the 2000-2002 period, but the sources and ultimate beneficiaries of the funds remain unknown.

in Thiruvananthapuram

Many hawala agents are often involved in businesses where the transfer of money on a regular basis arouses little suspicion. Dealers often leave no trail for investigators and rarely keep records of their transactions.-S. GOPAKUMAR

FOR once, Kerala's unseen money-movers are in the spotlight. The State's underground funds-transfer system, which has international links and is an opaque network that runs mostly on trust and leaves hardly any trail for the enforcement agencies, had so far remained a puzzle even to many of its operators and beneficiaries, among them hundreds of Gulf-based migrant Malayalees and their families.

Now, thanks to increasing media speculation over an incomplete inquiry into the flow of nearly Rs.708 crores into Kerala in 2000-2002 through regular banking channels and its virtual disappearance subsequently, the pieces of the `hawala' jigsaw as it exists in the State are slowly falling into place.

The money was deposited (during the "scrutiny period", between 2000 and 2002) in separate chunks in 74 accounts in branches in Mumbai of 12 "new century banks". In the majority of cases, the deposits were telegraphically transferred the same day to 70 accounts in various branches of 10 banks spread over five northern districts in Kerala and Coimbatore in Tamil Nadu. The deposits were withdrawn on the same day they were credited, in almost all the cases.

Key players in the network included many from Kerala and Mumbai, their relatives, employees or associates. Nearly Rs.68 crores (of the total Rs.708 crores) was similarly transferred from banks in Mumbai and withdrawn from a cooperative bank in north Kerala, in what now appears to be part of an operation with probable links with the first one.

Enforcement, police and intelligence agencies have since identified 37 persons involved in the underground funds-transfer network originating in Dubai, with a non-resident Indian (NRI) businessman in the kingpin role of a gold-hawala dealer, who used to collect remittances from Gulf-based Malayalees and ensure their delivery to their kith and kin in Kerala within hours. Like several others of his ilk in Dubai, he offered them a lower cost of transfer, a better exchange rate and freedom from tax burdens in India - not an illegal activity in the emirate.

A senior official said that a portion of the Rs.708 crores might have come in as "compensatory payments" to hawala agents who had delivered the remittances earlier to families of Gulf-based Malayalees in Kerala. "But we do not know for sure where the money went eventually. The six persons still under detention are yet to reveal the identity of the beneficiaries, and under the new FEMA rules [Foreign Exchange Management Act, which replaced the Foreign Exchange Regulation Act and its penal provisions for such offences] we cannot force them to do it either. Normally, if they had indeed delivered the money to innocent families in Kerala, they should have had no reluctance to reveal the details of those transactions," he said.

Enforcement officials believe that the funds must have come to Mumbai initially as gold bars sent through couriers, using the liberalised laws allowing every air passenger who has stayed in a foreign country for six months to bring in 10 kg of gold. In typical hawala style, which tries to change the colour of money from black to white and erase every step of the transformation process, the funds finally reached Kerala through respectable banks in cash, possibly from the proceeds of the sale of gold in Mumbai or other parts of the country.

An officer involved in the inquiry told Frontline that in at least two instances, members of the network had withdrawn Rs.1 crore and Rs.1.5 crores from bank branches in gunny bags and had transported them in trucks. When confronted, they confidently replied that they were merely "withdrawing money from their personal accounts for honouring business commitments". In one instance, the investigating officers found a list on the basis of which the Rs.1 crore withdrawn from a bank was distributed among "unidentified beneficiaries". The biggest share delivered was marked as Rs.25,000, and officials were told that the entire Rs.1 crore was distributed in a day among several beneficiaries.

Again, typical of the hawala networks that work on the basis of complete trust, investigators said, the arrested persons had refused to identify the final beneficiaries of the funds that came through bank accounts. Some of the account holders had as many as 10 accounts in the same branch in Mumbai and in Kerala. Others had been named as proprietors of nearly a dozen (fictitious) companies in the same bank.

Those arrested merely told the investigating team that the money was distributed to people who came with "chits" issued by a jewellery owner in Mumbai, who was in the United Kingdom when he was last heard of. In addition to the NRI hawala-gold dealer in Dubai and the jewellery owner, two persons from Kerala are high on the wanted list in the case. Prominent among those in detention are a Mumbai-based exporter and the NRI businessman's father, based in Kerala.

A kingpin dealer and his sub-agents in Dubai, Mumbai and Kerala, an exporter and a jeweller based in Mumbai, a closely knit string of retail agents in Kerala - the pattern unearthed so far fits the classic hawala mould, which also has a money laundering edge. `Hawala' is a system to transfer money from one part of the world to another through informal networks, independent of normal banking channels. The system is illegal in India because of laws prohibiting speculation in the rupee and black-market foreign exchange transactions, and licensing requirements on foreign exchange dealers. But it is more or less legal in many parts of the world, including West Asia. Dubai, a trading and financial centre, is by its very nature, the main source of gold and hawala fund flow into India.

According to Department of Revenue Intelligence (DRI) sources, a large number of hawala transactions in Kerala are believed to be "routine ones", involving the transfer of remittances from migrant workers to their relatives. Many of the migrant workers from the State, especially those in the Gulf countries, prefer to use the hawala system as it offers better exchange rates and a faster, efficient and more reliable method of sending money home than the legal means of transferring money through banks and other financial institutions.

According to the sources, a routine (though, simplistic) hawala deal works thus: a migrant in the Gulf wanting to transfer funds to his relatives in Kerala approaches a hawala dealer there with the money and a fee; the dealer then asks his agent in Kerala to deliver an equivalent amount (minus the fee) to the relative; the dealer compensates his agent over a period of time through a variety of methods such as bulk cash transfers as in the case being inquired into, gold, jewellery or gemstone consignments, consumer or manufactured goods, machinery, or invoice manipulation in a fake export-import business. Such an informal system, which also offers anonymity and opportunities for tax evasion, remains popular with non-resident Malayalees, in spite of Indian laws that prohibit it. Enforcement officials largely ignore such "legitimate" hawala deals, termed variously as "white" or "social" hawala (as opposed to "black" or "criminal" hawala).

Officials of the DRI said that remittance-driven hawala funds that came into Kerala, among other places in the country, were matched by a complex movement of funds in the opposite direction. Hawala has been defined as "money transfer without money movement" and the "balancing of hawala transactions" also happens without the movement of currencies. The final settlement of accounts perhaps occurs over a period of time in the form of reverse cash flows, financial or trade settlements, under- or over-invoicing of export-import goods, gold sales or other means.

Invoice manipulation, for example, offers the hawala agents in Kerala the perfect cover for their "unofficial remittance business". Many hawala agents are often involved in businesses where the transfer of money on a regular basis arouses little suspicion. A remittance service thrown in between attracts no attention even if the transactions happen through a regular bank account. Dealers often leave no trail for investigators and rarely do they keep records of their transactions.

But the enforcement agencies are worried about the increasing likelihood of such hawala routes - used by traditional customers for their cost-effectiveness, efficiency, reliability, lack of paper trail and for tax evasion - becoming instruments of money launderers, smugglers, drug dealers, illegal gemstone traders, music pirates, bullion dealers and of late by some export-import "businessmen".

In the course of the inquiry into the Rs.708-crore flow of funds into Kerala, officers of the Directorate of Enforcement (DoE) unearthed a number of business ventures that existed only on paper and named variously as `Lord Krishna Bullion', `Padmagiri Bullion', `Oasis Corporation', Goodluck Seafoods', `Asiatic Agencies' and so on. The DoE and the DRI have found that a number of bogus export firms have been conjured up of late as a conduit for hawala funds into Kerala from the Gulf. Deposits in the formal banking system in return for highly priced fake exports through these firms, and duty-free import of costly machinery and luxury cars using loopholes in the law and their sales elsewhere for a profit - even a daring attempt to send bricks inside a container meant to carry silk garments from Kochi to Hong Kong, another hawala trade centre like Dubai - are among the various routes of sustenance of Kerala's hawala system. A few instances of hawala channels being used to bring in laundered money from the sale of heroin smuggled into Saudi Arabia have been reported, but officials said drug money laundering was not yet a big-time venture in the State.

A senior officer of the DRI told Frontline that the main agents of hawala dealers were smugglers who distributed the hawala wealth within and outside the State as gold, silver, gemstones or electronic components bought from foreign markets and sneaked into the State through a variety of ways. The electronic components, for example, are smuggled in regularly as "second-hand goods with no commercial value", with the smugglers using the services of `carriers' who pose as ordinary air passengers.

The choice of goods smuggled in depends on their relative value in the domestic market at that point of time. Thus carriers regularly bring in gold, silver, electronic components and, of late, even costly chemicals used by certain herbal medicine factories. A DRI official said that some bullion dealers, licensed to import gold for sale in the country, were also the main buyers of contraband gold that comes through the hawala stream. Kerala - especially some northern districts - is a major outlet for gold jewellery.

THE system is built on trust and credibility. The agents rarely keep formal records, except perhaps immediate transaction details. Sources and beneficiaries of funds are identified only by codes that can be crosschecked. The system is built into the culture of certain Muslim-dominated north Kerala districts, where traditionally men seek employment in the Gulf and a sizable number of uneducated women and the aged are left behind. The majority of them have remained ill-equipped to go to a bank and cash a cheque, for example. For a lot of them, the anonymous `carrier' who delivers cash regularly at their doorstep is a godsend. "Most of these agents are unemployed youth who are paid Rs.2,000 to Rs.5,000 for a day's work," an officer inquiring into the hawala funds said.

According to a DRI official, the hawala dealer-agent network is widespread in Kerala and is very strong in the districts of Malappuram, Kannur, Kozhikode and Palakkad. Many of them, who came under scrutiny recently, belonged to middle-class families and did not have education beyond the school level. Some were post-graduates, a few of them former bank employees, and belonged to well-known families. A large number of export trade-based hawala agents operated in all parts of Kerala. In Kochi alone, there were nearly 10 such major agents, an official said. Normal transfer of funds may fetch them a commission of 1 to 5 per cent of the total value, if what some of them told the officials is true.

The foreign funds coming into Kerala in the name of religious activity or charity, which is eligible for tax exemptions, is also a possible hawala channel, according to a senior official. "In some cases, an unwritten agreement is that the religious organisation or charity for which the funds are meant can use 50 per cent of the funds. Where the rest goes is anybody's guess, and it must be invariably through the hawala tunnel," he said. The bulk of the funds come in the name of Christian charities and institutions, but the largest number of organisations receiving foreign funds are those catering to the Muslim community, especially of north Kerala. Hindu groups had also started receiving substantial funds from abroad, police sources said.

According to enforcement officials, the other end of the hawala network that operates in Kerala, as in other parts of India, is almost always in the United Arab Emirates (UAE), specifically Dubai, a free trade zone that places little restriction on the movement of goods or currency. The large population of expatriate Malayalees there has been using the hawala system for years to send money home. Dubai's gold market decides the daily price of gold in India and also satiates the craze for gold jewellery in Kerala. It is the source of much of the gold that comes into the State, illicitly in the pre-liberalisation period and freely today, through a regular stream of "carriers" with the sanctioned 10kg gold bars. According to Interpol, since Dubai allows "essentially unregulated financial dealings" many Indian businessmen maintain offices in Dubai, and money is often wired there to circumvent regulations elsewhere.

Even at the global level, Dubai, which has pegged the value of its currency permanently to the U.S. dollar and had used an ever-growing number of migrant labourers for its development as a regional trading hub, is one of the main centres where streams of hawala transactions coming from various places are also "consolidated and cleared".

According to a paper presented at a World Bank conference on migrant remittances in London in 2003, a crucial institution through which these hawala transactions are organised is the UAE Exchange Centre in Dubai, started in 1980 by a migrant from Udupi in Karnataka (near the Kerala border), with a network of agents and sub-agents who feed in remittances from members of many Malayalee communities in the entire region. Similar exchanges serving migrants from other parts of India and other South Asian countries were established following its lead, according to the paper (`Hawala Transformed: Remittance-driven Transnational Networks in the post-Imperial economic order' by Roger Ballard of the Centre for Applied South Asian Studies, University of Manchester).

In the mid-1990s, in a significant development in the Indian hawala context, the UAE Exchange became a member of the SWIFT system of global inter-bank electronic money transfers - "an extremely secure electronic communications system through which major international banks conduct transactions with one another". With this advantage, it also soon established a secure Local Area Network linking all the other hawala exchanges doing business in the entire region and thus giving them access to the SWIFT system, which is used by mainline international banks. The exchange thus became a confluence of funds from the international hawala stream and the mainline banks, a place where various streams of hawala money could be consolidated into huge chunks of funds and "swapped on a global scale". In Dubai, the difference between legal and illegal funds blurred beyond recognition. The new facility also enhanced the UAE Exchange's role to complete transactions with banks in Kerala and Karnataka in a jiffy, which, the paper says, remains its "business speciality", to the advantage of hawala operators in southern India.

Significantly, in the case under investigation, officials found that during the period under scrutiny the huge deposits were invariably made in the "new-age banks", which are eager to grow and in which managers are given incentives to increase deposits and transactions. The Mumbai accounts, where the crores were deposited, were in Lord Krishna Bank (39 accounts), Vysya Bank (11), Indian Overseas Bank (7), Karad Urban Cooperative Bank (6), Catholic Syrian Bank (4), Nedungadi Bank (2), Bank of India (1), Federal Bank (1) and South Indian Bank (1).

In Kerala the deposits were made in the HDFC Bank (14 accounts), Nedungadi Bank (11), Centurion Bank (10), Lord Krishna Bank (9), Catholic Syrian Bank (8), Vysya Bank (8), Indian Overseas Bank (4), South Indian Bank (2), Federal Bank (1), and the State Bank of Travancore (1).

None of the officials is willing to give a reliable estimate of how much money actually comes into or goes out of Kerala through the hawala system in a year. According to the State-level Bankers' Committee, in June 2004, NRI deposits in Kerala banks (almost all of it from Keralaites working abroad and which came through legal channels) was Rs.29,620 crores, while the "domestic deposits" were a whopping Rs.35,789 crores. In a State whose industrial and agricultural production is poor, and whose main source of income continues to be remittances from abroad, the source of many of the "domestic deposits" continues to remain a mystery. An unofficial estimate puts the daily remittance flow into Kerala at Rs.12 crores, "75 per cent of it through hawala channels".

Department of Enforcement, DRI and police officials, to whom Frontline spoke, said that there was nothing surprising in the quantum of funds that flowed through the various banks, because migrant hawala remittances "were quite high in the State". What may look surprising, they said, was that the mainstream banks were used for the purpose, when earlier there were instances in which money or smuggled gold was transported physically in bulk from Mumbai, Chennai, Kolkata and other places. But liberalisation of gold import and other laws may be one reason why the operators chose to transfer funds in bulk through these banks, a process that is bound to continue. Moreover, there is the pressing need of the hawala money-mover to transform the legal character of his funds at every stage.

Top police officials continue to maintain that there is no evidence as yet to show that the hawala routes in Kerala are being used to fund terrorist or anti-national activities. Director-General of Police Hormis Tharakan said at a recent press conference that initial doubts about the funds being used in the Coimbatore blasts had not been confirmed and that the inquiries had drawn a blank. But DoE and DRI officials maintain that they cannot confirm that the money deposited in the banks in Kerala and withdrawn immediately is distributed among families of migrants alone. None of those arrested has revealed the identity of the final beneficiaries.

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