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2017: The status in Kerala
Days after the RBI's November 8 withdrawal of high-denomination currency notes, Kerala's hawala network went into complete paralysis. The illegal hawala pipeline funnels what the Directorate of Revenue Intelligence (DRI) and the Kerala police estimate to be Rs 40,000 crore between the Gulf countries and India's southern-most state. Overnight, this parallel banking network was stuck with useless currency worth thousands of crores. A body blow had been dealt to a network with incestuous ties to the gold smuggling, builder and the fake currency network as it would never be able to mobilise enough currency from the market for distribution. Or so the authorities believed. But as it now emerges, the effects of demonetisation wore off quickly. Hawala, banned by the Foreign Exchange Management Act (FEMA), 2000, and Prevention of Money Laundering Act (PMLA), 2002, is thriving again. It's not the first time that the hawala syndicate, which operates almost exclusively in South and West Asia, has thwarted efforts to shut it down. It had beaten a post-9/11 global crackdown (hawala routes were used to fund the terror attacks) and more recently a clampdown by the Saudi interior ministry which, since last May, has been freezing bank accounts suspected of transferring funds to Al Qaeda. To beat that, hawala operators started smuggling Saudi rials in bulk in vegetable trucks to Dubai, the headquarters of the illegal money trade. In post-demonetisation India, the syndicates soon teamed up with banks to source large amounts of new currency, and later, made a killing exchanging it for old notes. An India Today investigation reveals why it will take more than just note bans to eradicate the hawala trade.
On November 12, just four days after demonetisation, 65-year-old Mariyamma from Kondotty in Malappuram district tried to deposit Rs 49,500 at the local State Bank of India branch. However, Rs 37,000 of this was found to be fake currency notes of Rs 1,000 denomination. During interrogation, she told the police that the money had been sent through the hawala network by her Gulf-based son. Security agencies have always known that the network is a crucial channel for distributing Fake Indian Currency Notes (FICN). As far back as in 2009, a report by the National Intelligence Agency (NIA) had cited two high security printing presses run by Pakistan's Inter Services Intelligence (ISI) in Karachi's Malir Cantonment as the source of the FICN. And now an Intelligence Bureau report from January 2017 says around Rs 4,000 crore worth of high-value fake currency has reached Kerala after demonetisation. Had the presses been recalibrated to print the new currency notes? The new fake Rs 500 currency notes seem to be of inferior quality and can be easily detected. The fake Rs 2,000 notes, though, are worryingly close to the original, mimicking 11 of the 17 security features. So strong were the reports that fake currency was being shipped through containers that raids were conducted in the Chennai, Thoothukudi and Cochin ports. In fact, the Chennai port was reportedly closed for a week to scan containers.
Just how inextricably linked the fake currency and hawala networks are had been proved after the 2013 arrest of Abid Chullikalavan Hassan at Kochi airport. Hassan was arrested with a relatively small sum, Rs 9.5 lakh in FICN, but he identified a Jeddah-based Indian national, Abdul Salam of Malappuram, as the mastermind of the fake currency racket. Salam was deported by Saudi Arabia and arrested by the NIA at IGI airport in New Delhi on December 23 last year. He revealed that he had smuggled "high quality" fake currency worth an astonishing Rs 3,000 crore in a five-year period (2009-14) using carriers to Kerala. A senior NIA official says that "most of the fake currency that was being distributed through hawala chains was used for real estate investment". Hawala distributors slipped counterfeit currencies in a 60:40 ratio while making payments (40 per cent being the share of fake notes). Most of these notes are of such high quality that they escaped micro scrutiny.
The Hawala laundry
'Hawala' is derived from the Arabic word for trust, a key attribute that oils a parallel banking network involving many strangers, few of whom even meet face to face. But the currency exchange operation is a minor cog in the wheel nowadays. As Nizar Mohammed, a hawala operator based in Malappuram, says, "Our money laundering operations are much more profitable. When you consider the risk factor, it's the safest business." Mohammed, 48, worked as an accountant in Saudi Arabia for eight years before learning the tricks of the trade from his brother-in-law and switching careers in 1996. He now specialises in laundering black money. His operations take advantage of the Dubai free trade zone where promoters do not have to disclose their source of income to run a firm. Mohammed locates a local sponsor in Dubai, helps his Indian clients get a business visa and float a trading company or join one of his many firms as a partner. As the client holidays in Dubai (for 181 days, the mandatory period to be declared a non-resident Indian), his black money is turned into white and transferred into his 'NRI' account as tax-free Indian rupees. This modus operandi continues, unaffected by demonetisation.
"If someone has Rs 100 crore in black money, we help them launder it for a 20 per cent fee," Mohammed says. Businessmen are not the only ones using his service. He claims to have many politicians and bureaucrats as his clients. "They float companies in the name of family members or relatives in Dubai to launder the money," he says.
Another hawala dealer claims his network pays protection money to police officials and politicians across Kerala. "We take care of their interests. It's part of our 'operational expenses'," he discloses. These expenses take the form of hefty bribes, liquor, holidays in Dubai and even women. "Nothing can stop it. Hawala will continue as long as Keralites work in the Gulf," says a grinning Jaleel, 37, who claims he transacts hawala money worth Rs 10 crore every day.
Koduvally town in Kozhikode district is the state's ground zero for the hawala trade. Over a thousand people, of the town's population of 53,986, are said to be directly linked to the kuzhal panam or 'tube money' operations, as hawala is known locally. "It's socially accepted and the economy is based on it," says C. Sunilkumar, an official at the Koduvally municipality. A senior Enforcement Directorate official estimates that Koduvally's hawala operators do transactions worth around Rs 150 crore a day, among the largest such underground cash operations in the country.
Hawala took root in the early 1970s in this predominantly Muslim municipality. Villagers working in the Gulf wanted a banking channel which could funnel earnings to families back home and offer a better exchange rate (sometimes as much as 20 per cent more). Most workers were poor and semi-skilled with limited knowledge of banking operations, and whose womenfolk, from conservative families, were discouraged from visiting banks. A hawala operator would collect remittances from workers in the Gulf, and his local distributor in India would deliver the exchange in rupees to the worker's family back home. At its peak, in the 1970s, Kerala's hawala kings controlled 70 per cent of the transactions in India. But over the years, in the aftermath of globalisation and Dubai becoming the hub of operations, transactions in Kerala account for only 30 per cent of Indian operations, mostly as source money from NRKs working in the Gulf. Over time, the network has segued from phone calls to WhatsApp or Instagram messages, but the modus operandi has essentially remained the same.
Terror and gold
What has complicated matters since the '90s are the linkages with gold smuggling networks and terror finance. Hawala today is the medium of choice for terror networks as it is anonymous, leaves no electronic trails and is difficult to trace back to the source, making it ideal for terror sponsors in countries like Pakistan. Besides the international hawala links, domestic channels further facilitate internal transfers, obfuscating the trail. Nearly a decade ago, in July 2007, then Kerala intelligence chief Jacob Punnoose had warned of the nexus between the fake currency racket, hawala networks and radical Islamist networks like the National Development Front (NDF), the parent organisation of the Popular Front of India (PFI), in a five-page secret report to the home secretary. He had even listed case studies of hawala operators with close ties to the NDF. No action was taken on this report. Even in the latest case of 21 missing Kerala youths joining the Islamic State (IS) in Afghanistan, the NIA suspects that hawala networks were used to secure funds for their travel.
Police officials say the jewellery trade too feeds off hawala money and its ancillary gold smuggling activities. Gold smuggling operations help hawala networks double their profit margins. Anwar, a hawala operator based in Koduvally, explains the link. "Hawala networks earnRs 7 lakh for every Rs 1 crore they invest in gold smuggling. Rs 1 crore in Dubai can buy you three gold bars weighing a kilogram each. With the help of customs and airline crews, gold can be smuggled to airports in Kerala or Mumbai," he says. Over the past five years, gold smuggling between Dubai and Kerala has surged. Couriers come in all forms-on January 23, 2017, Kochi customs even arrested a Catholic priest, Fr Isaac Kizhakaeparambil, with 300 grams of gold bars concealed inside chocolate bars in his baggage.
Post-demonetisation, the network turned to laundering the old currency notes at a 30 per cent premium. Operators offered Rs 70 lakh for every Rs 1 crore in old currency. The money was laundered through banks, with the operators splitting the commission-10 per cent to crooked bank officials and pocketing the remaining 20 per cent. "Hawala transactions as such are not as profitable now, compared to the risk we are taking. But subsidiary operations like gold smuggling, money laundering, real estate and the fake currency racket give good returns," reveals Anwar.
The gold-hawala links are openly visible in Koduvally-89 retail jewellery shops are lined up astride a 400-metre stretch on National Highway 766, a novelty even in gold-crazy Kerala. Intelligence reports warn that several hawala operators work with the gold smuggling network, too, reinvesting the money in the real estate sector. "We have the state's largest number of retail jewellery shops," says Abdul Nasser, owner of Arabia Jewellers, proudly. The jewellery shops employ some 1,400 families. Nasser, however, vehemently denies any link between the jewellery business and the hawala operations, pointing to the village's tradition of being an abode of goldsmiths. Koduvally's gold trade, which dropped from 140 grams a day to almost zero post-demonetisation (most purchases were in cash), is now limping back to normal.
But despite its corrosive influence, hawala is primarily seen as a white-collar crime which does not interfere with law and order in the state. Weak laws and corrupt officials help further. "We have only a limited role in hunting down hawala operators. Whenever a huge amount of currency is seized, we hand over the case to the Enforcement Directorate. Loopholes in the FEMA rules ensure that most hawala operators go free by paying a fine," a senior police official says. The hawala operators produce statements which show proof of income or they pay a fine and get away with it. Police can't register the crime and investigate the case. Kerala's dark money web remains safe in the shadows.