How Demonetisation Has Derailed The Hawala Route; But More Needs To Be Done

How Demonetisation Has Derailed The Hawala Route; But More Needs To Be Done

by Abiram Devnathan - Friday, January 20, 2017 04:16 PM IST
How Demonetisation Has Derailed The Hawala Route; But More Needs To Be Done The Rs 500 and Rs 1,000 notes withdrawn from circulation. 
  • Intelligence agencies should be equipped with sophisticated technology to track the trail of money, which are transferred through hawala.

    The heat of demonetisation has been felt heavily by the hawala users and its operators.

The archaic and narrow streets of old Delhi, like any other normal day, witnessed busy hours on the morning of 8 November 2016. But the night of the very same day turned out to become unpleasant for some. Old Delhi has been touted as a hub of hawala: an international underground banking network. The demonetisation announcement by Prime Minister Narendra Modi was a bombshell to many hawala operators (hawaladars) here. Since this announcement was made, hawaladars in old Delhi have shut their shops, due to the absence of cash and customers.

The hawala, which is an Informal Value Transfer System (IVTS), has been predominantly used by terrorists, drug dealers, arms salesmen, and other culprits. The Pakistan sponsored separatists and terror outfits have been major users of hawala. In addition to the Fake Indian Currency Notes (FICN), the funds raised in Pakistan, for funding terrorism, are dumped into India through this system. According to Intelligence Bureau, the Lashkar operatives in Dubai were asked to raise funds for the 26/11 Mumbai attacks. They managed to do this through the hawala racket, with the assistance of the underground gangster Dawood Ibrahim. This system was efficiently used for funding numerous other terror strikes in India.

The word hawala originates from the Arabic root which means ‘to transform’. It is told that this system came into existence in the twelfth and thirteenth centuries for facilitating trade along the silk route. Simply speaking, in hawala, the money is transferred from one place to another, without any actual movement of that money. This is unique in nature. It is distinguished from other remittance systems by the trait of trust which prevailed amongst its stakeholders.

To understand the mechanics behind the hawala transfers, consider this example.

Hawaladar 1 in Karachi is approached by a remitter to transfer the money to his friend, the recipient in Delhi. Hawaladar 1 accepts the payment in the local currency. He later contacts his counterpart hawaladar 2 in Delhi to pay the recipient. To confirm their identities, both the remitter and the recipient are given a password. Through a phone call, the remitter and the recipient read the alternate digits of the password. If this is done correctly, the identity thus established, will allow the hawaladar 2 in Delhi to pay the recipient in Indian rupee.

In this process, the output money is from hawaladar 2 in Delhi. This means that the hawaladar 1 in Karachi, is creating an informal debt to his counterpart in Delhi. This debt has to be settled. Usually, for better settlement process, the hawaladars are relatives. Sometimes, the debts are covered through reciprocal transfers (in this case: a transfer from Delhi to Karachi). If there are no reciprocal transfers, the settlements are done through courier, postal cards, wired transaction, checks or bank transactions.

When we say bank transactions, this means that both hawaladars in India and Pakistan have their bank accounts in cities such as Dubai, Singapore, London, Hong Kong and other conducive places. This allows them to settle their accounts in a single country and helps to serve their customers efficiently. Cities like Dubai are free trade zones, where there are no regulations on movement of goods or currencies. Having bank accounts in such countries with hard currencies helps them in conversion to other currencies.

There are all sorts of advantages for choosing hawala transfer system, over the formal money transfer system offered by banks or any other global payment companies.

Firstly, the time consumed for a transaction in the hawala system is a matter of few hours. But the transfers through formal remittance agencies typically take days or weeks.

Second is the minimum fee charged. In the formal system, the fee charged from the remitters revolves around 10-20 per cent of the total amount transferred. Contrastingly, in hawala, it is only around 0.25-1.25 per cent of the amount transferred.

Third is the risk factor involved. In hawala, the risks exist only at the agent level. Even if the hawala agents are caught, it would be intricate to trace the trail of the money involved.

Lastly, the most important advantage is the space provided for anonymity. Unlike formal transfer system, there is no requirement for the stakeholders to disclose their identities. This characteristic feature makes terrorists and other criminals to choose hawala over the formal system of remittance.

Pakistan too harnesses its funds which are received and supplied mainly using the hawala system. There are substantial pieces of evidence available.

In a secret letter leaked by WikiLeaks, former US secretary of state Hillary Clinton expressed her concern on the Gulf money being spent to fund terror outfits in Pakistan and Afghanistan. Further, it is said that part of the funds spent for 26/11 attacks was funded by a Saudi-based company. According to US intelligence agencies, the charities and donors in Saudi Arabia pumped in huge funds through hawala to radicalise the Kashmir valley. This has been done with the help of Pakistan. In 2005, the House of Saud had approved Rs 1,75,000 crore to promote Wahhabism in South Asia. The Wahhabi groups in Jammu and Kashmir were major beneficiaries of these funds. Recently, the Chief Minister of Jammu and Kashmir Mehbooba Mufti said the hawala money was being used to fund terror activities and violence in the state and 173 such cases have been registered in the state since 2001.

The Indian intelligence agencies have dug out the call details of the conversations between Pakistani handlers and the Hurriyat Conference. Post the encounter of BurhanWani, Hafiz Saeed and Syed Salahuddin, the chiefs of Pakistani terror outfits, joined hands to foment violence in the Kashmir valley. The duo collected the donations across different parts of Pakistan, to fund the Hurriyat Conference. Hurriyat leaders run eight trading companies to receive these funds through hawala. The funds received are managed and distributed by them. The annual funds received by them revolves around Rs 1,000 crore. In addition to fake currency notes, the funds transferred through hawala are crucial, as the stone pelters can only be paid by original currency notes, not by fake notes. Post demonetisation, there have been several reports of bank robberies by militants, to overcome the cash crisis.

The heat of demonetisation has been felt heavily by the hawala users and its operators. As per the reports of Central intelligence agencies, the call traffic by hawala agents in India has dropped by 50 per cent. There have been several reports of busted hawala rackets across India. The people who were running these rackets were involved in illegal conversion of old currency notes. Some RBI officials were also held for facilitating them.

A prominent businessman and a hawala trader, Parasmal Lodha, was arrested for converting demonetised notes worth Rs 25 crore linked to Chennai-based industrialist J Sekhar Reddy, into new currency. Similarly, a Thane-based chartered accountant, Rajesh Agarwal and his colleague were arrested by the police. They have been operating a racket for the last two years. The police have found documents that prove Agarwal floated six companies in the names of his office employees. Furthermore, reports on busted hawala rackets in the Indian airports also occurred in several news platforms.

The demonetisation move has certainly impacted the hawala system. But how long is this impact expected to last? Because of limited record keeping and undecipherable coding of each transaction, it is intricate to intercept the hawala transfers. Therefore, the challenge before the intelligence agencies is to track the trail of money which are transferred through hawala. This is especially an arduous task for agencies involved in counter-terrorism efforts. Intelligence agencies should be provided with sophisticated technologies to help them succeed in this. Although demonetisation has hit hawala operations, there are several reports on their revival too. One should therefore understand that demonetisation is not a checkmate to hawala, rather it is a checkpoint. There are more such measures which are necessary to curb such underground systems and to keep them in check. The current political leadership seems to have understood this.

In total, this is a transition from an untraceable to a traceable system of functioning, an investment for a better tomorrow.

Abiram Devnathan is a research intern at Vision India Foundation, New Delhi. He is a final year Mathematics undergraduate in Loyola College, Chennai.

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