Black Economy, Havala and India

Black Economy, Havala and India

Arun Kumar

CESP, SSS, JNU

Fatehali caught at Delhi airport trying to leave India with a large sum of dollar currency notes has focused attention on Havala. It is also in the news because of Mr. Hasan Ali of Pune against whom the Income tax department has a placed a demand of Rs.40,000 crores. The billions of dollars in his foreign accounts were most likely not his but of clients using his services.

These are pointers to the huge hoards of black money lying abroad in tax havens. They are estimated to be between 33% and 200% of India’s GDP. This is flight of capital and havala aids it. A poor country has been exporting capital and experiencing shortage of capital for industry, employment, education, rural development, and infrastructure.

The part of the black economy that goes out of the nation maybe $ 100 billion annually, not counting the return on the money lying outside. Apart from havala, mis-invoicing of trade is used to spirit funds out of the country. Businesses in foreign trade use the latter while others use havala.

Havala is a banking channel parallel to the legal regulated banking system. Hence illegal transactions can be routed through it with little fear of detection and prosecution. Thus, movements of kickbacks, drug money, speculative financing or terrorist funding is routed through these channels.

Havala is also used for moving funds within the country. India has a large informal money market fuelled by the black savings and the informal sector. Unfortunately, all this strengthens the black economy, illegality and criminalization and thereby slows down development.

In havala, like, in legal banking, money does not have to move physically. Funds move in both directions so that havala operators need only make book entries and square them up periodically. If a NRI wants to send money to his family in India, he deposits the dollars with the operator A in the country he is in. The corresponding havala operator B in India gives the rupees to the Indian family. Someone in India wanting to send his funds abroad gives his rupees to B and he gets dollars from A in the other country. Cash hardly moves. Such transactions result in loss of foreign exchange to the country and impact money supply.

Why was Fatehali carrying dollars and not using the havala channels to transfer his funds without cash movements? Was he a courier for havala operators? Entertainment industry is active in the black economy. It receives finance from mafia, smugglers and drug traffickers. Since it is based on large cash payments and receipts, it is easy for such illegal money to circulate and often control the industry. Its international links have expanded over the last 40 years so it is easy for it to transfer funds across borders and provide havala services.

Illegal money going out of the country is routed into shell companies in tax havens. It is transferred from one to the other shell company and the previous company closed so that the money is hard to trace and then it can legitimize itself and even return to India through, say, the PN route. This is money laundering - cleaning the dirty money.

Many reputed MNC banks also act as conduits for transfer of funds. They have managers who service the accounts of HNI clients and offer advice and support. These banks have opened a large number of subsidiaries in tax havens for this purpose.

From time to time the enforcement agencies catch havala operators. Earlier they were prosecuted under FERA and now under the weaker FEMA and Money Laundering Act. The Jain Havala case of 1991 became famous due to the top politicians named. Eventually, no one was prosecuted since the agencies spoilt the case. It emerged that the Jains only counted cash and did not distinguish between the politician’s dirty kickback money or the dirtier terrorist funds. So, it prefers to operate in the nether world.

Businessmen, politicians, bureaucrats, professionals and so on use havala to transfer their funds but this private knowledge is not used officially to close this channel because of its usefulness to them. Tackling it is then a question of political will.

arunkumar1000@hotmail.com