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Strategic Analysis:
A Monthly Journal of the IDSA
Hawala-The Invisible Financing System of Terrorism
N.S. Jamwal
*
, Research Fellow, IDSA
Abstract
Hawala transactions have been prevalent in India and South Asia in one form or another for a long time. Operators of this illegal activity attracted little attention till it came to light that this mode of fund transfer was being used to fund terrorist activities in India and many other parts of the world. This paper focuses on the origin and growth of Hawala, its modus operandi, major cases and successes despite various flaws. The paper also throws light on the shortcomings in the legal, banking and commercial practices and the difficulties faced by the enforcement systems.
Introduction
The events of September 11, 2001 have changed the world’s perception of terrorism and brought focus on terrorist support structures and funding. The attacks of September 11 could not have taken place without the movement of funds through the global financial system. 1
Terrorist groups need money to motivate people to join their activities, to procure materials like arms and ammunition and to keep their network going. The experience of the Indian subcontinent in dealing with terrorist outfits operating in Jammu and Kashmir shows that they get their resources mainly from two sources-from the intelligence agencies of Pakistan and the Kashmir diaspora spread across the world. It is now an open secret that Kashmiri organisations located in places like London and New York raise resources through donations, extortions and collections in mosques. In addition, they also channel money from agencies of countries like Pakistan.
Fund transfer through normal banking channels is usually not opted by terrorist groups as any such transaction would invite the attention of the authorities.
Normally, sourcing agencies adopt two methods: by personally carrying through the land borders by couriers; secondly, through the traditional Hawala method.
Hawala is a system through which money is transferred from one part of the world to another without following the normal banking channels. Though no one perhaps knows how and when this method of money transfer started, it appears, it is as old as the beginning of monetary transactions themselves.
This system has been in existence for a long time in India and other Asian countries. 2 Some Hawala operators feel that it is an extension of the ‘Hundi’ system of money transfer that came into existence during the Mughal rule in India. This was started by the Sindhi community to avoid dacoity and highway robberies during money transfers. Later, sometime around World War II, Muslims going from Kerala to the Persian Gulf adopted the system of giving a coded message sent by post to deliver the money to people in Kerala. Since the Indian Rupee was legal tender in the entire region, the transaction did not suffer from cross currency exchange rates.
With the revolution in communications, messages through post got replaced by telephone and later by fax; and, now by e-mail. In the process, the scope of Hawala transactions got enlarged.
According to one account, Hawala, in Urdu meaning ‘reference’ and in Arabic, “trust”, 3 is in fact, an unauthorised underground banking system used by people from different walks of life, for a variety of reasons. In the lexicon of Hawala operators, the word Hawala means ‘Hawa mein lena-dena’ (transactions in air).The system was in place before the start of Western banking. Arab traders used it as a means of avoiding robbery along the Silk route. 4 It is a known fact that operators in Kandhari Bazaar of Quetta city of Pakistan openly carry out Hawala business in a five-storey building. 5 Millions of Pakistanis, Indians, Filipinos and other people from Asia working in foreign countries use the system to send money home to relatives through the Hawala route. 6 Intelligence officials believe that Hawala, in recent years happens to be the safest and fastest means to militants for transferring money across the globe as it leaves no evidence of its movement and is difficult to track. In most cases, only couriers get apprehended; they are merely a small part of a long chain.
The Hawala system is known to be exploited by militants all over the world for financing their activities, to purchase arms, to send funds (ISI, Mohammed Atta, Dawood Ibrahim, Mohammed Ansari, etc. are a few well known names who have exploited this system for overt or covert funding of terrorist activities), and to finance films.
Hawala code words used are khokas, paties, etc which mean crores (10 million) and lakhs (1,00,000) respectively. But these can and do change.
Narcotics dealers also use the Hawala system for siphoning off their illegally earned money for financing the terrorist activities and underground deals.
Modes of Hawala
As an alternative remittance system working in parallel with the normal banking channels, Hawala has two categories.
(a) Domestic Hawala.
(b) Transnational Hawala.
These are described below:-
Domestic Hawala
In the course of normal business transactions between two parties located in different cities within India, unaccounted payments are made through Hawaladars (Hawala operators) in these cities. This job is normally done by Angadias who are people who run shops. These shops are unofficial institutions that act as postal couriers for letters, parcels and money, among different cities. They also make Hawala payments for the concerned parties located in different cities without carrying the money through various cash holdings/transfers.
Transborder Hawala (International Hawala)
In transborder Hawala, money moves across international borders without being physically carried. The payments are made by hawaladars located in India to the friends and relatives of expatriates working abroad. The Indian Hawala operator has his counterpart outside India who receives payments in foreign currency from these expatriates and passes on instructions for distribution in India in Indian rupees.
Similarly, unaccounted payments are made from India to foreign parties through this system, particularly in cases of under-valuation of imports. People in India having large unaccounted tax-evaded money also transfer money outside India through Hawala to safe places abroad. Such monies may finally find a place in banks located in tax havens; and, may be transferred to other places in due course of time depending upon business requirements or may find its way to India as legitimate inflow after undergoing the laundering process.
Both the inward and the outward systems are complementary to each other. Besides evading tax, the system is fast, cost-effective, reliable and conceals the trail. In the first three decades of the Indian Republic (1950-80), the black market rate of the US dollar was higher than the bank rate. It was therefore advantageous to resort to the hawala route to transfer funds. In India, Hawala business centres are in Delhi, Mumbai, Chennai and Kolkata. Their share of the business is about 20, 30, 20 and 20 per cent respectively. 7
Magnitude of Hawala Transactions
An official US report shows that tax havens harbour deposits around US dollars five trillion and the US government itself loses about US $70 billion by way of tax. 8 According to one estimate, in 1990, drug traffickers earned a staggering profit of Rs 20,000 crores in foreign exchange. A part of the proceeds returned to India through the Hawala route to influence such businesses. 9
One could use it to import goods illegally, say, smuggling of gold. If capital is to be taken abroad, called ‘flight of capital’, the hawala route may be used. In fact, reference to Hawala being used as mode of transferring money came to light only when a militant was apprehended. 10 It is estimated that India has lost through gold smuggling and its import(1992) an estimated US $150 billion since independence. The estimates for flight of capital are unreliable but it could be anything upwards of US dollars 100 billion by now. 11
Pakistan Finance Minister Shaukat Aziz, a former executive vice-president of Citibank in New York, said $2 billion to $5 billion moved through the “Hawala system annually in Pakistan”, more than the amount of foreign transfers through the country’s banking system. 12
In India no estimate of Hawala business is available as it did not receive adequate attention of the enforcement agencies prior to its use for financing terrorism. According to an estimate of Hawala operators, approximately Rs 30 crores move to Punjab daily through Hawala. Money moves to India from all over the world but, Mumbai, Delhi, Chennai and Kolkata are major centres of this activity (Refer Fig-1).
Generally, it is region specific; e.g., money coming to Chennai is normally of expatriates working in South-East Asian countries, money coming to Mumbai normally comes from Dubai and belongs to the underworld and money coming to Punjab is again of expatriates working in North America. Though, no study seems to have been carried out to find out the exact percentage share of various players, yet, based on the author’s discussion with various sources, an estimated share of Hawala transactions can be attributed to: importers-65 per cent, exporters-10 per cent, expatriates-15 per cent, funding militancy-5 per cent, travellers-5 per cent. Money meant for militant activities forms a small part of the whole spectrum. It is hence difficult to segregate. However, the country of origin gives an indication about the possible end user, like money coming from Dubai is generally believed to be meant for militant activities and this is where Hawala operators can be of use to intelligence agencies. 13 After September 11, 2001, US authorities believe that millions of US dollars were sent through Hawala by Al-Qaeda to Dubai. 14
Funding terrorism through Hawala comprises only a miniscule part of the overall black economy network in India. A very small force of the Enforcement Directorate (ED) was deployed to check such Hawala transactions. 15
The details of cases involving an amount of Rs.25 lakhs and above detected by the Enforcement Directorate over a period of five years are indicated in Table-1. 16 These payments normally relate to the payments sent by expatriates working abroad to their relatives in India.
Table-1: Hawala Cases Involving Amounts More Than Rs. 25 Lakh Booked by Enforcement Directorate
| S. No. | Year | No. of Cases | Total Amount Involved (Rs. Crores) | Source Countries |
|---|---|---|---|---|
| 1 | 1995 | 74 | 313 | Gulf, Saudi Arabia, Afghanistan, Dubai, UK, USA, Canada, Germany, Bangladesh, Nepal, The Philippines and Singapore. |
| 2 | 1996 | 33 | 55 | do |
| 3 | 1997 | 44 | 180 | do |
| 4 | 1998 | 145 | 180 | do |
| 5 | 1999 | 39 | 284 | do |
Source: Enforcement Directorate, New Delhi
Legal Position In India
The process of liberalisation in the country saw the Foreign Exchange Regulation Act (FERA) being replaced by the Foreign Exchange Management Act (FEMA). The provisions of FEMA aim at consolidating and amending the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting orderly development and maintenance of foreign exchange markets in India. FEMA assumes readiness for full convertibility account that appears to be on the verge of being reckless. 17
Section 22 of the recently passed Prevention of Terrorism Act( POTA), 2002 deals with fund raising for a terrorist organisation as a criminal offence and a person guilty of an offence under this Section shall be liable, on conviction, to imprisonment for a term not exceeding fourteen years, or fine or both. 18
The money laundering bill leaves out of its purview the most obvious and widely used money-laundering device, Hawala transactions. The bill’s schedule does not include foreign exchange manipulations such as over-invoicing and under-invoicing of foreign trade transactions.The money laundering bill which addresses terrorist funding and arms trade among other crimes, is stuck in the Parliament for three years for want of a consensus on some of its controversial provisions.
Hawala was a criminal offence under Section-8(1) and 9(1) (b) and (d) of the Foreign Exchange Regulation Act, 1973 (FERA, 1973). For contravening these legal provisions, penalities up to five times the amount involved in contravention could be imposed. In addition, the offenders could be prosecuted under Section-56 of FERA, 1973 where punishment prescribed was imprisonment up to seven years with fine in cases where the amount involved exceeded Rs. one lakh. In cases involving lesser amounts, the punishment could be up to three years with fine.
The FERA, 1973 stands replaced by the Foreign Exchange Management Act, 1999 (FEMA, 1999) w.e f. June 1, 2000. Under the new Act, Hawala is a civil offence and the persons violating the provisions of FEMA can be penalised with fine up to three times the amount involved in the contravention. Prosecution of offenders under FEMA is more difficult because foreign exchange violations, unlike other crimes that come under the purview of the Criminal Procedure Code (CrPC), do not leave a trail of evidence, especially in Hawala cases. Under FEMA an Enforcement Directorate officer does not enjoy the powers that were available under FERA. Under both the Acts the amounts involved in the contraventions, if seized, are liable for confiscation.
The basic features of FEMA vis-a-vis FERA are given in Appendix A.
Some recent cases of funding of terrorist organisations sent for prosecution under FERA and FEMA are listed in Table-2. 19
Table-2: Some Cases Sent for Prosecution under FERA/FEMA
| S. No. | Year | Amount (Rs. Lakh) | FERA/FEMA | Militant Organisation | Brief of case |
|---|---|---|---|---|---|
| 1. | 1998 | 48.89 | FERA | Hizb-ul-Mujahideen | Recovery of this amount led to confession aboutHM)hawala transaction to the tune of Rs 2. 85 crores and around Rs 70 crores being sent annually by the ISI for HM via Hawala route |
| 2. | December 22, 2000 | 48.89 | FEMA | Lashkar-e-Toiba (LeT) | Red Fort attack. Arrest of two Hawala operators led to the confession. |
| 3. | June 20, 2001 | 15 | FEMA | Jammu and Kashmir Mass Movement | The accused confessed before the ED that the money as Received from Pakistan. |
| 4. | December 13, 2001 | 10 and laptop computer | FEMA | LeT | Parliament attack |
| 5. | December 16, 2001 | 14.89 | FEMA | LeT, HM,and 16 other organisations | Arrests linked three Hawala dealers to instructions from Dubai. |
| 6. | January 14, 2002 | 39.59 | FEMA | LeT | Pre-Republic Day arrests of 4 militants. A Gujarati Hawala Operator admitted to have handled Rs 20 crore in the past. |
Source: Enforcement Directorate, Ministry of Finance, New Delhi.
Hawala and Terrorist Funding
Hawala is one of the most effective conduits of terrorist funding in Kashmir, also known as the underground or parallel-banking channel. Intelligence agencies estimate that about 90-95 per cent of the funds come through this channel. 20
The Hawala route is used by Pakistani intelligence agency ISI and several other fundamentalist outfits based in countries grouped under the Organisation of Islamic Countries (OIC) to send money to terrorist groups in J&K. Funding to militants through Hawala is done through a network of dealers which extends all the way to Delhi, Mumbai and other places in India. Pakistan and Dubai are the epicenters of Hawala operators for funding to militants in J&K, Singapore and Bangkok service insurgents in the North-East. Many of these Hawala dealers have begun genuine wholesale and retail businesses as fronts to divert money to the J&K militant groups. It has been reported that Kashmiri carpet dealers throughout the country under-invoice their exports to Islamic countries and the balance of the under-invoiced value is diverted to the terrorist groups. 21
A US Treasury Department study identified Hawala as a means of money laundering for drug trafficking and other crimes in Pakistan. 22 The report said Pakistan, India and Dubai on the Persian Gulf form the ‘Hawala Triangle’ to move money secretly worldwide 23 (see Fig-1). Authorities have found evidence that Hawala has been used for payments by smuggling rings and militant groups based in Pakistan-occupied Kashmir 24 (See case study Appendix B). According to a report in The International Herald Tribune, Al-Qaeda used couriers and the virtually untraceable Hawala money transfer system to transfer millions of dollars from Karachi to Dubai. 25 Interrogation of Aftab Ansari disclosed that Rupees one crore was transferred through Hawala channels from Hyderabad to a Sheikh in Dubai. The money in turn was allegedly transferred to Mohammed Atta, the ringleader of the September 11 attack. 26 The Indian Government is investigating cases in which Hawala transactions are suspected to be linked to terrorist organisations. The first one has already been sent for prosecution. 27 Besides the cases mentioned in Table-2, details of covert and overt Hawala transactions related to militant activities in J&K are given in Table-3.27
Motivational Factors
One of the overriding motivational factors of Hawala transactions is the inherent wish of businessmen to avoid high taxes. The terrorists use this route for fast, safe and untraceable transfers while expatriates use it to avoid tortuous banking channels and quick delivery at home.
The factors that can be considered to be the motivation behind the Hawala system are listed as follows:
1. Difference in exchange rates: Higher rates of exchange are offered to those selling foreign exchange. A number of Non-Resident Indians (NRIs) who want to send/transfer their money to India sell foreign exchange abroad and their relations or others in India receive payments in Indian Rupees.
2. Quick transactions: Cumbersome and tedious procedures, especially those involving foreign exchange transactions, prompt even law abiding citizens to resort to this illegal mode of money transfer.
3. Increase in foreign exchange demand: There is heavy demand for foreign exchange for financing illegal activities like smuggling of gold and narcotics, promoting fanatic and terrorist organisations under the garb of foreign aid for various ostensibly religious and social activities.
4. Unrealistic permissible limits of foreign exchange: Meagre foreign exchange released by the authorities for pleasure or business trips abroad, induces travellers to procure foreign exchange through Hawala channels.
5. High Customs duty: High Customs Duty on selected high value items prompts businessmen to resort to under-invoicing. The duty saved by such illegal means is brought back to the country through Hawala or remitted to Swiss banks.
6. Misuse of export incentives and tax-free import income. Certain incomes generated through legitimate export as export promotion incentives are exempted from income tax. Black money is laundered by showing it as export income to enjoy the benefit of tax exemption.
7. Capital account convertibility. Indians intending to purchase property overseas cannot do so because the Indian rupee cannot be converted into international currency for this purpose. Therefore, such people resort to the Hawala route for obtaining the necessary amounts.
8. Fluctuating Rupee exchange rates: The rupee exchange rates fluctuate violently. This induces businessmen to transfer international currency with a view to absorbing the effects of sudden devaluation of the rupee. Such money to be parked abroad is transmitted through Hawala.
9. “Slush funds”: Kickbacks received from arms dealers, commission agents, etc., are transmitted through Hawala to secret bank accounts overseas.
10. Complicated foreign exchange banking procedures: NRIs remit large amounts of money to their relatives in India. However, complicated and cumbersome banking procedures and red tape in the system prompts them to remit the money through Hawala rather than regular channels as both parties find it more efficient, fast, and a secure system compared to the normal route.
11. Leaves no trail: This system is difficult to track, hence anti-national elements, including militants, find it safe to transmit the money through Hawala. The recent disclosure of money transfers to Mohammed Atta, the mastermind of the September 11 attacks, is one such example where the terrorists received funds through this channel for long periods and regularly without raising any suspicions at any level.
12. Illegal drug trafficking. Drug traffickers produce illegal drugs like heroin and sell it in the international market. The money so received is remitted through Hawala.
13. Flexibility: The system is flexible with enough scope to take care of unforeseen circumstances and fluctuations in the exchange rates. As no legal contract is signed or made and all transactions are verbal or based on faith, the system becomes attractive to players on both the sides.
Table-3: Details of Covert/Overt Hawala Transactions Related to Militant Activities in J&K
| S. No. | Year | Amount (in Rupees) | Recipient | Remarks |
|---|---|---|---|---|
| 1. | 1992 | 3.2 lakh | Daughter of a senior Hurriyat leader | This was revealed by a Hawala operator on his arrest when he went to deliver Rs 57,000 to the lady. This amount was received from Pakistan. |
| 2. | 1993 | 3.6 million p.a | Ikhwan-Ul-Musalmeen | Mushtaq Ahmed Khan, Dy (IUM) Chief Commander disclosed that IUM received Rs 3.6 million annually from ISI. |
| 3. | 1993 | 1.1 million | All Party Hurriyat Conference (APHC) | Senior leader of Dukhtaran-e-Millat disclosed that APHC received the amount from Pakistani agencies |
| 4. | 1993 | 3.3 million | Jamait-ul-Mujahideen | Disclosed by Mohd Ramzan Sofi @ Gen. Abdullah, Chief Commander JUM. |
| 5. | 1997 | 1 crore | Abdul Majid Dar | Interrogation of Abdul Majid Dar disclosed that one senior leader Hurriyat persuaded him to open a cloth shop and accept the amount on behalf of his organisation. |
| 6. | 1997 | 5 million and 30-40 lakhs p.m | Mohd Nazir and Shafi Mir | Supreme Commander of HM sent the amount to Kashmir via Dubai and through the owner of a carpet company. |
Source: Various law enforcement agencies, New Delhi
Modus Operandi
The modus operandi of Hawala is simple. The racketeers procure foreign exchange abroad from different sources and arrange payments in India through their henchmen or paid employees. It happens the other way also, viz, certain persons in the country specialise in arranging payments abroad and either by themselves or through their employees in India arrange payments in Indian rupees equivalent to the foreign exchange which had been procured by their contact men abroad. Often a code-word is provided to both parties which the sender conveys to the recipient anywhere in the world and the amount can be collected after disclosing the code-word. The sender does not have to provide his name or identify to the recipient. Transactions in opposite directions are also carried out which, over time, may get adjusted in accounting. As a result, the physical movement of cash is minimal. If some balance is built up, a settlement is made by way of transfer of cash, gold or through trade invoices. Money is thus transferred without any bureaucratic enquiry. 29
During the course of investigations by the Enforcement Directorate, relating to Hawala cases, the sleuths found that all transactions were listed in coded terms. 30 In one of the cases, the code-words used were ‘trouser’ for telegraphic transfer, ‘recorder’ for one lakh rupees, one ‘cassette’ for one thousand. ‘India Today’ meant the note’s serial number and in another case 10 was used for 10,000/-, 50 for 50,000/- and 100 for 1,00,000/-. In many cases the recipients could also be identified but could not be charged for violation of the relevant laws for want of sufficient evidence acceptable in a court of law.
Impediments for Law Enforcing Agencies 31
1. All the transactions are done through code-words, which are difficult to decipher. The system works purely on trust. Even if the codes are broken or are understood by law enforcers, these cannot be translated into hard evidence acceptable in court.
2. There is no physical movement of major amounts making recoveries difficult. Also, linking of the amounts or couriers to illegal transactions would be virtually impossible.
3. Hawala couriers are merely a part of the chain and are usually not aware of the originators. Even if they are apprehended and booked, the big fish remain undetected leaving the main chain intact.
4. Law enforcement system: The prevailing law enforcement system suffers from several shortcomings which are exploited by the unscrupulous operators through lawyers. Enforcement officials do not have sufficient powers; the evidence collected is often inadmissible under the current legal system and prolonged delays in prosecution of the accused leads to disappearance of material witnesses and tampering of evidence.
5. Telephone surveillance: During the enforcement of FERA, Enforcement Directorate sleuths were able to collect actionable information/intelligence by putting the telephones of suspects under surveillance as Hawala was a criminal offence. But with FERA being replaced by FEMA, it is not clear whether such action of telephonic surveillance can be repeated.
The above-mentioned factors make the task of the law enforcement officials largely ineffective.
Need for an Integral Approach
Recent terrorist activities have focused the attention of the world on the mode of funding of terrorist groups and organisations. Various routes and modes, both legal and illegal, of transfer of funds from different parts of the world using the existing banking systems and traditions, have come to light. India has been suffering from the scourge of terrorism for the last several years. In this part of the world, Hawala transactions by unscrupulous dealers have been the main source of illegal transfer of funds to different parts of the world. Till recently, it was a mode of transferring slush money generated by various illegal activities in the country. Recent revelations linking such transfers to funding of terrorist activities have made the law enforcement agencies sit up and take a fresh look at the existing legal procedures and modus operandi. Efforts are now on to identify and plug the existing loopholes wherever they exist and choke this smooth, efficient and untraceable conduit. There is a need to devise an integral approach to counter this activity which involves taking a fresh look at the tax laws, export/import policies, and banking, legal and enforcement systems. They need to be modified and amended to suit the current requirements to deal effectively with this menace and ensure that this channel of funding militants is effectively countered.
Acknowledgements
The author is grateful to Shri. K. Santhanam, Director, IDSA for his motivation, to Shri T. Shreedhara Rao, SRA and Dr (Smt) Sudha Mahalingam, Senior Fellow, IDSA for providing valuable inputs and guidance, to Shri V K Joshi, senior police officer and Shri M.K. Jha senior officer in the Enforcement Directorate for their professional inputs.
Endnotes
Note *: N.S. Jamwal is a Research Fellow at IDSA specialising in Border Management. He is a Commandant in Border Security Force (BSF), and has seen action in Jammu and Kashmir, Punjab and North-East. He has also served as Instructor with BSF and NSG. Back.
Note 1: Hon, John La Flace, Member of US Congress while making a statement on September 26, 2001. Back.
Note 2: M.N. Verma in “Havens for terrorism -Strike against Global tax Evasion”. The Times of India, January 10, 2002 New Delhi. In India it is known as Hawala, in Pakistan as Hundi, in China fei qian or flying money,in philippines,black market peso exchange. Back.
Note 3: Douglas Frantz, “The Financing : Ancient secret system moves money globally”, The New York Times, October 3, 2001. Back.
Note 4: National Geographic Channel: Documentary on “Story of Money” January 10, 2002. Back.
Note 5: Douglas Frantz, No.3. Back.
Note 7: As told to the author in an interview with senior officials of the Enforcement Directorate dated March 10, 2002, New Delhi. Enforcement Directorate is the official agency which investigates cases related to violation of FEMA (Foreign Exchange Management Act). Back.
Note 8: M.N. Verma, No. 2. Back.
Note 9: Arun Kumar, The Black Economy in India, Penguin Books, New Delhi, pp. 17-54. Back.
Note 12: Douglas Frantz, No.3. Back.
Note 13: As told to the author in an interview with senior officials of the Enforcement Directorate dated March 5, 2002, New Delhi. Back.
Note 14: Douglas Farah , “Qaeda’s gold: following the trail to Dubai”, The International Herald Tribune, February 18, 2002. Back.
Note 15: As told to the author in an Interview with officials of Enforcement Directorate on February 26, 2002. Back.
Note 17: Sudha Mahalingam, “FERA under scrutiny: A diluted replacement sought”, Frontline, May 30, 1997, p. 93. Back.
Note 18: Prevention Of Terrorism Ordinance, 2001, Sec 22, p. 10. Back.
Note 19: Enforcement Directorate No. 15. Back.
Note 20: Interview of the author with Senior Officials of the Ministry of Home Affairs New Delhi on February 27, 2002.
In one of the Hawala related cases, Shahabudin Gori a journalist by profession and hailing from Kanpur also confessed after his arrest of having received Rupees 16 lakh through a Hawala operator named “Gupta” in Delhi in 1991. The money was sent by one Dr Ayub Thakur based in London and a Pakistani national. The code-word used was the number of one rupee note. The money was meant for Kashmiri militants. Back.
Note 21: Jyoti Trehan, “Violence in J & K: Complexities and Pathways”, in Faultline vol. 7, 2001. Back.
Note 22: Douglas Frantz, No. 3. Back.
Note 24: Douglas Farah, No. 14. Back.
Note 25: Murli Krishanan, “A Canary in the Cage”, in Outlook, February 25, 2002. Back.
Note 26: Ritu Sarin : “ED is ready to prosecute its first terrorism Hawala case”, Indian Express, New Delhi February 5, 2002. Back.
Note 27: Interview of the author with Senior Officials of the Ministry of Home Affairs, New Delhi on February 27, 2002. Back.
Note 29: M.N. Verma, No. 2. Back.
Note 30: Interview of the author with Senior Officials of the Enforcement Directorate New Delhi on February 26, 2002. Back.
Appendix-A
Basic Features of FEMA
1. The aim and object of FEMA is for promoting the orderly development and maintenance of foreign exchange market in India.
2. The concept of criminal liability under FERA has changed into civil liability under FEMA.
3. Sections 3, 4 , 5, 6, and 8 of FEMA are substantive contraventions and in the event of contraventions of these provisions, civil liability is invoked in the form of imposition of penality or civil imprisonment as the case may be.
4. The adjudicating authorities exercise their quasi-judicial powers under Sections 13 and 14 of FEMA. The adjudicating authority is empowered to issue warrant of arrest and put the defaulter into a civil prison up to three years-where the demand is for over Rupees one crore and up to six months in any other case.
5. The party aggrieved by an order passed by the Assistant Director and Deputy Director (Appeal) under Section 17 of FEMA may appeal to Special Director(Appeals).There is also statutory remedy available against the orders made by an adjudicating authority other than the Assistant Director and the Deputy Director for filing appeal to Appellate Tribunal under Section 19 of FEMA. Any person aggrieved by an order made by the Special Director (Appeal) , may also prefer an appeal to the Appellate Tribunal under Section 19 of FEMA.
6. FEMA applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention committed outside India by any person to whom FEMA applies.
7. The quantum of penalty under Section 13 of FEMA will be up to thrice the sum involved where such amount is quantifiable and where such contravention is a continuing one, further penalty of Rs 5,000 for every day after the first day during which the contravention continues may also be imposed.
8. Any contravention under Section 15 of FEMA, may be compounded in accordance with the procedure prescribed in the Compounding Rules, 2000 and once this is done, no further proceedings shall be initiated in respect of the contravention so compounded.
9. An adjudicating Authority is also empowered to confiscate any currency, security or any other money or property in respect of which the contravention has taken place, to the Central Government under Section 13 (2) of FEMA. This is in addition to any penalty which such authority may impose under Section 13(1) of FEMA.
10. Section 49(3) and (4) of FEMA provide an outer limit of two years from the date of commencement of FEMA for regulating offences committed under FERA with a stipulation that “all offences committed under the repealed Act shall continue to be governed by the provision of the repealed Act as if that Act had not been repealed”. It further provides that anything done or any action taken or purported to have been done or taken including any rule, notification, order or notice made or issued to any appointment, confirmation or declaration made or any licence permission authorization or exemption granted or any document or instrument executed or any direction given under FERA shall in so far as it is not inconsistent with the provisions of FEMA be deemed to have been done or taken under the corresponding provisions of FEMA.
11. The power of investigation under Section 37 of FEMA may be exercised by the Director of Enforcement and other officers not below the rank of Assistant Director of Enforcement. Similarly power of search, seizure etc. shall also be exercised by the officers of Enforcement and while exercising such powers, the officers will exercise such powers which are conferred under the Income Tax Act, 1961 subject to the limitations laid down in that Act.
The FERA, 1973 has been repealed by FEMA. However, if provisions of the repealed Act were contravened the liability can be enforced as if that Act had not been repealed for the period of the two years from the date of commencement of FEMA. The provisions of Section 49 of FEMA make the provisions of Section 6 of the General Clauses Act applicable and that section specifically preserves the previous operation of any enactment repealed or liability incurred under the repealed enactment.
It is significant to note that the provisions identical to Section 35 (power of arrest) Section 56 and 57 (Criminal prosecutions) and Section 59 (Presumption of culpable mental state) of FERA, 1973 do not exist in FEMA 1999 as the concept of criminal liability under FERA has been changed into civil liability under FEMA. However, in the event of failure to pay penalty imposed by the adjudicating authority, the consequences would be civil imprisonment up to three years where demand is of an amount exceeding Rs. one crore and in any case up to six months by virtue of Section 14 of FEMA.
Broad Analysis Of Fema Vis-à-Vis FERA
Snapshot
Definition of “person resident in India” modified to include physical presence in the preceding financial year as one of the criteria to determine residence.
Current and capital account transactions defined. New definitions inserted in line with Rupee being convertible on current account.
The new definition of “repatriate to India” includes use of realisation of amount for discharging foreign debts or liability denominated in foreign exchange.
All account transactions would be permitted subject to restrictions as may be imposed by Central Government.
Export procedure earlier applicable only to export of goods, now made applicable to export of services.
Part proceeds for goods and services to be realized within the prescribed period.
Power to arrest not available in FEMA. Only civil consequences and no criminal consequences for offences under FEMA.
Offences under FERA that have not been prosecuted after two years from enactment of FEMA will be tried under section-49(5) of FEMA as a civil contravention if the offence under FERA also continues to be a contravention under FEMA.
Appendix-B
Red Fort Shoot Out – Case Study
Introduction
On December 22, 2000, militants entered the highly guarded Red Fort in New Delhi and killed some security personnel. Investigations into the incident by the police have brought out linkages of militants with Hawala operators, operating from the walled city Ballimaran, Delhi. The case reveals the origin of the funds, the network of Hawala operators in the Indian Capital, modus operandi and transfer of funds from Delhi to Jammu and Kashmir. The details of the money transactions carried out by the Hawala operators and their contacts are spelt out below:
Total money received from Afghani Hawala operators Rs 38 lakh*.
(I) Sher Jaman (II) Sabir@ Salharullah, (III )Abid.
The remittances were made from Saudi Arabia and Pakistan.
Hawala money sent to Srinagar through an overseas bank Rs 31 lakh
Recoveries of Hawala money by the police during investigations. Rs 9.14 lakh
Telephone numbers of Pakistani Hawala operators 51442298 & 51440335
Sajjad P and Sajjad & Co.
Riyadh/Dubai Hawala operators’ telephone number 009668842247 & 0096648841205
Modus Operandi
Militants had opened four accounts in different branches of an overseas bank i.e., three at Delhi (two at New Friends Colony and one at Connaught Place) and one at Srinagar under different names. Money received through Hawala operators at Delhi from Pakistan, Dubai and Riyadh was deposited in these accounts at Delhi and withdrawn at Srinagar. Some of the money was being shown as part of the export earnings as the drawees were dealing in export business. According to police, the export business is actually a front for the terrorists’ illegal money transaction. Details of money transactions carried out are as follows:
Details of Money Received Through Hawala and Sent to Terrorists in J&K
1. New Friends Colony branch, bank A/c no 3226392 opened in the name of Nasir and Sons on August 30, 2000. Rs 4 lakhs received through Hawala was deposited on September 15, 2000. The said amount was withdrawn as per the details mentioned below.
| S. No. | Date | Cheque No | Amount(inRs) | Recipient |
|---|---|---|---|---|
| a) | 18.9.2000 | 307761 | 60,000 | Abdul Saad Khagro |
| b) | 18.9.2000 | 307759 | 70,000 | Ali Mohd |
| c) | 18.9.2000 | 307760 | 30,000 | Mohd Shafi |
| d) | 18.9.2000 | 307762 | 40,000 | Bilal Ahmed |
| e) | 20.9.2000 | 307763 | 65,000 | Mohd. Shafiq |
| f) | 20.9.2000 | 307764 | 35,000 | Ajhar Ahmad |
| g) | 20.9.2000 | 307765 | 50,000 | Self |
| g) | 20.9.2000 | 307766 | 50,000 | Furkan |
2. On November 8, 2000, again Rs 5 lakh was deposited by one Ashfaq in Delhi and the said amount was withdrawn as per the details given below.
| a) | 10.11.2000 | 307770 | 1,00,000 | Tanbir Ahmad Qasid |
| b) | 10.11.2000 | 307772 | 1,00,000 | Nasir Ahmad Qasid |
| c) | 13.11.2000 | 307771 | 3,00,000 | do |
3. Again on November 13, 2000, Rs 5 lakhs received through Hawala was deposited in the same account and withdrawn at Srinagar as per the details given below.
| a) | 15.11.2000 | 307773 | 60,000 | Ali Mohd |
| b) | 15.11.2000 | 307775 | 70,000 | Abdul Gani |
| c) | do | 307776 | 60,000 | Mohd Yusuf Qawa |
| d) | do | 307779 | 30,000 | Abdul Gani |
| e) | do | 307778 | 30,000 | G.M. Mir |
| f) | do | 307777 | 40,000 | Ali Mohd |
| g) | do | 307780 | 40,000 | Mohd Yusuf |
| h) | do | 307774 | 70,000 | G.M. Mir |
4. On November 15, 2000 Asfaq deposited Rs 1 lakh and on November 16, 2000, Rs 3 lakh in the Connaught place branch. The money was received through Hawala by Asfaq in Delhi and withdrawn from Srinagar branch as per the details given below.
| a) | 16.11.2000 | 307781 | 5,000 | Shamim |
| b) | 20.11.2000 | 307782 | 75,000 | Mohd Bala |
| c) | do | 307783 | 25,000 | Ali Mohd |
| d) | do | 307784 | 65,000 | G.M. Mir |
| e) | do | 307785 | 35,000 | do |
| f) | do | 307786 | 1,00,000 | Abdul Gani |
| g) | do | 307787 | 10,000 | Self |
| h) | 22.11.2000 | 307790 | 50,000 | Bashir Ahmed |
| j) | do | 307789 | 50,000 | G.M. Mir |
| k) | do | 307788 | 50,000 | Niyaz Ahmed |
| l) | 30.11.2000 | 307792 | 1,000 | do |
| m) | 1.12.2000 | 307793 | 25,000 | do |
| n) | do | 307791 | 1,000 | do |
| o) | do | 307794 | 2,000 | do |
| p) | do | 307795 | 6,000 | do |
5. Another bank A/c no 28552609 of the same bank opened on the name of M/s Bilal Ahmad and the following amounts received through Hawala were deposited in the bank as per details given below.
a) On July 17, 2000 , Rs 3 lakh was deposited by Ashfaq @ Arif in the Connaught Place branch.
b) On July18, 2000, Rs 2 lakhs was deposited by Ashfaq @ Arif in New Friends Colony branch.
c) On July18, 2000, Rs 5 lakhs received through Hawala was deposited by Asfaq @ Arif in the New Friends Colony branch.
6. Thus, a total of Rs 10 lakhs was deposited in the two branches of the bank at Delhi and the amount was withdrawn at Srinagar as per the details given below.
| a) | 19.7.2000 | 776978 | 10,000 | Farooq Ahmad |
| b) | do | 776981 | 3,00,000 | Ali Mohd |
| c) | do | 776982 | 13,000 | Hazi Bashir ahmad |
| d) | do | 776983 | 3,00,000 | Mohd Yusuf |
| e) | do | 776984 | 30,000 | Hussain |
| f) | do | 776985 | 40,000 | Farooq ahmad |
| g) | do | 776987 | 15,000 | Self |
| h) | do | 776986 | 2,90,000 | Farooq Ahmad |
7. Another bank A/c no 32181669 was opened on the name of Farooq Ahmad Qasid on July 20, 2000. and Rs 1,50,000 was deposited on Aug 14, 2000 and Rs 1,56, 000 on Aug16, 2000 by Asfaq in Connaught Place branch.
Source: Law Enforcement Agency
* While Rs 31 lakh could be accounted for, the balance amount utilisation is not known.
* This money was utilised for payments to the terrorists, purchase of weapons and logistics support for acts of terrorism and violence.