How Hawala Works: An Underground Banking System

HAWALA
INTRODUCTION
Among the methods terrorists worldwide use to move money from regions
that finance them to target countries some hardly leave any traceable trail.
As regulators learned recently, one of the weak points in the payments chain
through which illicit funds can enter is a system of traditional trust-based
banking originating in southern Asia which is known as hawala.
The word hawala is Hindi meaning "trust" or "exchange". Often used in
relation with the word hundi which stands for "bill of exchange" hawala is an
unofficial alternative remittance and money exchange system enabling the
transfer of funds without their actual physical move. Traditional financial
institutions may be involved but more often the system is used to bypass
banks. There are an estimated 3000 international hawala brokers operating
in Asia. Allegedly the business is monopolized by migrants from India who
mostly operate from countries in the Gulf and South East Asia. Networks
include trading points in the financial centres of Singapore and Hong Kong,
and some of the biggest family-based money-dealers are based in London.
In principle, hawala works as follows: Individual "brokers" or "operators”,
known as hawaladers, collect funds at one end of the payment chain and
others distribute the funds at the other.
For example, an expatriate working in America or Kuwait who wants to
send money back to his family in Pakistan or Syria turns to a moneylender or
trader with contacts in both countries giving him the money. The trader calls
a trusted partner in the home country who delivers the amount to the family,
minus a commission. For identification and the details of the trade often a
code is used. The two traders settle accounts either through reciprocal
remittances, trade invoice manipulations, gold and precious gem
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smuggling, the conventional banking system, or by physical movement of
currency. Usually, hawaladers operate independently of each other rather
than as part of a larger organization.
For Asian immigrants the hawala system provides a speedy, reliable and
trustworthy method to remit money home. In principle, it allows cash
delivered in one place to be made available elsewhere in the time it takes to
make a telephone call or send a fax.
The system proves superior to any Western banking operation: No
identification needs to be presented, commissions are very low, transmission
is very fast, and the system is in operation 24 hours a day and every day of
the year even in regions where no banks or other financial institutions exist.
The latter also explains why the system is not only used by expatriates, drug
barons and terrorists, but in some countries is quite common in rural areas.
For example, in the 1980s, about 70% of total credit outstanding in Pakistan
were estimated to be in the informal sector, and about 80% of all informal
credit were in agriculture.
Hawala has been a traditional method of moving money in south Asia long
before Western banking became established in the region protecting early
merchants along the silk road against robbery. In ancient China it was known
as "fei qian" or "flying coins". The system spread throughout the world –
to other Asian regions, the Middle East, eastern and southern Africa, Europe
and North and South America – following immigration patterns. Based on a
man's word there is strong market segmentation in that, for example, a
Pashtun trusts only a Pashtun hawaladar, a Sikh only a Sikh one, and so on.
These days, although mainly used for legitimate transfers and often
operating in conjunction with Western banking operations, the hawala
system is regarded as a key factor in money laundering, other financial
crimes and financing of illegal organizations committed in and associated
with South Asia.
Hawaladars in Dubai, India and Pakistan are said to be forming a "hawala
triangle" responsible for significant international money laundering activities
that spread far beyond the region.
Hawala is illegal in many countries. However, Islamic and Western banks all
over the world, and even central banks, make use of the system. For
instance, in May and June 2001 the State Bank of Pakistan was said to have
turned to hawala shops in Islamabad to buy dollars in order to support the
own currency. Even top-ranking Western corporations turn to hawaladers for
transactions to regions without a modern western-style banking system.
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In several OECD (Organization for Economic Cooperation and
Development) member countries, licensed traders legally perform hawala.
OECD Member Countries (And Year of joining)
Australia (1971) Austria (1961) Belgium (1961)
Canada (1961) Czech Republic (1995) Denmark (1961)
Finland (1969) France (1961) Germany (1961)
Greece (1961) Hungary (1996) Iceland (1961)
Ireland (1961) Italy (1961) Japan (1964)
The Netherlands (1961) New Zealand (1973) Norway (1961)
Poland (1996) Portugal (1961) Spain (1961)
Sweden (1961) Switzerland (1961) Turkey (1961)
United Kingdom (1961) United States (1961) Luxemburg (1961)
Korea (1996) Mexico (1994)
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What is hawala?
Hawala arose out of the gold smuggling operations in South Asia during late
1960s and 1970s, a time when local governments had all but banned gold
imports. Smugglers used dhows—originally fishing boats, but later
speedboats—to smuggle gold from Middle Eastern ports such as Dubai and
Abu Dhabi. Once the gold reached South Asia, smugglers sold it through a
network of dealers, where it ended up in legitimate jewelry stores all across
the subcontinent. But this left smugglers with a problem that like the one
that Colombia's drug runners face—how do you get the cash back home?
Smugglers found the solution in the growing number of Indians and
Pakistanis working in the Persian Gulf states. These expatriates, often single
men, needed to send home money to their families. Going through the
official banking channels meant that the money could only be converted at
the government exchange rate, which was usually lower than the market
price. The smugglers could offer better exchange rates because they were
making profits on the gold. Over time, the gold smugglers, jewelry
merchants, and others built an efficient mechanism for delivering money
from the expatriate in the Middle East—and increasingly as well in Southeast
Asia, the United Kingdom, and even from North America—to families in
Pakistan and India.
The hawala money route continues to serve those who want to move money
outside the official banking system. Drugs have replaced gold smuggling,
especially in Pakistan. As drugs are moved out of the country, the hawala
route is used to pay for their purchase in Afghanistan-Pakistan. The Pakistan-
Afghanistan region also imports huge quantities of consumer goods,
including truck tires and appliances. Less importantly, the hawala route
continues to be used by those who want to transfer money in an emergency.
For a check to clear through a bank, it still takes almost one month. The
hawala operators, most of whom run legitimate businesses, can transfer the
money much faster, often in less than a week. The use of hawala networks
by terrorist organizations is easy and could pass unnoticed in the large bulk
of "legitimate" transactions undertaken by expatriates South Asians.
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HOW DOES HAWALA WORK
Hawala works by transferring money without actually moving it. In fact
'money transfer without money movement' is a definition of hawala that was
used, successfully, in a hawala money laundering case.
An effective way to understand hawala is by examining a single hawala
transfer. In this scenario, Abdul is a Pakistani living in New York and
driving a taxi. He entered the country on a tourist visa, which has long since
expired. From his job as a taxi driver, he has saved $5,000 that he wants to
send to his brother, Mohammad, who is living in Karachi
Even though Abdul is familiar with the hawala system, his first stop is a
major bank. At the bank, he learns several things:
The bank would prefer that he open an account before doing business
with them;
The bank will sell him Pakistani rupees (Rs) at the official rate of 31 to
the dollar; and
The bank will charge $25 to issue a bank draft.
This will allow Abdul to send Mohammad Rs 154,225. Delivery would be
extra; an overnight courier service (surface mail is not always that reliable,
especially if it contains something valuable) can cost as much as $40 to
Pakistan and take as much as a week to arrive. Abdul believes he can get a
better deal through hawala, and talks to Iqbal, a fellow taxi driver who is
also a part-time Hawaladars.
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Iqbal offers Abdul the following terms:
A 5% 'commission' for handling the transaction;
35, instead of 31, rupees for a dollar; and
Delivery is included.
This arrangement will allow Abdul to send Mohammad Rs 166,250. As we will
see, the delivery associated with a hawala transaction is faster and more
reliable than in bank transactions. He is about to make arrangements to do
business with Iqbal when he sees the following advertisement in a local
'Indo-Pak' newspaper (such advertisements are very common) :
MUSIC BAZAAR AND TRAVEL SERVICES AGENCY
• Cheap tickets to India, Pakistan, Bangladesh, Sri Lanka, Dubai
• Great rupee deals (service to India and Pakistan)
• Large movie rental selection
• Video conversions
• Latest Bollywood hits on CD and cassette
• Prepaid international calling cards
• Pager and cellular activations (trade-ins welcome)
• Conveniently located in Jackson Heights
(718) 555-1111 ask for Nizam or Yasmeen
(718) 555-2222 [fax]
(718) 555-2121 [pager]
Abdul calls the number, and speaks with Yasmeen. She offers him the
following deal:
A fee of 1 rupee for each dollar transferred;
37 rupees for a dollar; and
Delivery is included.
Under these terms, Abdul can send Mohammad Rs 180,000. He decides to do
business with Yasmeen.
The hawala transaction proceeds as follows:
Abdul gives the $5,000 to Yasmeen;
Yasmeen contacts Ghulam in Karachi, and gives him the details;
Ghulam arranges to have Rs 180,000 delivered to Mohammad.
Even though this is a simple example, it contains the elements of a hawala
transaction. First, there is trust between Abdul and Yasmeen. Yasmeen did
not give him a receipt, and her recordkeeping, such as it may be, is designed
to keep track of how much money she owes Ghulam, instead of recording
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individual remittances she has made. There are several possible relationships
she can have with Ghulam (these will be discussed later); in any case she
trusts him to make the payment to Mohammad. This delivery almost always
takes place within a day of the initial payment (a consideration here is time
differences), arid the payment is almost always made in person. Finally, in
some scenarios, he trusts her to repay him the equivalent of either $5,000 or
Rs 180,000.
Connections are of equal importance. Yasmeen has to be connected to
Ghulam in Karachi to arrange this payment. As her advertisement indicates,
she also offers service to India, so she either knows, or has access to,
someone who can arrange payment there. Hawala networks tend to be fairly
loose, communication usually takes place by phone or fax (but email is
becoming more and more common).
To complete this discussion, there are two related issues to be addressed.
The first is the relationship between Yasmeen and Ghulam, and the second is
how Ghulam 'recovers' the money that he paid to Mohammad on Abdul's
behalf.
As was stated above, hawala works through connections. These connections
allow for the establishment of a network for conducting the hawala
transactions. In this transaction, Yasmeen and Ghulam are part of the same
network. There are several possible ways in which this network could have
been constructed.
In brief, hawala 'works' - or competes effectively with other remittance
mechanisms - because of its cost effectiveness. A secondary consideration is
that hawala is often related or even integral to existing business dealings.
One reason for hawala's cost effectiveness is low overhead. A business like
Yasmeen's 'Music Bazaar and Travel Services Agency' operates out of a
rented storefront as opposed to a bank building (which has expensive vaults
and alarm systems), and may even share space with another business (e.g.
a sari or gold shop), further reducing rental expenses. Yasmeen's employees
are paid less than bank officers, and they probably do not have insurance or
access to a retirement plan. Some hawaladers operate with even less, using
a table in a tea shop as an office and having little more than a cellular phone
and notebook as overhead expenses.
The second reason is exchange rate speculation. In India, for example, the
Foreign Exchange Regulation Act (FERA), states that except with the
previous general or special percussion of the Reserve Bank, no person,
whether an authorized dealer or a moneychanger or otherwise, shall enter
into any transaction which provides for the conversion of Indian currency into
foreign currency or foreign currency into Indian currency at rates of
exchange other than the rates for time being authorized by the Reserve
Bank'. Since hawala dealers do not, in many if not most cases comply with
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such regulations, their transactions may be illegal (a more detailed
discussion of the legality of hawala follows).
Depending on one's perspective (and possibly jurisdiction), hawaladars are
either engaging in foreign exchange speculation or black market currency
dealing. In any case, they exploit naturally occurring fluctuations in the
demand for different currencies. This enables them to turn a profit from
hawala transactions (which, in addition to being remittances, almost always
have a foreign exchange component), and they are also able to offer their
customers rates that are better than those offered by banks (most banks will
only transact at authorized rates of exchange).
The rates cited in this paper (35 Rs/$ for Iqbal, 37 Rs/$ for Yasmeen and the
official rate of 31 Rs/$ as cited by the bank) reflect a difference of 12-19%
over the official rate. These may actually be a little high. A U.S. hawaladar)
involved in the laundering of drug proceeds as well as legitimate remittances
told one of the authors of this paper that he could still make a profit on an
exchange rate margin as small as 2%, making him much more competitive
than a bank.
In addition, since many hawaladars are also involved in businesses where
money transfers are necessary, providing remittance services fits well into
these businesses' existing activities. Monies from remittances and business
transfers are processed through the same bank accounts, and few, if any,
additional operational costs are incurred by a business that offers hawala
remittance services.
Finally, an important component of hawala is trust. Hawala dealers are
almost always honest in their dealings with customers and fellow
hawaladars. Breaches of trust are extremely rare. It is worth noting that one
of the meanings attached to the word hawala is 'trust'!
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RULES OF HAWALA
Rules of Hawala (Transferring Debt)
 If a debtor directs his creditor to collect his debt from the third
person, and the creditor accepts the arrangement, the third person
will, on completion of all the conditions to be explained later, become
the debtor. Thereafter, the creditor cannot demand his debt from the
first debtor.
 The debtor, the creditor and the person to whom collection is
referred, should be adult and sane, and none should have coerced
them, and they should not be feeble-minded, that is, those who
squander their wealth. Also, if a bankrupt person is barred from the
right of discretion over his property by a fully competent Mujtahid,
cannot be asked to get his debt from others and others cannot
transfer their debt to him, but he may transfer his debt to a person
who does not owe him anything.
 As an obligatory precaution, transferring the debt to a person who is
not a debtor will not be correct, unless he accepts it. And if a person
wishes to affect a transfer to a debtor for a commodity other than
that for which he is indebted (for example, if he transfers the debt of
wheat while he is indebted to him for barley), the transfer will not be
in order, unless he accepts it.
 It is necessary that a person should actually be a debtor at the time
he transfers the debt. Therefore, if he intends taking a loan from
some one, he cannot transfer the prospective debt in advance to
another party, telling the would-be creditor to collect the debt from
the party.
 The debtor must specify exactly the category and the quantity of the
debt he transfers to another party. For example, if his debt
comprises of ten kilos of wheat and 100 t. owned to one person, and
he tells him to go and collect either of the two debts from a certain
party, that transfer will not be valid.
 If the debt is fully identified, but the debtor and the creditor do not
know its quantity and category at the time of assigning the transfer,
the transaction is in order. For example, if a person who has
recorded the debt he owes to someone in his books, assigns a
Hawala or transfer of debt before referring to the books, and later,
after consulting his records, informs the creditors about the quantity
of his debt, the transfer is in order.
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 The creditor may decline to accept the transfer of debt, although the
person in whose name the assignment has been given may be rich,
and may not fail to honor the Hawala.
 If a person accepting the Hawala is not a debtor to the person giving
the Hawala, he can demand the amount of the Hawala from the
person who gave it, before honoring the Hawala. And if the creditor
compromises for a lesser amount, the person honoring the Hawala
should demand only that sum which he has paid.
 When the conditions of the transfer of debt or Hawala have been
fulfilled, the person affecting the Hawala and the person receiving it
cannot cancel the Hawala, and if the person receiving the Hawala
was not poor at the time the Hawala was issued, the creditor cannot
cancel the Hawala even if the recipient becomes poor afterwards.
The same will apply if the recipient of the Hawala was poor at the
time it was issued, and the creditor knew about it. But if the creditor
did not know that the person to whom Hawala has been issued is
poor, and when he comes to know of it, the recipient is still poor,
then the creditor can abrogate the Hawala transaction, and demand
his money from the debtor himself. But if the recipient of Hawala has
turned rich, then canceling the Hawala cannot be substantiated.
 If the debtor, the creditor, and the person to whom the Hawala is
assigned agree among themselves that all of them or any one of
them has a right to cancel the Hawala, they can do so in accordance
with the clause of the agreement.
 If the person issuing a Hawala pays the creditor himself, at the
request of the person in whose name the Hawala was issued, who
was also his debtor, he can claim from the recipient of Hawala what
he has paid to the creditor. And if he has paid without his request, or
if he was not his debtor, he cannot demand from him what he has
paid.
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ECONOMIC IMPACT OF HAWALA
Despite its informality, the hawala system has direct and indirect macro-
economic implications— for financial activity as well as for fiscal
performance.
One aspect is its potential impact on the monetary accounts of countries on
either end of the hawala transaction. Because these transactions are not
reflected in official statistics, the remittance of funds from one country to
another is not recorded as an increase in the recipient country's foreign
assets or in the remitting country's liabilities, unlike funds transferred
through the formal sector. As a consequence, value changes hands, but
broad money is unaltered. However, hawala transactions may affect the
composition of broad money in a recipient country. In the remittance
business, such transactions are conducted mainly in cash, even though
hawaladars may use the banking system for other purposes. Individuals from
developing countries who transfer funds abroad through the hawala system
for investment or other purposes are usually members of wealthy groups.
They supply local hawaladars with cash by making withdrawals from their
bank accounts. As a consequence, hawala-type transactions tend to increase
the amount of cash in circulation.
Furthermore, IFT (Informal funds transfer) systems have fiscal implications
for both remitting and receiving countries because no direct or indirect tax is
paid on hawala transactions. The negative impact on government revenue
applies equally to both legitimate and illegitimate activities that involve the
hawala system.
Hawala transactions cannot be reliably quantified because records are
virtually inaccessible, especially for statistical or balance of payments
purposes. This holds true for both the remitting and, especially, the receiving
sides of the transactions. Hawala transactions from developing countries are
sometimes driven by capital flight motivations; they may also be driven by a
desire to circumvent exchange control regulations and the like, leaving no
traceable records. Nevertheless, the authorities of some countries have
sporadically made estimates of hawala activity based on their expatriate
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populations and balance of payments data. In any case, all crude estimates
should take into account both hawala and reverse hawala transactions (see
box) as well as transactions driven by illicit activities. Although it would be
impossible to provide a precise figure, the amounts involved in hawala
transactions are likely to entail billions of dollars.
Regarding the economic impact of hawala, above all, there are two aspects.
1. One is the macroeconomic effect it has on individual economies and state
sovereignty.
For example, according to Pakistan estimates amounts reaching the
equivalent of billions of US dollars are channeled past the country's tax
authorities in this way every year. In India, there are estimates that,
although forbidden, up to 50 % of the economy uses the hawala system for
moving funds.
2. Another aspect is the impact on international financial markets, financial
regulation and monetary policy. In principle, informal money transfer
systems tend to reduce the effectiveness of traditional instruments of
monetary policy in making it more difficult to judge the need for money
balances in an economy and the reactions to changes in rates and prices.
Beside, they hamper the supervision of money and capital flows and the fight
against risky or illegal financial practices. This is the reason why, for
example, the Financial Action Task Force (FATF) and the Asia/Pacific
Group on Money Laundering (APG) pay close attention to the system.
On the other hand, there are two aspects which help to put in
perspective the importance of hawala:
1. First, with an estimated annual volume of $200bn it is a rather minor
phenomenon amid the vast amounts of cash flowing through the global
markets each day.
For instance, average daily turnover in traditional foreign exchange
markets world-wide is estimated at $1,210bn. Annual transaction values in
the US CHIPS and Fedwire payment systems, the British CHAPS or the
German EAF reach up to hundreds of trillion dollars.
2. Second considering the intranets used by large multinational firms
operating world-wide, hawala is only one among many informal payment
systems bypassing traditional banks.
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ORIGIN OF CHIT SYSTEM
The chit system did not originate with overseas Chinese remittances nor with
so-called native banks. Chits are a British colonial invention. The word "chit"
itself is the derivative of "chitty", a word of Anglo-Indian origin borrowed
from the Hindi chitthi, meaning a mark. From the late seventeenth century,
the word crept into the English usage as meaning a note, pass or certificate
given to a servant. The chitty came to China in the nineteenth century by
way of British custom. Foreign residents in the treaty ports found handling
strings of Chinese cash or silver ingots a major inconvenience. A system was
devised to eliminate this inconvenience.
Harvard University economist Frank King describes this system: "The salary
of foreign employees was paid by check drawn on the Chinese compradore,
who then held the funds against which the employee wrote
'chits'...memoranda acknowledging debts for retail transactions. These were
accepted by the shopkeeper and passed for collection to the firm's
compradore." The Chinese underground banking network is active in China,
Taiwan, and throughout Southeast Asia.
In August 1984, Lt. General James A. Williams, then Director of the U.S.
Defense Intelligence Agency (DIA), reported to the U.S. Senate, "Some
sources have stated their suspicions that this system is being used by
criminal elements in Vietnam as a way of transferring funds generated in
Vietnam through black market activities to a safe haven outside Vietnam for
unspecified future use. In the opinion of our DIA analysts, such a system
may also be used by Soviet Republic of Vietnam (SRV) intelligence and
security agencies, possibly in association with criminal elements. This system
would result in availability of operational funds for the use of SRV personnel
or others, both in the United States and elsewhere.
Such a barter system is not unique to Vietnam. It is quite probable [you
have] noted the barter system in use in other countries around the world
which have strict prohibitions regarding foreign currency transactions."
Money Laundering: Hawala and India In 1994, the U.S. State Department
reported that India is increasing in significance from a money laundering
perspective. Raids conducted in August 1992 against a Colombian money
launderer working for the Cali and Medellin cocaine cartels revealed that drug
money was being deposited in an account in Punjab. A multilateral effort was
recently initiated in the United States to target a well known Colombian
cocaine kingpin, who has used at least one bank account in India to facilitate
the transfer of funds from the U.S. Although there have been no
arrests/prosecutions for money laundering, investigation of a major stock
market scandal in Bombay in 1993 and 1994 developed leads indicating
possible ties to narcotics-related activities.
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In general, India is meeting the goals and objectives of the UN Convention
with respect to adopting money laundering legislation, but enforcement
measures needs improvement. Money laundering is a crime. Indian banks
are required to maintain records on large currency transactions that are over
20,000 rupees (approximately US$800) and to report them to the Central
Bank. However, reliance on manual bookkeeping for some 60,000 branches
and loose accounting practices have created abundant opportunities for
fraud. The Central Bank created a separate bank supervising board in March
1993 to address the widespread perception that bank supervision is weak
and ineffective. The major difficulty law enforcement agencies face in the
successful pursuit of financial investigations is that the Indian asset seizure
law is a criminal statute requiring a criminal conviction to effect asset
forfeiture.
The law contains so many loopholes and requires so many years to prosecute
as a criminal matter that U.S. officials consider it ineffective. In March 1992,
duties on imports were reduced, and a variety of currency and foreign
exchange requirements were liberalied. Restrictions on gold and silver
imports were also relaxed. In September 1992, the Indian Government
announced that foreign institutions would be allowed to invest directly in all
stock market instruments, operate foreign currency accounts, and convert
funds to rupees at market rates. Hawala, the Indian form of an underground
banking system traditional throughout the Middle East and Asia, has links to
drug trafficking. With the easing of foreign exchange controls and the unified
exchange rate, Hawala activity has apparently slowed.
There has been a 40 percent increase in remittances by nonresident Indians
through banking channels. Indian Customs reports a recent increase in large
currency importations. Indian law requires declarations for imported currency
exceeding US$10,000. However, records are maintained by hand and
investigations rarely follow. While the long-term effects of India's
liberalization measures remain to be seen, the Hawala system will continue
to be used by persons involved in such illicit activities as tax evasion, drug
trafficking, money laundering, political corruption and arms smuggling.
Invoice manipulation is pervasive and is used extensively to launder illicit
proceeds.
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HAWALA AND TERRORISM
Recent anti-terrorist legislation in the US and the UK allows government
agencies to regularly supervise and inspect businesses that are suspected of
being a front for the ''Hawala'' banking system,thus making it a crime to
smuggle more than $10,000 in cash across USA borders.
There is a belief that the al-Qaida network of Osama bin Laden uses the
Hawala system to raise and move funds across national borders.
A Hawaladar in Pakistan (Dihab Shill) was identified as the financier in the
attacks on the American embassies in Kenya and Tanzania in 1998.
But USA is not the only country to face terrorism, financed by Hawala
networks.
Sometime ago, the Delhi police, the Enforcement Directorate (ED), and the
Military Intelligence (MI) arrested six Jammu Kashmir Islamic Front (JKIF)
terrorists. The arrests led to the exposure of an enormous web of Hawala
institutions in Delhi, aided, some say, by the ISI (Inter Services Intelligence,
Pakistan's security services). The Hawala network was used to funnel money
to terrorist groups in the Kashmir Valley.
Luckily, the common view that Hawala financing is paperless is wrong. The
transfer of information regarding the funds often leaves digital trails. Written,
physical, letters are still the favourite mode of communication among small
and medium Hawaladars, who also resort to extremely detailed single entry
bookkeeping.
Such flows of funds affect the local money markets in Asia and are
instantaneously reflected in interest rates charged to frequent borrowers,
such as wholesalers.
Most countries have only one system, the storehouse of data regarding all
banking (and most non-banking) transactions in the country. Yet, even this
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is a partial solution. Most national systems maintain records for 6-12 months
only.
Yet, the root of the problem is not the Hawala or the Hawaladars, but the
corrupt and useless governments of Asia are to blame for not making
flexible their banking systems, for over-regulating everything else, for not
developing competition, for throwing public money at bad debts and at worse
borrowers, for over-taxing, for robbing people of their life savings through
capital controls, for tearing the weak fabric of trust between customer and
bank.Perhaps if Asia had reasonably means, reasonably priced, reasonably
regulated, user-friendly banks - Osama bin Laden would have found it
impossible to finance his mischief so invisibly.
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SOURCES OF BIN LADEN’S FUNDING
Osama bin Laden is believed to rely on three principal sources to finance his
terrorist network and its activities:1. personal inheritances and
investments;2. funding from Arab supporters of al Qaeda; and 3.charitable
contributions from Islamic organizations.
Bin Laden is believed to have exhausted most of his own money, however,
and is thus likely depending on the latter two sources.
1) Personal investments
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1) Personal investments
Osama bin Laden is the son of a billionaire Saudi construction magnate with
close ties to the country's royalty. Bin Laden inherited an estimated $250-
300 million from his family in the early 1990s, which he has invested in a
range of businesses or placed in bank accounts around the world.
According to the FBI, bin Laden manages a range of lawful businesses across
North Africa, Middle East, Europe and Asia. While in Sudan between 1991
and 1996, he reaped profits from a holding company called Wadi al Aqiq,
which acted as an umbrella for a number of businesses. He is linked to
agriculture, construction, transportation and investment firms in Sudan.
The Islamic Cultural Institute in Milan is considered the nucleus of the al
Qaeda network in Europe. The institute is believed to have had direct
involvement in the bombing of U.S. embassies in 1998. Sources say a
company named Arketa in Cyprus also helped launder money for bin Laden
by moving funds between its subsidiaries and foreign banks it used. In
addition it provides cover for movements of soldiers and funds, and
procurement of weapons and chemicals within the al Qaeda network.
Furthermore, bin Laden is believed to own investments in Mauritius,
Singapore, Malaysia, the Philippines, and possibly Panama. He holds bank
accounts in Hong Kong, Malaysia, Vienna, Dubai and London. Hundreds of
millions of dollars are secured in real estate in Paris and London.
2) Arab supporters
According to reliable sources, about $16 million is funneled every year from
the Arab world to bin Laden's terrorist network. Most of the amount,
however, is believed to be illegal support from wealthy Arabs in Saudi Arabia
— some of whom were probably blackmailed — who either sympathize with
bin Laden's cause or seek protection from terrorist activities in their
countries.
3) Charity organizations
Islamic charities collect billions of dollars a year, and much of it is used for
the generous causes the charities openly support. Some of the donations,
however, are secretly handed over to Islamic terrorists and fighters by
sympathizers. Gulf Arab governments' abilities to investigate the activities of
charity organizations are often held back not only because they must respect
members' religious sensibilities, but also because most of these charities are
lawful and often well respected.
U.S. authorities have maintained a secret list of suspect charity organizations
around the world, but have been reluctant to make it public due to the
sensitivities involved.
18

MONEY MOVEMENTS THROUGH HAWALA
In addition to the complex combination of individuals, companies,
bureaucrats and governments that contribute funds to bin Laden, U.S. efforts
to trace terrorists' money is further puzzled by the fact that many of the
financial transactions are done in such a way that they leave nothing to be
traced.
Al Qaeda relies heavily on hawala. Brokers advance funds to depositors on a
nod or a handshake, leaving no paper or electronic trails. Those involved
often operate from a back of a store or, in remote areas. They may not even
have an "office" from which they conduct transactions. Brokers are known to
use telephones to communicate, but the scarcity of other evidences make
the helpfulness of tracking phone calls almost nil. Furthermore, hawala's
generations of existence throughout South Asia and the Middle East make it
difficult for foreign authorities to eradicate the mysterious system.
According to experts, hawalas have existed in the United States since the
1980s. The number of outlets in the country is unknown, but six or seven
hawalas are operating in the Washington-Baltimore area alone. Most clients
are immigrants who use the system — which often transfer money faster
than regular banks — for the lawful purpose of sending money to relatives
and friends abroad.
19

Some users, however, exploit the system to launder money obtained or
intended for illegal activity. Drug dealers have relied on hawala to send
profits of drug sales from the United States, often to arms dealers abroad.
In a major step to uproot suspicious hawala networks, the Treasury
Department on Nov. 7, 2001, launched domestic raids to shut down two
hawalas, Al Barakaat and Al Taqwa, both believed to be funneling millions of
dollars from the United States to abroad to support terrorist activities.
Al Barakaat is a financial, telecommunications and construction group
headquartered in Dubai and operating largely out of Somalia. It was founded
in 1989 and operates in 40 countries around the world. It transfers about
$140 million a year in remittances, 80 percent of which goes to Somalia,
while the rest goes to Somali refugees living in other African countries. The
Treasury Department said the raids on Nov. 7 resulted in the blocking of
approximately $971,000 in Al Barakaat assets.
The Bush administration asked nine countries — Switzerland, Somalia, the
Bahamas, Liechtenstein, Sweden, Canada, Austria, Italy and the United Arab
Emirates — to crack down and freeze Al Barakaat and Al Taqwa assets.
20

A BANKING SYSTEM BUILT FOR TERRORISM
'Hawala' can move millions of dollars around the globe with no paper trail
and no questions asked
In the labyrinthine depths of old Delhi, where the lanes are too narrow even
for a rickshaw, men drink tea and chat in shabby offices. Nobody seems to
be doing any work, until the phone rings. Then, numbers are furiously
scribbled, followed by some busy dialing and whispered instruction. Although
it's far from obvious in the innocuous setting, these men are moving money
— to exporters, drug traffickers, tax evaders, corrupt politicians And
terrorists.
Welcome to the world of hawala, an international underground banking
system that allows money to show up in the bank accounts or pockets of
men like hijacker Mohammed Atta, without leaving any paper trail. There are
no contracts, bank statements or transaction records, and yet those who use
the hawala networks can move thousands of dollars around the world in a
matter of hours.
In a smoke-filled, empty office in Delhi, Ali — who would not give his real
name — explains his trade. "All it needs is a good network of trustworthy
people," he explains. "If today you want to me to arrange a delivery of cash
anywhere in the world — Hong Kong, Johannesburg, New York, Paris — it will
be done in, maximum, eight hours."
To move money to New York, for instance, Ali will accept payment in Indian
rupees from a client in Delhi. Then he'll call associates in Dubai, who in turn
contact their man in New York. The client in Delhi is given a code, usually the
numbers from a currency note, which is passed on to the recipient. When the
phone rings in New York, both messenger and recipient will read back
21

alternate digits from the password. Identity thus established the recipient will
be paid in dollars.
Not only is there no paper trail, Ali's system avoids bank charges,
transmission delays and foreign exchange regulations. All that hawala
requires is trust. And that, ironically, is why it thrives in the underworld. No
one cheats, Ali insists. And if they do? He looks a little shifty. "The small gain
will not be worth the bigger price," he says. "You will lose respect, and for a
man, honor is his most important asset." How about his life? Ali laughs. "Yes,
if someone is very upset, he might want to kill the thief," he says. "But it
seldom comes to that."
Although Indian authorities have found Kashmiri militants making extensive
use of the hawala system, funding terrorism is not a priority for the hawala
dealers. The big money comes from defrauding trade regulations: An
importer arranges with a supplier to charge a fraction of his real prices on an
invoice, and pays the difference via hawala. Drug traffickers and corrupt
officials also use the system for money laundering. "Hawala dealers don't
care about where the money comes from or what it is being used for," says
Ali. "They only concern themselves with the deal."
The industry's hub is the oil emirate of Dubai, home to many gangsters from
both India and Pakistan who maintain legitimate enterprises there but also
operate hawala networks. Dubai is a free trade zone with no limitations on
the movement of goods or currency. In the absence of laws expressly
prohibiting the practice of hawala, it is difficult to track and arrest the
offenders. And since hawala does not affect the Dubai economy, and it's not
a priority for local law enforcement.
Hawala hurts the national economies of developing countries desperate for
foreign exchange deposits, but every individual in the chain has the incentive
of earning a commission. And that's what keeps the networks going. "People
know that salaries cannot buy the good things," says Ali, one of thousands of
operatives in an underground banking world that stretches from New York to
Tokyo. "You need a little extra." Even at a cost of enabling crime and
terrorism.
22

DIFFICULT TO TRACE
Typically, a transaction begins with a visit to a hawala broker.
The person wanting to send money gives the broker the sum of money to be
transferred plus a fee and the name and location of the person he wants the
money delivered to.
The broker then gives his customer a receipt. The receipts are usually
nothing elaborate, often just a bit of paper.
The broker then contacts a broker in the recipient's country. The recipient
contacts the local hawala broker.
While the system may be ancient, hawala brokers routinely use fax machines
or the internet to communicate with other brokers.
The broker is given a code. It could be anything. It could be a string of
numbers, or it could be a $5 bill with a specific serial number sent to him by
his relative.
Records are kept only until the transaction is completed. Then they are
destroyed. The money does not move, either physically or electronically.
Brokers dole out money from the same pool that they take it in. They make
money from the fees they charge for the transactions.
The system is built on the trust between brokers, a trust built up between
generations of hawala brokers.
Though the government has taken various measures to avoid these kind of
transactions within the country, hawala is widely used measure. Till date no
transaction is conducted as efficiently and smoothly like the hawala
transaction.
This trust indeed is a boon to the people and a curse to the nation.
23

MODERN ROOTS
While the hawala system may have ancient roots, much of the present
hawala network grew out of gold smuggling operations in South Asia in the
1960s and 1970s.
To get around gold import restrictions, smugglers used boats to ship gold
from Dubai and Abu Dhabi to South Asia.
After selling the gold, they then needed to get the cash back home.
The smugglers discovered a solution in the growing population of Indians and
Pakistanis working in the Gulf States.
These workers often sent money back home to their families, but if they
went through official banking channels it cost more than the hawala system
set up by the smugglers.
They could offer better rates because of the profits they were making on
smuggled gold.
They developed an efficient system for moving money from expatriates in
the Middle East, South-East Asia, the UK and even in North America to
families in Pakistan and India,
"The use of hawala networks by terrorist organisations is easy and could
pass unnoticed in the large bulk of 'lawful' transactions undertaken by
expatriate South Asians.
24

IS HAWALA LEGAL AND WHAT ARE ITS INDICATORS
Since hawala is a remittance system, this question really addresses
regulations governing remittance services and the circumstances of the
remittance. The assumption here, of course, is that these remittances are
like Abdul's, and 'legitimate'; the illicit use of hawala in money laundering is
discussed in the next section of this paper.
Even though hawala is illegal from a regulatory standpoint in some U.S.
jurisdictions, hawaladars advertise their services widely in a variety of media
(ethnic newspapers have been the traditional place to find them, now some
are using the Internet). Enforcement of these regulations is difficult with
respect to hawala. The advertisements are often printed in foreign
languages, and wording like 'sweet rupee deals' does not necessarily suggest
remittance services.
In South Asia, the situation is more complicated. Many South Asian nations
(such as India and Pakistan) have laws that prohibit speculation in the local
currency, prohibit foreign exchange transactions at anything other than the
official rate of exchange, and impose strict licensing requirements on money
remitters and foreign exchange dealers. In addition, there are regulations
governing inbound and outbound remittances.
25

A detailed discussion of these regulations is beyond the scope and intent of
this paper. It is, however, possible to state 'hawala is illegal in India and
Pakistan' with nearly complete accuracy.
The important point for our purposes is that the existence of these
regulations is another reason hawala is still used. Many people in these
countries have money that they would like to move to another country due
to concerns about stability, to pay for education or medical treatment.
Hawala provides a ready means of doing this, and its use as a facilitator of
'capital flight' on both large and small scales is very common. The existence
of these laws also explains, in part, the prevalence of invoice manipulation as
part of hawala schemes.
Another aspect of these regulations is the use of the United Arab Emirates,
specifically Dubai, for hawala transactions. There are two main reasons for
this.
The first is the large population of expatriate workers from India and
Pakistan; they use hawala to send money home.
The second is Dubai's large gold market, which is the source of much of the
gold sent (licitly and illicitly) to India and Pakistan. Dubai, unlike many other
South Asian nations, allows essentially unregulated financial dealings.
Because of this, many South Asian businessmen maintain offices in Dubai,
and money is often wired there to circumvent regulations elsewhere. In
addition, Dubai offers a neutral meeting place for Indian and Pakistani
businessmen, as tension between these countries makes travel between
them difficult if not impossible.
This paper should not, however, be considered a condemnation of the
economic policies of India or Pakistan, both of which have taken concrete
steps to combat money laundering. The efficiency and cost effectiveness of
hawala make it an attractive means of remitting money under almost any
26

INDICATORS
As has been shown in this paper, hawala is actually quite simple; much of
the complexity associated with and ascribed to hawala money laundering
comes from the nearly infinite number of variations that are encountered in
hawala transactions.
This complexity of variation makes it nearly impossible to lay out a
straightforward guide to recognizing hawala money laundering as part of a
criminal undertaking. It is, however, possible to provide a few indicators that
may be useful.
One of the most consistent and valid indicators of hawala activity in
investigations conducted in the United States is seen in bank accounts.
A 'hawala' bank account almost always shows significant deposit activity,
usually in the forms of cash and checks, which are often from one or more
ethnic communities (e.g. Afghan, Bangladeshi, Indian, Pakistani, Somali)
associated with the hawaladar.
These checks may be made out to the primary account holder, or some
secondary entity (often outside the United States) somehow associated with
the account. These checks may also have some sort of notation, consisting of
a name (presumably of the person to whom the money is remitted to) or
something supposedly indicating what was 'bought' with the money.
In one case, many checks were seen with the word 'bangle' written on them;
this was done apparently in order to make it appear as though the checks,
which were almost all for even dollar amounts, had been written to purchase
jewelry.
These accounts will also almost always show outgoing transfers (usually by
wire) to a major financial center known to be involved in hawala.
Three of the most common locations are Great Britain, Switzerland, and, as
discussed previously, Dubai. Given the flexible and casual nature of the
hawala business, hawala accounts will not always be seen to balance.
As has been discussed, certain businesses are also more likely than others to
be involved in hawala. Once again, it is not possible to give an exhaustive
list, but the following is a starting point:
Import/Export
Travel and Related Services
Jewelry (gold, precious stones)
Foreign Exchange
27

Rugs/Carpets
Used Cars
Car Rentals (usually non-chain or franchise)
Telephones/Pagers
Laws in India, Pakistan and other countries make it difficult to convert
foreign currency (or foreign currency instruments, such as travelers' checks).
Criminal activities in these countries may often involve foreign currency
(especially dollars), which pose something of a problem. A 'solution' that has
been seen to this problem is the shipment of these negotiable instruments
from South Asia to the United States. Even though such shipments may
violate both courier policies and U.S. law, the money launderers accept these
risks rather than try to attempting to place these instruments into their local
economies.
28

HAWALA BOOK KEEPING
'Hawala bookkeeping' emphasizes keeping track of how much money is owed
to whom. The following sample chart is based on records analyzed by one of
the authors of this paper during a recent investigation, and is representative
of the records that might be encountered during a hawala investigation (note
that these charts are usually handwritten, and it is not uncommon for English
and another language to be used):
16/6/98 Vinod 100000 37.6 2659.57 F-1202
16/6/98 Ashish 250000 39.25 6369.42 F-1203
16/6/98 Nitin Bhai 350000 42.3 8274.23 B-8146
17/6/98 DK 50000 38.75 1290.32 F-1204
17/6/98 Suresh Kumar 300000 39.25 7643.31 B-8147
17/6/98 Anil 200000 40.1 4987.53 S-5428
17/6/98 Vinod 150000 39.75 3773.58 F-1205
18/6/98 Manoj 300000 41.25 7272.72 B-8148
18/6/98 Vinod Bhai 350000 42.2 8293.83 L-2160
18/6/98
Ganesh
Trading
200000 38 5263.15
19/6/98 Suresh Kumar 175000 39.5 4430.37 B-8149
The first column indicates the date of the transaction.
The second column is the name of the hawala broker to whom the debt is
owed; it is very common to use partial names (e.g. 'Vinod') or codes (e.g.
'DK' ).
The third column is the amount of the debt. This chart reflects a tendency to
do business in multiples of 100,000; so it would not be uncommon to see
things like '1.5' for 150,000.
The fourth column indicates the dollar/rupee exchange rate in effect for the
transaction.
The fifth column is the value of the transaction in dollars.
The sixth column reflects the way in which the payment was made. Notations
such as 'F-1202' usually represent a bank ('F' might be 'First Bank'; 'B' and
'L' would represent other banks) and the check number. The notation for
Ganesh Trading is '52 t' in Hindi. This represents 52 tolas of gold, possibly
paid to a local goldsmith or jeweler instead of remitting the money via a
bank.
29

WHY THESE SHOCKING FACTS ABOUT HAWALA CASE ARE
BEING CONCEALED FROM YOU?
• The Hawala accused politicians claim to be innocent. They say that
there are no evidences against them. They say that it is a conspiracy
to frame them in this case. If it is true then why are they so scared of
an honest probe into this case ?
• Hawala is the biggest ever scandal in the world involving 115 top
politicians and bureaucrats. Never have so many top politicians been
caught in a single scandal. Not even in the Bofors, Harshad Mehta
scandals. Vineet Narains Hawala crusade has given a jolt to Indian
politics. In the post Hawala period three general elections have been
held in four years and 5 Prime Ministers have taken oath. Instead of
one party, two dozen political parties have been forced to run the
government. Despite such serious ramifications of Jain Hawala Scam
no political party has made it an issue to demand honest investigation
in this historic case.
• Why is it that so much noise was made in the past on other scams. But
the same people have been maintaining mysterious silence about in
the Hawala Case, Obviously because everybody who matters in Indian
politics is involved in it, then who would want punishment for the
guilty.
• Indian government accuses Pakistan for encouraging dreaded militant
outfit Hijbul-Mujahideen to spread terrorism in India, but why it does
not want to investigate the Jain Hawala case, which is directly
connected with the funding of the Hijbul-Mujahideen? It is the same
organisation which caused the Kargil war and took the toll of our young
officers and soldiers.
• Vineet Narain has been single-handedly and persistently fighting
against 115 mightiest people of the land since 1993. To prove his point
about the unscruplous hushing-up of this case, he did not hesitate in
locking horns with the top judiciary of the country. Interestingly those,
who could not achieve even a fraction of what Mr.Narain has
accomplished, were projected as media hereos by different
governments in the past. At the same time Mr.Narains role is being
underplayed by the established opinion makers. Is it because they are
not able to digest the fact that an individual can create such a history
without their patronage?
• Vineet Narains credentials as an investigative TV journalist are well-
known in the media circles. His bold expose have repeatedly created
ripples in the country since 1986. Despite this, why is it that ever since
he started the Hawala crusade in Aug 1993, the electronic media is
30

shying away from him? Is it because vested interests do not want the
truth to be presented before the nation? Several hawala accused
politicians mislead the nation through electronic media in 1996 by
alleging that the Hawala case was a conspiracy to frame them. Why
were they not confronted with the probing questions as mentioned
above? Why were they allowed to get away with such open lies, which
created the wrong impression as if there were no evidences in the
Hawala Case?
• The hawala case on 1st Nov.1994 gives us a feeling that the authorities
waste their time over matters which are nothing compared to the
matter – something which is eating in to the vitals of the system it
gives rise to a suspicion that the (CBI) were made to remain inactive in
this dark affair by some forces.
• On 28th Aug 1998, the CBI did not do proper investigations in the
Hawala case, otherwise so many politicians would not have gone scot
free.
• On 10th Feb 2000, Mr. BR Lal, DGP Haryana, (who was the then Joint
Director, CBI incharge of Hawala investigations) told the nation on
Prime Time show of Zee TV, that CBI had sufficient evidences against
Hawala accused politicians but there was tremendous pressure from its
Directors and from above to conceal the same or file flimsy
chargesheets, so that the politicians could be let off. He also said that
he was willing to present these facts before any Court of Law. Why the
print media ignored such a bold revelation ? Why the government and
CBI did not take notice of it ?
31

OVERVIEW
In the wake of the September 11 terrorist attacks on the USA, attention was
drawn to the age-old, secretive, and globe-spanning banking system
developed in Asia and known as "Hawala". While not limited to Muslims, it
has come to be identified with "Islamic Banking".
Islamic Law (Sharia'a) regulates commerce and finance in the Fiqh Al
Mua'malat, (transactions amongst people). Modern Islamic banks are
overseen by the Shari'a Supervisory Board of Islamic Banks and Institutions
("The Shari'a Committee"). The Shi'a "Islamic Laws according to the Fatawa
of Ayatullah al Uzama Syed Ali al-Husaini Seestani" has this to say about
Hawala banking:
"If a debtor directs his creditor to collect his debt from the third
person, and the creditor accepts the arrangement, the third person
will, on completion of all the conditions to be explained later, become
the debtor. Thereafter, the creditor cannot demand his debt from the
first debtor."
The prophet Muhammad (a cross border trader of goods and commodities by
profession) encouraged the free movement of goods and the development of
markets. Numerous Muslim scholars railed against hoarding and harmful
speculation (market cornering and manipulation known as "Gharar").
Muslims were the first to use promissory notes and assignment, or transfer
of debts via bills of exchange. Among modern banking instruments, only
floating and, therefore, uncertain, interest payments ("Riba" and "Jahala"),
futures contracts, and forfeiting are frowned upon. But agile Muslim traders
easily and often circumvent these religious restrictions by creating "synthetic
Murabaha (contracts)" identical to Western forward and futures contracts.
Actually, the only allowed transfer or trading of debts (as distinct from the
underlying commodities or goods) is under the Hawala.
"Hawala" consists of transferring money (usually across borders and in order
to avoid taxes or the need to bribe officials) without physical or electronic
transfer of funds. Money changers ("Hawaladar") receive cash in one
country, no questions asked. Correspondent hawaladars in another country
dispense an identical amount (minus minimal fees and commissions) to a
recipient or, less often, to a bank account. E-mail, or letter ("Hundi")
carrying couriers are used to convey the necessary information (the amount
of money, the date it has to be paid on) between Hawaladars. The sender
provides the recipient with code words (or numbers, for instance the serial
numbers of currency notes), a digital encrypted message, or agreed signals
(like handshakes), to be used to retrieve the money. Big Hawaladars use a
chain of middlemen in cities around the globe.
32

But most Hawaladars are small businesses. Their Hawala activity is a sideline
or moonlighting operation. "Chits" (verbal agreements) substitute for certain
written records. In bigger operations there are human "memorizers" who
serve as arbiters in case of dispute. The Hawala system requires unbounded
trust. Hawaladars are often members of the same family, village, clan, or
ethnic group. It is a system older than the West.
Hawala arrangements are used to avoid customs duties, consumption taxes,
and other trade-related levies. Suppliers provide importers with lower prices
on their invoices, and get paid the difference via Hawala. Legitimate
transactions and tax evasion constitute the bulk of Hawala operations.
Modern Hawala networks emerged in the 1960's and 1970's to circumvent
official bans on gold imports in Southeast Asia and to facilitate the transfer of
hard earned wages of expatriates to their families ("home remittances") and
their conversion at rates more favourable (often double) than the
government's. Hawala provides a cheap (it costs c. 1% of the amount
transferred), efficient, and frictionless alternative to morbid and corrupt
domestic financial institutions. It is Western Union without the hi-tech gear
and the exorbitant transfer fees.
In 1999, Institutional Investor Magazine identified 1100 money brokers in
Pakistan and transactions that ran as high as 10 million US dollars apiece. As
opposed to stereotypes, most Hawala networks are not controlled by Arabs,
but by Indian and Pakistani expatriates and immigrants in the Gulf. The
Hawala network in India has been brutally and ruthlessly demolished by
Indira Ghandi (during the emergency regime imposed in 1975), but Indian
nationals still play a big part in international Hawala networks. Similar
networks in Sri Lanka, the Philippines, and Bangladesh have also been
eradicated.
The OECD's Financial Action Task Force (FATF) says that:
"Hawala remains a significant method for large numbers of
businesses of all sizes and individuals to repatriate funds and
purchase gold.... It is favoured because it usually costs less than
moving funds through the banking system, it operates 24 hours per
day and every day of the year, it is virtually completely reliable, and
there is minimal paperwork required."
33

CASE STUDY:
National Fertilisers Limited (NFL)
V. Sundershan M. Sambasiva Rao
VEN as Justice V.B. Gupta of the Special Court administered a rap on the
knuckles of the Central Bureau of Investigation (CBI) on November 17 by
asking it to examine whether the agency did not have sufficient grounds to
file charges against P.V. Prabhakar Rao, son of former Prime Minister P.V.
Narasimha Rao, in the urea deal case, the Enforcement Directorate (E.D.),
which is independently pursuing the foreign exchange violation angle in the
matter, went ahead and arrested Prabhakar Rao and got him remanded to
judicial custody for 15 days from November 30. The E.D., which claims to
have tracked down the trail of the complex transactions leading to the
ultimate beneficiaries of the alleged Rs.10.8-crore payoffs involved in the
deal, will soon issue show-cause notices to all the accused, including
Prabhakar Rao.
The charge-sheet filed by the CBI in May 1996 named nine accused including
M. Sambasiva Rao and B. Sanjeeva Rao (associates and relatives of
Narasimha Rao), who put through the deal; the then top executives of
National Fertilisers Limited (NFL), the public sector company involved in the
matter; officials of the Turkish firm, Karsan Limited, which defaulted on the
supply of urea but allegedly paid kickbacks to certain individuals in India;
and Prakash Chandra Yadav, son of Ram Lakhan Singh Yadav, the then
Union Minister for Fertilizers. The charge-sheet did not mention Prabhakar
Rao, one of the alleged recipients of kickbacks.
A few months ago the CBI told the Special Court that it did not have any
charges to level against Prabhakar Rao. However, in the first half of June
1996 the CBI had produced records that apparently led the trail to the
doorsteps of Prabhakar Rao. If the court calls for the CBI case diaries and
notes of the investigating team, it will find that the officials had gathered
34

enough evidence to charge-sheet Prabhakar Rao. For some reason this
situation was not reflected in the charge-sheet filed by the agency.
The CBI team had traced a cheque for Rs.10 lakhs, dated March 16, 1996
and drawn in favour of B.V. Rama Rao, an executive of Sinclair Electronics
Industries Limited, a company owned by Prabhakar Rao. The amount had
been deposited in the current account of Rama Rao. The individuals
concerned, when questioned by the CBI about the transaction, said that it
was a personal loan given to Rama Rao and produced records in support of
this claim. However, further investigation, including the questioning of an
auditor of the company, apparently revealed that the loan documents had
been fabricated hastily to conceal the identity of the real beneficiary. The CBI
obtained statements from the auditor to the effect that the document was
fake and that the payment was intended for Prabhakar Rao. Thereupon, the
investigating team sought to arrest the persons concerned in Hyderabad, but
the then CBI Director reportedly turned it down.
The CBI team had found that the cheque originated from S.R.R. Investment
& Finance Limited, a company owned by B. Sanjeeva Rao. The CBI had also
established that another firm owned by Sanjeeva Rao, Medicon Marketing
Private Limited, an intermediary in the urea deal, had received an identical
sum from Mallesham Goud a couple of days earlier, and that it was this sum
that was transferred to the account of Rama Rao. Mallesham Goud,
alongwith Sambasiva Rao, was a director of Sai Impex Private Limited, the
Indian agents of Karsan Ltd. NFL had remitted the entire sum of $38 million
(Rs.133 crores, at the exchange rate prevailing at that time) as 100 per cent
cash prepayment for the supply of urea into the accounts of Karsan Ltd.
While 1 per cent of the amount had been remitted into Karsan's account in
Ankara, 99 per cent had been remitted into the company's account in Pictet
Bank, Geneva, in November 1995. Two other Swiss banks had refused to
accept the funds, citing stringent disclosure requirements for such
transactions.
The CBI team found more evidence. It established that Sai Krishna Impex
had purchased air tickets from Hyderabad to Delhi for Sanjeeva Rao and
Prabhakar Rao on March 11, 1995 and the journey was undertaken on March
12, 1995, around which time the deal was planned and executed. It also
established that Prabhakar Rao was in Delhi when the deal was struck. It
also traced certain leads that showed that the money from Karsan's account
found its way to Hyderabad to finance the purchase of land at Nampally in
the city by the recipients of the funds. Yet, it told the Special Court that it did
not have any charge against Prabhakar Rao.
THE E.D.'s remand report on Prabhakar Rao has made comprehensive
disclosures about various transactions in the deal. The charges are that $4
million out of the total of $38 million remitted by NFL to Karsan Limited
found its way as commissions to Edible Foodstuff Trading in Dubai, from
where it came to India through hawala channels. The remand report alleges
35

that in the process Rs.10.8 crores came into the country, of which Rs.40
lakhs was handed over to Sambasiva Rao by Mallesham Goud who, in turn,
issued three cheques, for a total amount of Rs.32 lakhs, all of which found
their way to Prabhakar Rao.
The report alleges that Sanjeeva Rao used his kinship with Prabhakar Rao to
procure the order for the supply of two million tonnes of urea by Karsan Ltd.
It alleges that Sambasiva Rao had negotiated/deliberated with Karsan Ltd for
the payment of a commission of $4 million out of the total payment of $38
million. It further alleges that Prabhakar Rao was one of the beneficiaries.
In support of its claim, the E.D. has said that it has obtained statements
from Mallesham Goud saying that a secret commission of 8 to 10 per cent
was to be paid to 'bigwigs' including Prabhakar Rao, who helped clinch the
deal. According to the E.D., a secret commission of between Rs.5 crores and
Rs.6 crores was received by Prabhakar Rao and others through hawala
channels arranged by one Rajinder Babani. The E.D. also claims that
according to another statement, made by D.S. Kanwar, Executive Director of
NFL, on July 15, 1996, Sambasiva Rao had claimed to be working for
Prabhakar Rao, and this was corroborated by a statement made by one
Deepak Lal, an associate. Rajinder Babani had claimed in a statement made
on October 17, 1995 that a secret commission of Rs.10.8 crores reached
Hyderabad through hawala channels and was paid to Sambasiva Rao; the
E.D. claimed that this had been confirmed also by the CBI, in its charge-
sheet. The E.D. claimed that it was the hawala money that was used to
purchase the land at Nampally. According to the E.D., that Prabhakar Rao
was the beneficiary of the commission was confirmed also by a statement
made by one S. Nuthi, another associate. Yet another statement made to the
E.D., by Anand Mohan, an intermediary, says that he delivered Rs.2 crores to
an emissary sent by Prabhakar Rao.
The E.D. claims to have in its possession confidential papers seized by the
CBI from Sai Krishna Impex showing a detailed plan for securing contracts
and parking outside India secret funds received as commissions. It has also
obtained a statement from Rama Rao, who was issued a cheque for Rs.10
lakhs by Sanjeeva Rao, that the amount was paid to Prabhakar Rao. The
CBI, on the other hand, had tended to go with the version that the amount
was a personal loan to Rama Rao, although the recipient himself has now
admitted to the E.D. that he was merely a conduit passing on the amount to
Prabhakar Rao, the ultimate beneficiary.
Now that the E.D., whose probe into the urea scam was conducted
independent of the CBI, would soon issue show-cause notices to the accused,
including Prabhakar Rao, for alleged foreign exchange violations in the deal,
the CBI may have little option but to re-examine the issue of framing
charges against Prabhakar Rao, especially since the court has ordered it to
do so. With the E.D. having identified the ultimate beneficiaries, if the CBI
demurs at this stage its credibility will take another beating.
36

This is also a test case for the scope for coordination among various agencies
investigating different angles of a such a case. The Supreme Court had, while
hearing the Jain hawala case, directed the establishment of a nodal agency
to pool intelligence and evidence in cases involving a nexus among
politicians, bureaucrats and criminals.
The Special Court's direction to the CBI to re-examine the non-inclusion of
Prabhakar Rao's name in the charge-sheet came in the wake of arguments
advanced by Ashok Kumar Arora, counsel for Prakash Chandra Yadav, one of
the accused named in the CBI charge-sheet. Arora argued that the CBI had
named Prabhakar Rao even during the remand proceedings. He pointed out
that if the Minister in charge of NFL, namely, the Minister for Fertilizers and
Chemicals, himself was not taken into confidence when the deal was struck,
it only pointed to the possibility of the involvement of someone even more
powerful than the Minister, which could only be the Prime Minister or persons
close to the Prime Minister. Arora also argued that the fact that the Supreme
Court had denied anticipatory bail to Prabhakar Rao in August 1997 showed
that even the apex court was not convinced of his innocence. The court
accepted his arguments and ordered the CBI to file a status report in two
months' time.
37

Dubai-Muscat-Riyadh link of Kerala Politicians
A leading Contractor approaches the branch manager of a public sector bank
in Kerala and asks him to arrange fresh Five Hundred rupee notes worth Rs.
10 lakhs within one day. Without bothering to know the intricacies of
withdrawing Fresh Five Hundred rupee notes exclusively by a regular
customer , the manager arranges the money. Next day the businessman
comes with an empty suitcase and arranges the five hundred rupee notes in
it and walks away to an unknown destination.
The bank official was curious to know the secret behind insisting on
withdrawing only five lakh worth fresh currency notes. Even though he asked
the gentlemen about it later, he avoided any direct answers. However, one
day he invited the manager for a party at his residence and when he was
fully drunk, he called him to a corner and said: "You asked me about the
purpose of taking fresh five rupee notes from the bank. Nowadays, these
stupid ministers started accepting suitcase full of money directly from
businessman like me. Earlier they needed the assistance of third parties or
agents to receive bribe. Because of this new five hundred rupee notes and
the acceptance of bribery as a routine matter, they have started accepting
money directly."
The manager was quite surprised to realize that Kerala ministers started
receiving bribe directly from such businessman. Many branch managers will
be aware of the businessman withdrawing fresh five hundred rupee notes
from the banks located in the state capital. During informal conversations,
bank employees share a number of such stories, which reveal the uncivilized
and corrupt face of Kerala politicians. While giving big as well as small
contracts, project tenders or other major deals involving money, the
ministers, senior bureaucrats involved in the decision making and some
senior political leaders engage in an unholy partnership to share a part of the
booty. The State Chief Minister is adamant that due to the salary given to
government employees, the state exchequer is empty. But compared to the
amount of money siphoned off by this unholy nexus of politicians and
businessman, the employees role in emptying the treasury is very limited.
The commonly accepted practice in tendering is to accept a certain
percentage of the total bill amount as commission to the ministers and senior
officials. "While awarding any major contracts, the minister invites all the
major bidders for private meeting and advise them how to go about to get
the contract," reveal sources closely associated with the tendering process in
Thiruvananthapuram. "If there are four pre qualified bidders for a project,
the minister invites all of them for separate meetings and advise them that
each bidder will get a share of the work. Instead of quoting lower amounts,
he will ask them to quote a higher amount and share the work among the
four. If it is a project worth Rs. 10 crores, he will ask them to quote for Rs.
20 crores. The additional ten crores, which flows from the public exchequer
to the contractor, the minister and his subordinates, will be the additional
38

earning for all the parties involved. The only loser in this business is the tax
paying public.
Even though the work is contracted for Rs. 20 crores, the consortium will see
to it that the project is not implemented within that cost and time period.
Citing a number of silly reasons, the contractor will introduce new terms and
conditions in the project work, seeking more funds for completing it. 'With
the knowledge of the minister and other higher officials involved in project
implementation, the contractor will say that for removing some rock in the
project area or some additional work, he incurred additional expenditure,"
added sources. It is the common modus operandi used by the contractors to
make quick money. In awarding liquor and hotel licenses and tourism
projects corruption is prevalent in the state, added sources.
All the black money earned through corruption and dubious deals is
converted into white money following the hawala route. Many of the Kerala
politicians have got their 'agents' or 'benamis' engaged in some sort of
insignificant business in the Gulf countries, Canada, the USA or any other
foreign countries. "In Canada and USA such agents are operating the dirty
business openly on behalf of some of the Kerala ministers. In various Gulf
countries, they have their benami operators who are used as a cover to
convert their black money earned in the state into white money. Prominent
state minister have their own people in the Gulf. Some of them are engaged
in business, as a cover to transfer huge amount of money through the
hawala route and convert black money into white.
Thanks to the liberal approach of Dr.Manmohan Singh, the former finance
minister, any amount of foreign exchange can be remitted or gifted by a Non
Resident Indian to anyone in India. The hawala operation or the unofficial
fund transfer from the Gulf region to South Asian countries and vice versa -
comes handy for these politicians to convert their black money earned in
India into white money. The modus operandi is very simple - those who need
to send their foreign currency to India give their money directly to the
hawala agent in the Gulf. Many ordinary people and members of the crime
syndicate who want to send money for illegal purposes like drug trafficking,
arms struggle or funding political groups, engage the service of these hawala
operators.
People who are not comfortable with sending money through banks also
prefer this illegal route. Hawala operators give higher exchange rate to
attract customers. After receiving the foreign exchange abroad, the hawala
agent's representative in India arranges to give the black money earned in
India through dubious means to the end recipients. So without any trace of
paper or documentation, money has changed hands and black money is
converted into white. The politician will give a higher premium to the hawala
agent for converting his black money into white.
39

The foreign currency bought by the hawala agent in the foreign country is
remitted through the legal channel to India either by the local agent of the
politician or by a "carrier". 'Carriers' in hawala business are persons who are
working or doing business in the Gulf with fake labour card or passports.
"These businesses are a cover to convert their black money into white,"
added sources. This is the secret behind the frequent foreign visits of some
of the state ministers ostensibly for tourism promotion or as part of a foreign
delegation. Non Resident Indians who send money to India for purchasing
property or real estate also prefer the hawala route because in any property
transaction they have to give a portion of the deal in black money. If you
monitor the Kerala ministers who frequent the USA, Canada or Gulf region,
you get a clear idea as to who is doing what. During these visits some of the
ministers go with their suitcase filled with gold biscuits because the VIP
baggage goes unchecked in Kerala airports. A business pays for the gold as
part of his generosity. Is there anything wrong if the minister reciprocate
back home.
Controversial Minister's Gulf Visit
Dubai: The Kerala state tourism and Fisheries minister K.V.Thomas is in the
news once again because one of his party members has filed a vigilance case
accusing him of amassing huge amount of wealth disproportionate to his
known source of income and evading several lakhs worth of stamp duty in
dubious property deals in the late 1980s. Amassing several crores of rupees
is not an easy task, but to a Kerala minister handling the hot portfolios, it is
not that difficult. Recently the honourable minister was touring various Gulf
capitals ostensibly to promote tourism.
Was tourism promotion the only purpose of his Gulf tour? Was it really to sell
Kerala as a tourist destination through a tourism festival which will be held
sometimes by the end of 2002 or was he trying to engage in some more
property deals in Kerala, with the Gulf based Indian tycoons?
According to sources, during a crucial Gulf tour recently, the Kerala state
tourism and fisheries minister along with the central minister for civil aviation
was in major Gulf capitals. During this meeting, they were reportedly wining
and dining with a number of Indian businessmen, who had keen interest in
some of the major privatisation projects in India. The ministers were part of
the tourism promotion delegation.
At a time when chief minister A.K.Antony is cautious about the state
financial health, how come that all his cabinet colleagues keep
visiting the Gulf countries one after another? There must be
something that attract all the Kerala ministers to the Gulf capitals.
Did K.V.Thomas and other Central Ministers who were involved in
taking crucial decisions met any of the bidders and what was the
purpose of such a meeting just before taking important decisions?
The Minster left without meeting any of the social organizations
40

there. What was he doing in a leading Indian businessmen's private
villa in one of the Gulf capitals?
The ongoing controversy in Kerala is all about the dubious land deals with
hotel groups through which he has amassed several crores worth of
property, alleged K.V.Babu in a vigilance case. A dubious land deal with BRJ
Hotels was conducted in the late 1980s when he was only a Member of
Parliament. According to reports, the land surrounding the National High Way
at Kanayannoor Taluk, Marad Village was bought and sold to leading
investors who created an international convention centre, a leading
international five star Hotel chain and other major multinational companies
on the property.
Recently the Minister was roaming around all the major international capitals
to market his so called Vision 2025 tourism plan to develop Malabar coast as
a tourism spot. Has he planned any major land deals in the Malabar coast,
where a number of international hotel chains will be coming up? A number of
Kerala politicians including a former Chief Minister have made big money by
purchasing property from the locals at Nedumbassery area at the rate of a
few thousand rupees just before announcing the plans for the new
International Airport project. Once the project was announced, the land
prices skyrocketed and they managed to sell the same property at as high as
Rs.50,000 per cent to make millions. Is it all part of a major conflict within
the ruling coalition to share the family silver among themselves?
A number of business groups have keen interest in obtaining some of the
prime property in different parts of Kerala, especially Kochi owned by some
of the so called loss making public sector units. One of the government
owned company has got more than four thousand acre of land and going by
the real estate price alone their book value will be much lower than their real
market value. The scramble among politicians, ministers and businessmen is
to get such properties at throwaway prices by bribing the ministers,
bureaucrats and political leaders.
41

Narmada Bachao Andolan (NBA)
The Narmada Bachao Andolan (NBA, Save Narmada Movement), which has
been spearheading the decade-long movement against the Sardar Sarovar
Project on the Narmada river, has been accused of collecting funds through
illegal channels and violating the country's foreign exchange regulations.
An Ahmedabad-based organization, the National Council for Civil Liberties,
issued an advertisement in newspapers here alleging that the NBA has been
passing confidential reports to foreign countries and is collecting funds
through the "hawala" channel of money laundering.
Some time ago Gujarat's Narmada Minister Jaynarayan Vyas had charged
that the NBA is accepting foreign funds and demanded an inquiry by the
Central Bureau of Investigation (CBI) into alleged foreign exchange violations
by the anti-dam movement.
The NBA has termed these allegations "fallacious" and accused industrialists
and politicians of Gujarat of hatching a conspiracy against it.
"This is an intentional assault on the NBA by the industrialists of Gujarat who
will gain most from the Sardar Sarovar dam," Rahmat, a prominent NBA
activist, told IANS on phone from Badwani, from where he runs the
movement in Madhya Pradesh. He alleged that politicians are hand in glove
with industrialists in their bid to derail the anti-dam movement.
The half-page anti-NBA advertisement alleged that the anti-dam campaign is
sending highly confidential reports concerning projects of national
importance to foreign countries. To support this allegation, it included a copy
of a letter written by NBA activist Chittaroopa Palit to someone in Switzerland
saying a report was being sent.
But it turns out the document mentioned in the letter was compiled by the
NBA itself. "This advertisement is misleading and is self-contradictory. The
report (mentioned in the letter) is our own which we can send it to anyone,"
Rahmat said.
The National Council for Civil Liberties further alleged that the NBA has been
running the anti-dam movement over the past 10 years without sending an
audit report of its accounts to the government because it is collecting funds
through Hawala.
The advertisement alleges that the NBA is collecting funds through several of
its associate organizations instead of accepting money directly. A copy of a
letter and a receipt of Rs. 40,000 issued by a voluntary organization called
Lok Samiti of Nashik, Maharashtra, has been displayed in the advertisement,
in which the Laljibhai Group of Industries has been thanked for its
contribution towards the Narmada movement.
42

NBA says it is no secret that it has been collecting funds from its supporters
and the locals of the areas affected by the Narmada project.
On the Gujarat minister's allegation about foreign exchange violations, Alok
Agrawal of the NBA said: "We take no foreign funds, nor have we taken the
award money of any of the foreign awards."
The NBA, he said, is open to any inquiry constituted by any authority, "but
on one condition. If the allegation is proved wrong, Vyas, apart from
apologizing publicly, should resign from ministership and quit politics."
The report has also questioned economic viability of big dams, stating that
large dams often incur substantial capital cost overruns and schedule delays.
The large dams tend to benefit groups other than those who bear the social
and environmental costs and other risks of these dams, the report stated.
On the charge made in the sponsored advertisement that the NBA had
passed on 'confidential documents' relating to the Maheshwar dam to
foreigners, The NBA has not given any sensitive document relating to
national security to any foreign agency. It is committed to disseminate at
national and international levels its perspective on the disastrous
consequences of a project like Maheshwar with 80 per cent funding from
foreign sources.
The NBA has also strongly refuted the advertisement's allegation that the
NBA is funded through hawala transactions.
43

The Jain hawala case
It’s been a decade (May 3, 1991) since the sensational Jain Hawala
corruption case unravelled with raids on the residence, office and farmhouse
of ‘‘diary-keeper’’ S.K.Jain. But it’s ironic that even after the main charges
have been thrown out by the courts, the supplementary investigation
embarked upon by the Income Tax (IT) Department carries on endlessly.
The Rs 65-crore Jain hawala scam implicated politicians of every kind except
for the communists. And it is hardly surprising that vested interests sprung
up keeping it going. The pay-off scandal was investigated by the Central
Bureau of Investigation (CBI) and closely monitored by the Supreme Court,
which had once asked Secretary-level officers to report on its progress. On
another occasion, the apex court asked the IT Department to inquire into
disproportionate assets of the hawala accused and 10-year long assessments
in the case of politicians and bureaucrats were opened.
It was in 1997-98 that the IT Departments began chasing political leads
more closely. At that stage, former Congress ministers Buta Singh and Arjun
Singh bore the brunt. Buta Singh allegedly had the highest undisclosed
income, from over Rs 10 crore with alleged violations including the purchase
of fishing trawlers by his sons to huge unexplained cash deposits and other
44

extravagances like hiring chartered planes by him and his family. It is not,
however, known how much of the penalties were paid up by Buta Singh.
The other important political twist was the challenge petition filed by Arjun
Singh against the re-valuation of the marble palace he had built on the
outskirts of Bhopal. While Singh had claimed the value of the property was
Rs 18 lakh, the IT Department had put the real cost at above Rs one crore.
Arjun Singh fought the case right to the Supreme Court.
Apart from him, 14 politicians were forced to get their properties re-valued in
the wake of the investigations.
Nine years ago Delhi policemen raided premises in the crowded,
predominantly Muslim Chandni Mahal area in central Delhi. According to
senior police officers, foreign exchange irregularities and hawala transactions
are common in this area.
The police stumbled upon a large hawala network and through subsequent
raids discovered that money was routed to Kashmiri militants through a
student at the Jawaharlal Nehru University, Shahabuddin Ghauri, who was
arrested in early 1991. The police charged two individuals in the case, Ghauri
and Devidayal, allegedly a hawala dealer. Devidayal is still absconding;
Ghauri, whose trial concluded in conviction two years ago, is serving his
sentence at the Tihar jail.
In 1991, the Central Bureau of Investigation (CBI ) raided a hawala dealer,
S.K.Jain’s farm house in Mehrauli and recovered Rs.90 lakhs in cash and a
diary, which revealed the identity of politicians and bureaucrats who
allegedly were the recipients of the money (Rs.60 crores) from S.K.Jain for
awarding lucrative contracts in the power sector with foreign companies. The
share of the bureaucrats was a small amount as compared to the amount
given to the ministers and politicians. The diary entries revealed that Rs
65.47 crore had been paid to 115 people from 1988-91. Of this, Rs 53.5
crore was found to be illegally transferred to India via hawala channels. The
payoffs were allegedly made around 1988-1989 during the final months of
the Rajiv Gandhi regime.
The diary was sealed and for some time, no investigations were carried out
on its basis. In the meantime, responsibility for the main investigation
changed hands, from the Delhi police to the CBI.
At about the same time, CBI deputy inspector general O P Sharma was
caught for allegedly seeking a bribe. The police alleged that Sharma,
who was aware of the names in the diary, was trying to blackmail them.
Sharma, however, claimed he was falsely implicated at Advani's
instance because he had questioned the BJP leader on seeing his
name in the dairy. Before he was charged with the offence, Sharma, who
retired with that stigma, was considered a fine officer who rose from the
45

ranks to successfully investigate some of the most sensational crimes of the
1970s and early 1980s.
Till 1993, there was little progress on the hawala case and the file remained
in a sealed cover. Most of all, no one in the CBI investigated the corruption.
In 1993, senior Delhi police officer Amod Kanth took over as DIG,
CBI, and was entrusted with the case.
Before joining the CBI, Kanth was officer on special duty to then minister of
state for home Subodh Kant Sahay.
Sahay was close to then prime minister P V Narasimha Rao. Perhaps, that is
why Kanth was entrusted with the case under the erroneous impression that
he would be pliable on Rao's behalf. As things turned out, investigation into
the diary commenced in Kanth's time.
However, differences within the CBI soon surfaced. One group of officers
wanted to implicate Narasimha Rao. The other, led by then CBI director, Raja
Vijay Karan, wanted to stick to the diary alone which mentioned Rs 65 crore
(Rs 650 million) as the payoffs. Kanth arrived at the conclusion that the Rs
65 crore mentioned in the diary was not all, and that the actual payoffs
amounted to Rs 73 crore (Rs 730 million).
Of the remaining Rs 8 crore (Rs 80 million), he surmised Rs 3.5 crore (Rs 35
million) was paid to Rao.
Second, the CBI officials alleged since the payments were made by some
MNCs, the foreign angle to the payoffs had to be investigated as well.
However, according to some of these officers, the powers that be were
unwilling to allow the investigation to proceed beyond the amount mentioned
in the Jain diary.
According to the investigators, the Rs 73 crore were kickbacks from
multinationals for the awarding of three power projects in north India and
the modernization of a steel plant.
The CBI made the beginning of their trial in January 1996. The special
Hawala court issued non-bailable warrants against 10 politicians –
L.K.Advani, Arjun Singh, Kalpnath Rai, Arif Mohammed Khan, Jaswant Singh,
Devi Lal, his grandson Pradeep Singh, V.C. Shukla, Balram Jakhar and
Madhavrao Scindia.
But apart from the diaries, there was no additional evidence. In the V C
Shukla and L K Advani cases, the Delhi High Court had held that there had to
be corroborative evidence apart from the diaries, while quashing the lower
court order that framed charges against the two.
46

With the CBI filing charges against 14 more politicians in the Jain Hawala
case and submitting the report to the Supreme Court, investigations showed
that it was the most widely ranging scandal in recent time. In the final tally,
27 political figures, including Madan Lal Khurana, who resigned on the 23rd
February 1996 as Chief minister of Delhi and 2 Governors – Moti Lal Vora
and Shiv Shankar also faced Trials from among the 62 names of politicians
found in the Jain Diaries.
On the prime accused, S.K.Jain’s allegations that he paid money to the
former Prime Minister P.V. Narsimha Rao, the CBI told the Supreme court
that as things stood, it had not found any “reasonable basis” to proceed
further.
On the 31st
of January 2000, the case against all the accused was
closed.
Allowing a request of the Enforcement Directorate (ED), a Delhi court has
ordered a joint trial of the Jain brothers, Ameer Bhai and Arif Mohammed, in
the Jain hawala case, involving the violation of the Foreign Exchange
Regulation Act.
Many former Union Ministers and senior politicians had been chargesheeted
in the case and later discharged or acquitted by a Delhi court or the Delhi
High Court.
The Enforcement Directorate accused the brothers - Mr. B. R. Jain, Mr. S. K.
Jain and Mr. N. K. Jain - and their manager, Mr. J. K. Jain, of acquiring and
selling foreign exchange worth $ 2.26 crores to Ameer Bhai and Arif
Mohammed in violation of FERA.
The case was an offshoot of the Jain hawala case as the Directorate had
initiated investigation and later filed complaints in the matter after the
recovery of Mr. J. K. Jain's diary from his residence in South Delhi.
The diary, marked `M,' had entries of about 26 transactions, representing
the conversion of U.S. dollars into Indian currency, at unauthorised rates.
The total value of the transactions was about $ 2,26,50.000, the ED alleged.
The proceeds of the transactions were credited to `A,' who, following
investigation, were identified as Mr. Ameer Bhai and Mr. Arif Mohammed,
partners, Messrs. Gem Traders, Mumbai, the Directorate said.
Allowing the submission that the two accused should be tried jointly as the
offences against them had originated from the same incriminating facts, the
Additional Chief Metropolitan Magistrate, Mr. Justice V. K. Maheshwari, said:
``I am of the opinion that both the complaints may be clubbed together, and
a joint trial of both these complaints is possible.''
47

Union Home Minister Lal Krishna Advani and all others who escaped the Jain
Hawala case are again in the Central Bureau of Investigation (CBI) net
following the Income-Tax Department reporting that they had amassed
"black money."
Among those listed with their black money in brackets, according to the
daily, are Union Ministers like Advani (Rs one lakh), Sharad Yadav (Rs 25
lakhs), Yashwant Sinha (Rs 4 lakhs) as also the Congress leaders like Natwar
Singh (Rs 1.10 crore), Arjun Singh (Rs 67 lakhs), Narayan Dutt Tiwari (Rs 25
lakhs), Buta Singh (Rs 15 crores) and R K Dhawan (Rs 8 lakhs).
Other names in the list include: Former Deputy Prime Minister Devi Lal (Rs
90 lakhs), his son Ranjit Singh (Rs 12 lakhs), his nephew Pradeep Singh (Rs
3.68 crores), Prakash Bhatia (Rs 50 lakhs), S krishna Kumar (Rs 5.50
crores), Kalpnath Rai (Rs 1.30 crores), Arif Mohd Khan (Rs 1.50 crores) and
Babanrao Dhakne (Rs 8 lakhs).
It may be mentioned here that the CBI and other investigating agencies had
inquired into the Hawala case at the instance of the directives of the
Supreme Court, challanning 110 persons on the basis of the infamous Jain
diaries in which industrialist S K Jain had maintained record of money paid to
various politicians and officers for all kinds of favours.
48

Kashmir's hawala scandal
Frontline investigation has unearthed evidence which suggests that at least
two senior members of the All Party Hurriyat Conference (APHC), which is
committed to Kashmir's secession from India, have been siphoning off funds.
It has been discovered that People's Conference leader Abdul Ghani Lone and
the Jamaat-e- Islami's Amir (chief), Syed Ali Shah Geelani have used proxies
and dummy bank accounts to harbour illegally obtained funds. Frontline's
five-month investigation also found hard proof that massive sums of money
collected for the reconstruction of the Chrar-e-Sharief shrine, and for the
relief of the town's residents, have vanished.
There is no hard evidence to show where the enormous sums of money
received by the Hurriyat came from; nor could it be proved that the leaders
converted the funds into personal assets. The mysteries of where the money
came from, and what it was spent on, remain. The Central Bureau of
Investigation (CBI) filed First Information Reports (FIRs) charging the two
leaders with hawala offences, but the Central investigative tools is showing a
curious unwillingness to go deep into the matter.
UNDERSTANDING the significance of these discoveries requires an
understanding of the workings of funding terrorism in Kashmir. Since the
1991 arrests of Ashfaq Lone and Shahabuddin Ghowri in New Delhi on
charges of channelling hawala funds to Kashmir terrorist groups blew the lid
off the Jain brothers' hawala scandal, it has been known that illegal inflows
have been supporting terrorism in Kashmir.
It has been known that Pakistan's Inter-Services Intelligence (ISI) routinely
uses the West Asian hawala network as well as "Kashmiri pressure groups
working from the U.K. and United States" to fund politicians associated to
terrorist groups.This money is then passed on by these leaders to armed
organisations.
Much of this money is skimmed off by the Hurriyat leaders, as well as their
proxies, who include businessmen and journalists, for personal benefit. It is
then laundered through the attainment of lawful assets like property and
financial assets, which are claimed to be organisational purchses rather than
personal ones. Thus, international funds arriving through hawala channels
have served two purposes: they have not only paid for terror, but created a
political vested interest in continued bloodshed.
49

The CBI's FIRs were seen as a sign of the Government's intention to resolve
the last remaining string of the Jain hawala case and to attempt to establish
the I.B. plan that terrorism in Kashmir was sustained through hawala
inflows, nothing of the kind has so far happened.
Prime Minister I.K. Gujral's revelation in Srinagar that the Hurriyat leadership
consisted of his "old friends", too, had done little to motivate investigators to
discover the truth.
The Jamaat-e-Islami trail
Syed Ali Shah Geelani's Jamaat-e-Islami has control over schools, hospitals
and charitable trusts, as well as a substantial network of political cadres
committed to its fundamentalist politics. The Jamaat's armed wing, the
Hizbul Mujahideen, is, the State's most feared terrorist group. Intelligence
officials have long believed, though without hard evidence, that the Hizbul
Mujahideen's mysterious Amir-e-Jihad (supreme leader of the Jihad) was in
fact Geelani himself.
An FIR registered in New Delhi by the CBI's Special Investigation Cell
suspected that Geelani had violated Section 23 of the Foreign Contributions
(Regulation) Act by receiving 2 million rials (Rs. 19.4 crores at current
exchange rates) from Saudi Arabia and a separate donation of Rs. 10 crores
from the Kashmir American Council. These payments, the FIR alleged, were
collected from hawala dealers in New Delhi.
While part of these payments were sent on to terrorist groups, investigators
believed, important diversions took place to buy property.
Geelani's defence is as follows: he does not deny the allegation that he has
been involved in property purchases, but insists that the purchases were
made with party funds for the use of the Jamaat-e-Islami.
Abdul Ahad, a Srinagar shopkeeper, was found in possession of 12 bank
drafts worth Rs. 5,95,000, all issued in favour of a Sopore company, Riyaz &
Co. Army officials discovered that the account was held by Riyaz Ahmad
Lone, an employee of the Sopore head office of the Kamraz Rural Bank.
Investigations led to the recovery of more drafts, worth a total of Rs. 11
lakhs. Each had been purchased against payment of cash. One of these
drafts was worth Rs. 3 lakhs - in violation of the rule that no draft for over
Rs. 50,000 can be purchased by any means other than a crossed cheque.
Abdul Ahad told officials of 20 Grenadiers that the drafts were handed over
to him by the Jamaat-e-Islami's office clerk, and Geelani's chief of the
Jamaat-e-Islami, Ghulam Mohammad Bhatt. Such drafts, he claimed, were
50

How Hawala Works: An Underground Banking System

How Hawala Works: An Underground Banking System

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How Hawala Works: An Underground Banking System