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4. India: organized crime, political corruption and underground banking.
India is the world's largest democracy. Unlike so many countries which gained their independence from colonial rule after the Second World War, India did not become a one-party state. Despite its continuing problems of widespread poverty, worsening ethnic divisions and administrative inefficiency, India has valued democratic ideals and has maintained competitive elections. Indeed, scholars such as Amartya Sen, a recent winner of the Nobel Prize for Economics, have argued that democratic institutions have been essential for protecting the country's poor and for leading to improvements in educational opportunities.
But there is a dark side to the story. This is told by the Indian political scientist, R. B. Jain (1995) and in a detailed, pessimistic account by B. V. Kumar (1996). India is an example of a country where a high proportion of economic transactions are conducted with cash and do not flow through the banking system.
According to Kumar, underground banking ('havala') developed during the partition of India 1947 into two independent countries: a mainly Muslim state (Pakistan) and a mainly Hindu one (India). The underground networks established then have reportedly survived and become more sophisticated.
Underground banking is part of a series of problems of illegal behavior facing India. These include: the 'black' economy (transactions unreported for income tax purposes), evasions of regulations concerned the export of capital, organized crime, political corruption, rigging of stock markets, political contributions and other forms of manipulation by multinational corporations.
(a) Underground banking.
Kumar writes that movements of secret funds are needed in India to meet a number of objectives:
1. Tax evasion: taxable earnings are not reported to fiscal authorities and stashed in financial repositories abroad.
2. Smuggling and related activities (evasion of exchange control regulations).
3. Capital flight triggered by anticipated political, economic or cultural uncertainties.
4. Maintenance of slush funds generated by corrupt politicians and public officials in major international deals, like purchase of arms, aircraft, ships, major projects, etc.
5. To undertake securities transactions, insider trading, etc.
6. Fraud/theft of real or financial assets kept hidden and out of reach of the investigating authorities.
7. Money laundering associated with illegal activities, like drug trafficking, organized crime, gunrunning, etc.
8. Undercover activities of intelligence agencies, clandestine operations including supporting terrorist outfits.
9. Financial resources received covertly by various ethnic, resistance or terrorist groups fighting internecine wars with governments of the day.
10. Contributions to individual politicians or political parties. (Kumar, 1996, 321-2.)
The underground banking system reportedly developed in the 1940s from networks connected with specific villages from which much of the population emigrated to Hong Kong, Britain, Canada and the United States. When India was partitioned millions of people were displaced. Hindus living in Pakistan often fled to India, while Muslims in India fled to Pakistan. Both groups found 'underground' ways to salvage their assets.
The groups which facilitated this process of capital flight were often émigrés from villages in Tamilnadu, Gujarat, the Punjab and Sind. Using the system of extended families, gang members were trained first as couriers and then for higher posts. From these beginnings, permanent organizations developed. Family loyalties, careful training, and recruitment of new members on the lines of the Italian Mafia have all served to ensure that couriers rarely reveal information to investigating authorities if they are arrested. Typically, a fee of 15-30 percent is demanded for the illegal transfer of money across international borders.
Apart from money, smuggling of gold and other valuables is common, especially because of Indian traditions of keeping wealth in the form of gold ornaments, a popular smuggling route is from Dubai, on the Persian Gulf, to India's west coast.
(b) Legal and illegal methods used by multinational corporations to evade exchange controls and other regulations.
From the 1940s, the underground banking (i. e. smuggling) system described above reportedly helped British companies in capital flight operations following Indian independence. By the 1960s and 1970s, writes Kumar, multinational corporations used not only the established smuggling agencies but also a variety of other methods to exert political influence thereby to affect or to evade exchange control regulations. They were:
1. Donations to political parties, including donations at the time of elections to individuals.
2. Maintaining lobbies inside and outside of the legislature.
3. Influencing domestic policies through the media.
4. Bribing outright, illegal payments, fees, commission, pay-offs to local politicians and government officials.
5. Hospitality to bureaucrats and politicians.
6. Evasion of local taxes.
7. Under-invoicing and over-invoicing of import and export bills.
During an Indian parliamentary debate held in 1975, it was alleged that forty American companies employed 'liaison officers' to deal with Indian officials, to lobby, and to make political donations. (Kumar, 1996, 327.)
According to an assessment cited by Jain, corrupt practices and illegal practices by corporations grew in the 1970s as a result of the ban on company donations to political parties introduced by the government of Indira Gandhi. This «played ... hell with the system and also with business ethics and morality.» Since the Right Wing opposition could no longer receive business donations on a legal basis,
«other methods of raising money were discovered ... Licenses and permits were unabashedly hawked. Dubious foundations and organizations were created with a view to raising and soliciting funds. Leading industrial houses, known for their impeccable business morality ... eventually buckled under in the race for survival... Although the ban on company donations was removed by Prime Minister Rajiv Gandhi, the damage done to political life ... with repeated allegations and counter-allegations of bribery and kickbacks (as in the Bofors affair) has been irreparable.» (Jain, 1995,162-3.)
The Bofors Affair, which rocked Indian politics in ...., was a scandal involving alleged political donations made in exchange for a weapons contract involving the Bofors Company of Sweden.
(c) Organized crime.
Kumar traces the rise of criminal organizations in India to the prohibition against the sale of liquor introduced after Independence in several Indian cities. This led - as in the United States when there was a ban on alcohol after the First World War - to the development of organized criminal groups in cities such as Bombay (Mumbai), Madras and Delhi. The criminals not only manufactured and distributed the illegal alcohol, they also made illegal payments to politicians and members of law enforcement agencies to buy protection from arrest and prosecution.
A further cause of organized crime was the prohibition after the Second World War on the import and export of gold, silver, diamonds and other commodities. This led not only to the smuggling operations which have been described but also to the growth of criminal groups to ensure the safe landing, transportation and payments for the contraband jewels, protection from arrest for retailers, and the liquidation of informers. Kumar has alleged that one of the largest and well known syndicates initially was based in Bombay and presently operating from Dubai. Its leader had an 'army' of dedicated killers who would not hesitate to liquidate any rivals. A long gang war between this leader and a rival led between August 1977 and June 1991 to 40 murders.
(d) The lack of solutions to the problem of underground banking and smuggling.
Kumar draws some depressing conclusions from his study of 'secret money' and underground banking in India. His pessimism is significant because India is one of a large number of countries where a high proportion of economic transactions are in gold and in other assets which do not pass through a conventional banking system. He writes:
«Parallel banking was born because there was a need to be filled. Havala (underground banking) will cease to exist when smuggling, drug trafficking, tax evasion and black money cease to exist. This will never happen so long as the demand for secret money exists.» (342.)
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