What follows is a polished variant of the age-old hawala deal.
Step 1. Give cash to a big hawala operator in Mumbai.
Step 2. His business partner in Europe credits an equivalent amount to a newly-floated Dubai company; this could happen in 2-3 transactions, called layering in money laundering parlance.
Step 3. The Dubai entity can either invest the money anywhere in the world or bring it back to India a few years later by investing it at a hefty premium in a FDI-compliant project. This project is sponsored by a front company of the person who gave cash to the hawala operator (in Step 1).
Step 4. A year later, the same person buys back the company at Rs 10 a share from the Dubai company.
Regulators rarely track these small, unlisted firms outside their radar. All transactions are within foreign exchange regulations as the money that comes in (through a premium payment) is much more than the money that is paid to the ‘foreigner’. No rules are broken, no one traces a link.
Wednesday, November 18, 2009
Hawala 101: A backgrounder on how this informal money transfer system operates.