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Are happy days here again? For gold smugglers

Monday, March 19, 2012

This year the Budget has created a path for the return of gold smuggling and perhaps a return to the ‘glittering’ 70’s and 80’s. In fact, this illegitimate traffic in gold could now go a step further, by clearing the way for bringing back slush funds converted into gold at present stashed abroad. Neel Shah gives readers a glimpse of and old trend, which had ceased to exist...!

“I must be cruel only to be kind,” was the first statement of Finance Minister Pranab Mukherjee on Friday before starting the reading of the highlights of the 2012 Budget. This sentence of ‘Pranabda’, taken from Shakespeare’s ‘Hamlet’, would go down well with gold smugglers, as the Budget has yet again opened the doors to gold smuggling in India, which had come to an absolute halt in the early 90’s.

The reason for this thankless state of affairs is the government’s newly declared intent to slap additional taxes of excise and customs duty on imports of gold. The customs duty has been doubled from 2 per cent to 4 per cent and 1 per cent as the excise duty on the gold import.

“To avoid these duties, which would surely trigger the price rise of around 2.5 per cent to 4 per cent in gold purchase, the jewellers would prefer gold import through illegal channels,” informs Kumar Jain, vice president of Mumbai Jewellers Association.

The members of Bombay Bullion Association (BBA) agrees with Jain that the government’s decision would encourage smuggling but added that the this would not reach the levels that existed in the 70’s and 80’s. In such a scenario, around 10 per cent of the demand for gold would be met by smuggling, according to a BBA member. He added that “the gold traders would try to evade not only the 4 per cent custom duty but also 1 per cent VAT, which would help the trader gain 5 per cent profit.”

Being the world’s top gold importer, India imported around 970 tonnes of gold in 2011, in which over half the volume was to meet the demands of the jewellery market. If one considers this and puts the BBA member’s statement into perspective,  then annually around 100 tonnes of gold would be smuggled in India, which would be worth around Rs.28,000 crore.

Smugglers and gold smuggling
To Indians, gold is much more than a precious metal. Indians have a mystic attachment to it and there is no festive or family occasion where gold does not play a part. In India people buy gold for its own sake and jewellery is handed down from generation to generation. Also, people in India never sell gold unless there is a real crisis and only as a last resort. And yet the price of gold is perhaps the highest in India.

Smuggling of gold into India has always been a lucrative business for those willing to take the risks. Considering the current scenario, it seems that nearly 10 per cent of the demand would be through smuggling, and the profits would be large enough for the smugglers to take the risk.

Commenting on the issue, a senior customs officer in Mumbai, requesting anonymity, said, “Gold smuggling would certainly again start in India regardless of the gold price being high, as Indians insist on gold being a part of the transaction in each and every marriage, and largely, every significant family function.”

“There will be a little change in smuggling styles, with the smugglers using all three routes, sea, land and air, along with the traditional style of smuggling through couriers,” said the custom officer.

However, there would be a significant change in the form of gold smuggled gold this time. Unlike earlier days, when the smugglers would bring in contraband in the form of  pure gold bars and coins, this time they would directly smuggle in jewellery that would be a finished gold product, said Mumbai’s custom officials. For this, Dubai and Hong Kong will be the smugglers paradise from where the finished gold jewellery would be smuggled to India.

According to DRI sources, apart from the 5 per cent duty evasion in India, there are two important factors why the smugglers would prefer Dubai and Hong Kong for smuggling the finished gold jewellery, rather than bringing in the pure gold bars from any other countries.

First, the finished gold jewellery would cut making charges for the jeweller purchasing gold from smugglers. In turn, the reason for this is that the gold jewellery from Dubai and Hong Kong are machine made products. In India, the jewellery is usually made by the hand, which increases the price of jewellery due to making charges.

Second, these two countries are free from local taxations like sales tax, excise tax and VAT, which would serve the purposes of both the smugglers as well as the gold traders.

Elaborating on the smugglers using the air route for smuggling, sources in the customs said the smugglers would approach gullible Indian workers earning their livelihood in Gulf countries. These people will be used as couriers and will be paid a sum of Rs.15,000 to 20,000 for each consignment of over 50 grams of gold, which would be five tolas. Such a practice was followed in the 80’s, wherein the Air Intelligence Unit of Customs in Mumbai, had arrested more than 200 people in 1987. These arrests had taken place as the government had then completely prohibited import of pure gold bars and coins, except for the licensed dealers.

Politicians’ and industrialists’ black money a major factor in gold smuggling
It is, perhaps, a known fact that politicians and industrialists have slush funds stashed abroad, which is converted into gold bars and jewellery. The illegitimate traffic in gold import would become a way for these politicians and industrialists to bring back their ill-gotten money converted into gold, said insiders in the BBA. This could be a major factor in the gold smuggling, as this factor alone would threaten to surpass the dizzy levels of gold smuggling, in terms of value, recorded in the post-emergency period, added market speculators.

Moreover, it would also help the smuggler’s gang mushroom and operate with great vigour and with virtual impunity, as the value of the contraband in traffic is firmly set in the range of thousands of crores of rupees.’

The age-old attraction for the yellow metal in India is unlikely to wane and considering this there seems to be hardly any possibility that gold prices would ever come down. And in any case, so long as such government policies exist, gold smuggling will beckon brightly... leaving the smuggler laughing all the way to the bank.

Rise of the monopoly man
One man who was raking it in on spiraling gold prices in the 80’s was Dawood Ibrahim, son of a retired head constable and now a globally declared terrorist worth over Rs.25,000 crore.

Thanks to the elimination of most of his rivals, either through gang warfare or through police encounters, Dawood emerged as a monopoly smuggler who can control the flow of gold into then Bombay and cash in on the prevailing gold prices.

A discussion with the DRI sleuths and customs officials revealed intriguing viewpoints: since it was not possible to curb gold smuggling activities then, why not create a monopoly smuggler? After all, isn’t it easier to keep tabs on one gang instead of a large number of splinter groups? With only one smuggler around, the official said, it was easy for the agencies to keep track of how much gold comes in and how much silver goes out. The RBI, for instance, can monitor the repercussions of an increase in the supply of gold on the economy.

Is this why Dawood’s rivals were eliminated? The list of the killed is almost endless... Mahesh Dholakia, Rahim Khan, Samad Khan, Amirzada Nawabkhan, Alamjeb Zangrez, Kalya Antony, Kalya Mehmood, Abdul Kunju, Chandrashekar Safalika, Adam Sohel Sheikh, Rajan Nair alias Bada Rajan...

This list, for those who know what was happening in the underworld, is one sided. Those who were killed in either gang warfare or through police encounters, belonged to the groups in opposition to Dawood.

In fact, the creation of a monopoly smuggler had made a quick killing possible through an artificial increase or decrease of gold prices in Bombay’s bullion market. The process was simple: after gold shipments from Dubai got underwritten by a syndicate in Bombay, enough gold was brought in to cater to boom conditions in the market. A boom situation, as everyone knows, prevails during April-May (the marriage season) and during October-November (the festival season). Gold would be purchased by the consumers during this time period, whatever the cost.

An artificial shortage was thus created by squeezing out the supply of gold and one sure fire method of doing it was by tipping-off the customs of the forthcoming gold shipments from Dubai. Two or three seizures of Rs.5 to 10 crores and suddenly there was no gold in the market. So what was available for Rs.2,000 per ten grams then in the market immediately zoomed to Rs.3,500 – a simple reaction to the laws of demand and supply.

Once the price of gold had gone up, it was time for releasing hoarded gold brought in by the monopoly smuggler, whether it was Dawood or his senior, Haji Mastaan. For those who were affiliated to this inner circle, the profit margin tripled but for those who did not belong, anonymous tip-offs and seizures of rivals of the monopoly smuggler not only lost them their shipments but also landed them behind the bars.

The creation of Dawood as a monopoly smuggler was systematic, either through the physical elimination of his rivals or death in police encounters. While the police had eliminated at least 80 notorious mafioso in shootouts in the 80’s, not a single person affiliated with Dawood’s camp was touched.

Curiously, the fortunes of men who had masterminded the gold syndicate – from its beginnings to early 80’s – rose and fell with the rise and fall of ruling governments. Ageing dons like Mastaan, Yusuf Patel and Karim Lala, became respectable folk, thanks to the rise of the Janata Government in 1977, who granted them Amnesty in exchange for their vote banks and liquid cash.

These men, who took gold smuggling to its peak in the late 70’s, diverted riches into real estate and construction and soon, the slumlord who used to expand horizontally on land, started increasing his holdings vertically by grabbling old tenements and illegal FSI.

The Janata Government which bestowed respectability on men like Mastaan, Patel and Lala, however did not last long. It came toppling down and in the process shook up the hierarchy in organized crime. New politicians cropped up and along with them came a relatively new entrant into smuggling – Vardarajan Mudaliar and the south-Indian mafia. Taking off from an illicit liquor empire, he quickly took over dock smuggling and according to the records in crime branch in 1982; Mudaliar started grossing over Rs.40 crore from the docks alone. He also started breaking into coastal smuggling, which was till then dominated by only one community.

Mudaliar and his men had just got entrenched and were making a concentrated drive towards respectability when Indira Gandhi’s assassination changed the political picture. The old order was eased out and new ministers took over and pretty soon the foundations of Mudaliar’s empire started shaking. From 1984-1986, his illicit liquor network was smashed, his henchmen were held and he himself was forced to flee to Madras.

During the same time period, Dawood’s counterpart in Central Bombay, Karim Lala, saw his men whittled down, either through gang warfare or through police encounters. The victims included nephew Samad Khan and brother Rahim Khan. Lala himself was jailed, on rather flimsy charges, and released by the police only after a year.

Till the 1993 blasts, there were no rivals for Dawood and he was able to control his activities efficiently. In simple words, the law looked the other way during his crime activities. Will this era come back? Will Dawood back get into gold smuggling? The answer, if history is any indication, will depend on the fortunes of the present government.

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