As a result of COVID-19, heavy hitters in the United States and elsewhere are talking about shifting investments and supply chains out of China. This dovetails with existing strategic concerns about Beijing. When looking around the Indo-Pacific for an alternative democracy-compatible, large market that has the potential to be increasingly strategically useful, India pops to the fore.
The Indian strategic community knows it and is chomping at the bit to “take the tide at the flood” and use the opening to redefine India’s place in the world. There is even talk of floating an Indo-Pacific Charter to replace the Atlantic Charter.
There is enormous potential, and at least one major roadblock. One of the biggest strategic mysteries of the past few decades is why India hasn’t lived up to its vast economic potential. Its relatively lackluster growth has not only affected the lives of a billion Indians, it has stunted Delhi’s geopolitical reach at a time when a strong India could be an effective counter to an expanding China.
A series of court cases currently underway in India is starting to decode some of that mystery. What is being alleged is a decades-long complex, sophisticated, high-stakes scheme that led to the multibillion-dollar capture and manipulation of core elements of the Indian economy, masterminded by some of India’s most senior leaders. This is serious.
The highest profile arrest so far is India’s formerly untouchable finance minister, Pallaniappan Chidambaram. The cases against Chidambaram are spearheaded by two investigative agencies, the Enforcement Directorate (ED), a specialized financial investigation agency under India’s Ministry of Finance, and the Central Bureau of Investigation (CBI), India’s main police investigative agency.
Corruption allegations have dogged Chidambaram for years. So why lay charges now? India’s two main political parties, Congress (Chidambaram’s party) and the ruling BJP, spar in public but there seemed to be close ties between some individual members of the two parties, especially where large amounts of money are concerned.
Chidambaram was finance minister on and off for over a decade, most recently in 2014. When Congress lost to Narendra Modi’s BJP in that year, Chidambaram’s old friend Arun Jaitley became the BJP finance minister. In spite of Modi coming in on an anti-corruption vote, there seemed little interest in investigating members of the previous Congress administration and Jaitley continued with many of Chidambaram’s policies.
In 2019 Modi was re-elected and Jaitley was replaced as Finance Minister due to ill-health. As Jaitley’s health waned, so did his influence. Coincidentally or not, Chidambaram was arrested on August 21; Jaitley died August 24.
Since then, the increasingly public allegations against Chidambaram have started to sketch out a massive network of corruption that has major geopolitical and security implications that reach far beyond India.
The allegations involve four elements: how money was made illegally in India; how money was moved out of the country; how money was used abroad; and how money was moved back into India. They involve a network of politicians, bureaucrats, bankers, regulators, financial service providers, money launderers, front companies and more. Chidambaram is not alleged to have been involved in all elements, but rather was part of an extended, embedded system that resulted in stifling economic growth and creating security risks such as opening up some of the highest levels of governance to blackmail.
How Was Money Made in India?
It is alleged that Chidambaram and his network used their positions to put in place people, policies, regulations, and regulators that enabled them to funnel money flows through their offices and favorites, while at the same time shutting down any competition from clean alternatives.
For example, Chidambaram and his network seemingly wanted to promote and protect the National Stock Exchange (NSE) as India’s primary exchange. Competing exchanges, especially successful ones such as those run by Jignesh Shah, were targeted, with the powers of the state used to pound competitors into submission through arrest, audits, seizure of assets, and more. By the time the charges made their way through the courts and are dismissed, is it too late; the competition is destroyed.
Meanwhile, the value of the NSE to its patrons was maximized through a range of mechanisms. One currently being investigated is “co-location,” in which favored brokers were allowed to place their servers adjacent to the exchange, giving them millisecond arbitrage advantages over off-site brokerages. That time advantage combines with high-frequency trading algorithms to produce consistent profits.
Often the manipulation wasn’t that sophisticated. Rumors might be started about problems with the Indian economy; shares drop, are bought low. Then there are statements about corrective measures and shares recover and are sold off. Similar games were allegedly played to manipulate the value of the Indian rupee.
The case that triggered the initial arrest of Chidambaram involved his role as finance minister. His ministry was responsible for approving applications to the Foreign Investment Promotions Board (FIPB), a mechanism for bringing foreign direct investment into India. When the principals of INX Media made a request to fast-track their FIPB application, they were allegedly told by Chidambaram to consider his son Karti’s consulting business. Subsequently, a substantial amount found its way to Karti and the request was approved.
How Was Money Moved out of India?
There is a range of ways to move money out of India, but one of the most concerning is hawala networks. Hawala trading was pioneered in the Islamic world as a way of transferring money without having to physically move cash. If “Joe” in Delhi wants to transfer $50,000 to his brother “Jack” in London, Joe can go to his local Delhi hawala trader, “Bob,” and give him $50,000 cash. Bob calls his hawala contact in London and instructs him to give the $50,000 cash (in local currency) to Jack. The two hawala traders settle their books periodically. And that’s it — no paper trail, no tax, no customs.
That is why hawala is so popular with criminal organizations, terrorism financiers, drug dealers, arms traders, and human traffickers. The network works on what INTERPOL calls “trust” – a trust usually backed by the brutal enforcement of criminal or terrorist organizations. As the money of corrupt politicians joins that flow, they become “invested” in protecting the whole system – and are subject to being blackmailed by the people who run the system itself. This means they are more likely to block prosecution of those facilitating their money flows even if they pose a national security risk to the country.
At one point, Congress leader D. K. Shivakumar was in the same jail as Chidambaram, on pending charges of money laundering via hawala transactions. Congress Party President Sonia Gandhi visited them both in jail.
Sometimes the traditional banking system is used as well. One of the most notorious pending money laundering cases is that of politically well-connected Hasan Ali Khan, who reportedly casually moved an estimated $8 billion. In one case, according to investigators, $300 million was transferred from a Chase Manhattan account into a UBS Khan-linked account for a hotel purchase in Switzerland. The note attached was tagged “Funds from weapons sales.”
Khan’s case has moved at a glacial pace, and the billions that passed through his accounts have disappeared.
How Was Money Used Abroad?
The Enforcement Directorate has identified multiple properties around the world linked to various members of the Chidambaram family. Bank accounts are harder to identify as there are allegations that the Indian government is reluctant to request full lists of illicit accounts held abroad from willing countries.
How Was Money Moved Back Into India?
There are myriad ways of moving money into India, but a popular one during Chidambaram’s time as finance minister was Participatory Notes (P-Notes) handled by companies such as Goldman Sachs. Foreign investors could use P-Notes (via brokers) to buy shares in India, for example on the NSE. Under Chidambaram, the identity of those individual investors was not diligently pursued.
So, if someone got a bribe in India, moved it abroad via hawala, then brought it back in via P-Notes, that money has now been nicely laundered and, if they happen to be running it through a co-locating broker, their investment has also grown.
Meanwhile, however, honest entrepreneurs and investors have come up against invisible walls, been harassed into oblivion, and had their livelihoods destroyed. Tata research estimated that Jignesh Shah’s markets were supporting up to a million jobs. When he was shut down, seemingly for being too much competition to a corrupt system, a lot of that potential was shut down as well. That’s happened all over the Indian economy.
It is remarkable that Chidambaram is awaiting trial. But the tentacles constricting the Indian economy still reach deep into the system. There are desperate and well-resourced efforts to scupper the cases. This is a crucial inflection point not only for India, but for global balance of power.
If India is freed from the shackles of deep corruption, it could help spread growth and stability beyond its borders. Those fighting corruption in India need all the support they can get: more external media coverage of the issues, cooperation from foreign governments in tracking illegal money flows, more scrutiny of the operations of international financial institutions, and more. If not for India’s sake, then for our own.
Cleo Paskal is Non-Resident Senior Fellow for the Indo-Pacific at the Foundation for the Defense of Democracies.