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CHAPTER 6

CORPORATE CRIMES

Corporate crimes are often referred to as crime committed either by a corporation such as

business entities having a separate legal personality as compared to a natural persons who

manage its affairs or by individuals who may be associated with a corporation or other

business entity. Whenever it is connected with an individual, it is so connected by virtue

of individual’s corporate liability while being associated with the corporation or with an

individual business entity. It is that category of white-collar crime that are committed by

persons associated with occupation of business, trade, manufacturing, services, banking,

capital market, insurance, institutional loans and so many other corporate activities.

These individuals may be employees or owners of such corporate and individual entities.Their deviant behavior is necessarily to fall within this category of white-collar crime

because they are fairly placed in white-collar class because of their professional and high

social status. Obviously crime of individuals against their corporation or individual

business entity does not fall in category of corporate crime because of nature of their

criminal activity and it is necessarily to be placed in category of occupational crime.

Corporate crime is deviant behavior of these individual that is adopted in furtherance of

interests of the business entity which is usually profit multiplication.

Some common type of corporate crime include price fixing, price discrimination,

violation of patents and copy right laws, industrial espionage, misleading financial

statement, unfair labour practices, misrepresentation in advertisements, consumer fraud,

financial manipulation, tax evasion and fraud, under-invoicing for imports, violation of

environmental laws, violation of quality standards, monopolies, cartelization by an

individual or group of corporate and business entities, hoarding of commodities by

creating artificial shortages and the list continues.

Most of the corporate crime activity goes un-punished or penalties are lax because these

remain out of view of public, media, police, policy makers and enforcers because these

create little instant public concern and cry like other street crimes. The illegal activity is

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performed in the garb of legitimate business unlike the street crime. Thus the deviant

behavior and violative activities of corporate criminals often remain to be classified as

crime by public, media and policing agencies. However, Sutherland’s assertion that an

unlawful act is not defined criminal by the fact that it is punished, but by the fact that it is

punishable (Sutherland, 1949). While introducing the concept of white-collar crime

Sutherland highlighted this aspect of criminality and later in his seminal book ‘white

collar crime’ he tabulated the decisions of courts and administrative commissions against

seventy of the largest manufacturing, mining, and mercantile corporations. Since the time

when concern was first shown about corporate crime, a debate is continuing whether

more severe sanctions are needed to eradicate unethical and illegal conduct and whether

such sanctions offer greater general or specific deterrence (Grunner, 1988). It is

emphasized that governments remain lenient with corporate criminals. The news media

find it difficult to respond to corporate crime both because reporting may compromise the

trial by tainting the jury’s perceptions, or because of the danger of defamation

proceedings (Mokhiber & Weissman, 1999).

In a society faced with crises of rule of law and law enforcement, attaching stigma to

corporate deviance is unlikely. In such social milieu deviant behaviour of individuals

becomes such a habit that it is taken as a practice of corporate sub-culture. Such practices

are neutralized as trick of the trade by individuals and corporate entities. The corporate

deviance becomes more prevalent where media, society and the government takes such

deviance with indifference and tolerance. It is often not possible to survey and interview

corporate managers about their own deviant behaviour because first qualification required

for such research is how the individual corporate managers themselves view their own

deviant behaviour. It is thus not likely to find a neutral view about such type of deviance

among the subjects practicing it.

There is another controversy in corporate crime literature that if at all serious sanctions

are required, is it the company or an individual that should suffer. (Elzinga & Breit, 1976,

also see Schlegel, 1990). It is somewhat political expediency of the government and law

enforcing authorities to stay lenient with corporate criminals because government

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depends upon them for a stable economy that should continue to provide funds in the

form of taxes. The case of Pakistani society is more complex because government’s own

stability often depends upon corporate and industrial sector especially when legitimacy of

the government itself remains questionable. The corporate managers have capacity to buy

and politicians and bureaucrats at high places have propensity to sell their influence to

condone corporate deviance. The government thus remains reluctant for one reason or the

other to proceed against corporate deviant behavior. The most relevant examples from

recent events are cartelization of sugar and cement industries where owners or their close

associates were part of the ruling cabinet. When after public outcry National

Accountability Bureau initiated investigations to identify the real culprits; the

investigations were suddenly dropped on the pretext that such action would destabilize

the corporate sector. The laymen were unable to understand how they have been deprived

of billions of rupees with sudden increase of prices of commodities unless government

noticed the market manipulation by big guns. But it was too late.

Characteristics of Corporate Deviance

The corporate crime in Pakistani society has certain dissimilarities as compared to those

committed in America or in other places of developed world. The size of corporate

entities is smaller and their resources are limited. Their ways of deviance are less refined

and thus affects lesser population. These business entities work under a regulatory

mechanism that is lax, less developed and yet not fully equipped to guard against

corporate deviance. There is surely no research on corporate deviance by scholars,

investigators and policy makers. There are a number of practices that are unethical or

illegal but still these are practiced as a norm without attracting attention of corporate

watchdogs. These include tax evasion, under invoicing and price fixing, exploiting

loopholes in the system, and taking undue advantage etc. With some exceptions due to

smallness of corporate entities owned by individuals, families and share holders decision

making is often not participative and few individuals are involved to run the affairs.

Apart from a group of individuals, the share holders remain aloof from affairs of the

corporate entities as long as they continue to have some dividends. It is thus very easy for

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these groups of individuals to mislead the share holders. Same is the case of capital

market where it is often heard that stock market has suddenly collapsed without fixing

any responsibility depriving the innocent investors of their hard earned savings. The

regulatory bodies such as Security and Exchange Commission of Pakistan (SECP) and

Monopoly Control Authority have yet to have teeth to eradicate corporate deviance.

Recent years have seen abrupt change of chairmen of SECP at least twice on pressure

from stock brokers, the most powerful corporate lobby having tremendous influence to

thwart government policies if these are not favourable. The taxation system is not only

handicapped but is corrupt up to its roots and hence tax evasion and buying of tax

officials is too simple. Cartelization among the industrialist is so rampant that it is not

possible for political authorities to break it without putting their own existence in danger.

Industrialists have turned into politicians and have found their ways in power corridors to

influence governmental policies that suit their corporate interests. They have capacity

and position to exploit precarious political situation that is often faced with crises of

illegitimacy. The corporate sector and private businesses have particularly in recent past

defrauded the public through dubious schemes promising quick and huge returns

(National Accountability Bureau, 2008a).

Corporate Deviance

The data presented and analyzed in this portion of this research work has been gathered

through individual surveys and interviews. As there is no past research available on the

subject, reliance has been placed on media reports and individual sources. However, even

the media reports provide limited insight into the subject matter.

The field of corporate world in our social world is full of deviance. Stories of this

corporate deviance hit our ears and eyes everyday. However, for the purpose of this

humble work, case studies that placed in devastating risk the economic security of

millions of individuals; have been included in this study. Many cases of corporate

deviance have been excluded both for want of space and relevance.

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Traders, middlemen and brokers have vast field open to manipulate market situation and

exploit the unaware consumer by hoarding the commodities and increase prices. The

recent months has seen climax of this type of manipulation when government lost public

support and riots erupted in cities for shortage of food items particularly wheat and flour.

The government was constrained to depute law enforcers to search for hidden stocks of

commodities to address the public outcry. Corporate culture that is based on ethics is yet

to be developed in our society. It is indifference and resourcelessness of regulatory bodies

that further de-stigmatizes such deviance. Sub cultures of different corporate sectors

have their own established practices that suit their interests to multiply their wealth.

Documentation of records of corporate activities is non existent and it is too simple to

manipulate and forge the records wherever it is required. There is no consumer activism

to confront corporate deviance at any stage; neither there are consumer’s courts to

penalize the criminals.

Sugar Scandal

Recent years have seen a number of developments underlining corporate deviance in

many forms and outlook. The association of corporate manager, industrialists, politicians

and business managers has been a prominent feature of many scandals that were

highlighted through emerging investigative activism in popular electronic media and print

media. The influentials were able to manipulate market situation to make quick gains by

creating artificial shortage of essential commodities like sugar, cement and wheat. It was

in beginning of year 2005 when prices of sugar started soaring and gradually increased

from usual price of Rs.21/Kg to Rs.45/Kg registering an increase of 119% and highest

ever in history of country having agro based economy. This sudden price hike provoked

public unrest and led to rioting and public protest. It was too late when public outcry

bothered the politicians sitting in the government and thus a notice was taken by Public

Accounts Committee (PAC) consisting of parliamentarians. By this time the poor

consumers were robbed of Rs.46 billion through price and market manipulation (NAB

blames ministers, 2007). Despite requisitioning of details by PAC no details were

provided by influential sugar mills owners and the matter kept lingering on. It became

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laughing stock in media when Monopoly Control Authority (MCA) imposed a fine of

Rs.100, 000 to a sugar mill making millions through stock manipulation.

When deviance of powerful sugar mills owners was continuously projected by media,

NAB initiated an inquiry to ascertain the facts with much pomp and show and asserted to

prosecute the culprits responsible for the crises. When it was about to complete the

inquiry, the inquiry was suddenly stopped without any explanation. The follow of these

developments by media continued and NAB high-ups remained tight lipped about their

pledge to investigate the matter. The influential sugar mills owners most of the sitting in

cabinet, attempted to create an impression that investigation by NAB was escalating

prices of sugar. They were able to convince the Prime Minister to order NAB to wind up

the investigation and NAB was thus forced to issue an official press release to announce

winding up of investigations. The NAB’s investigation report was concealed and marked

as secret document endangering public interest. This terminology of ‘public interest’ is

often used by ruling class to justify their wrong doings. Although investigation by NAB

were stopped, but due to continuing cries in media Supreme Court took a suo motu notice

of the developments after a number of civil society members insisted them to interfere. A

senator of the opposition requested the court to call an explanation from NAB’s and ask

as why it closed down their investigation within two days. The incomplete NAB’s report

gave startling findings:

Middlemen, sugar industry’s corrupt practices, tax evasion coupled with soft

government policies and the food minister’s action of inducing farmers to demandhigher price of sugar cane are reasons for ongoing sugar crises. These players and

factors took advantage of lower sugarcane production in the country which,

coupled with higher international prices, played havoc with common man’s

budget by increasing the commodity’s price from Rs. 21 per kilo in February2005 to Rs. 46 per kilo by the end of January 2006. Even the government policy

of allowing duty-free sugar imports benefited the aforementioned players.

The sugar industry in Pakistan is predominantly owned by politicians. Some of

them despite being in government have acted contrary to the business laws/ethics

and held sugar stocks that tantamount to hoarding. Minister of industries, ministerof commerce his brother and a cousin, President of ruling Party, two provincial

ministers, an ex-governor and an influential industrialist (all named in the report)

with their 12 mills were responsible for almost 70% of the 317,000 tons of sugar

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hoarded. Two politicians of opposition (both named) were responsible of

hoarding about 100,000 tons of sugar in addition (National AccountabilityBureau, 2007b).

The case example explains deviant behaviour of power elites. It also explains the

responses of the accountability mechanism to deviant behaviour of these power elites.

The National Accountability Bureau projects itself country’s elite anti corruption

institution. However, over the period its credibility has been vitiated when it was too

harsh with offenders with little position of power and politicians belonging to opposition

camps. The flagrant violation of ethics by the power elites who exploited market

situation to their advantage causing catastrophic damage to economic life of millions of

individuals, is also an indicator that hints at power imbued deviant behaviour that

provides motivation to the power elites to commit the crime against relatively powerlessindividuals. This power imbued behavior de-stigmatizes wrongdoings of these

individuals as this power at hand induces indifference to feelings of others and promotes

self righteousness in behaviour of the offenders. Weak law enforcement mechanism or

offender’s ability to defeat such mechanism, acts as a catalyst for such criminal

motivation that is derived from power. This power imbued motivation for crime becomes

operative wherever there is power lag between the victim and the perpetrator in give

social context of interpersonal relationships. It is thus not restricted only to elite class of

offenders.

This scenario of power dynamics fosters corporate deviance as signified by the above

example. The industrialist tycoons of the sugar industry went on exploiting the common

man once they acquired power as influential politicians. They had strong influence on

policy formulation that was serving their self interest. Then they manipulated the market

conditions by hoarding the commodity that ultimately deprived the consumers of billions

of house hold savings. The responsible criminals still managed to escape any penalty or

stigma because of their powerful positions. The system of accountability was humbled by

these corporate barons and it was constrained to close down its investigative process.

This indicator is a manifestation of the fact that it is power alone that determines as to

what acts of apparent deviance and criminality are classified as culpable or blameworthy.

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It is the power that determines culpability of powerless for relatively less harmful acts

and it is same power that projects criminality of these powerful for more harmful acts as

acts of feasance and goodwill. It is the power of perpetrator that justifies wrongdoings as

acts of benevolence.

Cartelization of Industries

During the last two years, a number of cases of collusion between corporate managers of

particular industries surfaced where these corporate managers acted in collusion to

manipulate the market by limiting the supply of commodities to multiply profits. These

industries are owned by influential corporate manager having capacity and connections to

arrange political deals for the government often faced with crises of legitimacy. This

cartelization resulted into unusual rate of inflation that reached 20 per cent in case of food

related commodities in just four months (State Bank of Pakistan, 2008 and Breaking the

cartels, 2008). These cartels of industries prevent maximum utilization of production

capacity. This not only creates unemployment but also lowers industrial growth. As a

result prices go up and poor become the ultimate victims of this sort of corporate

deviance. This cartelization was recently seen in banking, automobile, pharmaceutical,

sugar and cement industries. After a public outcry and fear of riots, the government

rushed to legislate a law to create an institution later known as ‘The Competition

Commission of Pakistan’ under Competition Commission of Pakistan Ordinanace-2007.

This Commission is yet to start biting the influential industrialist who have their

collaborators in high positions in bureaucracy. The inefficacy of government to act

against these cartels became so pronounced that World Bank strongly advised the

government to break the cartels in banking, sugar, automobile, pharmaceutical and

cement industries. Earlier six professional organizations like Pakistan Business Council,

Overseas Chamber of Commerce and Industries, Institute of Chartered Accountants and

Management Association of Pakistan also recommended to the government to come

heavy on these cartels. The World Bank went to the extent of threatening the government

to link their annual assistance especially being offered to the Competition Commission if

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it failed to ensure prudent business practices (World Bank urged, 2008). In an earlier

report on business competitiveness, the World Bank observed:

We understand that proven or suspected cartels have existed and many still exist

in cement, sugar, ghee, autos, fertilizer and perhaps other industries, which needto be investigated. Pakistan should track down illicit cartels to regulate businesses

without which it would be difficult to attract adequate local and foreigninvestment in the country. We understand that that MCA has conducted 103 cases

of monopoly including cars, batteries, tobacco, electrical, gases and chemicals. Of

course this figure, by itself provides no indications of abuse of monopoly

position. However, there is a wide field for inquiry. These cartels were by along way the chief impediments to competition in Pakistan and that there was

a need to conduct thorough inquiry as to what types of anti-competition

conducts were most prevalent in Pakistan. (World Bank, 2007).

Cartelization in Cement Industry

The cartelization in cement industry is an often heard case of large scale corporate

deviance. This cartel is a loose formation of country’s two dozen of cement

manufacturers who fix an unwritten production quota for each to restrict supply to

manipulate price. They have production capacity of about 17.85 million tons of cement

per year and often keep 40% of this capacity as idol to restrict supply. In October 2005,

when country was hit by a massive earth quack, the rehabilitation efforts of next summer

were seen as an opportunity by this cartel and they increased price by Rs.50 per bag

registering an unusual increase of 40%. This increase was unexplainable because prices

of all inputs remained unchanged. This stalled rehabilitation efforts of the government.

The builders and developers protested this increase stating that this increase was an

inhibitor of development in construction industry. Instead of regulating deviant corporate

behaviour, the government withdrew Rs.25 per bag tax on cement to reduce price.

However, the powerful cartel continued with their price and only partially transferred this

benefit to voiceless consumers. The government tasked MCA to investigate and punish

this kind of unfair business practice but none of the deviant member of industry could be

penalized. The government quickly to responded this manipulation and allowed import

of cement from China with a special subsidy of Rs.50 per bag. When consignments of

imported cement reached the port, the cement manufacturers manipulated for withholding

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of imported consignments at port claiming that the cement was sub-standard. Influential

Chinese manufacturer rushed to prove that their product was of international standard.

The government clearly warned the cement industry to reduce prices of face action. This

warning brought fruits and price was reduced by Rs.50 per bag. However, this was first

time that government realised existence of cement cartel perhaps to secure its own

existence against mounting public pressure. Despite an elaborate field work, MCA could

not submit its report to avoid embarrassment to sitting government as the general

elections were just round the corner (Submission of cement scam report, 2007).

There has been rift between the Association of Builders And Developers (ABAD) and

cement manufacturers being the natural rivals. An office bearer of ABAD explained how

this cartel operates:

The cement manufacturers work like a cartel and exploit the situation by fixing

quota for production for each manufacturer. This provides an articulated conduit

for corruption because all mega projects have a built in escalation clause in eachcontract. This does not bother anyone because public money is misappropriated in

a systematic way by this cartel and the middlemen associated with it. In private

sector construction sector suffers adversely inhibiting development and promotingunemployment. Cracks in this cartel sometime appear temporarily where these

manufacturers work against each others interests such as price discrimination in

South by manufacturers located in North that places manufacturers of South indisadvantageous position. Where manufacturing units with enhanced capacity, are

asked to restrict their production or where exports to Afghanistan is cheaper forunits places in North and they attempt to compete with those placed in South.

Common man is the ultimate victim of this cartelization. Most of them cook their

books to show fewer profits to their share holders but realistic profits shown bysome also bothers others. Where it comes to profit taking, they join hands

together. They manipulate and regulate production to fix quota to keep their

prices high even with rising demand. Although some brands become popular but

consumers are not left with an option when limited quantity of that brand isavailable at almost same price. Thus the common man becomes the ultimate

causality and their profits remain intact. They never come to face each other for ahealthy competition in prices.(Butt, personal communication, April 9th, 2008).

As a result of rising cost of fuel, most of the cement industry converted to coal, bringing

down their production costs. However, they silently opted not to transfer this benefit to

consumers despite reduced cost of production. An office bearer justified this action:

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Cement companies have the right to use advantage of conversion to coal to reduce their

own losses and we need not be pushed on to pass that benefit to the consumer (Rasheed,

personal communication, April, 13th

, 2008.). This view of the cement industry can hardly

be agreed as it is selfish to cling to prices where cost of production goes down. The root

cause of this rudeness is absence of a culture of corporate competition among the cement

industry that enjoys symbiotic relationship to follow their mutual pursuits of unfair

profits. The toothless regulatory mechanism provides further strength to this kind of

deviance that glamorizes the deviant behaviour. How impotent is the newly created

regulatory body Competition Commission of Pakistan (CCP), may be seen from a recent

case where three executives of the cement industry absented themselves from its hearing.

These executives were served with a show-cause notice for stopping officials of the CCP

from inspecting the office of the association to find a clue to restrictive trade practices.

One of them absconded on motor cycle with an important file containing valuable

evidence (Cement executive failed, 2008).

The corporate deviance of cement industry is not only restricted to price manipulation

and unfair trade practices but it has other dimension where they under report their

income, evade taxes and hoodwink their share holders. An investigative study by Large

Tax Payer’s unit (LTU) revealed that those involved in cement business under report

their income to the extent of Rs. 7.628 billion per annum. The data presented in this

report reflected that people in cement industry under report profit by Rs.30 per bag. The

study also mentioned that during the last two fiscal years the gap between the market

price and ex-factory price continued to widen as the cement manufacturer’s cartel was

operating at full swing. They found that the manufacturers and their dealers shared profits

in shape of underhand agency deals. The study recommended that a tax intelligence

system is necessary to check unfair business practices in cement industry (Large Tax

Unit, 2007).

The example of cement industry is one among many of the corporate entities in other

sectors who associate themselves in unfair trade practices and this deviance goes on

unabated because of impotent regulatory control over corporate sector. Their power to

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manipulate and join hands to work like monopoly in furtherance of their common aim of

generating more and more profits and signifies the fact that their power enables them to

commit acts of deviance.

Mehran Bank Scam

Abuse of position by corporate executives to benefit themselves and other associates and

relatives is a common form white-collar crime in banking sector of corporate world. In

this case Mr Younis Habib serving as provincial chief of a public sector Mehran bank,

siphoned funds of the bank through malpractices by granting loans to his friends,

relatives and associates. These loans were not paid back and all the beneficiaries went in

default and there were no guarantees to secure the loans. The watchdogs of the central

bank noted that the bank was almost bankrupt and was having serious liquidity problems.

On request of the central bank, NAB initiated investigations and the offender was

arrested. NAB investigators detected 11 accounts of the offender in an other bank

financed through money siphoned from Mehran bank against insecure loans. Another 69

bank accounts were detected in another government owned bank. The total amount in

bank accounts misappropriated from the bank managed by Habib was Rs. 1.6 billion. The

immoveable property having market value of Rs. 2.2 billion was also located by the

investigators. As a result of plea bargain NAB recovered the amount payable to the two

banks. The Mehran bank was merged with another larger bank as both were owned by the

government. This recovery is the largest ever recovery from any corporate offender in

history of the country. The offender was also involved in many cases of financing

political parties and investing with dubious activities of intelligence agencies. He is

facing jail and case against him in at least 11 cases is continuing in accountability court.

The possibilities of deviant behaviour are more in a social milieu where system of social

and regulatory control is weak and tools of social engineering are not sharp enough to

deal with this kind of deviance. The motivation for crime becomes strong when there is

an opportunity loaded with incentives. Money is one of the strong incentives for deviance

among corporate mangers whose sole aim is to multiply profits. The temptation that other

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entities in corporate sector are doing the same way provides an additional impetus for

corporate deviance of these corporate managers in all segments of corporate world.

Weak regulatory mechanism, their influence on high places in bureaucracy, their position

to exploit the loopholes of the system, political expediency and voiceless consumers lead

them to power imbued deviant behaviour. Hence we see a combination of theories of

motivation and opportunity, differential association modeling and power dynamics that

glamorizes white-collar crime among these corporate managers. It is widespread practice

of the corporate sector to evade taxes, profiting illegally, and willfully defaulting against

bank loans without being caught that has de-stigmatized such sort of deviance among the

corporate managers.

Hazardous Production: Toxic Waste

Disposal of industrial waste by the industries is one of the areas where corporate crimes

of the influential industrialists goes unpunished. In countiers like Pakistan where

enforcement mechanism lacks resources, will, institutional system and legal frame work

to monitor these mighty offenders; there is less emphasis on safe production. This way,

well being of society is often ignored. As a result citizens keep suffering in one way or

the other. Unlike USA and Europe, working conditions and environment in most of the

industrial areas of developing countries is flawed. There is no concept of taking

preventive and control measures to dispose of dangerous and toxic industrial waste to

safeguard the society from dangerous effects of chemicals discharged by the industries.

There are no arrangements for record keeping and data collection of accidents, and

incidents most often go unreported and even unnoticed. It is truer in case of unorganized

sector where about two-third of the total workforce is employed in Pakistan. Whenever

any accident takes place and someone loses his life, the industrialists manage to secure a

patch up with the family of victims. Victim’s resourcelessness, lack of awareness of

rights, discredited justice system and work culture precludes any possibility of

accountability of the offending industries where an incident of loss of life due to

carelessness and deviance from standard practices takes place. Unemployment, job

insecurity, lack of concern for human rights and easy availability of substitutes for labor,

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hegemonic posture of industries and weak governance that is unable to check their

deviance are some other factors leading to insensitivity towards corporate safety.

The high risk industries include textile, leather, paper, plastic and ceramics. These

industries generate hazardous chemicals that resultantly cause illness, injuries not only to

the workers but also to the general public, where these toxic chemicals are not properly

disposed off. Textile is country’s largest industry and due to multistage production

generates number of chemicals injurious to health. Similar is the case with other

industries like engineering, steel and fertilizers where different processes generate dust,

smoke and hazardous gases.

As per National Environment Quality Standards (Self Monitoring and Reporting by

Industries) Rules-2001, all industries are required to submit their environment monitoring

reports confirming compliance of environment protection laws. However, these reports

are submitted by these industries with tall claims of environment laws compliance. In

reality these industries care least about their obligations and dispose off hazardous and

dangerous chemical waste in open places where their own employees and citizens remain

vulnerable. The violation of corporate entities to generate profits by compromising on

safety and environmental laws is not merely a local phenomenon. It is a practice followed

in developed industrial countries too but it is met with penalties whenever caught. Our

scenario is different. As the proper disposal of toxic waste in these countries involves

heavy costs, they export their scrap to under developed countries often referred to as third

world. Technological developments have added to the variety of hazardous waste often

termed as ‘high-tech trash’ or e-waste like computer parts, circuit boards, electronic

gadgets. These are rapidly becoming a hazardous burden for developed countries and

instead of spending on its disposal; they resort to exporting this toxic waste to developing

countries due to their residual usefulness. Large quantities of used monitors were

exported by US based companies into Pakistan in recent past. The genius importing

Pakistani companies and individuals, used picture tubes of these monitors to assemble

TV sets using imported Chinese kits that are very cheap. These TV sets were seen in

every household because these were available at one third of the price of new. As a result,

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local TV manufacturing industry collapsed and hundreds of workers lost their jobs. It was

too late when government imposed taxes on import of used monitors to revive local TV

manufacturing industries. A by-product of this process was that highly toxic plastic

bodies of monitors, circuit boards, electronic devices and other gadgets were found every

where to spoil the environment. Environment officials are unaware about its disposal or

understandably are not even aware of their harmful effects. In a recent case, an

international conservationist Greenpeace informed their associate NGO in Pakistan to

raise alarm that a consignment of obsolete waste was exported from Europe to a Pakistani

firm declared to be used computers. This was illegally exported from Europe because the

exporting business house was not willing to spend huge amount on its proper local

disposal and found it beneficial to dump into Pakistan. Perhaps they know it well that law

can be bent easily in Pakistan. In another case, a mercury plant was to be imported to

Pakistan from Denmark by a local firm after they claimed of bringing new technology

into country. It was not declared that the plant located in Copenhagen harbor had been

shut down by the government for being obsolete and had released mercury into sea.

When the matter appeared in the local press in Pakistan, the government did not move.

However, Denmark government reacted and banned its export from Copenhagen and

advised the owner to dismantle it.

Another well known case of corporate irresponsibility pertaining to disposal of toxic

waste often referred by media was the case of those twenty children in site industrial area

of the city, who entered into a vacant plot to chase their ball while playing cricket. They

were trapped in toxic waste dumped by an industry making chipboards. One boy lost his

life because his whole body was poisoned as soon as he entered into the toxic dump. His

other surviving friends are now living a nightmarish life as some had to have their arms

and legs amputated. The industry was initially sealed for few days on the order of director

general environmental protection. However the influential industrialists, managed to

manipulate their way out through political pressure and sealing order was reversed and

the ‘non-compliant’ director general was also transferred for taking harsh action against

insufficient evidence. The deviant industrialist lobby, responsible for dumping the

hazardous waste into vacant plot, also ventured to offer monitory compensation to father

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of the deceased boy and other parents of affected children, but they refused to accept this

compensation on the point of principle. It was contended by the industry responsible for

dumping this waste that they have not dumped the toxic waste, and some other industry

was responsible for it. However, the parents remained on guard and when after few days

another truck loaded with toxic waste reached the plot to discharge more material, he was

caught and then police arrested the offending executives of the industry. A routine clever

way of shedding away responsibility in case one is caught doing wrong.

Lack of monitoring and vigilance often provide such opportunities to these deviant

offenders. The parents of the affected children did not give up and they filed a petition in

High Court, seeking a direction to compel the management of whole industrial trading

estate, to clear the toxic waste from the area. The respondents pleaded innocence.

Considering that such cases often come to light, the High court, converted this petition

into public interest litigation, and deputed a senior police officer of good reputation, to

conduct investigation and submit report to the court. The investigation gave interesting

findings. It was reported that besides the owner of the vacant plot and owner of the

factory that used the plot for dumping, management of the industrial and trading estate

was criminally liable for negligence. The toxic waste was confirmed to be extremely

dangerous to human body by three laboratories. About two hundred plots were identified

within the same industrial complex; those could be used as dumping yard. The secretary

of the environment protection agency had maliciously kept the case file dormant for over

a year. The director general of environment who sealed the industrial unit and registered

a criminal case, was kicked out to preclude further follow up of the case (High Court,

2007). The court directed the police officer to prepare a charge sheet in the light of his

findings and prosecute the offenders before a competent court.

In another case, seven children were severally burnt from an abrupt fire that erupted in a

chemical dump in an open plot in industrial area of Orangi town. This toxic waste was

dumped by a reputed multinational paint manufacturing industry in this open area where

children and other citizens were vulnerable. The police investigation blamed the children

instead of the deviant industry, for the fire claiming that the children were carrying fire

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crackers that caused fire in highly flammable chemical. Despite follow up by

environment protection agency, the responsibility for dumping of this toxic waste could

not be fixed. Even it was yet to be established that fire erupted due to inflammable waste

because samples were collected after three days and possibility of removing the

dangerous chemical by the offending industry well before taking of samples could not be

ruled out. An official of environment protection agency confided that although

irresponsible and unprofessional dumping of hazardous chemicals was a prevalent

practice in the industrial area, it is very difficult to fix the responsibility because of

insufficient resources. They had their own limitation as an eye witness is needed along

with substantial proof to blame these mighty industrialists (Ghauri, personal

communication, December 18, 2007). It is this culture of complacency and lethargy in

being proactive, that promotes deviant practices among these industries. Onus is being

placed on innocent children that they were carrying fire crackers. It is not being thought

out why highly inflammable chemical was disposed of in an open place exposed to public

access. When attitude of people responsible for law enforcement is such and they are

living under a psychosis of fear, it is unlikely that a legal action will be taken against the

criminals.

It is the complacency of law enforcement and compromise and patronage by senior

bureaucracy that facilitates this deviant behavior of industries. In this case secretary

environment acted to favor the culprits by keeping the case file dormant and kicking out

the proactive director general to look after interests of industrialists despite death of an

innocent boy. Instead of looking after public interest, he guarded interest of these white-

collar criminals. Coleman explained this combination of lack of resources and corruption

of enforcement as under:

“On top of chronic shortages of resources and all the difficulties inherent in proving charges against powerful white-collar criminals, the enforcement process

is further weakened by its corruption. A host of political and economic rewards

may await employees who are willing to neglect their legal responsibility,

whereas those who show too much zeal may risk arousing the displeasure of theirsuperiors. To complicate matters further, bonds of friendship, sympathy and

common back ground may give the agents of enforcement reason to pause before

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demanding that full weight of the law be brought to bear against white-collar

defendants (Coleman, 2001).

The white-collar criminals in corporate sector break the law just to make quick and

ensured money. Their choice for the crime is rational because after evaluating their

situation they perceive that their criminal activity will bring them more reward and less

pain in achieving their goal of money. A study of business and government officers by

Robert (1954), explained: “most businesses and most responsible government officers, at

least from sample interviewed, believe that businessmen run afoul of law for economic

reasons; they may want to make ‘fast buck”. The other factor in criminal motivation of

corporate criminals is what Weisburd et al (1991) call financial self-interest. The

individual’s desire to preserve what he has and to protect it provides him drive to do

whatever is possible to consolidate his position. In these pursuits a corporate man resorts

to all sorts of methods to violate the law. It is perhaps more true in our scenario where

political instability, inconsistent economic policies, discrimination, credibility deficit of

government, weak institutional framework and lax enforcement promote uncertainty and

inequality. The individuals resort to all sorts of short cuts to survive at their own. In such

scenario glamour for white-collar crime increases as in criminal’s eyes it is a scenario

where immediately available opportunities may be lost in future. It is hence considered

more suitable way to consolidate one’s wealth whenever an opportunity becomes

available. Even if it is at the cost of violation of law and norms of society. The

competition with rivals to keep cost of production low is also a factor that compels these

offenders to compromise wherever and whenever possible. In a price conscious society

their options becomes limited. Same is true when produced goods are meant for exports

because the foreign buyers normally do not compromise on quality and hence other

avenues of cutting corners and compromise on occupational safety, environment

protection are adopted to stay in business successfully for longer time.

Since the industrial complexes and sites are mostly surrounded by populace from low

classes, mostly laborers and other low income strata, it is very rare that victim hits back

after being victimized at the hands of these corporate criminals. The report submitted to

the High Court, stated: This is case of high class persons verses poor people which was

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highly influenced to the level of covering up in favour of rich. In this case father of the

deceased boy along with other affected children, despite being poor; did not give up and

pursued the case to its logical conclusion. Despite their manipulation, the offending

industrialist was brought to books. In this case glamour for white-collar criminality was

met with conviction of victims, who were not willing to live with a stigma of deprivation

and social relegation at the hand of white-collar offenders. This rarely seen phenomenon

is indeed a beacon in a prevalent social environment of de-stigmatization.

Safety Hazards

One of the significant violations by corporate sector is in the field of production where

workers are exposed to dangerous work environment by the corporate entities. Norms

and rules of occupational safety are ignored to reduce cost of production at the cost of life

and safety of workers. While intensity and level of this type of white collar crime varies

from industry to industry and from country to country, one thing is sure that such crimes

are more prevalent among societies having lax law enforcement, poor state of human

rights, less awareness of safety among employers and workers both and where cultural

norms do not place enough emphasis on occupational safety. This assertion is more valid

in case of developing countries like Pakistan and yet truer in case of informal corporate

sector in these countries. Formal corporate sectors such as multinational oil marketing

and exploration companies have more emphasis on occupational safety in respect of their

work force.

Whenever any accident takes place and someone loses his life, the industrialists manage

to secure a patch up with the family of victims. Victim’s resourcelessness, lack of

awareness of rights, discredited justice system and work culture preclude any possibility

of accountability of the offending industries where an incident of loss of life due to

carelessness and deviance from standard practices takes place. Unemployment, job

insecurity, lack of concern for human rights and easy availability of substitutes of labor,

hegemonic posture of industries, lax law enforcement and weak governance that is unable

to check their deviance are some other factors contributing to insensitivity towards white-

collar crime of corporate occupational safety hazards. In recent years, promotion of

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occupational safety and health at work places has assumed significance because of

emphasis on human right and thus International labor Organization has developed ILO-

SafeWork program that is aimed at dealing with occupational safety and health and work

injury prevention. There are 125 million work related accidents worldwide annually. Out

of these, 220,000 are fatal implying that about 700 employees lose their lives in their

work place environment, mostly in developing countries (International Labor

Organization, 2007). The labor force survey in Pakistan has indicated that only 2.9 per

cent of employed industrial work force reported occupational injuries/diseases during the

year 2006 (Government of Pakistan, 2006). No supporting details are given. It is surely

under estimation of the problem. Practically there are no reliable statistics available at

national level to project this problem. It is the concern for saving cost of production that

keeps industries away from attaching importance to occupational safety and they remain

reluctant to provide protective clothing and equipment to their employees at work. There

is no single comprehensive law on occupational safety and this leaves an open field for

the industries to act at their discretion. Under the provision of labour policy 2002, a

Tripartite National Occupational Safety and Health Council was to be established to

provide safety at workplace, ensure compensation to the affected employee and frame,

review and update the requisite standards. Over five years have passed and there is no

progress towards this important aspect. This social situation is a glaring example of

governmental apathy that contributes towards de-stigmatization of deviant behavior of

offending industries.

The most glaring example of criminal behavior of industries in violating occupational

safety norms is that of a boiler explosion in a towel dyeing and bleaching industry which

killed 9 people and caused injuries to 25 workers. The explosion caused destruction of 10

adjoining living quarters injuring its residents. The boiler did not have safety devices in

place. Its heat intensity gauge meter was non operational and its annual inspection was

not carried out by department of industries. The industry was not having and emergency

exit, ventilation system and first aid kit. The industry owner was arrested by the police

on manslaughter charges and boiler operator escaped. The factory owner could not

produce boiler clearance certificate to the police, the boiler operator was not having valid

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qualification and licensed to operate the boiler. He only had informal training and was

hired because unqualified and unlicensed boiler operators were available at less salary.

The authorities have been complacent in ensuring proper surprise and formal yearly

inspection of this boiler. Wherever they visit industries for inspection, they are not

properly equipped and such inspection is merely a formality. An official of boiler

inspection wing at ministry of industries confided:

“Some of the industries are not properly registered with the government. A liberal

policy regarding their surprise inspection for curbing child labour and boilerinspection was adopted after a cabinet meeting to lure in investment, to reduce

unemployment and to reduce complaints of industrialists. After this unwritten

policy, government departments are not very stringent to enforce law as long aseverything goes well. These factories are located in far flung areas and the department

does not have transport, qualified man power and other resources to check malpracticesof these industries”(Rasool, personal communication, December 10,2007).

This combination of corporate deviance and government supported latitude in

enforcement of law somewhat resembles with that fire incident in a chicken processing

factory in 1991 in Hamlet (please see Route & Raymond, 1993) where laws on

occupational safety hazards were compromised and profitability was placed ahead of the

workers safety. The safety practices were not regulated because regulatory authority on

occupational safety was not effectively organized.

How complex and huge problem of occupational safety is in the city; may be seen from

the fact that a survey of fishmeal manufacturing industries in Goth Ibrahim industrial area

revealed that out of 87 factories only 3 were having qualified boiler operator. Only 19

had fire fighting equipment in place. All other factories were having informally trained

operators primarily because of convenience and profitability. These unqualified and

informally trained operators were available at about half of the salary; they are available

round the clock in the living quarter of these industries and do not insist and emphasize

on periodical inspections, apparently keeping the owners free of botheration. Qualified

boiler operators were deputed where comparatively costly, complex and larger boilers are

used. A fishmeal factory owner explained this confluence of glamour and de-

stigmatization, in following words:

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“We know we have to see our interest and have to keep watching that we areresponsible for our deeds. While running our factories, we have no support from

the government monitoring agencies neither they are adequately equipped to

inspect our boilers. They do not carry hydro testing pump to check the pressure

limits. They have no facility to calibrate safety valves and all they do is just a paper formality after their palm is greased. We have to arrange testing and

calibration of our machines for our own interest. Whenever something goeswrong, we are held answerable. There are no enough qualified boiler

operators and we are forced to hire other engineers who have years of experience

and do much better. They are devoted, competent and are available round the

clock. We do not have to bargain with them unlike qualified boiler operatorswho ask for big salaries and yet their demands continue”(Munaf, personal

communication, December 12, 2007).

This interplay of regulatory environment and the business attitudes produce criminal

conduct by industries and consequence of this criminal conduct is social injury. The

attitude of the industrialists to cut costs giving their own rationalizations to violate the

norms, and lax enforcement and resourcelessness of regulators jointly encourages

violation of occupational safety practices. When limitations of regulators are known to

those regulated then they find newer ways of violations and rationalizations to justify

their wrong doings. The fact remains that they violate the business norms for profits.

They do not raise their voice against the regulators if at all they are not adequately

equipped or do not serve their purpose because it suits their interests well. Instead of

acting in a professional manner, they neutralize their misdeeds by giving justifications

that by all means violate laws and occupational norms and yet their violations add to their

profits. This is how glamorization and de-stigmatization keep moving.

HAWALA: AN UNDERWORLD BANKING SYSTEM IN CORPORATE CRIMES

The word hawala is borrowed from Arabic which means to hand over. Conceptually, it is

used to refer to trust, transfer of money or exchange. In conventional corporate settings, it

refers to transfer of money through informal means without involvement of formal

banking sector. Money is handed over to one person at one geographical location who

acts as agent for transfer generally called hawaladar . It is paid to the beneficiary at

another geographical location domestically or internationally. A fee or commission is

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paid to the agent that is nominal and often less than what is paid to the banks operating in

formal sector. Some time no fee is charged and hawaladar benefits from manipulation of

extended rate of exchange still obliging the client. The commission charged by hawaladar

ranges from 0.25 to 1.25 percent of the amount involved (Passas, 2001). In Afghanistan

and South Asia it is between 1 to 2 percent ((Maimbo, (2003). This low transaction cost

and several other factors are catalyst for this deviant behavior in which hawaladars

violate foreign exchange and other local regulations in a systematic manner for personal

gains. When the hawaladar understands that the transaction involves criminal proceeds or

transaction by the client is illegal, the charged commission may go up to 15-20 percent

(Carroll, 1999). However, during field interviews at least one interviewee confided that

these days hawaladars are often reluctant to involve themselves if they come to know that

the amount required to be transferred comes from proceeds of a crime. (Munaf, personal

communication January 18, 2008).

Hawala also sometimes refers to such transactions that are not hawala at all (Wilson,

2002). This assertion is correct because with passage of time this practice has adopted

many facets to suite convenience and requirements of the clients and services offered by

the hawaladars. Interfacing of formal banking system with hawala system has given

many faces to this simple system of money transfer. An empirical evidence to this

assertion may be seen later in this part of this research work. These hawaladars adjust and

reconcile their accounts mutually according to their own arrangements which mostly

include reverse hawala or return of money against amounts received from customers at

second location, export and import of goods and adjustments through manipulating

export invoices, physical transfer of money or sale and purchase of gold. These

adjustments may be multilateral where a number of hawaladars are involved in

settlement. In some cases same hawaladar keeps his arrangements at both places to

multiply his profits. It is invariably true in case of domestic hawala business between

various cities or transactions relating to amounts moving between Dubai, UK, China and

Pakistan. The hawaladars may be a full time exchange company, a jeweler, a trader or a

roadside vender depending upon the volume of business and frequency of transactions

handled.

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The biggest factor that makes this arrangement questionable is that no paper work or

records of these transactions are kept and hence there is no traceability of movement of

funds. In fact money is moved without actually moving it, which is moved both

domestically and trans-nationally. This system of transfer stands illegal from the

perspective of the country from where funds are transferred or where these funds have

landed. This system amounts to running a parallel banking that is a crime of a dimension

that perhaps can be checked but cannot be completely controlled. In Asia and Pacific Rim

there exists a high level of use of hawala both for legitimate and illegitimate transactions

(Government of Pakistan, 2003).

This type of underground banking originally did not develop for criminal use and is

historically being used as a facility for those who do not have access to formal banking

system or find its use as inconvenient due to many reasons. Academic literature on the

subject asserts that it has not developed in order to bypass laws, or currency restrictions

(see Bosworth-Davis and Saltmarsh, 1995). Ethno-cultural factors are often sighted as

most strong reasons for its continuous use and development for legitimate transfers of

money. The customer must have some sort of reference or some intimate relationship

with the hawaladar to avail his services. However, empirical evidence gathered during

this humble work established that even strangers are entertained by these hawaladars in

city. These hawaladars are mostly licensed exchange companies authorized to transfer

funds as agents of the State bank and they are required to maintain a trail of records for

all official transactions. However, in this garb they run a parallel underworld banking

system. This is because of lax enforcement of law and poor monitoring by regulators at

State Bank of Pakistan and complacency and other expediencies. There is a total of 35

licensed exchange companies operating in city1.

A network of connections between hawaladars at different geographical locations is

necessary to keep the system going. No formal receipts against money received for

transfer are issued by the hawaladars and system moves on trust. This trust is the

1. As per records of State Bank of Pakistan.

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backbone of hawala system between the customer and service provider, and among the

hawaladars themselves. This trust is rarely breached and if breached, it means instant

business death of hawaladar. All interviewee in study by Passass (2001), who had direct

experience with hawala networks, emphasized in certain terms the paramount importance

of trust in hawala. Where hawala system is organized with an institutional backing like

that of Afghanistan where some donor organizations, development aid agencies and

NGOs use this system for funds transfer. The bad performers are kicked out of eighty

years old money exchange market of Kabul by money exchange dealers association

(Maimbo, (2003). The hawala system moves on the analogy that dishonest dealings

between the two violators are often performed honestly as long as both are gaining. The

customer intending to send money to another person is either given a code number which

the beneficiary at receiving end is required to disclose at the time of receipt. In traditional

local practices cell phone number of the beneficiary is used in lieu for identification and

in some cases both sender and recipients are connected on mobile phones for

identification before making payment at receiving end. This happens where customers are

not frequent user of this service.

The hawala system is being practiced since centuries when modern banking system was

not in place. A variety of literature on the subject of hawala around the world provides

over whelming assertions that hawala system is an ancient system of money transfer and

it had its origin in Indian and Chinese civilization. Some scholars assert that hawala

system developed more than a century ago when Indian immigrant communities in Africa

and South East Asia devised it as a means of settling accounts (Miller, 1999). Some

locate the origin of hawala system to centuries ago, when people sought a secure system

though which traders could transfer money (Alert Global Media, 1996). Brown (1991)

claimed that it was devised so that travelers could protect themselves from thieves.

However, despite globalization, unprecedented ease of traveling, high tech global

banking system and somewhat de-regulation of economies, the system is continuing. It is

called Fei-Ch’ien in Chinese and means flying money, Padala in Philippines, Hui Kaun

in Hong Kong and Phei Kwan in Thailand (Muhammad, 2002).

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Criminological Dimensions of Underworld Banking

It is generally believed that hawala is used for transfer of money between individuals and

families of immigrants working abroad in Gulf States, North America, Europe, China and

other parts of the world. A variety of literature on the subject also mention its used for

payment of medical treatment abroad, for payment of educational charges of children

studying in developed countries. It is believed that immigrants are the biggest users of

hawala system. However, this belief has limited accuracy as far as only frequency and

number of transactions respecting funds transfers is concerned. Considering the volume

of value transferred for trading and other purposes, this belief is not correct. Hawala is

widely used by trading community and hawaladars around the world for tax evasion and

invoice manipulations for example see (Passas, 2001). It is used by criminals for a variety

of crimes ranging from terrorist financing to human smuggling. In city trading

communities in New Chali, Jodia Bazaar and electronics markets, hawala is widely used

to under-invoice imports, to evade taxes and thus the amount involved is far more than

total volume transferred by immigrants.

Considering the present day corporate practices, hawala is considered to be a glaring

illegal activity and it attracted significant attention world wide after terrorist attacks in

United States. This system of fund transfer is viewed with more suspicion by regulators

around the world because of hawala system’s alleged role in financing illegal and

terrorist activities (Muhammad, 2002). From criminological point of view, most glaring

catalyst in hawala system is hidden nature of transactions involved. A workshop on

underground banking system held under the auspices of Asia Pacific Group on money

laundering at Tokyo concluded that significant portion of the funds remitted through

hawala system were believed to be derived from serious criminal activities (Asia Pacific

Group, 1999). A study by Passas (2001) underlined use of this value transfer system in

criminal activities like tax evasion, capital flight, cover operations, intellectual property

rights violation, ransom collection, financial frauds, terrorism, smuggling of immigrants,

money laundering, illegal trade in drugs and body parts.

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Because of its anonymity and hidden nature, the hawala system is prone to be used for

money laundering and other illicit activities. Empirical evidence suggests that it is even

used for bribery of government officials who prefer to receive money in foreign countries

in their hidden accounts or in accounts of one of their relatives or associates. A tax

consultant acting as intermediary between a senior tax officer and a business man

explained that his client paid money into a foreign account indicated by the officer before

an order for refund of sales tax against exported goods was passed. (Nadeem, personal

communication, January 28, 2008). Another business man did the same way before he

got a permission letter for re-export of goods that were imported in violation of import

policy.(Adeel, personal communication, January 28, 2008).

It was adopted as convenient way of money transfer when conventional banking system

was not in place. It was preferred to save money from dacoits, and for barter trade.

However, despite development of modern societies around the world this alternate

practice of funds transfer is continuing because of a hidden criminal essence in its

operational characteristics i.e before and after the transaction is completed, both

beneficiary and sender are untraceable. Transactions usually remain concealed and

amount involved is never known. Any current publication on the subject from academic

books, journal articles, working papers of IMF, World Bank, Asia Pacific Group or other

organizations, would often mention association of India, Pakistan and Bangladesh and

their citizens connected with hawala system in one context or the other. It must not be

misconstrued that these countries have bad economic policies. It is historically associated

with South Asia and the Middle East (Muhammad, 2002 also see Wilson, 2002). There

are many factors contributing to such perceptive attributions. Most important is that

comparatively more focus is placed on these countries because of their proximity to

Afghanistan, which has been hub of activities of US and European forces against

terrorists.

Hawala is illegal in many jurisdictions because of its inbuilt characteristics of having a

capacity of facilitating a variety of other crimes and concealing the identities of senders

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and receivers. At local level, it amounts to parallel banking outside the ambit of state

laws. Such transactions are not disclosed and do not pass through the account books of

national economy. In Pakistan exporting rupees beyond a fixed limit and importing

foreign currency is prohibited under exchange control regulations. The holder of such

currencies is required to disclose his cash at exit entry points. These inbound and

outbound restrictions are often prevalent all over in South Asia. Hawala is thus illegal in

India and Pakistan with complete accuracy (Jost and Sandhu, 2000 and also see State

Bank’s Foreign Exchange Control Regulations, 2007). Hawala is practiced in all the

continents of the world. There are an estimated 3000 international hawala brokers

operating in Asia. Allegedly the business is monopolized by Asian migrants who mostly

operate from countries in the Gulf and South East Asia. Networks include trading points

in the financial centers of Singapore and Hong Kong. Some of the biggest family based

money dealers are based in London (Mateen, 2002).

Hawala may not be absolutely criminal as far as it is used as a facility for legitimate

purposes. However, its widespread use to support criminal activities has forced the states

around the world to take legislative and coercive measures to eliminate it.

Pakistan is a country in which hawala reportedly is quite common. There is remarkable

consensus that the ‘degree of hawala’ for inward remittances to Pakistan is very high

(Wilson, 2002). This assertion may apparently seem to be correct but quantum of

outward hawala often used by trading community to evade taxes is much more.

Consequently this hawala system is supporting activities of white-collar criminals more

than it is providing services to legitimate immigrants intending to send money to their

relatives from gulf region, USA, Europe and other parts of the world.

An Interface of Underworld and Formal Banking System

Hawala is practiced in local sector in its modified form where it assists in safe movement

of cash. Hawaladars provide their own cheques keeping identity of the owner hidden,

whenever the later traveling from one city to another and wishes to carry money himself

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without associated risks. Modern communication system like on-line banking has further

facilitated such activities.

The empirical evidence collected during field interviews suggests that simple traditional

facility has been given criminal shape because the activities of the hawaladars are not

limited to funds transfer only. They have integrated unscrupulous officials of formal

banking sector to manipulate, transfer and legitimize funds transfer to prove remittances

of exported goods to claim refunds and rebates from tax authorities. The co-operation of

bank officials is bought to show proof of payment from one company’s account to

another normally shown as supplier and buyers of goods. It is essential to show the

transactions where refund of sales tax and export rebate is sought. In such manipulations

the actual title of exported goods belongs to another anonymous owner. They can inject

strength into a bank statement of an individual, who actually may not have money. But

still his bank statement would look rich and strong that can then be used for any purpose,

from increasing a loan ceiling to seeking a visa for a European country on the strength of

these bank statements. The charges or commission for these services vary from case to

case and share of the middleman who acts as a bridge between the hawaladar and the

customers.

Hawala as a Catalyst for White-Collar Crime

Another dimension of hawala as criminal activity is that these hawaladars have

established partnership with some unscrupulous bank officials in Dubai and other

countries, from where funds may be shown to have been remitted on behalf of any

nominated company or individual to whiten the black money gained through corrupt

practices.

This practice is also used to show payments of exported goods to prove a credit advice.

With this facility at hand, necessity of opening a letter of credit is obviated and legitimate

crediting of foreign exchange into account of exporter is proved to entitle him for the tax

and rebate refunds. Dubai, Saudi Arabia and South Africa have been popular destinations

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where these exports are shown to have been made. In most cases, there are Pakistanis at

both ends (Nadeem, personal communication January 28, 2008). The depth and

dimension of such fraudulent exports and refunds escalated to such a level that in 2005,

government was constrained to withdraw levying of sales tax and disallowed rebate on

export of five categories of goods that included textile made-ups, printed fabrics, leather

and leather goods and surgical equipments. Connivance of customs authorities cannot be

over ruled in this dirty business because over invoicing is an essential component of this

criminal activity to claim more amount of refunds on the basis of enhanced ratio basis.

The higher the value of exports, the higher the amount of refund for sales tax and rebates.

Literature on the subject of under world banking generally suggests that major catalyst in

keeping this practice ongoing is ethno-cultural factors, low commission or service

charges, absence of bureaucratic inertia, convenience, speed, potential for anonymity and

round the clock services. There is general perception that it is used for transfer of funds

by immigrants working in developed countries to their hometowns for their relatives or

other investments. Another belief is that it is used in money laundering and financing of

terrorism. There is sufficient literature suggesting use of hawala in tax evasion and

money laundering (see Jost & Sandhu, 2000,and Passas, 2001). Such literature hardly

suggests a new dimension of this criminal activity.

Modus Operendi in Tax Frauds

It was discovered during field interviews that a modified form of hawala is used in

claiming fraudulent sales tax refunds, rebates and export of goods to other countries

where instead of incurring cost of export over heads, the original owners are paid for

transportation of their goods to their desired destinations in other countries and they

remain anonymous at all stages like hawala users. This transportation of goods with an

accompanied dividend is handled through phony and fraudulent export companies who

fraudulently draw huge sales tax refunds and rebates against these phony exports and

original owner still enjoying not only the facility of free transportation of his goods but

also he remains anonymous and is paid part of money fraudulently drawn through export

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incentives claimed through sales tax refunds and rebates. During the last about 5 years

this criminal practice continued and it was only in 2005, when tax managers realized that

more sales tax was being refunded than what was being collected (ST zero-rating, 2006).

This happened due to fake or what is called in tax jargon as flying invoices issued by

supplier companies showing sales tax deductions from buying companies but without

depositing the money in government exchequers. Over 7000 companies involved in this

illegal business were blacklisted to act as traders and their invoices were declared

unacceptable because these were issued without depositing tax in government treasury.

Hawala system played an instrumental role in this criminal activity where it is used in

combination with formal banking system to show that transactions associated with export

activities were genuine.

An exporter actively involved in this illegal activity explained the modus operandi that is

followed in this criminal activity. To start with one need to have a company registered

with sales tax and income tax authorities to rise as a legitimate business entity. There are

a number of individuals and groups who wish to dispatch their textile and leather goods,

such as fabrics, yarn and course cloth and leather made ups to other destinations like

Dubai, Saudi Arabia and South Africa. They do not want to be named or identified. The

fraudulent exporter is needed to approach them for export consignment referred as

‘shipment’ in colloquial terms. He is required to pay them cost of this purchase that

usually depends upon demand of consignment in the market, nature of goods, value and

permissible rebate rates. The consignment is usually sold at a prevailing rupee rate per

US Dollar value of consignment shipped. Payment of freight is usually the responsibility

of exporter and thus purchase rate of consignment also depends largely on this factor.

Once the consignment has been shipped the anonymous seller is out of the deal as he

would receive his goods at port of destination against the name of consignee indicated by

him. In this way he had already received his part of dirty money in shape of cost of

selling his ‘shipment’ to phony exporter. This is another face of hawala system where

goods are moved not only without money but also some dividend in the form of dirty

money is pocketed by the original owner still remaining anonymous.

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Once the goods have been shipped successfully, the role of hawaladar comes in. The

fraudulent exporter approaches the hawaladar, who are mostly the owners of licensed

exchange companies. He needs to give details of the importing company in port of

destination of goods and the bank account details of the exporting company in Pakistan.

The hawaladar arranges remittance as if coming from importing company into account of

exporting company with complete trail of paper work and traceability. An advance

cheque of corresponding amount is taken by the workers of hawaladar from the

fraudulent exporter, to secure their money arriving through wire transfer and an

additional cost as agreed per US dollar is paid in advance to hawaladar. They have good

connections with bank officials and thus their money is promptly released to them against

cheques of phony exporter. Otherwise also this system runs on trust between the two

criminals who deal honestly with each other because both are gaining out of this criminal

activity. Now comes the role of third character, another sales tax registered company that

is to provide fake sales tax invoices to prove purchase of goods that has already been

exported. These are also called flying invoices because no amount is paid into

government treasury and still it is shown as charged from the exporting company. Only a

part of invoice value is charged from the fraudulent exporter and thus all amounts of

refund and rebate fraudulently claimed from government is distributed among the five

characters i.e original owner of the goods, hawaladar, Supplier Company, bank officials

and the fraudulent exporter in this whole transactional cycle (Nadeem, personal

communication, January 28, 2008).

The supplier company is usually owned by another associate of the fraudulent exporter,

who provides fake back up invoices showing sale of exported goods (without paying tax)

to the government and charging nominal tax amount from the fraudulent exporter. These

invoices along with proof of payment are produced to the sales tax authorities to claim

sales tax refund and rebates for seemingly legitimate export business activities. Again the

proof of payment between selling local company and fraudulent exporter is provided in

connivance with banking officials where bank accounts of the two companies are kept.

The exporter provides a crossed/named cheque to the bank manager in favour of selling

local company despite having no credit in his account. The selling local company

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provides a bearer cheque to the bank officials in advance. The cash flow is shown as

passed from the exporter’s account to the seller’s account and a certificate/bank statement

proving sale purchase activity is provided to the two parties by the bank officials. The

case is thus ripe for claiming sales tax refund and permissible export incentive rebate

showing perfectly legitimate export activity. Thus the government revenue is swindled

because the selling local company does not deposit any sales tax with the government and

yet issues invoices to the buyers. Thousands of such companies were black listed by

Federal Board of Revenue for their involvement in this fraud but by that time enough

damage had already been done and billions of rupees were lost to these phony exporters.

When the revenue officials further proceeded to trace out the real culprits, it was

disclosed that their identities were fake; they had given fake addresses in their identity

cards. In some cases identity cards of drivers, servants and innocent employees were used

to raise a company. Blank cheque books were got signed from these innocent and

illiterate individuals. Some of these innocent persons were picked up by revenue officials

for tax fraud about which they had no clue. This way a mega fraud of billions of rupees

that took place and the real beneficiaries and perpetrators in most of the cases could not

be traced. The government was thus constrained to apply zero-rating sales tax on five

sectors of economy as refunds were more than the revenue generated through sales tax.

The Chairman of Federal Board of Revenue admitted that this action has saved about 40

billion in fake refund case of flying invoices (ST zero-rating, 2006).

Corporate Fraud of Phony Exports: A Case Example

One of the most relevant examples highlighting role of hawala in white-collar crimes is

of several cases of massive tax fraud by manipulating fake exports by Bawan Shah Group

of companies, who were implicated in tax fraud of over Rs. 20.1 billion. Raja Zarat Khan

resigned from Pakistan Customs department as a clerk in 2002, and launched Bawan

Shah Group of companies. Within a period of four years he became a billionaire through

fraudulent exports and fake tax refunds and rebates. He planted 12 companies by using

fake national identity cards of his employees, associates and did the same to open bank

accounts. He cultivated good friendship with senior officials of Central Board of

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Revenues thus deriving his influence to get his refunds quickly. On his arrest, a number

of sales tax and Customs officials were also implicated. One of his associate working

closely with him explained:

‘The man invited trouble by contesting election on a senate seat against a

government candidate and bribed many of the members of a provincial assembly.

Yet he could not win. This attracted attention of agencies. Influence of politiciansin power forced an investigation into his business activities and thus investigation

revealed his criminal activities. He was sending expansive gifts to senior custom

officials and was paying monthly to lower level tax officials. He was running no production facility of textile manufacturing and yet was winning best textile

exporter of the year award of Federation of Chamber of Commerce and Industries

consecutively for the last 3 years. Export consignments of his group companies

were placed under strict observati

chapter 6-corporate crime 231-271

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