Phuentsholing Mini Dry Port (Photo: CUTS CITEE)

How Tax evasion, Bribery, Smuggling, Illegal currency trade and Informal payment mechanisms are facilitated by Bhutanese officials and traders at the border

Recently, the Anti Corruption Commission (ACC) started its investigation into tax evasion, bribery and smuggling allegations at the Phuentsholing Mini Dry Port (MDP) with the involvement of Bhutanese officials including customs.

However, this is just the tip of the iceberg as The Bhutanese found that this is just a part of much larger illegal activities in trade, banking and smuggling, some of which have been there for years or even decades, while some have come up after the lockdown.

The paper talked to various sources in Phuentsholing and Jaigaon, all requesting anonymity for fear of retribution by customs officials, to uncover a variety of scams that run between the two countries, how they are related to each other and involve people from customs officials to bank employees in Bhutan.

The Banking Scam

Ever since the border was sealed from March 2020, one of the biggest industries that have cropped up in Jaigaon is the INR and Ngultrum exchange business or popularly called the ‘IC/BC business’ in Jaigaon.

With a lot of Bhutanese currency somehow still filtering into Jaigaon there is a 15 percent to 8 percent commission to be made for exchanging the Nu with INR. 

Business people that the paper talked to in Jaigaon said that what happens is that a Jaigaon businessman basically makes a fake bill or Performa Invoice showing a Bhutanese businessman buying a large quantity of goods. However, in reality there are no goods.

The Bhutanese businessman takes this fake bill and goes to a bank in Bhutan to release an equivalent IC to the Indian counterpart. Ordinarily the bank employee is supposed to release only a small advance and the remaining amount after getting the import declaration form from Customs when the goods physically come into the country.

But sources in Bhutan and Jaigaon said that here the bank employee is also involved and so he or she releases the entire amount without the goods ever entering the country through the Real Time Gross Payment (RTGS) system that facilitates bank to bank transfer of funds.

The Indian partner then makes an average of 10 percent commission by exchanging this IC with BC in Jaigaon and this quick profit is shared between the Indian and Bhutanese trader with the involved bank employee getting a cut.

A businessman in Jaigaon said that people involved in this business in Jaigaon to avoid being tracked by their tax officials open bank accounts in the name of poor people in states like Bihar, but they effectively operate the account.

Another Jaigaon businessman said that another approach to avoid the taxman in India is that each fake individual bill is below 10 lakhs as any bill at or above 10 lakhs is looked into by the tax system in India. So several of these bills at below 10 lakhs are sent at a time which adds to a larger overall amount.

The ACC has also just started looking into this scam. So far, it has found that two Bhutanese business people within just a few months had sent Nu 150 mn to India through the DrukPNB bank. ACC is hopeful these few cases will enable them to track other such wider payments.

An ACC team in Thimphu is looking at this issue by looking at such transactions by bank employees even while another team is doing its own investigation in Phuentsholing.

ACC will look at how valid the bills are and also how authentic the customs declarations forms are.

This scam is bad for Bhutan as not only does it deplete Bhutan’s INR reserves for fictitious imports, but it leads to the devaluing of the Nu through the commission system and this  could even be payments for smuggling or tax avoidance. 

Tax avoidance

A Jaigaon businessman who does regular business with Bhutan said that he had been encouraged by Bhutanese customs officials to not follow the formal process of exporting to Bhutan, but use the ‘informal’ system where he can pay lesser or no tax in return for giving a cut to customs officials.

“I refused as I was doing a legal business and sent it though the formal route, but there was a lot of harassment by Bhutanese custom officials who raised all kinds of objections,” he said.

This businessman said that the customs officials have some middlemen in Jaigaon who operate on their behalf and get a cut too.

He said Bhutanese customs officials are bolder in extracting money from Indian exporters, but are more careful with local Bhutanese for fear of being exposed.

He said one main target of the customs officials are smaller Indian business people especially those who are not aware enough to do all the paper work.

Another Jaigaon businessman said that the tax avoidance is not new and did not start with the MDP, but it has been going on for many years.

A source in Bhutan said that the modus operandi is that if a good has a tax of Nu 100 then the customs officer offers to decrease it to Nu 50 to have lesser tax. On the remaining Nu 50 tax the Bhutanese customs officer takes a cut of Nu 25 and the trader takes Nu 25. 

This is part of an institutionalized corruption in the Phuentsholing customs department.

The second Jaigaon businessman gave another concrete example. He said that Made in China mobile parts have no Maximum Retail Price on them and so Jaigaon traders make a huge killing on them.

For example, a mobile protection screen could be actually worth Nu 5 to Nu 10 but it is sold for Nu 100 to Nu 150 in Thimphu.

So, for example, if a Nu 1 mn worth of such consignment comes to Bhutan then it should not only attract higher tax due to the profit margin, but also customs duty since it is from a third country.

The Indian trader is called and all kinds of regulatory and tax issues are pointed out, but instead of seizing the goods or sending it back the issue can be settled for around 50 percent of the due tax.

He said in fact there is now an understanding between Bhutanese customs officials and certain traders in Jaigaon.

Apart from this, another form of tax avoidance is Indian and Bhutanese traders colluding to undervalue the goods so that both the Indian and Bhutanese traders save tax.

The second Jaigaon businessman said the main people of these Bhutanese customs officials are around three to four middlemen who deal with both Indian and Bhutanese businesspeople for everything from tax avoidance to smuggling.

Smuggling

On the smuggling front the two Jaigaon businessmen again said that a lot of the successful smuggling through the MDP was done with the knowledge and collusion of Bhutanese customs officials with the involvement of the above middlemen.

The first businessman said that only one to two percent of the smuggling consignment have been caught at the MDP, and that too mainly because some of the local Jaigaon business people including business rivals tipped the police in Bhutan.

The second businessman said that at other times it was caught because the consignment would not reach at the same time as the custom officers getting the cut and so another officer would catch it.

The first businessman said that there is a certain big smuggler in Jaigaon and that person has his contacts in the Bhutanese customs and also the MDP.

In addition, the customs middlemen would also fan out and facilitate this smuggling in return for a cut.

He said that apart from tobacco, which is now legal, other items commonly smuggled through the MDP in collusion with customs were certain medicines banned in Phuentsholing, abortion pills, Indian chilli etc.

The businessman said that the modus operandi is that the customs in Bhutan would be informed of certain illegal consignments coming in by the middlemen and it would be made sure that the particular consignment would not be inspected or let through with minimal checking.

“No smuggling would dare happen from the Jaigaon side without somebody on the Bhutanese side helping,” he said.

The first businessman said that the customs people may also be instructing the loaders at the MDP to ignore certain consignments.

Initially, the smuggling happened through the vegetable and fruit trucks coming into Bhutan, but later it spread to almost all other consignments. In some cases, the owners of the consignment are involved and in some cases it is the drivers and helpers involved.

These same trucks leaving Bhutan would also carry the Bhutanese currency in cash as payment for the smuggled consignments, remainder payments to Indian traders for undervalued goods or other smuggling payments.

The second businessman said that Bhutanese currency is not only sent via the trucks, but some of it comes via foot across the border using the same network that was used to smuggle tobacco into Bhutan.

This is what explains the fact that despite the border being closed since March 2020 and Bhutan facilitating exchange of Nu 1.5 bn in Jaigaon in seven transactions there is another Nu 1 bn plus in Bhutanese currency that has popped up in Jaigaon again.

The second businessman said that these days for smaller consignments the smugglers in Jaigaon make use of the Bhutan Post vehicle that comes around twice a week to Jaigaon to collect various parcels.

He said the fact that the middlemen themselves have made millions show how much smuggling is going on.

Here too, the Jaigaon sources said that smuggling is not entirely a new thing, but was going on even before the MDP.

An ACC source said that while the main focus of their investigation is tax avoidance and bribery of officials, they cannot rule out the smuggling of contraband items like tobacco and chilli through the MDP.

The ACC source said that around two months ago they had heard about bribery and corrupt practices among the people on duty in the MDP and so they had scanned 1,000 bank accounts before getting some leads.

The ACC is not only looking into customs officials but also BAFRA with regard to import of Indian chillies, Dessups, loaders and also the RBP people on duty at MDP.

The ACC had detained some customs officials and traders over the case.

Theft at the MDP

While the ACC is not looking into this aspect there have been complaints by both Jaigaon business people and Bhutanese business people that some items always go missing from the MDP.

A Jaigaon trader said, “I once sent 1,800 bags of 25 kg rice to MDP but around 20 bags went missing. It is now commonly accepted that two percent to three percent of the goods get stolen from the MDP and this is probably being done by loaders.”

The trader said this theft is made possible as the Indian driver cannot come out of the truck during unloading and so no one can monitor how the goods are being unloaded.

He said that it is common for Jaigaon exporters to get calls from business people in Thimphu and other places of items always being short. 

Hawala and Fronting bank accounts

With the border being closed between the two countries another yet illegal mode of payment has come up between traders and others of the two countries.

The Indian term for it is ‘Hawala’ which is a system to illegally transport money across borders.

It works when an Indian businessman in Jaigaon and a Bhutanese partner in Bhutan set up an understanding to make payments to local people on behalf of people across the border for a fee of 1 to 2 percent.

For example, if a Bhutanese man has to pay Nu 100,000 to a Jaigaon businessman and he cannot smuggle or RTGS the cash, but instead, what he does is approach a local Bhutanese businessman with a partner in India. The local businessman for the 1 to 2 percent fee asks his Indian counterpart to pay the Nu 100,000 in Jaigaon and vice versa.

According to sources in Jaigaon this has really taken off between the two borders and has been used to settle a variety of payments from the innocuous trade to other dubious things.

The danger with this system is that apart from helping evade tax it is also used to pay for illegal activities.

Another issue is Jaigaon businessmen using the the IDs of their Bhutanese counterparts or contacts to open bank accounts in Bhutan and then make use of online banking, and also take the RuPay card of INR 15,000 per month limit that allows them to withdraw INR in Jaigaon.

The thread that links them all

The above are all different types of illegal activities, but there is a common thread. While the smuggling and tax evasion involves customs officers and traders network and the RTGS involves traders and bank employees, there is a link.

The smuggling and tax evasion are among the biggest sources of Ngultrum entering Jaigaon, again through smuggling networks.

This large rush of Ngultrum leads to a thriving IC/BC trade which is where RTGS and Hawala and fronting accounts come in.

The big danger for all the above are two fold. The first is that it will further institutionalize and expand corruption in the border areas and in trade, leading to loss of revenue.

The second and long-term risk is national security as these same networks of easy moving contraband and cash can be used to create internal security risks within Bhutan by any foreign elements hostile to Bhutan.

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