PLANES OF CASH SEEK TO TURN BLACK MONEY WHITE
India’s cash ban has led money-laundering networks promising clean notes to prosper
As Indians struggle with the chaos caused by last month’s sudden banning of their 500 and 1,000 rupee notes, money-laundering networks are spreading across the country, seizing on a new market in helping people turn their cash hoards into legal tender.
While people have until year-end to deposit old notes in their bank accounts, the government has said it will scrutinise large cash deposits and money with undeclared origins — and will tax or penalise depositors. That’s created a scramble for ways to turn so-called black money, the local term for cash that has evaded taxation, into white.
Agents offering to launder money are using creative means, including flying banned cash by the planeload to northeastern states exempt from restrictions as well as connecting people to high-turnover businesses that can deem old cash as revenue, keep a portion of it, and return the rest, according to people involved in the networks. Premiums range from 10% to 50%, depending on the difficulty, they say. At least one property brokerage is offering to arrange the sale of apartments using banned money in an upscale suburb of Mumbai that’s popular with Bollywood movie stars.
While the government has been working to close loopholes — which Prime Minister Narendra Modi decried as people’s “illegal means to save their ill-gotten wealth” in a radio address two weeks ago — new ones are opening even faster. So far, the policy aimed at reducing the scale of the black economy and bringing more people into the tax net is, in the short term, leading to just the reverse: money-laundering, tax-avoidance, and new opportunities for existing organised crime, the evolution of the longstanding hawala money-transfer system, and the start of new illicit networks.
“The whales and sharks will break out of this net easily and find a way to pump their money back into system through organised networks,” said CH Venkatachalam, general secretary of the All India Bank Employees Association, a union representing bank personnel. “It is not easy to cull out the black money from India’s economy, and the real big players are tough to touch. ”
The rise of underground networks illustrates the challenge Mr Modi faces in trying to stamp out entrenched corruption in a country where cash accounts for 98% of consumer transactions — and raises the prospect that he’ll pay a steep political price for a move that threw India into chaos.
Money-laundering networks promise to deliver clean cash by routing it through India’s hinterlands. One method relies on high-turnover businesses, such as trading houses or manufacturing operations, which report cash revenue to the government. With their sales disrupted by millions of Indians’ sudden inability to access cash, these businesses can make up the shortfalls by accepting old cash from money-laundering networks, calling it revenue, and then returning a portion — typically 50% of the total — in new notes.
Ashok from Mumbai, who didn’t want to disclose his full name due to the illegality of the transaction, said that a lawyer he contacted after the Nov 8 cash ban put him in touch with a cashreliant business in the state of Rajasthan, which has operations in both garment manufacturing and jewellery. He plans to give the business 200 million rupees (US$2.9 million) worth of banned notes he obtained from selling property, he said, and expects to get just 100 million back in brandnew notes.
A lawyer who is part of a money-laundering network in Mumbai confirmed on condition of not being identified that most people looking for help are willing to lose as much as 50% of the value of the currency. A proposed change to the tax law, which passed the lower house of Parliament on Nov 29, would levy a 50% penalty on unexplained bank deposits.
Other laundering networks focus on bringing the money into the system through the bank accounts of people with tax exemptions, such as those who derive income from agricultural activities, the lawyer said. Certain tribal communities in India’s northeastern states, including Nagaland and Manipur, are exempted from paying taxes on income from any sources.
Some of the operators are turning to the hawala system — which is based on trust or family connections and operates using the mispricing of goods, financial loopholes and hidden accounting procedures to take in cash in one location and pick it up in another — active in India for decades. By using the hawala networks, agents offer to replace old currency notes with new and offer services to pick up the money in remote locations, the lawyer said.
Individuals are transporting millions of rupees on trains or vehicles, and the big moneylaundering networks have been chartering flights to transport crateloads of cash to India’s northeast from small airfields, the lawyer said.
In an attempt to halt these operations, the civil aviation ministry said on Nov 29 that approvals must be sought from the police chief of the district for flights taking off from airfields not controlled by the government.
There’s big risk in transporting currency notes. Apart from theft, income tax authorities or police officers could intercept mass cash transports and impound them. Yet the hawala system uses trust as a bedrock, and those involved honour their commitments or face repercussions, the lawyer said. The network, a centuries-old system of moving cash around the Muslim world outside formal banking channels, has become active in India only in the past few decades.
People are also taking things into their own hands. They use household staff or people with little money to move their currency notes into bank accounts of multiple people below the 250,000 rupees limit that triggers inquiries from the tax department.
There are also reports of temples being used to convert the black money into new currency notes. People are also using weddings as a way to deposit the currency into bank accounts, as cash gifts received during marriage are exempt from taxation.
The real estate industry, which accounted for a large share of illicit deals with an estimated 10 to 15% of its transactions done with black money even before the currency ban, is also attracting further investments with banned notes.
The government has been trying to plug loopholes. Plane and railway tickets that previously were allowed to be booked with banned notes led people to purchase and then cancel them for a refund in valid notes. The government stopped cash refunds for these tickets within two days of the cash ban.
Winning support for demonetisation and implementing it effectively is crucial for Mr Modi before key state elections next year and a national poll in 2019.