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Money-laundering networks thrive amid India's cash-ban chaos

Monday, December 5, 2016 - 11:12

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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.

[MUMBAI] 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 scrutinize large cash deposits and money with undeclared origins - and will tax or penalize 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 per cent to 50 per cent, 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 last week - 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 organized crime, the evolution of the long-standing 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 organized networks," said C.H. Venkatachalam, general secretary of the All India Bank Employees Association, a union representing 500,000 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 Modi faces in trying to stamp out entrenched corruption in a country where cash accounts for 98 per cent 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 percent 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 cash-reliant business in the state of Rajasthan, which has operations in both garment manufacturing and jewelry. He plans to give the business 200 million rupees ($2.9 million) worth of banned notes he obtained from selling property, he said, and expects to get just 100 million back in brand-new notes. "All I want to do is save as much as I can of this money," said Ashok, who didn't pay taxes on the money and said he's still deciding whether to declare his new notes. "This is money from a real estate transaction, which I have been holding onto for future investments."

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 percent 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 per cent 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 farmers or those who derive income from agricultural activities, the lawyer said. Certain tribal communities in India's northeastern states, including Nagaland, Manipur and Tripura, 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.

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