After India's Cash Ban, Money-Laundering Networks Thrive: Foreign Media

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 percent to 50 percent, 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.

Whales, Sharks

"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 percent 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 percent penalty on unexplained bank deposits.

Tribal Exemptions

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.

Individuals are transporting millions of rupees on trains or vehicles, and the big money-laundering networks have been chartering flights to transport crateloads of cash to India's northeast from small airfields, the lawyer said.

Flights Curbed

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, and that police and the pilot must screen customers and passengers before departure.

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, at least, uses trust as a bedrock, and those involved honor their commitments or face repercussions, the lawyer said. The hawala 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. The Reserve Bank of India put limits on transactions "to protect the innocent farmers and rural account holders" from activities of money launderers and legal consequences, according to a statement posted on the central bank's website on Nov. 30.

Temple Conversions

There are also reports of temples being used to convert the black money into new currency notes. Donations to religious institutions in old notes are exempt from the ban, but a television channel caught on camera a priest at the Govardhan Temple in Mathura in northern India who offered to convert banned currency notes into new ones. 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 percent of its transactions done with black money even before the currency ban, is also attracting further investments with banned notes.

An e-mail offer sent out by the Mumbai property brokerage had the subject line, "Under old currency 2BHK Sale Khar West," which meant that the purchaser could pay in banned bills for 2-bedroom apartments in the upscale Mumbai suburb of Khar. The offer price, for units in a seven-story building with floor-to-ceiling windows, was about 30 million rupees, or about a 10 percent premium over other comparable sales.

Surging Transactions

"Real estate transactions have seen a surge after the demonetization announcement, as opportunistic deals are being struck between various stake holders," said Shashank Jain, Mumbai-based partner at PricewaterhouseCoopers. "It is tough to quantify how much of these are happening in currency notes that are no longer legal tender."

Sales of hard assets are increasing wherever sellers or retailers will accept the bills, even after the government banned them from doing so. A person who bought 1 million rupees worth of gold from a jewelry store in Mumbai last week said he was able to use old 1,000-rupee notes, paying a 20 percent premium -- with the jeweler then expected to turn to money-laundering networks to legitimize the proceeds.

Denouncing Evasion

Modi, who announced the demonetization of 86 percent of the country's currency in a bid to crack down on tax evasion through black money, denounced the evasion networks that are springing up.

"Even now, some people think that they can re-introduce notes into the system, money from corruption, black money, unaccounted wealth," he said on a national radio program on Nov. 27, condemning these "illegal means to save their ill-gotten wealth." "By misguiding the poor, enticing them through the vices of avarice and temptation, wrongfully pumping money into their bank accounts, or getting them to undertake some wrong activities, some people are trying to save their black money."

The government has been trying to plug loopholes. Plane and railway tickets that previously were allowed to be booked with banned currency notes led people to purchase and then cancel them for a refund in valid notes. The government swung into action and stopped cash refunds for these tickets within two days of the currency ban.

Winning support for demonetization and implementing it effectively is crucial for Modi before key state elections next year and a national poll in 2019.

"The government has its eyes and ears open and claws out and is moving quickly to ban all the illegal ways in which black money is brought back into the system," said Gaurang Shah, vice president at Geojit BNP Paribas Financial Services Ltd. in Mumbai, which offers investment advisory services in India and the Middle East. "We will have to wait for the final tally at the end of December to see how effective those measures have been."


(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)