Laundering Model, Why Disclosure Scheme will fail

Assume person X approaches agent Y to change a stash of Rs 10 lakhs in old currency notes into new ones. Agent Y has a clutch of bank accounts that he operates. He deposits Rs 2 lakhs in old currency notes in the account that is in the name of A. Since the amount is below Rs 2.5 lakhs, A will not be asked to explain the source of his money.

Agent Y uses RTGS to transfer Rs 2 lakhs to the account of B, and also deposits Rs 2 lakhs in old currency notes into that account. This Rs 4 lakhs amount is then transferred to C’s account, into which another Rs 2 lakhs in cash is deposited. The Rs 6 lakhs that has accumulated is now transferred to D’s account, which is then replenished with a cash deposit of Rs 2 lakhs. The accumulated Rs 8 lakhs is transferred to agent Y’s account (or for that matter, in E’s account) where another Rs 2 lakhs is added.

Agent Y now has Rs 10 lakhs, which is the amount person X had given the agent to exchange from old to new. Y transfers the amount to X. He shows in his books that Rs 10 lakhs has been given as a loan to X.

A few days later, X issues a cheque of Rs 10 lakhs to agent Y, or electronically transfers the amount to Y’s account. In his books, Y then shows that the loaned money has been returned. He will withdraw Rs 10 lakhs once the limit on withdrawal is lifted in January 2017. The amount he will receive will be in new currency notes.

It is considered safer if X and Y are relatives or have had business relationships in the past. After all, nobody lends Rs 10 lakhs to an unknown person.

It is very unlikely for income-tax authorities to become suspicious of such transactions, let alone track them, as the amount being shifted from one account to another is not high.

But it is also because the accounts agent Y operates will have no past record of having been served income-tax notices. It is well known that once an assessee comes on the radar of income-tax authorities, they are routinely served notices for at least five years – and their transactions are scrutinised.

Agent Y will then take a cut, say, 30% of the Rs 10 lakhs and hand over the remaining Rs 7 lakhs to person X. Thus, Rs 3 lakhs is the hair-cut person X took to convert his Rs 10 lakhs in old currency notes into new ones. But X’s Rs 7 lakhs is still black money.

For person X, the transaction makes economic sense. In case the government’s legislative proposal of November 28 is accepted, he would have to pay 50% of Rs 10 lakhs as tax, that is, Rs 5 lakhs, and deposit another 25% or Rs 2.5 lakhs in interest-free deposits for four years. Therefore, all that he gets in hand is Rs 2.5 lakhs, though it would be deemed as white money.

Since no interest accrues on deposits, inflation would erode the real value of Rs 2.5 lakhs that X is liable to receive after four years. Given that he is habituated to hoarding cash, he is likely to prefer keeping the Rs 7 lakhs he has received in cash, or divert it to buy property, than disclose his concealed wealth to the government. more