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  

View all 60 comments Below 60 comments
People bent upon breaking rules will always find innovative methods. In all type of medicinal systems, there will be side effects but that does not detract need to administer medicine for the decease. Black economy and corruption are a canker to the economy and the government has bitten the bullet sacrificing short term goals for long term gains. Only time will tell the success or failure of the scheme more  
People should be forced to bank online or through cheques.At an appropriate time it is better to withdraw currencies of Rs500 and above which are mostly used to hoard black money. more  
Why should the Income tax department allow person A to give loan to person B and to C and so on. The IT act should be changed so that such loans have to be given at the bank rates and not free. and all beneficiaries have to declare and file such income (however small) and pay tax on the interest earned. This will curb the practice of the Loan channel for money laundering. Remember the 2G Scam and other cases where large sum of money was given as a loan and some of the recipients never paid any interest or declared such receipts. If proper accounting practices are maintained then flow of money and cash can be tracked and the paperwork makes it difficult for any one to plea ignorance. more  
In order to improve the transparency in the Governance - 1.Demonetisation is one of the major method that is adopted first time.This should be followed by discontinuing high value denomination currency such as Rs 500 and Rs 2000as a next step 2.On line payment/payment by various bank instruments should get a big support,and,should be made mandatory 3.Tax laws should be simplified and Inspector Raj should get discontinued.Let there be an surprise audit by expert team periodically inspecting various businesses,which would get signalled,through the system 4.With in a year or two,we will lead the world. more  
I think as a routine all large notes should be demonetised every two years. Say these 2000 Rs notes be demonetised and only 500 Rs notes may remain. Next two years the 500 Rs notes be demonetised and only 100 Rs notes may remain. The cost of demagnetisation may be the penalty we have to pay for removing black money. Slowly over a period the black economy shall vanish. US demonetised ALL high value currency during Nixon and have now only 100 $ bills. There is no problem as all high & low value transactions are through bank/credit cards.... I know we take coffee also by card. We have to reach that stage. more  
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