The aftermath of demonetization in India

On Behalf of | Nov 14, 2017 | White Collar Crimes

One year ago, India made a bold and controversial move. In an attempt to thwart “black money”—which encompasses undeclared wealth, counterfeit banknotes and networks that finance terror activities—the government banned all 500 and 1,000 Rupee notes from use. The hope was that criminals—wanting to avoid exposure—would be afraid to exchange their cash in for smaller denominations and would instead be stuck with heaps of worthless paper.

Unfortunately, things didn’t go exactly as planned. Seemingly overnight, advanced money-laundering networks materialized, allowing corrupt officials, businessmen and criminals to deposit enormous quantities of undeclared money without anyone raising en eyebrow.

In the year since demonetization, the Enforcement Directorate (ED) has carried out 620 investigations into foreign exchange rule violation and money laundering. Its recent report found that 96 percent of those searches pointed to violations of the Foreign Exchange Management Act, totaling 46 billion Rupees—which comes to around $700 million USD. The ED also has tentative findings of about 53 billion Rupees ($810 million USD) from violations of the Prevention of Money Laundering Act.

In its report, the ED identified six overarching means the black money has laundered:

  • Bribery of bank officials
  • Shell companies
  • Jewelry and precious metal investment
  • Illegal foreign exchange remittances
  • Foreign currency investment
  • Real estate investment

Of these avenues, financial institutions accounted for 48 percent of the uncovered money laundering activity.

According to cyber law expert Pavan Duggal, a recent amendment to the Information Technology Act means that this type of white collar crime faces soft penalties. Banks have become increasingly susceptible to cyber crime in the wake of demonetization, enforcing the need for cyber-resilient policy.