India’s money laundering driven by trade-based financial crime and hawala system not cash

An expert in illicit fund flows has said that India’s decision to withdraw large denomination notes from circulation will damage the economy but it will not have a big impact on money laundering.

Professor Arun Kumar does however reckon that substantial amounts of money are channeled offshore through trade-based money laundering and hawala informal remittance systems, and then finds it way back to India.

Negative impacts

Kumar, a former economics teacher at Jawaharlal Nehru University and a recognised expert on India’s black economy, says the withdrawal of 500 and 1,000 rupee banknotes, will have a negative impact on parts of the economy where cash is most used. These include business, trade, industrial and household transactions he says.

Kumar says that the rationale behind demonetisation was to strike at the roots of money laundering black money. But the professor estimates that cash is but a tiny fraction – not more than 2-3 per cent – of India’s domestic black economy.

Economic calculations

He reckons that India’s economy is currently US$2.2 trillion, some 62 per cent of which is generated in the black economy.

Kumar believes the vast majority of illicit earnings are converted to gold, real estate, stocks and shares, or channeled abroad to tax havens.

Trade mis-invoicing

Around 40 per cent of illicit earnings flowing to tax havens come back to India via ’round tripping’ he says.

Illicit funds are channeled abroad via hawala remittance providers or trade mis-invoicing and are deposited in international tax havens.

From there the funds are returned to India via an investment route, typically Mauritius, which has favourable tax treaties with India. Black money is now effectively ‘whitewashed’, Kumar concludes.

Categories: Trade Based Financial crimes News

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