Tuesday, January 14, 2014

How does black money hurt the country where it originated and how does it travel to foreign countries?

Author: Sachin Gupta | Find me on Twitter

Black money hurts the country a lot. The tax revenues if reportedly accurately by individuals and businesses would have gone to the country’s exchequer. The government with right intentions could have used these revenues judiciously by building infrastructure (ports, roads, educational, healthcare, communication, power, etc) and that would have resulted in higher GDP growth, more jobs, and poverty reduction. Instead these revenues now lie with individuals & businesses and some of them invest these amounts in domestic assets such as real estate and gold. Why only real estate and gold? Primarily because of the ability of these assets class to absorb cash and this is turn distorts the property and gold market. Housing becomes unaffordable in a country where there is shortage of about 18.78 million houses as per the 2012 estimates. There are various other disadvantages of black money as we have covered in many of our other posts.

However, in this post, we are focusing our energies on black money that travels abroad. This is the worst form of corruption because money which could have been used for nation building is now building other nations. We pondered a lot and thought of ways in which this black money can travel outside. In recent times, stashing of black money in foreign banks (read, tax havens) has been the topic of debate between the political parties, media, and the public at large. There have been theories that Indians are the largest depositors of black money in foreign banks. There have been murmurs that the amount of black money stashed abroad could be as high as India’s GDP, which is close to 1.84 trillion US$.

In a press conference few months back CBI director (central bureau of investigation) put that number to be 500 billion US$, almost 35% of India’s current GDP. By any stretch of imagination, this is huge amount for a country, whose fiscal deficit is at record high level, whose infrastructure needs investment at a scale which has been unprecedented in human history.

There are various discussions, round tables with tax havens countries to bring back the money deposited to India. But so far, only a pittance of the total amount has been declared. It will take time, says government sources.

Now, the whole scene of stashing black money to foreign banks got us thinking…how the hell this black money would travel to those foreign banks? How? And in this article, we encourage readers to answer this very question.

Explored a bit and two possible scenarios came to our mind

Formal Routes:

  1. Wire transfer: Wire transfer or credit transfer is a method of electronic funds transfer from one person or institution (entity) to another. This one looks formal and we are sure it can be traced with proper tools and training.
  2. Buying foreign assets such as real estate, companies, etc: But this is all in white and traceable.
  3. People traveling abroad: People traveling abroad carry the allowable cash with them and deposit it in foreign accounts. But that is going to take years to reach 500 billion US$.

Informal (or should we say black) routes:

  1. Gold Transfer: Gold is bought by these tax evaders in the parent country and then the same is transferred to foreign shores in ships or chartered planes.
  2. Money transfer: Rupee or parent country currency is converted to internationally accepted currency (usually US$) with central bank knowing all the details and then that converted money is flown to foreign shores in chartered planes. Now, this amount in internationally accepted currency is used by the foreign country for their own investment purposes which ultimately lead to growth in those countries at the cost of growth in parent countries where the money actually originated.

In all these informal (black) routes, we fail to understand, why central bank or country’s top political leadership is clueless in tracing the black money? As far as we understand, money just cannot move out of the country without their approval.

Our imagination took us to these ideas…but we are sure, there are talents out there who could help us in deciphering all this. Waiting to hear from all you guys out there about the possible routes of black money traveling to foreign shores.




Have any Questions?

13 comments:

  1. There are many possible one will transfer it has become so easy after everything has become online... Even paypal allows one to transfer money from one country to another without any issues, even currency conversion is not a head ache. Even I doubt some of the religious trusts having branches all over the wold are used to transfer the currency without having to depend on any carrier.

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