Developing markets often experience high levels of financial crime. This is unfortunately done by both the governments and the population. Within the government, corruption is commonplace, especially among the less developed frontier markets. And for the general population, tax evasion can be rampant, robbing governments of the funding necessary for basic social and infrastructure projects.
The more an economy relies on cash, the easier it is for money to ‘disappear’ from the system. In more developed economies, a much greater proportion of the population is employed and ‘banked’, resulting in more accurate accounting of money by the government. But in ‘cash societies’, money laundering is rampant as sophisticated black markets exist to facilitate the crimes.
One country that is experiencing this first hand is India, where cash accounts for roughly 98% of transactions.1
India’s Cash Ban
In India, a major offensive is underway to fight tax evasion and money laundering. India’s Prime Minister Narendra Modi moved towards ‘demonetizing’ the economy by banning the use of existing 500 and 1000 rupee cash notes.
Just these two bills alone reportedly account for 86% of the cash in India’s system, so banning them will go a long way towards demonetization.2
Retail shops will no longer accept these bills which are worth roughly ($7.50 and $15 respectively).
The old bills can be deposited into a bank and replaced with new, legal bills which will differ in size and design. But any major deposits (above 250,000 rupees) will be reported to the government and if the depositor cannot present proof the money was obtained legally, it is subject to tax and potentially a stiff penalty of 200%.3 The intent is to make any illegally obtained cash to make its way into the banking system, so it can be accounted for and taxed.
While the government did implement an amnesty program that ended in September, which brought back over $625 billion rupees, it’s really a drop in the bucket at just 0.5% of India’s GDP.4 The Indian treasury is in a predicament as economic activity nationwide is declining.
To make matters worse, just 1% of Indians pay any taxes.5
Why the Cash Ban by India?
The Indian government is convinced that India’s population is evading taxes on a systemic level. The World Bank estimated that over 20% of Indian GDP was lost to tax evasion in 2007.6 If that number is even close to accurate, that is remarkable and substantiates the actions by Modi.
But there is also a populist reason for the move. Modi wants to be a champion for the poor and in a 2014 election speech all but promised the recovered cash would go to the poor. He even went so far as to quote a specific number, 20 million rupees (a little under $30,000) per member of the poor.7 That kind of promise can win a lot of votes.
Since the ban will mostly affect done by the wealthier Indian citizens (who shift money offshore to be hidden) the promise has a Robin Hood tone to it. But the wealthy aren’t going to sit by and watch their money get taken.
Money Laundering Tricks
There has been some fantastic reporting on the various ways that money is being laundered around the world. Since the cash ban in India affects mostly the wealthy, they have come up with a few ways around the ban. One way is with the help, ironically, of the poorer citizens. Basically, a wealthy person trying to deposit money without triggering any red flags with a large deposit will find a poorer person (or persons) with a bank account and then put their own money into these accounts. Many times, these are people that work for the wealthy-gardeners, housekeepers, etc. One wouldn’t imagine that these employees would be willing to say no.
Another evasion method is by the use of special cash only companies such as in garment manufacturing, who will launder the money for a hefty fee, up to 50% of the total.8 So if $1 million of bills can be laundered, they can expect to receive $500,000 worth of new bills.
Also, many wealthier Indians are getting rid of their money by purchasing expensive items like Apple phones in droves with the banned bills. How is that possible if the money is banned you might ask? Simple, the retailer simply backdates the receipt to before the ban.9
It’s too early to tell, but the cash ban may be backfiring for India.
Manufacturing activity has plummeted since the ban and may cause the Indian Central Bank to cut interest rates to try and spur on growth. Goldman Sachs revised down its Q4 GDP for India to almost half the level that was the consensus among economists. So, this could be a case of “chopping off the nose to spite the face” by Modi. Further, many small businesses and the poor in rural areas are suffering. Remember, there are 600 million Indians that rely on cash because they don’t have a bank account.10
Where will demonetization happen next?
Globally, illegal money flows are estimated at $2 trillion per year.11 As long as these levels exist, there should continue to be a trend towards demonetization. Demonetization already began in the Euro Zone with the European Central Bank’s plan to stop printing 500 euro bills to combat its use by criminals.
Many believe the next shots to be fired in the War on Cash will occur right here in America. We have already seen moves by JP Morgan Chase who implemented a tax on large, uninsured deposits.12 There has been talk of doing away with the $100 bill to combat illegal activity, a moved supported by former Treasury Secretary Larry Summers.
Other emerging market countries such as Indonesia and China could see similar action, considering their economies are heavily cash-based.
The percentage of consumer transactions that use cash is virtually 100% in Indonesia and 90% in China, according to a US Funds/PWC report.13
The move towards a cashless society has also been happening around the world with the proliferation of digital currencies such as bitcoin.
A Career Fighting Fraud
If you find the fight against money laundering and other financial crimes exciting, consider a career in fraud management. There are a number of positions with the same crime fighting themes including forensic accountant, fraud investigator, special agent and tax examiner.
Forensic accountants hunt for money launderers on a constant basis. They have a very specific skillset, scrutinizing financial statements to uncover potentially fraudulent schemes. They are also trained in enhanced interrogation skills to gather information during interviews.
And while not thought of as crime fighters, compliance and operations personnel often see the first red flags or inconsistencies. Usually, they are harmless but sometimes it’s the clue that a financial crime is being hidden. Let’s not forget that the crimes of several of our Masters of Fraud members such as Nick Leeson, Jerome Kerviel and Kweku Adoboli could have been discovered by operations personnel, but were overlooked for various reasons. It was these traders prior experience working in the back office that gave them the knowledge of the systems to hide trades (often in error accounts).
Online Masters of Financial Crime Degrees
There are a number of Masters level degrees that may provide aspiring financial professionals pursue a career in fighting economic crime. An online Master’s in Financial Crime and Compliance Management degree focuses on detecting and preventing financial crimes, as well as developing and implementing policies and procedures within an organization.
This is especially critical for financial companies because these entities are 5x more likely to experience instances of money laundering than any other industry. Financial positions fighting financial crime average $85,500 according to the Association for Anti-Money Laundering Specialists.14 Improving corporate risk management should remain a top priority for the foreseeable future.