Money Laundering — Crime, Tax Aur Dhoka !!

Here I try to explain, the what, how and why of money laundering

The terms Black money and money laundering are often used interchangeably by a lot of us. Whenever we hear these terms over the news, our general thought is that it is a financial crime. These two concepts, which are perceived similarly, are in reality poles apart. Black money is simply the income on which tax has been evaded, however, the source of income is legitimate. For instance, a lot of times Landlords rent their immovable properties without paperwork and in cash. This way the rent is not taxed, GST is not applied and no TDS is deducted. The money on which they did not pay taxes becomes black money but it was not generated via an illegitimate activity. On the other hand, money laundering is a whole different process. It is an exercise where some people try to convert money generated from illegitimate sources to legitimate money, even if it means paying taxes to the government. Such money, let’s call it ‘Dirty Money’, may have been generated from extortion, human trafficking, sale of drugs, etc. All of these activities are illegal, but the owner of this money now wants to convert this money to legitimate money. This whole process is called Money ‘Laundering’.

Why do money laundering?

Some might wonder, why would these people convert their money into white. What is the advantage of this? Let’s say there is a narcotics lord in India, say Tablo Escobar Swami. Over the course of years, he has built a large empire of selling drugs. His monthly income is about INR 400–500 crores pure cash (not in stocks) and does not feature in Forbes list of the richest men in India. His daughter is getting married and he wants to gift her the most expensive car in the world, Bugatti La Voire Noire which would cost about $44.68 Mn (About INR 335 cr) in India including the import duty. He can not purchase the car directly, as it will attract a lot of attention from the public and the taxation authorities. For all of this, he needs to show that his earnings are coming from a legitimate source and not from making people high. To live his luxurious life and to give his daughter a gift, he needs to show to the world that he is a legitimate businessman via paying taxes.

Now, one can not just go to the income tax authorities and say I want to pay taxes on my income from selling drugs. You need to have a proper paper trail to show it as an income originating from a legal source. A PAN card is needed, GST registration is needed, along with a number of other proofs. The larger the scam, the more nuanced the mask needs to be. If he lands in jail, we don’t think his Bugatti would do any good. Hence, remaining out of the radar of the government authorities is a top priority.

We have till now illustrated why these unscrupulous men want to do money laundering, now lets deal with how they end up doing it.

How to do money laundering?

The businesses which have a lot of revenue in cash are used as fronts for money laundering. The average ticket size needs to be small so as to permit cash receipts. As in India, you can not have transactions worth more than 2 Lakh in Cash. Another thing to be kept in mind is that the number of transactions should be huge so that substantial cash can be converted easily. If the variable cost is lesser then it is even better, because if someone ends up shoring up revenue then he needs to shore up expenses as well. Some of these businesses could be parking lots, restaurants, and casinos.

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