Demonetisation gave birth to new fraud schemes and the danger isn’t over. Here’s a guide to clean money.
November 8, 2016 has become a marker in India’s attempts to eradicate black money when Prime Minister Narendra Modi made the announcement to demonetise `500 and `1,000 notes as a part of legal tender in India. The stated objective was to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as to crackdown on black money in the country.
Given the apparent success of Pradhan Mantri Jan Dhan Yojna (PMJDY)which had resulted in low income households having access to banking services, it was believed that the most critical component which will determine the success of the demonetisation scheme was in place. However, the jury is still out on whether the demonetisation has achieved the objectives, as were originally envisaged. But as the famous author Malcolm Gladwell has said “the same qualities that appear to give them strength are often the sources of great weakness”, the demonetisation decision gave rise to novel ideas towards converting black money to white.
Some of the main fraud schemes in operation were:
• Routing of black money through accounts of low income groups or through fake identity accounts
• Lending was done to cash-deficit companies and these funds were used to repay their overdraft facilities for return of the funds at a discount at a future date.
• Connivance with banking officials to make the old currency notes look legitimate by recording them in dormant or multiple shell company accounts opened with them. Certain cooperative banks which were yet to be computerised and were still using physical ledger books took cash from customers to issue back dated FDs. They also issued DDs and pay orders against cash.
• Purchase of assets, especially jewellery/gold and even foreign exchange - by pre-dating multiple transactions as cash sales
Though demonetisation was introduced with the intent to stop counterfeit currency and curb black money, the ingenious fraud schemes had the potential to adversely affect the demonetisation exercise. This also forced the regulatory authorities to think out of the box. It was reported that the government and the regulatory authorities undertook measures such as roping in third party agencies to carry out mystery shopping procedures with the intent of nabbing deterring bank officials. Interestingly, incidents were reported wherein certain religious trusts also chipped in by maintaining records of their camera footages to capture details of people depositing their black money in their donation boxes, just in case the RBI required those video footages!
Now that the demonetisation exercise is over and the availability of cash has also improved in the recent month, what the Government and the regulatory authorities do next will determine the success or failure of the demonetisation exercise. Since the digital mediums are still evolving and are not yet mature, it will also open up another front for the fraudsters to attack. Government and the regulatory authorities will need to come up with innovative tactics on a continuous basis to make demonetisation a success.
There is a significant amount of data that has come to the regulatory authorities in the period during demonetisation. The ability of the regulatory ecosystem to effectively manage and analyse the data which should lead to actionable steps would finally determine whether all this effort and toil was worth it after all.
Some of the aspects that the regulatory agencies should keep in mind are:
|There is a whole treasure trove of information available with the banks and the regulatory agencies... Need to have a structured mechanism to collate, manage and sanitise the data for analytical queries.|
Data management: There is a whole treasure trove of information – though disparate in nature and from multiple sources – available with the banks and the regulatory agencies. They need to have a structured mechanism to collate, manage and sanitise the data so as to be able to execute analytical queries. Once they have put a proper data framework, they will be able to identify if they need any additional information from any other arm of the government.
Rigorous data analytics: Regulatory authorities are also turning towards modern technologies such as advanced data analytics for mining through huge and complex data sets available with the banks and the tax department. Advanced analytics are being used to discover hidden patterns and unknown correlations.
System to seek queries/explanations: For the red flags so identified during the analytics exercise, the agencies have developed an online mechanism which is used to send queries to individuals/entities as well as to upload any submissions/additional documentation that these individuals/entities need to make.
Focused Investigations: Once these submissions/additional documentation has been scrutinised, there will be some cases which will get dropped on account of the explanations provided. For the remaining cases, it will involve a detailed investigation with the support of the different regulatory agencies and potentially independent external experts.
An overall holistic approach is required to ensure that we are able to leverage the potential gains of the demonetisation exercise. The key things that will be of importance are:
Technology: Leverage technology to the maximum to be able to identify the individuals/entities who might have escaped the tax net.
Expertise: Include external experts in areas where there is a shortage of skills.
Focus: Prioritise and focus on the big fish and not the small fry.
Measured: Be measured in your approach and ensure that the innocent taxpayer is not harassed.
Agility: Speed is of essence as the entire exercise needs to be wrapped
If the regulatory ecosystem is able to make this happen, we would have a significant mark in our journey towards a clean and transparent society.