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Linking Aadhaar to bank accounts is a recipe for creating benami[2] bank accounts and scaling benami bank transactions. It threatens to destroy your bank accounts and destroy the country’s banking system. It’s devastating that the integrity of banking processes is being destroyed by dividing, outsourcing and privatising processes integral to core banking so that they become the responsibility of no one.

Linking Aadhaar[1] to bank accounts is a recipe for creating benami[2] bank accounts and scaling benami bank transactions. It threatens to destroy your bank accounts and destroy the country’s banking system. It’s devastating that the integrity of banking processes is being destroyed by dividing, outsourcing and privatising processes integral to core banking so that they become the responsibility of no one.

Destroying the banking system

India’s Department of Revenue (DoR) has done it again.

On June 1, 2017 vide Notification №2/F .No. P.12011/11/2016-ES Cell-DOR it mandates the linking of every bank account with an Aadhaar number before December 31, 2017. While lawyers point out several illegalities, including the scope, of the notification of this subordinate legislation under the Prevention of Money Laundering Act (PMLA), the failure of the DoR to consistently protect national interest is unbelievable.

A few days back a co-panelist on a TV channel defended the DoR arguing that linking Aadhaar to Bank Accounts will weed out money laundering by verifying bank accounts. What my co-panelist did not say is money laundering is facilitated by creating benami accounts. It is also facilitated by benami transactions. Nor did my co-panelist explain how benami accounts happen or how benami transactions are scaled by money-launderers.

This latest notification ensures that the Trojan horse that they instilled into the banking system on January 27, 2011, will destroy the Indian economy along with the Indian banking system. As feared by the Reserve Bank of India before January 2011, Aadhaar is yet the best state sponsored enabling mechanism for money launderers to enable benami bank accounts. Aadhaar can even help the money launderer to take over your bank accounts. Aadhaar is also the enabler to scale benami transactions.

Here are just 5 ways in which linking the Aadhaar to PAN[3] or a bank account will hurt you, destroy India and, for those who care, an explanation of how Aadhaar creates benami bank accounts and scales benamitransactions.

The innocent will lose money, reputation and access to justice, dignity and livelihood

One, the innocent will lose money, reputation and access to justice, dignity and livelihood as their Aadhaar numbers can act as mules for money laundering, their subsidy and other Aadhaar enabled payments can be easily compromised, their access to their own bank accounts be denied, or they can be framed for economic offences. Helpless citizens and businesses may also find themselves at the receiving end of covert human rights violations as even their access to money and existence is disabled by deactivation or blocking of Aadhaar leaving no recourse to survival.

Linking Aadhaar to bank accounts or PAN converts India into the new tax haven for money launderers

Two, linking Aadhaar to bank accounts or PAN converts India into the new tax haven for money launderers as it becomes easy to remotely create benamiaccounts and operate benami transactions while claiming complete legitimacy. This will destroy India’s economy and governance.

Financing crime and terrorism will grow uncontrollably

Three, financing crime and terrorism will grow uncontrollably as it becomes increasingly difficult to discover, report or close down such operations. This will make it impossible to ensure national security as the rule of law is destroyed.

Corruption will increase

Four, corruption will increase as it becomes easier when proceeds will not be traceable to the corrupt. It will be increasingly difficult to restore swarajya and impossible to ensure suraiya.

Banks will not be able to contain non-performing-assets

Five, banks will not be able to contain non-performing-assets, fraud and financial misappropriation as the real users of banking services will be untraceable. The economy will be completely out of control as the black and white economies become indistinguishable.

We are in a policy vacuum as the NITI Aayog and the bureaucracy have failed to recognise the Trojan horse and protect national interest. Unless the RBI de-licenses the payments systems based on Aadhaar (AEPS) immediately and the government stays linking Aadhaar to PAN and bank accounts, our leadership will have failed to protect India from this fast colonisation of India by the private interests driving Aadhaar.

Enabling Benami Bank Accounts

Benami accounts get created when banks fail to identify the real customers who own the accounts. The Panama Papers exposed data of thousands of benami accounts created through a Panamanian law firm, Mossack Fonseca. The Panama Papers exposed one modus operandi of hiding the real owners of the assets in tax havens.

panama papers modus operandi
The use of Aadhaar as KYC for bank accounts is similar to the note from Panama Law Firm Mossack Fonseca saying “they are an honest client”

Prudent bankers recognise the importance of knowing who they bank with. It is no wonder that the RBI had warned, right from before the Trojan horse was instilled in to the RBI in 2011, that the Aadhaar enrolment process does not have due diligence. It pointed out that for Aadhaar enrolment verification is not compulsory, as confirmed by the UIDAI in the Demographic Data Standards and Verification Procedure, and does not require document based verification.

The RBI also highlighted that such use of Aadhaar as third party identification is against Prevention of Money Laundering Act, the Financial Action Task Force (FATF) and the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision and circulated to scheduled commercial banks by the RBI on November 29, 2004.

The RBI also observed that a fixed time document like the Aadhaar cannot be a Proof of Address. It further cautioned using Business Correspondents (BC), to open bank accounts or undertake banking transactions, as the vulnerability of the system has not been tested and co-mingling funds of different banks in the hands of BC’s was a major operational risk to the banks. While resisting the use of Aadhaar, the RBI also highlighted the Government’s concern about the perceived misuse of such accounts for terrorist financing.

Under pressure from the UIDAI and the Department of Revenue, Ministry of Finance, the RBI, through its circular dated January 27, 2011, allowed bank accounts to be opened exclusively on the basis of Aadhaar number. However the RBI required such accounts to be put to restrictions and be subjected to conditions and limitations prescribed for small accounts.

Not happy with the restrictions, the UIDAI pressed the RBI to lift the restrictions placed on accounts opened with Aadhaar numbers under the PMLA. On September 28, 2011, again through the Department of Revenue, the UIDAI succeeded in getting the RBI to backtrack and suspend the restrictions of the PMLA on bank accounts opened solely through Aadhaar. The UIDAI also succeeded in causing the RBI further to accept eKYC or remotely using information associated with an Aadhaar number as KYC. According to the UIDAI eKYC brings scale to the ease of onboarding customers.

To put the problem in perspective, Aadhaar enrolment was completely outsourced to private parties by the UIDAI with the sole aim of building the worlds largest biometric database. Mr. Nilekani’s UIDAI repeatedly emphasised that they merely provided a framework to issue a number and store the (unverified and unaudited) data.

RTI says Aadhaar has never been verified or audited
UIDAI admits that the Aadhaar (UID) database has never been verified or audited

No one from the UIDAI or even the government even sign the Aadhaar card that is mailed back to the enrolee. The very same organisations that were declared by the UIDAI as holding databases full of ghosts and duplicates were asked to serve as “Registrars” to the enrolment process. They were even given flexibility in the collection, retention and use of the data (including biometric) that they collected.

Without a verification and audit Aadhaar enables duplicates and ghosts
Without a verification and audit Aadhaar enables duplicates and ghosts

No one in the Aadhaar enrolment process was required to identify anyone. At best they had to merely verify documents that were submitted for enrolment. Needless to say anyone in possession of your documents could enrol with minor changes in any demographic information or with different biometrics. Field stories of enrolments are replete with descriptions of biometric jugaad including using combination of persons, use of biometric masks, biometric modifications, and other ingenious methods to maximise registrations.

According to the IT Minister Ravi Shankar Prasad, 34,000 operators who tried to make fake Aadhaar Cards have been blacklisted. Even if each operator worked for a year before being blacklisted, at about 100 cards a day amounts to over a billion cards. That is more than 95 percent of the database. The Aadhaar enrolment has been unlike that of any other identity document, easily scaling the creation of duplicate and ghost identities.

Excrept of IT Minister Ravi Shanker Prasad’s reply in Rajya Sabha on April 10, 2017
Excrept of IT Minister Ravi Shanker Prasad’s reply in Rajya Sabha on April 10, 2017

While there is widespread belief that biometric authentication at time of opening a bank account prevents benami, it ignores the field realities of mobile phone SIM cards being issued on Aadhaar photocopies and used to open bank accounts, of having remotely “downloadable” accounts, and also plain simple use of photocopies of Aadhaar or parallel Aadhaar databases to open bank accounts. With Aadhaar, banks do not have any trace of the real customer. The real customer is simply masked by a benami owner using an Aadhaar number.
Even your Aadhaar can be used, without your knowledge, by a perpetrator to open multiple accounts in order to use it to collect bribes, park black money, or siphon your subsidies. In the eyes of law enforcement, if these accounts are discovered, you will be the criminal.

benami money laundering aadhaar bank account
Is Aadhaar the new Panama?

To compound the problem, UIDAI has no liability for benami bank accounts opened with Aadhaar. After the introduction of the Aadhaar to open bank accounts, the accounts and deposits have doubled in 5 years. No one knows who really controls these accounts.

Growth of bank accounts and deposits in India
Growth of bank accounts and deposits in India

Enabling Benami transactions

Even when it had no mandate to develop banking platforms, in 2009, the UIDAI signed an MoU with the National Payments Corporation of India (NPCI), a non government company, to develop an Aadhaar Enabled Payment System (AEPS). In this MoU the UIDAI has no responsibility for your banking transactions and the NPCI has no obligation to the RBI. The payment system uses the Aadhaar linked to a bank account as a financial address to do electronic money transfers from one Aadhaar number to another.

Company data for NPCI
Company data for NPCI

Unless an Aadhaar is linked to the account, the AEPS cannot access the bank account. Linking a PAN to the Aadhaar will have the same effect as linking the Aadhaar to a bank account as the PAN is already linked to the bank account. Such accounts become Aadhaar enabled. Aadhaar enabled bank accounts are ready to be used by the AEPS for Aadhaar to Aadhaar money transfers.

Linking an Aadhaar to a bank account is done through a process called as “seeding” an Aadhaar number to a bank account. After receiving the Aadhaar number from the customer, the bank uploads such numbers’ into a “NPCI mapper” or a repository of Aadhaar numbers and Institution Identification Number (IIN) numbers used for the purpose of routing transactions to the destination banks. The IIN is a unique 6-digit number issued by NPCI to the participating bank. If you or anyone else seed your Aadhaar with another bank account, the NPCI mapper is overwritten with the new banks’ IIN. Money transferred to an Aadhaar number, using the Aadhaar Enabled Payment System, gets transferred to the bank account linked to the Aadhaar number at the branch recognised by the IIN.

A money launderer can transfer money to an account linked to an alternate IIN and then re-seed the NPCI’s mapper with the original IIN for the Aadhaar number, completely wiping out any trace of money to the alternate IIN. Like transactions of bearer shares in Panama, such money transfers becomes no different from a hawala[4] transaction between real parties who remain anonymous or benami[5].

Your Aadhaar number can be used to facilitate such benami money transfers. If these money transfers linked to your Aadhaar number are detected by investigation officers or tax authorities, you, not the real operator will be held on suspicion of economic offences.

The NPCI’s idea of Aadhaar to Aadhaar banking itself is flawed. It is surprising if the RBI has licensed this payment system under the Payment and Settlements Act.

All money is ultimately stored in bank accounts and not in the name of a person. Nowhere in the world does one transfer money to a person, you transfer it to a persons account. Money transfers to and from a bank account makes every money transfer traceable from source to destination making money laundering difficult, if not impossible.

Hawala schemes make money transfers untraceable by eliminating the bank accounts. Money transfers that, like the hawala, are based on the premise that you do not share an account number, with someone transferring money to you, are inherently flawed in auditability as they wipe out the money trail.

The idea of a mapper, as used by NPCI’s AEPS, does not allow for instructions from sender but relies on periodic update of IIN in the NPCI’s table mapping Aadhaar numbers from banks. As multiple banks have to upload the Aadhaar numbers seeded with accounts held by them, this cannot guarantee desired results.

Perhaps the worst aspect of the mapper is that it slices the business process and outsources parts. This destroys the responsibility of the payment system from any single party as was in the case of NEFT or RTGS. Neither the NPCI, the UIDAI or the banks are responsible in such money transfers. They merely provide “look-up” services. In this system, a single compromised or rogue bank branch, or the perpetuator’s ability to exploit a good one, is enough to siphon off subsidy, park black money or take bribes.

Such money transfers would be difficult, if not impossible, to trace without a whistleblower. A few cases have been reported that suggest the large scale play of this scenario already. For example more than 40,000 erroneous transfers were reported through AEPS in DBT transfers meant as part of drought relief for farmers in Karnataka. The government allegedly blamed the banks for failure to seed the correct Aadhaar numbers with the beneficiaries.

Governments across India had been using the RBI’s own payment system, the NEFT or RTGS, to undertake electronic money transfers. This is also evidenced by the fact that Aadhaar Leaks has exposed that bank details are already present in every record of the leaked data. There is absolutely no reason to switch public payments from NEFT to AEPS, run by a non-government company.

The replacement of a time tested standard of electronic money transfers under government regulation by a non-standard payment system run by a non-government company raises several serious questions of national and public interest, propriety and possible conflicts of interest.

Preventing disaster

If the government and the Supreme Court implement the wisdom of 7 orders of the Supreme Court of India on the use of Aadhaar, they can yet save the country from disaster resulting from the colonisation of India by the new East India Companies or the private interests driving Aadhaar.

In its first order of September 23, 2011 the Supreme Court had indicated that “no person should suffer for not getting the Aadhaar card inspite of the fact that some authority had issued a circular making it mandatory and when any person applies to get the Aadhaar Card voluntarily”.

On August 11, 2015, the 3 member bench restricted the use of Aadhaar and indicated that it may not be used for any other purpose.

On October 15, 2015, a 5 member bench led by the Chief Justice had emphasised that “the Aadhaar card Scheme is purely voluntary and it cannot be made mandatory till the matter is finally decided by this Court”. It had restricted the voluntary use of Aadhaar to public distribution system (PDS) Scheme, the liquefied petroleum gas (LPG) distribution scheme, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), National Social Assistance Programme (Old Age Pensions, Widow Pensions, Disability Pensions), Prime Minister’s Jan Dhan Yojana (PMJDY) and Employees’ Provident Fund Organisation (EPFO).

In the meantime, following Mahatma Gandhi’s footsteps and refusing to link Aadhaar to anything may be the only option left for you.

On 10 January 1908 Mahatma Gandhi was arrested for the first time in South Africa for refusing to carry an obligatory identity document card commonly known as the ‘pass’.

[1] Aadhaar is a 12 digit random number assigned by India’s Unique Identification Authority of India to unaudited and unverified demographic and biometric information submitted by private enrollers.
[2] Accounts and transactions undertaken using a ghost or a duplicate identity are called benami.
[3] Permanent Account Number or PAN is a number used to track financial transactions and file income tax returns in India.
[4] Hawala is an alternative or parallel remittance system that works outside formal banking systems.
[5] This was first highlighted in September 2014 in http://www.moneylife.in/article/how-aadhaar-linkage-can-destroy-banks/38736.html

 

Originally published here.

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As soon as the demonetisation of Rs.500 and Rs.1000 notes was announced, I had said that it was a forced and public funded "bailout" of banks. This article examines news reports from the last year and explains how I arrived at the conclusion.

Please note: I am not an economist or banker or accountant or even particularly good with money or calculations. As a result, almost all the conclusions in this article are actually quoted from news reports and analysis. I have merely strung them together. I could still be wrong, feel free to argue in the comments.

As soon as the demonetisation of Rs.500 and Rs.1000 notes was announced, I had said that it was a forced and public funded "bailout" of banks. This is a phenomenon polite people call recapitalization unless the government literally dumps money into banks.

This view has not changed. But many are skeptical, saying that excessive money with banks is not good for them as they will have to lend it out in order to earn from it. That is true, and they will have to lower interests and give out more loans and such. However, to those following the news, I'm simply presenting various things that happened in the year before the demonetisation. Particularly with regard to the Non Performing Assets - NPAs. Too many NPAs and the banks won't be able to function. On the other hand... pay attention here: The bank with the largest number of NPAs - State Bank of India - doesn't seem to be in as much crisis as several others - say... Indian Overseas Bank - guess why? Because with that size come plenty of other performing assets as well as deposits keeping the show going.

For the record, it isn't the first time that the government has forced the country into actions that end up putting money in banks. The Jan Dhan Yojana was the first. It doesn't seem to have yielded much. Then came the DBTL, where in spite of the Supreme Court saying that citizens must not be deprived of their rights because of not having an Aadhaar, a convoluted scheme was imposed on them where the gas subsidies provided for the state would be provided as deposits into their bank accounts as opposed to people paying less for gas while buying it. Small amounts at a time, but it would end up totaling to a good amount of money belonging to citizens getting deposited into the banks by the government. People were free to withdraw it, but at least some of it would hopefully remain as deposited, just like some Jan Dhan accounts would indeed see use even if most remained empty. But these are old stories.

The NPAs of banks had increased to an alarming level by the end of the December quarter, last year. Then governor of RBI, Raghuram Rajan had been on the case of banks for NPAs for a while, and took a firm view of the matter, giving the banks until March 2017 to deal with their NPAs. Banks were to start flagging and resolving NPAs and restructured loans and by March, skeletons were tumbling out of banking closets and it was clear that the banks had been underplaying NPAs in order to show better results to investors (presumably). With the pressure on from the RBI, the banks started turning the heat on defaulters. It is no secret that it is banks with large corporate loans struggling the worst with NPAs, and I can only speculate that people who knew people who knew people had a lot of money at stake. To quote from the linked article:

RBI had conducted an asset quality review of Indian banks and found many accounts that were showing stress were required to be classified as non-performing. But since banks were not classifying those accounts as NPA, the banking regulator directed lenders to classify them as sub-standard and provide accordingly. Sub-standard assets attract 15-20 per cent provisioning as compared to five per cent provisioning requirement in standard assets.

RBI had asked the banks to complete the exercise of classifying assets as NPA in the third and fourth quarter.

As a result, many banks including the likes of Bank of Baroda, IDBI Bank, Bank of India suffered record losses in the Oct-Dec quarter. Since the remaining accounts (those which were not classified as NPA in Q3), need to be classified as NPA in Q4, losses could her mount. Bankers said this has prompted the banks to call the management of the defaulting companies and ask them to make payments, which will help the lenders avoid further losses.

Incidentally, this is around the time when Narendra Modi claims that planning for demonetisation started (although there doesn't seem to be much evidence of planning going by the manner in which it has been carried out).

Soon after this began noises of Raghuram Rajan not continuing as the governor of RBI after his tenure was complete. What happened behind scenes is anyone's guess and rumors and claims out in public range from Raghuram Rajan not wanting to continue to the government not wanting him to continue. Regardless, he was succeeded by Urjit Patel, who headed GSPC in Modi's Gujarat when GSPC took loans to the tune of 20,000 crore and basically had nothing to show for them, with no gas ever being produced. His closeness to Ambani (who profited majorly from the GSPC mess) as well as Jignesh Patel is well known. So, given Modi's preference for complete incompetence in area where competence is expected being a requisite for appointments, who better than Urjit Patel to head RBI while it was overseeing banks reducing NPAs?

Unlike Raghuram Rajan's approach, where the RBI would support banks in dealing with bad loans, Urjit Patel was of the view that "bad banks" take over the debt. It is unclear what happened of that approach or whether and what efforts continued toward NPAs, but they continued to rise. Attempts by Modi (and one wonders why Modi) to get Indian state owned firms to take over floundering defaulting companies (and their debt) failed a month before demonetisation was declared by Modi. To quote from the link:

India's government is pushing state-owned steel, power and shipping firms to take over assets of private companies that have defaulted on loans, but faces resistance from them, leaving it scrambling to clear a $135 billion pile of stressed loans from banks' books.

[...]

Last month, steel ministry officials met with Modi to outline measures to revive a sector reeling under bad loans and cheap Chinese imports. Days later, in a renewed push, Finance Minister Arun Jaitley met with top lenders, including State Bank of India (SBI.NS) and ICICI Bank (ICBK.NS), steel and shipping ministry officials and some state-owned companies.

He gave the state-owned firms a list of 23 troubled steel, power and shipping companies with bad loans totaling $14.5 billion, according to government officials and minutes of the meeting seen by Reuters.

The state-owned firms were "encouraged" to buy at least one asset and take a minority stake in a company on the list.

The banks needed lots of money and fast, or many of them being Public Sector Banks with the government owning more than half of them, it would stress the government for funds. One wonders what was wrong with turning the screws on NPAs harder. The banks needed money and fast.

How could this be achieved? Well, how about if all the people in India put most of the money they had into banks and left most of it there?

What followed, with demonetisation seems to be a harebrained scheme to get most of the cash with the country into banks. This is how not only do the banks not have enough cash planned and are not even in a position to provide enough cash in the near future, we have increasing noises about "cashless" transactions being an intent behind the demonetisation. So the money gets transferred from account to account, but remains with the banks instead of returning to the people with limits withdrawn and notes available again.

Then with demonetisation with banks bloated with funds, some of the staggering NPAs were "written off" to reduce their burden and free the money the banks would have to provision for the bad loans. Any taxes the government got would be a bonus (but given the expenses and waivers of demonetisation, I doubt these were the real motive).

Added feedback from someone who knows more about money than me: While the increased deposits will allow the banks to lend more, earn more, lower interest rates, etc, the interest earned by the banks and taxes to the government will no doubt be useful toward recapitalizing the banks. As will various confiscations of deposits be.

So now the thoughtless demonetisation with it unending new rules being pulled out of hats has happened. Banks have a different problem. Too much cash. And the methods to deal with it won't necessarily result in big profits for them. What they will do to existing loans with the economy and thus borrowers stressed far worse is anyone's guess.

Finally, how do I know that this is really a bank bailout and not a coincidence? Well, now that things are going south with the demonetisation, the usual process of protecting Modi from the consequences of his own action has already begun. From being "Freedom at Midnight" - Modi's project planned meticulously and in complete and necessary secrecy for 10 months, the story now is that the RBI and Finance Ministry presented the demonetisation plan to Modi in a manner that "turning down the scheme was out of the question". And guess why (emphasis mine):

Prime Minister Narendra Modi is working “more than ten hours a day” just on ensuring that the 8 November money measures announced by him ensure a smooth landing for the economy rather than turbulence. This despite the fact that the plan actually owed its origin to the Reserve Bank of India and the Ministry of Finance, who persuaded the PM to go forward with an idea which will affect (and has affected) over a billion citizens of this country. Prime Minister Modi showed moral courage in coming forward and accepting ownership of the currency swap scheme announced on 8 November, and has since then publicly backed every twist and turn in that policy by the monetary and fiscal authorities. Senior officials say “Prime Minister Modi was presented with the issue in such a way that turning down the scheme was out of the question”. Through the plan, concerned officials wished to “shield those in high positions in banks across the country from the consequences of the crony-oriented lending that they had been doing, specially since 2006”, the year when Narasimha Rao’s liberalisation policy was fully substituted by the UPA into a faux Nehruvian economic policy that combined Fabian socialism with Wall Street ways. “Officials argued that a windfall of up to Rs 550,000 crore would flow to the banks through the enforced extinguishing of currency notes issued by the RBI, and that this would recapitalise several banks that were in effect bankrupt, thereby allowing them to lend again”. The Prime Minister was assured that “steps would be taken to ensure that the common man suffered minimal discomfort” and that “the informal economy would accelerate its absorption into the formal without jobs being affected”. It needs to be mentioned that it is the formal sector that is responsible for not repaying bank loans of a value crossing Rs 750,000 crore, which will be several times the value of tax evasion by the informal sector. NPAs are being written off by banks at an accelerating pace over the past six years, with still more businesses declaring themselves unviable by the month.

I rest my case.

3

There is an abundance of claims by the government both about the virtues of demonetisation as well as the duration of the "inconvenience" people have to go through. Here is my attempt to debunk some of them.

To begin with, there is a slight problem. The objectives of the demonetisation have not been officially and explicitly listed anywhere, it appears, so one must draw them based on the Prime Minister's speech and whatever various people have said would be a "good" result from the demonetisation. These include fighting black money, fake currency notes, reducing corruption, bringing most of the money in the country into the banking system, generating more taxes and improving economy. Other non-stated objectives, widely pointed out of course, would be the ongoing bank bailout using private funds of citizens (recapitalizing, it is called in polite circles) and strangling the financial resources and thus limiting power while contesting elections for political opponents.

Let us look at these one by one.

Fighting black money

There seems to be no consensus on how much black money exactly is in the form of currency notes. An estimated 6% of all illegitimate income recovered has been in the form of currency, which does not appear to be a lot in comparison with the losses to the economy from the shock of the demonetisation. How much has been recovered is unclear. There are several reported instances of notes being confiscated. However how much of it is black money and how much is (or gets explained away as) legitimate income remains to be seen. There are reports of the news of the demonetisation already been leaked to the wealthy well in time and is supported by increased sales of gold before the demonetisation being announced. Additionally, as economists are repeatedly cautioning, black money is a result of the nature of the transaction rather than a quality of the money, so the same notes can be black money or white depending on the legality of the transaction and whether it is declared in taxes.

Supporters of the government, in their attempts to silence all criticism of demonetisation have increasingly taken to demonising cash transactions or the possession of cash itself as black money, which is a dangerous perspective in a country where 95% of the transactions happen in cash. They might as well call India a black money country. This view is incorrect and obfuscates facts. However, there is no shortage of reports of the old notes themselves being traded for a lesser value creating an overnight black market ranging from a single note to crores being laundered through agents. Between the advance warning and the laundering a large amount of the already small percentage of black money is likely to have safely returned to its owners without changing color.

A small percentage of people may declare their money and choose to pay tax on it, but this is not likely to be a large amount given that amounts over 2.5 lakh will be flagged for Income Tax, and those that cannot be explained as legitimate income are likely to incur a 200% fine in addition to the tax on the deposit (though there currently does not appear to be a provision under the law), essentially leaving only 10% with the owner of the money. Another percentage of the black money is likely to be confiscated from suspicious deposits in banks and through raids. Given that the Income Tax Department will have to show that this money is not legitimate income, the percentage of money likely to be confiscated will be small compared with all deposits flagged, if for no reason then for the sheer number of accounts that will be flagged requiring manpower to investigate and process. No doubt mass mailing of notices will happen and is already reported to have started.

However, there appear to be plenty of ways for people to launder money, including big and connected agents close to the government, false sales of gold, purchase of gold, backdated fixed deposits in banks, interest free loans, advance salaries for several months to employees and more. The government itself offered the victims of the Kanpur train tragedy compensation in the old and illegal notes. It is anyone's guess whether these amounts were originally withdrawn as legal notes and swapped with illegal ones before giving the victims, since the notes not being legal tender cannot be legally paid out by the government after demonetisation.

But the biggest blow to claims of black money being hindered by #demonetisation is the abundance of people named as having offshore accounts, notorious for having black money, cronies who have benefited from disproportionate favors from Modi led governments (state before center) and of course the noble denizens of the black money rich Bollywood. If all these people support demonetisation, they are clearly not worried about their black money being in trouble.

Fighting fake currency notes

The new notes introduced have no additional security features. Existing notes are already counterfeited, so it does not seem like demonetisation will prevent fake currency to any large degree. In fact, within days of the new notes being released, there were instances of photocopies of the notes being used to defraud people, including, in one instance by school children. The garish color and relatively flimsy paper of the new 2000 rupee notes make even real notes appear to be dubious in comparison with regular currency notes. How soon or late counterfeiters start producing fake notes is anyone's guess, but there is absolutely nothing to indicate that it won't happen. We certainly seem to have failed in intercepting their distribution, or fake notes would not be a reason to demonetise.

The hasty nature of the demonetisation causing the panic and overburdening the banks has not allowed banks to adequately examine deposits to catch and refuse fake notes, so existing fake notes are likely to have been knowingly or unknowingly legitimized with government approved real currency through deposits and exchanges.

Reducing corruption

This seems to be mostly fiction, as even in this short duration, a bribe of four lakhs was paid using the new 2,000 rupee notes, that at the time of being caught had not even been released for a week. Reducing corruption cannot be achieved by changing currency. It would require better law enforcement and deterrents. The government machinery being one of the biggest causes of corruption in the country on every level, the government making a claim of reducing corruption with the simple changing of notes sounds mostly like the fox claiming to provide security for the poultry. Indeed in recent days, we have seen allegations backed by documents that implicate the Prime Minister himself in receiving over 55 crores from the Sahara group when he was the Chief Minister of Gujarat.

Another set of serious allegations come from several quarters, notably a BJP MLA himself, indicating that businessmen close to the ruling party had advance notice of the demonetisation and had already cleared their black money. A third allegation is that people close to the president of BJP, Amit Shah himself are exchanging large sums of black money for a fat commission. This is by Yatin Oza, a former BJP MLA who also claims to have videos backing his accusation as well as makes some realistic challenges about the richest people not featuring among those with large deposits of money into banks. Large quantities of 2,000 rupee notes seen with various people support these accusations, as no one can legally get a bundle of 2,000 rupee notes at this point due to limitations on withdrawal. None of these allegations have so far been denied by the Prime Minster or Amit Shah.

While the country lines up for access to its own cash, a large number of loans by high profile defaulters have been written off. A green fine worth 200 crore levied on Adani has been waived. BJP MLA from Rohtak has publicly reassured black money owners that they need not worry and that Haryana Chief Minister Khattar and Modi were with them. And all this is just within the last few days without needing any extensive searches through history. It is unclear why corruption would reduce under a leadership like this.

Routing most money through the banking system

How much money remains in the banking system is a matter of debate once the cash demonetised is fully replaced. Opinions are split on this. Right now people have no choice, since they aren't allowed to withdraw much cash, and banks are often even failing to provide the allowed limits of cash given the severe cash crunch that is likely to last for 4 - 6 months by most estimates. When they do have choice, it is quite possible that a lot of the cash will be withdrawn right back out. Also, given the availability of the 2,000 rupee notes and their relatively low utility for transactions, the only purpose they could realistically be used in any quantity appears to be hoarding. Even while limited cash withdrawals are allowed, there have been several instances of bundles of 2,000 rupees being seen with people including office bearers of the BJP as well as being used to pay bribes. The instances described in the black money laundering also would remain outside the banking system. So it is entirely possible that while the country struggles for cash, a lot of the illegitimate money may still remain out of the system, merely converted to new notes.

In the meanwhile, there seems to be some evidence for the misuse of Jan Dhan accounts (and indeed it could be done with other accounts too) for parking funds. So money entering the banking system may not necessarily be in a manner desired. My suspicion is also that if there are corrupt bank employees, money could be deposited into the bank accounts of people who aren't even aware that their account is being used for laundering. Such money could probably be recovered by forging signatures on withdrawal slips or misuse of debit cards if the person whose account is misused is known to the launderer and trusts them. There seems to be evidence of this happening as well. Such money would fly right out of the banking system once scrutiny was reduced and if caught, would implicate a complete innocent.

The large number of Jan Dhan accounts lying unused and thus likely to not be monitored by owners are particularly a concern, as they have been suspected to be misused for hawala transations in the past.

Improving collection of taxes

While there will be increased collection of taxes, there are easier ways of doing this with far less loss to the economy. Namely tax reforms, reducing corruption in the tax system and robust enforcement. As of now, about 1% of India's population pays taxes. Given the widespread poverty even with an absurdly low poverty line, how much this number can be realistically expected to rise is anyone's guess. The economic stagnation will also result in fewer taxes being collected because of lost jobs, wages, business losses and devalued goods, even if more people temporarily seem to be on the radar.

Recapitalizing banks

Banks will be recapitalized, loans will be easier to get, interest rates will be lowered... are the expected outcomes from demonetisation. I am no expert on these matters, but given the kind of slowdown the economy is seeing, there will also be reduced deposits, transactions, people digging into savings and businesses collapsing, taking their loans down the drain with them. There is speculation that low interest loans will encourage rebuilding of the economy. No economist of note seems optimistic that it will outstrip the shrinking already set into motion. At best it is put as a possibility in the long run, all things going well. All things don't appear to be going well, given that it will be months before there is any liquidity worth mentioning for businesses. What advantage will evolve in the long run remains to be seen.

Preventing terror financing

This seems to be a popular reason on TV as well as supporters of the government. Modi himself referred to it in his speech. However, going by evidence so far, it does not make sense. Manohar Parrikar hurried to claimsuccess as a halt in stone pelting incidents in Kashmir after demonetisation. This echoes a popular belief within the ranks of the BJP leadership and supporters - that the stone pelting incidents in Kashmir are not spontaneous protests, but well organized and funded with black money. However, this couldn't be farther from the truth. Apart from demonetisation having triggered stone pelting on banks in other parts of the country, the stone pelting in Kashmir had actually reduced by October - as per the J&K Home department data (BJP itself is a part of the J&K government) - well before demonetisation and there have been incidents of stone pelting after the demonetisation as well, though congruent with the slower frequency. Furthermore, Kashmir actually saw the least disruption to daily life and order as a result of demonetisation in the country - this is attributed to the penetration of banking to even remote parts of Kashmir as compared with the rest of the country.

Furthermore, the most counterfeited currency in the world is the dollar and it is also the one most likely to be used by international terrorists for financing, yet demonetisation has not seemed to be a feasible deterrent to any such use if it happens. In comparison, Indian currency has far more limited use - within India and Nepal alone and is even less likely to be used. Several people have pointed out that there is no reason why terrorists wouldn't use online banking and electronic transfers, given that they could be accomplished with fake identities, and being caught for taxes is unlikely to bother those willing to brave the consequences of being caught for terrorism (there may be the potential to dispute this using some jokes on taxes here).

Attack on finances of other political parties

One would expect to see a lot more agitation among political parties if their finances were truly disrupted. And it would have been possible for the BJP to disrupt them quite thoroughly if it had chosen to implement transparency in political funding as well. However, BJP has not done that - quite likely as a result of it being the party with the largest amounts of unaccounted funding in the country at present. Consequently, the other parties are merely opposing the BJP for politics as well as the sheer disastrous nature of the demonetisation. There seem to be no indications of alarm for their own well being.

There have been no instances of black money being found with rival parties or politicans so far. In fact, so far the few instances of large amounts of cash being found as currency notes have all been from the BJP itself. The reason for this likely is that political parties being allowed to accept funds in cash as well as not provide details for donations under 20,000 rupees, it is a routine practice for parties to even show larger amounts of black money as several donations of smaller amounts. Far from being cornered, rival parties would likely be able to comfortably change old notes for new ones, including the potential of laundering black money to white for politicians belonging to the party.

It is unclear what advantage, if any the demonetisation will end up giving BJP in comparison with rivals when measured against the tremendous inconvenience, losses and worse caused to voters.

This post will be updated with links to all the claims and quotes in a couple of days when I get some time. Till then, you could probably google the references up if you need them.