You may be aware that the Government of India demonetised the highest two denomination bills of INR1000/- and INR500/- on 8th November 2016. Whilst, the usage of demonetisation as a tool to fight corruption and money laundering is debatable, the Indian case
study, as per a Reserve Bank of India memo released on 11th August 2017 mentions that an estimated
INR2.8 to INR 4.3 Trillion flowed incrementally (money kept outside the banking system) into the banking system. Circa INR64=1-USD.
There are costs associated to demonetisation and that includes loss of jobs in the unorganised sector. On 10th August 2017, media reported that the dividend paid by Reserve Bank of India dropped very significantly and one of the causes for the drop idemonetisation.
There are also other costs such as slowdown of economic activity, drop in productivity (disruptive) that need to be taken into consideration. The estimation of these costs are not easy.
On balance, bearing in mind FATF (www.fatf.org) recommendations, Demonetisation is not a Risk based AML-CTF approach. It has been used a few time by countries fighting Very High Inflation and the value of the domestic currency
is severely eroded. India has managed to pull through the first 8-months of demonetisation pretty well. The core elements (risk based approach) in the war against Money Laundering & Financing of terrorism are (a) Transparency, Accountability and Audit of
Political Funding and functioning of political parties (b) Trade based laundering & Organised Crime (c) Accountability of Gateway keepers i.e. Accountants&Auditors, Lawyers, Registrars (companies, charities, properties and others) (d) Accountability of Regulators
- Insider Trading, Conflict of Interest (e) Minimising the use of Anonymous (including bearer instruments and crypt currencies) assets in the economy. (Demonetisation has helped in shifting the focus on digital payments).
Money Laundering and Financing of Terrorism are intertwined. Laundered funds flows through the weakest channel. The twins risks are Real and Present danger for all of us.
Towards a Safer World.....kannan