The Black Money Myth Part 4 :Swiss Banks !

A big motorcade comes crawling through alpine roads and mountains and stops in front of a heritage looking mansion in a secret Swiss town....a fat guy with hat and sunglasses comes out from a limo and enters the building in the protection of 4-5 guards and vanishes into a "vault " .The secrecy is supreme and this guy only operates his vault with a single number combination..no questions asked.....sounds familiar ? Yes then either you are watching too many Hollywood mystery movies or trusting some of our joker politicians or "yoga gurus" ( ! ) who made you believe that India's billions of dollars worth illegitimate money is "stashed away" in Swiss Banks ! EVERY opposition party in India has cursed EVERY ruling government of not "bringing back" "swiss bank me pada hua kala paisa " ( Black money stashed in Swiss banks ).Today's ruling party of India went one step ahead in their election campaign that if each penny stashed in Swiss Banks would come back to India,every Indian will get Rs 15 lakh credit in their bank accounts...!!! How childish ! BJP used it as political stunt and now Congress is asking BJP when would they "bring swiss money back " !! :-p

Image Courtesy : Swiss Banking Antiques

Let's first understand why Swiss Banks are " fabled" as Global money havens!

Switzerland as a country has been a stable economy in last 50 + years with neither major wars (including second world war which was fought on their soils as well )  or communal tensions affecting them  nor having government instability issues either .Such economies are very few in the world and they also have strict privacy laws which governs their banking system .So the truth is ..yes..Switzerland has been a safe place for super rich and super corrupt alike to keep their money as a hedge against uncertainty in the home country . But that does not mean these politicians and super rich keep loads of 500 /1000 Rs notes or even USD/CHF/EUR currency in bank lockers in Swiss banks !I have been telling the principle from day one when I started writing this series on black money : " The money has a value only so far it can buy you goods or services OR can grow your returns " ! A stashed currency bundle in bank locker is NOT money and can become a waste paper overnight ..like we have seen during last week when demonetization was announced for old high denomination notes .

So what is done with Swiss accounts ?

First : You can not send "PHYSICAL" money abroad and deposit in these accounts.I mean you can but its very difficult and risky . Every country and customs law normally prevents you to carry physical currency beyond a limit.Most countries ask you to declare anything excess of USD 10,000 in cash or equivalent .So "Trucks full of black money" can not physically move across the international borders .People talk about then sending through  hawala syndicates but ignorant and super excited commoners in us fail to understand when even to deposit Rs 50,000 in cash in a third world country like India needs a PAN card,how can a corrupt politician deposit "truck loads of black money" across the counter to these banks who are governed by some of the best banking laws in the world  and follow best practices which are then becoming the benchmarks across the world !

So how money goes there then ? ...

The only way to send the money to Swiss bank is via international wire transfer.And to do that your money first has to be in a bank account somewhere  !Then only you can do wire transfer .Now can these corrupt politicians/businessmen  actually walk to nearest SBI/ICICI/HDFC counter,deposit 1000 Crore Indian currency and ask them ,"Bhaiyaa,Jara is Swiss Account me transfer karva dena ? " (Bro,can you pls transfer this money to my swiss account ? ).The answer is a big NO ! Then how the money Goes there ? To understand this we have to understand how global trade is done !

There are many countries/Islands across the world who allow anyone to set up a company WITHOUT doing any physical business like manufacturing or trading ! These companies are called "Shell Companies " .And this is legally allowed in THAT Country !Remember "Panama Papers " ?Cayman Islands,Barbados,Bahamas and many such islands/countries  offer this facility.

So anyone wants to send money abroad first have to establish a genuine business in home country,show that this genuine business which IMPORTS from this "shell entity " by under invoicing and over invoicing game ! Say you have a factory and you  buy a machine from a UK Firm which costs 50000 Pounds ! This company will not give you a fake invoice of higher value because of UK Laws .So what you do is your OWN shell company is say Dubai buys the same machine at GBP 50 K but sells the same to YOUR OWN Indian entity at GBP 300 K ! So you actually imported the goods worth GBP 50 K but remitted money worth GBP 300 K to the shell company  .This shell company then uses various international tax loopholes to get this money to Swiss Banks !

So basically all this money is "WHITE " !

So what do they do with all this money ?

Now this is very interesting. As Swiss economy is a developed economy ,the interest rates are very low.So the money lying there AGAIN first comes to a nation like Mauritius,pays tax in that country which is far lesser than India and then this money is INVESTED in India via FDI !India as DTAA (Double Taxation Avoidance Treaty ) with Mauritius and hence all such money coming into India is not taxed ! So this money comes as WHITE Money !

Another way to bring money in India is showing EXPORT of the software ! India is anyway known for this right ?So this Shell company in Mauritius /Bahamas/Cayman Islands/Panama/Cyprus IMPORTS software from India ..a blank CD or a movie CD is shipped out by following ALL customs paperwork and money is credited back to Indian "SOFTWARE" firm for the software exports ! Now this can not be challenged by authorities as many times software can also be deleivered by digital means !Also who knows whats inside the CD or DVD which is shipped !So for a blank DVD shipped to Cyprus,you can get even USD 500 K back and pay taxes here as "money received by exporting proprietary software "  ..+ various government schemes for promoting IT exports out of India ! :-) Amazing isn't it !

Yes there ARE cash and Hawala transactions and no one is denying the same.But the way they say 25 Lakh Crore and all in Swiss banks is STUPID !!!

So the summary is don't trust the politicians who fooled you in past (BJP) and present (Congress) who claim to have "billions of black money stashed in Swiss Banks " ..Just look around yourself...the latest flyover /road may have been already built through the SAME money which "came in via FDI " or the "Entrepreneur of the year" who just received the award for "Software Exports" may have already brought in the SAME money back to India :-)

The Black Money Myth : Part 3 : Real Estate !Big Fish is Through ?

Ok...Now that you have read my Part 1 and Part 2 of Black money myths ..(If not please read them on the same blog you or on ),let us discuss one more point which is always debated on whether the big fish who already have invested their money in real estate will face any pinch or it is only the commoner which will suffer who has to stand in line at the bank to exchange the demonetised currency  !Even in my own friend circle there are critics who feel that big black money sharks will not face any heat as "They don't keep notes at home " and "all money is in real estate already man ! " :-)

Let's understand how the black money is "invested" ( ! )  in real estate at the first place  .

1.When a builder launches a project,he has to first buy land from the landowner and this payment is depending on the city/locality normally is paid in 40 to 50 % cash.The agreement is still done at government ready reckoner rate and thus the black money is generated in the hands of the landowner.Now as I explained in part 1 ,this money is actually used by the landowner in economy to say buy gold for his daughter's marriage or buy some expensive clothes/white goods and so on.So the money was black,tax was not paid on it BUT it still got used in the economy somewhere in smaller denominations for REAL exchange of trade (Goods or services ) .So other than tax input ,this money came in circulation and economy could gain from it.

2.The builder also pays a bribe to local municipal officer and he also uses it to buy things for his family ( as explained in part 1 ..so not going in details ).Money STILL came in the economy as the government babu who accepted the bribe has no use of notes stashed at home if he can't spend them and get anything in return ( WHICH is THE CASE today with demonetised notes lying at their homes ;-) ) .But most of the money came in circulation and economy could gain from it..Interior decorators,wedding planners,travel companies,gold traders,tailors,electronic and white good manufacturers and so many guys got this money in their books and MAY  have already paid taxes on it thought it was given in cash to them by this babu !

Image Credit :Deccan Chronicle 

3.Now comes the third part of "big fish " and " bad guys" and "corrupt politicians " and so on :-) Now typically no black money shark invests in the property as completed units /flats as these transactions are still tracked by the way of property registration .So unless he finds a super close confidante proxy ( benami ) guy who has legitimate white income papers,he will not go in for registering Flat No. 402,sea facing with modular kitchen :-) These all are us middle class dreams to own a flat ..instead these "big guys" with "black" money strike a deal with the builder at a per square feet rate .So the selling rate is say INR 22,000/sq.feet ,this guys buys FSI of say 10,000 Sq.Feet @ Rs 6000/S    Q.Feet up front .

This is all paid in cash to the developer as "share holding" ( ! ) in the upcoming project.The developer uses this money again to buy building material,pay labour,do initial marketing expenses.So most money comes in the economy again .

4.Once the project is launched and middle class people like you and me go to purchase a flat,shady builder would ask us 30 -40 % component in black .He will do the agreement @ 12000 Rs /sq .feet with you and show that as his white income.Now he is left with extra Rs 10000 which he took in cash from you.The "bad guy" gets paid back Rs 8000 /SQ.Feet from this cash and builder keeps Rs 2000 as his cash income per sq.feet !

The "bad guy" makes cool 40 % return on his capital given in cash and builder generates black money as well.
5.Now please read carefully..the "skeptics" in you who say ,this "demonetisation" won't bring black money back as it is already "invested" in real estate...THINK how this "invested" money now can be made free again ?Because of the government regulations and tightening cash supply,all cash is in banks today .The majority of cash circulating in the market is waste paper ...So the "bad guy" who made 40 % returns in cash can't use it anymore....he is screwed..and even if he is not taken his money out yet from a project,he anyway can not "show" any asset in the upcoming project in his balance sheet as all transaction was in black.
So effectively the free cash is gone and now even if the builder wants to sell the asset to people like you and me who have white income,we will not be able to withdraw loads of cash anymore from our accounts in near future at least and won't be able to pay the builder.So he has to lower prices in the near term at least.

So with this brilliant move by government,even if you see common men and women suffering standing in serpentine lines in front of banks,make no mistake ..the "bad guys" "who already have blown up their money in real estate" / " who don't keep money at home..are they fools or what " are ALSO affected big time .

Unless our "cash" economy again generates enough Rs 2000 and Rs 500 notes in next 5-10 years,the "black" economy will be under severe pressure.With government announcing that the new high denomination notes will be in controlled supply mode,this becomes more difficult that we will again see same black market emerging again.

RIP Old Currency : What Next ? (The Black Money Myth Part 2 )

Ok...so those of you who are reading this post....please take some time to first read part 1 which I published in 2014 .The link can be found here 

Earlier this week Indian Government demonetized the old currency notes of Rs 500 and Rs 1000 in a surprise move and this has indeed far lasting impact on the fight against the black money.

Assuming you read my post (part 1 ),and by now you know that when the cash stashed away by evading tax still has a value of legal tender then this money is indeed used again in economy by some way .I had given the example of builders and jewelers there.

Now with recent move,this very cash which is lying with "tax evaders " is worthless overnight...This cash can't be SPENT on anything as no one will accept it and hence it will be out of circulation. Liquidity at stake !The only option is to deposit this money in bank and the come out open with source of income for many ,which is difficult as the window provided by government for voluntary disclosure of the income has been already closed and now depositing money will attract lot of questions from Income Tax.

(Image Credit : Indian CEO )

Here are my predictions on what would happen now :

1.As liquidity is low in market,it will not be easy for builders and govt babus to ask for cash in black for real estate or in bribes respectively.So for next 6 months at least till the liquidity situation improves,we will see all real estate transaction and government work getting slower .

2.The safe havens like Gold and Silver will see upward moment for sometime ,then go down and be stagnated .

3.Real estate and land prices will come down as no one would be able to match the "black" component of the property prices quoted.Legal white money will flow.

4.Stock market MAY see increased inflows as that remains a "legal" way of investing surplus money as bank deposit rates will be downwards .Banks will get adequate money in banking system and they won't need to lure investors with higher interest.

5.Government is introducing new bank notes of Rs 2000,Rs 500 and latest news is even Rs 1000 again.Many people ask what the logic is.In every debate post currency notes demonetisation , the economy "pundits " keep on repeating that reprinting new 500 and 2000 notes is not correct as high value currency notes are used for black cash stashing .Examples are given about USD and EUR that how US and the EU stopped printing any bank note greater than the face value of 100 each .But what they conveniently ignore is purchasing parity of the currency! Ignoring the Forex rates which are not real indicator of "value " of the currency,the simple purchasing parity comparison suggests that USD 100 can buy same amount of goods in US as that of almost Rs 1000 in India ! (+/- 10 % ) .

So for Indian economy which is still predominantly cash driven we need at least Rs 500 note !Try going to a vegetable market today and buy veggies and fruits for 2 days and Rs 500 gone !So rather than comparing how US and EU have highest note of 100 face value of local currency ,think practical and welcome then new currency notes !
Rs 2000 note seems to be overkill but Rs 500 note is absolutely needed !And as government promised,the supply of this currency will be tightly controlled and many people will stop accepting these notes anyway fearing that the same government may repeat the demonetisation act AGAIN in near future :-)

Government did mention that though they are facing criticism on this move to get new high value notes,they will control the supply in floating currency market...let's hope they do that .

Then what should a common investor and middle class taxpayer like you and me do :

1.Stay calm ! Forwarding whatsapp messages of Income Tax raids and how cash deposits are tracked won't help as anyway we have NOTHING to do with it !

2.Don't exit stock market if you are invested through SIPs.This is the time to buy...remember 2008 mayhem ?People who stayed invested and bought more are kings !

3.Gold is dead ! Come out of your "Indian" habit of "INVESTING " ( ! ) in Jewellery ....Jewellery is emotional piece..chances are you will NEVER sell that necklace you bought for your wife on your 10 th anniversary no matter how much trouble you would be in,.your money is locked FOREVER  .If you want gold exposure buy ETF s !

4.Learn to use digital currency/plastic money more and more AND teach your parents/family to use as well..gone are the days when you will go to market with "cash ki gaddi " (stash ) and buy things..today even subjeewala and autowalla accept digital payments like PayTM/Mobikwik et all.

5.If you INDEED have some unaccounted cash due to some property transaction/gift/loan received and no records kept properly for the transaction,please consult your CA and come clean on this in  your next IT return.No point in trying to hide the skeletons in the cupboard .They will come out tumbling some day .It's better to be honest up front than get caught later and justify .