Rs 200 crore unearthed in new notes and no one knows where it came from

The Income Tax Department, the Central Bureau of Investigation, the Enforcement Directorate, and other investigative agencies, have unearthed over Rs 200 crore in new currency notes from businessmen, hawala operators, and even some politicians, since the intensive crackdown on cash hoarders began in the aftermath of demonetization.

According to media reports, so far, 586 such searches have been conducted by the I-T department which has found Rs 2,900 crore in old and new cash, and gold.

While the government and the agencies tighten the noose around cash hoarders, three pertinent questions arise:

(a) How did so much new currency find its way out of the system in bulk amid tight cash withdrawal, exchange limits and vigilance? 

(b) Are the bundles discrete or in sequence?

(c) Is the new cash unearthed in these raids really that big an issue?

The Narendra Modi-led BJP government decommissioned the use of high denomination notes from November 8 midnight, removing 86% currency (in value terms) amounting to nearly Rs 14 lakh crore in Rs 500 and Rs 1,000 notes overnight. Against this, Rs 4.3 lakh has been released back into the system, only about 30% of the de-legalised amount, which means the cash crunch is far from over. 

Former Finance Minister P Chidambaram while taking a dig at the government on demonetization, recently said, "I cannot get a Rs 2,000 note. How did crores in Rs 2,000 notes find their way to individuals being raided all over the country?" 

DNA tried to get in touch with several banks to seek answers but all of them refused to comment. One bank, whose representative wished to remain anonymous, said, "We don't know how it happens; if we did, we would have plugged it." Others refrained, either saying that they were not the right ones to comment, or that they wouldn't be able to answer the question correctly. 

DNA spoke to an ex-banker of a public sector bank who didn't wish to be named either. 

"If the Rs 2,000 notes are discrete, it indicates an individual may have deployed 100, or even 1,000 people to stand in a bank queue to get his/ her cash converted in exchange for a commission. This would make up a bundle of new Rs 2,000 notes with a random series," the person said.

There were several incidents that came to light in the days that followed demonetization where individuals used proxies to exchange their illicit wealth. 

However, if the bundles are in a sequence, it would mean they came from within a bank directly, the banker said. "It indicates that people inside the banking system have been conniving and helping out these hoarders." 

A banking analyst, also on the condition of anonymity, echoed his views. "There are loopholes within the system and in the new rules, which are being exploited. Bankers are working in connivance with certain individuals to help them out. Such activities are generally carried out at the branch level; there is no way it can happen without the knowledge of the banking manager,"  the analyst said. 

It would be possible for the investigative agencies to run the series of the bundles through RBI's records to ascertain which banks or, more specifically, branches were involved in helping out the individuals. 

A senior special assistant of the Reserve Bank of India (RBI) was arrested in Bengaluru by the CBI on November 13 for his alleged involvement in currency exchange. Axis Bank has suspended 23 officials, three of its managers were arrested; HDFC sacked four employees including a branch manager, while two of its officials were booked; an official of Oriental Bank of Commerce was arrested and two officials of Syndicate Bank were questioned for facilitating an exchange of old notes into legal tenders after demonetization. 

KC Chakrabarty, former RBI deputy governor, holds a contrarian view: “In a country of 125 million people, if Rs 4 lakh crore of new currency is injected, Rs 200 crore held in cash is not a significant amount.” Indians tend to hoard cash whether it was before or after demonetization, he said. However, as the I-T department continues its raids, the amount may go further up in the coming days.  “There is no law in the country that prevents individuals from holding cash,” he told DNA.

Which means, holding that cash is not a criminal activity unless proven that it was accumulated by illegal means, such as stealing, drug money, or is undeclared income, he said. He urged that each incident should be treated on a case-to-case basis, and not as undeclared or illicit money unless proven. 

About the presence of the new Rs 2,000 notes in the raided cash, he said, “People will always try to hoard cash or any other commodity if it is in short supply. The government has created a situation of cash shortage in the country by demonetizing these bank notes, which will only push people to commit crimes to accumulate cash."

The demonetization exercise was unnecessary and doesn’t serve any purpose, Chakrabarty said. "It should be the responsibility of the government to create an environment where people are deterred from committing crimes and not the inverse."