One way to expose financial deceit is to shine the spotlight of honesty on it. On Tuesday, India’s leader effectively did just that in a decision that shocked his nation. Prime Minister Narendra Modi announced that the country’s two largest currency notes could no longer be used in everyday cash transactions. The bills, worth around $7.50 and $15, could only be deposited in banks and exchanged for newly minted notes.
The move immediately put anyone with a cache of “black money” – such as criminals, tax evaders, and terrorists – on the spot. Their paper money in the denomination notes of 500 or 1,000 rupees is now only paper – unless they declare it legally.
The move also strikes a blow at counterfeiters in India. And it comes soon after Mr. Modi’s anti-corruption campaign netted more than $10 billion from a tax amnesty for anyone who came forward to declare hidden income.
His campaign is aimed at more than simply cleaning up the financial system. “Black money and corruption are the biggest obstacles in eradicating poverty,” he said Tuesday. India also loses billions in the illicit flow of money overseas.
The South Asian giant is only the latest country to withdraw large bank notes in order to curb corruption and an underground economy in which cash is not easily traceable. Singapore, for example, withdrew its largest currency, worth about $7,000, two years ago. The United States stopped distributing bills worth $500 and higher in 1969. Last spring, the European Central Bank eliminated the 500-euro bank note (worth about $550). French Finance Minister Michel Sapin said such a large note is “more used to conceal than to purchase, more used for [conducting] dishonest transactions than to allow you and I to buy something to feed ourselves.”
To fully control the cash economy and crack down on corruption, South Korea plans to eliminate paper money by 2020. It has provided strong incentives for the use of digital transactions and credit cards.
Cash is still king in much of the world. An estimated 2 billion people do not have bank accounts. But the sooner they can be included in the formal financial system, the sooner countries can curb petty bribery and similar criminal activities that rely on undetectable cash transfers.
Criminals are able to move more than $2 trillion around the world each year, according to Peter Sands, the former chief executive of Standard Chartered Bank, in a Harvard study this year. “High-value notes play little in the functioning of the legitimate economy, yet a crucial role in the underground economy,” he writes.
India’s move is one more way to make sure those using legal tender are doing so legally.