AS Indians struggle with the chaos caused by last month’s sudden banning of their 500 and 1,000 rupee notes, money-laundering networks are spreading across the country, seizing on a new market in helping people turn their cash hoards into legal tender.

    While people have until year-end to deposit old notes in their bank accounts, the government has said it will scrutinize large cash deposits and money with undeclared origins — and will tax or penalize depositors. That’s created a scramble for ways to turn so-called black money, the local term for cash that has evaded taxation, into white.

    Agents offering to launder money are using creative means, including flying banned cash by the planeload to northeastern states exempt from restrictions as well as connecting people to high-turnover businesses that can deem old cash as revenue, keep a portion of it, and return the rest, according to people involved in the networks. Premiums range from 10 percent to 50 percent, depending on the difficulty, they say. At least one property brokerage is offering to arrange the sale of apartments using banned money in an upscale suburb of Mumbai that’s popular with Bollywood movie stars.

    While the government has been working to close loopholes — which Prime Minister Narendra Modi decried as people’s “illegal means to save their ill-gotten wealth” in a radio address last week — new ones are opening even faster. So far, the policy aimed at reducing the scale of the black economy and bringing more people into the tax net is, in the short term, leading to just the reverse: money laundering, tax avoidance, and new opportunities for existing organized crime, the evolution of the long-standing hawala money transfer system, and the start of new illicit networks.

    “The whales and sharks will break out of this net easily and find a way to pump their money back into system through organized networks,” said C.H. Venkatachalam, general secretary of the All India Bank Employees Association, a union representing 500,000 bank personnel. “It is not easy to cull out the black money from India’s economy, and the real big players are tough to touch.”

    The rise of underground networks illustrates the challenge Modi faces in trying to stamp out entrenched corruption in a country where cash accounts for 98 percent of consumer transactions — and raises the prospect that he’ll pay a steep political price for a move that threw India into chaos.

    Money laundering networks promise to deliver clean cash by routing it through India’s hinterlands. One method relies on high turnover businesses, such as trading houses or manufacturing operations, which report cash revenue to the government. With their sales disrupted by millions of Indians’ sudden inability to access cash, these businesses can make up the shortfalls by accepting old cash from money laundering networks, calling it revenue, and then returning a portion — typically 50 percent of the total — in new notes.

    Ashok from Mumbai, who didn’t want to disclose his full name due to the illegality of the transaction, said that a lawyer he contacted after the Nov. 8 cash ban put him in touch with a cash reliant business in the state of Rajasthan, which has operations in both garment manufacturing and jewelry. He plans to give the business 200 million rupees (US$2.9 million) worth of banned notes he obtained from selling property, he said, and expects to get just 100 million back in brand new notes. (SD-Agencies)