What is 'Black Money'

Black money is money earned through any illegal activity controlled by country regulations. Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed. Recipients of black money must hide it, spend it only in the underground economy or attempt to give it the appearance of legitimacy through money laundering.

BREAKING DOWN 'Black Money'

In its simplest form, black money is money on which tax is not paid to the government. A store that accepts cash for its merchandise and does not issue receipts to its customers will be transacting in black money since it would not pay tax on the unaccounted sales. Furthermore, a property buyer who purchases land valued at $200,000 from which $50,000 is reported on the books and $150,000 is paid under the table to the seller, will have transacted in black money worth $150,000. The sellers in both examples have earned money from legal sources but evaded taxes.

The most common source of black money is illegal means through the black market or underground economy, such as drug trafficking, weapons trading, terrorism, prostitution, selling counterfeit or stolen goods such as credit cards, or selling pirated versions of copyrighted items such as software and musical recordings.

The portion of a country’s income that is tied to its black economy affects the economic growth of the country. Black economy constitutes a financial leakage since tax income from unreported earnings is not received by the government, thereby, serving as a loss of revenue to the government. In addition, since these funds rarely enter the banking system, economies are stifled, as money remains hidden that otherwise could be used by banks to stimulate the economy by funding small business owners and entrepreneurs. In addition, black money causes the financial health of a nation to be underestimated. Since unreported earnings cannot be included in the gross national product (GNP), a nation's estimates of savings, consumption and other macroeconomic variables would be biased and misleading for accurate use in policy making and planning.

Most black money holders attempt to convert the money into legal money, also known as white money. This is typically done through money laundering, which can be attempted in a number of ways. For example, consider a consumer who pays the sales tax on retail goods, but does not actually purchase the merchandise. If he receives a sales receipt and is reimbursed for the price of the goods, the reimbursement is considered black money. The seller counters this effect by selling the merchandise to another customer who purchases the item, but does not receive a receipt for this purchase.

Money laundering can also be perpetuated using the hawala system of transactions. The hawala system is an informal and cheap method of transferring money from one region to another without any actual money movement and without the use of banks. It operates on codes and contacts, and no paperwork or disclosure is required. For example, a money launderer in the U.S. may decide to send $20,000 through a hawala dealer to a recipient in India. The exchange rate agreed upon will be fixed at a significantly higher rate than the official rate.

Tax havens, such as Switzerland, offer anonymity to money launderers due to the lax policies on funds deposited in their countries. Other outlets for black money include real estate, jewelry, informal and cash economies, bullion investments, etc.

It is almost impossible to estimate the amount of black money in any economy. For this reason, it is not included in the GDP of a country.

RELATED TERMS
  1. Black Box Accounting

    Black box accounting is a method to obscure financial reporting ...
  2. Black Thursday

    Black Thursday is the name for Thursday, Oct. 24, 1929, when ...
  3. Money Laundering

    Money laundering is the process of creating the appearance that ...
  4. Underground Economy

    The underground economy describes illegal economic transactions ...
  5. Black Swan

    A black swan is an event or occurrence that deviates beyond what ...
  6. October Effect

    The October effect is a theory that stocks tend to decline during ...
Related Articles
  1. Insights

    The Mechanics Of The Black Market

    Black markets will continue to exist as long as we have regulations and taxes. Discover how they work.
  2. Insights

    The Big Business Of Black Markets

    Black markets are alive and kicking in all corners of the world, sometimes in plain view. And they are big business.
  3. Small Business

    Understanding Money Laundering

    The process of creating the appearance that large amounts of money obtained from serious crimes actually originated from a legitimate source.
  4. Insights

    Black Friday Sales Figures: Fact and Fiction

    Retailers are eager to cash in on the all-important holiday shopping season. But what exactly should investors make of the ensuing sales figures?
  5. Insights

    5 Best States for Black Friday Shopping

    These states have great deals on your day-after-Thanksgiving purchases. The secret? No – or lower – sales taxes.
  6. Investing

    What's Anti-Money Laundering?

    Anti-money laundering involves the laws and regulations designed to prevent criminals from generating income through illegal activities.
  7. Insights

    3 Recent Money Laundering Scandals

    The market for laundering money has been estimated to be as high as $500 billion annually. Here are some recent investigations.
  8. Financial Advisor

    How African-American Savers Are Changing

    Although African Americans are still somewhat hesitant when it comes to retirement planning and investing in the stock market, that habit is changing.
  9. Investing

    Here's What Target Has Planned for Black Friday

    The Halloween decorations have barely been put away, and major retailers are gearing up for Christmas. But even though many have already starting offering specials and promotions, Black Friday ...
RELATED FAQS
  1. How is the stock market affected by Thanksgiving and Black Friday?

    Thanksgiving and Black Friday sales numbers are considered to be important indicators for stock market activity throughout ... Read Answer >>
  2. What methods are used to launder money?

    Learn about the methods that criminals use when they are looking to launder money. Many different methods are used, and they ... Read Answer >>
  3. What is the difference between fiat money and representative money?

    Learn the main differences between fiat money and representative money. Differences include actual physical currency and ... Read Answer >>
  4. How Central Banks Influence Money Supply

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. Learn more ... Read Answer >>
  5. What happens when M2 money supply grows faster than the overall economy?

    Find out what happens if the total supply of money and money substitutes expands at a faster rate than the productive output ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center