Black Money

What is 'Black Money'

Black money is money which is 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 that purchases land valued for $200,000 in 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. Through these portals, drug trafficking, weapons trading, terrorism, prostitution, selling counterfeit or stolen goods such as credit cards, and selling pirated versions of copyrighted items such as software and musical recordings are traded.

The portion of a country’s income that is tied to its black economy affects 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 hardly enter the banking system, money that could be used by banks to fund small business owners and entrepreneurs and, hence, to stimulate the economy, is hidden, stifling an economy. In addition, black money underestimates the financial health of a nation. Since unreported economy is apparently excluded from the official records of the Gross National Product (GNP), the estimates of savings and consumption of nations to the national income and measurement of other macroeconomic variables would be biased and misleading for accurate policy making and planning considerations.

Most black money holders attempt to convert the money into legal money, also known as white money. This is typically done through money laundering. Money laundering can be attempted in a number of ways. For example, consider a consumer pays the sales tax on a retail good, but does not actually purchase the merchandise. If he receives a sale 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 his 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 and disclosure is required. For example, a money launderer in the US may decide to send $20,000 through a hawala dealer to a recipient in India. The exchange rate agreed on 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 little to no tax 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.

Black Money is also the name of a television series hosted by Lowell Bergman that explores the secret world of bribery in international business.