how black money works
in its simplest form black money is money on which tax is not paid to the government suppose a store accepts cash for its merchandise and does not issue receipts to its customers that store is transacting in black money as it would not pay tax on the unrecorded sales as another example consider a property buyer who purchases land valued at 200 000 if the buyer only reports 50 000 on the books and pays 150 000 under the table then there is a black money transaction 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 the black market or underground economy activities in the black market may include selling prohibited drugs gunrunning terrorism and human trafficking black market activities also involve less severe offenses such as the sale of counterfeit goods stolen credit cards or pirated versions of copyrighted material the portion of a country s income tied to black money affects the economic growth of the country black money causes financial leakage as unreported income that is not taxed causes the government to lose revenue in addition these funds rarely enter the banking system as a result it can be more difficult for legitimate small businesses and entrepreneurs to obtain loans furthermore black money causes the financial health of a nation to be underestimated it is extremely difficult to estimate the amount of black money in any economy that is not surprising given that participants in the underground economy have strong incentives to conceal their activities these unreported earnings cannot be included in a country s gross national product gnp or gross domestic product gdp thus a nation s estimates of savings consumption and other macroeconomic variables would be misleading these inaccuracies adversely affect planning and policymaking criticism of black moneyin addition to some of the clearly immoral activities such as human trafficking that are pursued to obtain black money black money itself creates issues most notably higher amounts of black money in the economy often lead to increased corruption businesses that make substantial profits in the underground economy almost necessarily have to pay law enforcement to look the other way from time to time however that leads to a corrupt police force that may move from ignoring offenses to actively participating in crimes 1benefits of black moneyblack money produces the most benefits in societies with the most oppressive laws for example many ordinary market economic transactions were illegal in the soviet union people turned to the underground economy to alleviate shortages and obtain banned goods 2 in many other cases regimes imposed price controls that made goods unobtainable or sales taxes that made them unaffordable black money provided a way to decrease the damage black money can also help to reduce the impact of systematic racism historically governments banned certain races from holding land trading securities or otherwise exercising their natural rights to engage in commerce these bans pushed some victims of discrimination into less regulated areas where they were free to earn black money special considerationsmost black money holders attempt to convert the money into legal money also known as white money there are a number of ways to do that the penalties against money laundering are often severe so legitimate businesses must be careful to avoid accidentally participating in it money laundering can be perpetrated 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 if a money launderer in the u s decides 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 can 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 cash bullion investments and cryptocurrencies 