Modus operandi for conversion of unaccounted cash during Operation Clean Money – ITD Status Report

Modus operandi for conversion of unaccounted cash during Operation Clean Money/demonetization by bullion traders/jewellers, Petrol pumps, Contractors, Shell companies etc.

Modus operandi for conversion of unaccounted cash

The Income Tax Department on the occasion of launch of Operation Clean Money Portal by Finance Minister placed Operation Clean Money Status Report of May, 2017. 

As per the said report, salient features of enforcement actions undertaken by ITD during Phase I of Operation Clean Money were as under:

  • Search actions were conducted on nearly 900 groups in which undisclosed income of Rs. 16,398 crore was admitted. Assets valued at Rs. 900 crore (including Rs. 636 crore in Cash) were seized.
  • Survey actions were conducted in 8,239 cases in which undisclosed income of Rs. 6,746 crore was detected. 
  • More than 400 cases were referred to ED/CBI and 56 persons were arrested.

Modus operandi for conversion of unaccounted cash

The enforcement actions identified modus operandi for conversion of unaccounted cash which included the following:

  • Unexplained cash deposits by bullion traders and jewellers.
  • Unexplained cash deposits by Petrol pumps.
  • Unexplained cash deposits by Traders.
  • Unexplained cash deposits by Contractors and Real Estate Developers.
  • Unexplained cash deposits by Professionals.
  • Unexplained cash deposits by Government Employees.
  • Irregularities in cooperative banks and societies.
  • Unexplained cash deposits in name of employees  Cash deposits through Shell companies.
  • Abuse of Exemptions provided for North Eastern states.

The Annexure-A to the Status Report lists out the Modus Operandi adopted for conversion of unaccounted cash as under:

Unexplained cash deposits by bullion traders and Jewellers

The first impulse to covert black money held in cash was visible in the bullion and jewelry market. Large scale conversion of unaccounted cash was done by jewellers and bullion traders through following methods:

  • Back dating of sales
  • Splitting of sale bills to avoid PAN reporting norms
  • Providing entries through bogus sales
  • Layering transactions to hide the identity of the ultimate beneficiary
  • Acceptance of advances in cash against future sales

Income Tax Department (ITD) took swift action and a large number of surveys and searches across the country were conducted on jewellers in the first week after demonetisation. ITD also, in a large number of cases, called for the stock and sales position of these entities as on 8 November, 2016 to eliminate manipulation at the end of financial year.

Case 1: Hyderabad based Jeweller
Investigations were initiated on the Group on receipt of information that cash of Rs. 97 crore had been deposited in demonetised currency notes. During investigations, the Group claimed to have received cash from various customers on 8 November, 2016 from 9:00 pm onwards towards advance for purchase of bullion. The irregularities found during search actions are as under:

• It was claimed that cash advances of Rs. 90 crore were taken on 8 November from 0900 hrs from 5,200 customers. Declaration letters were, however, furnished for only 65 persons. It was also seen that cash receipts and sale invoices for these advances were for amounts below Rs. 2 lakhs and did not have PAN details.

• Statement of the security guard on night duty was also recorded who stated that no one had visited the premises from 8:00 pm onwards on 8th November, 2016.

• The premises was under CCTV surveillance, however no footage for 8th November was available, which the Director claimed had been overwritten.

From the evidences prima facie the conclusion drawn was that the two companies had facilitated conversion of unaccounted cash of beneficiaries into bullion through making dubious claims of receipts of cash advance from 5,200 persons without any evidences. The case has been also referred to ED and CBI for appropriate action.

Case 2: Bhopal based Jewellers

Specific intelligence was gathered that in Madhya Pradesh, many persons with unaccounted cash were purchasing jewelry and the jewellers were accepting old notes. Search actions were conducted on three jewellers. The irregularities found during search actions are as under:

• One entity with annual turnover of approx. Rs. 8 crore had booked sales of more than Rs. 17 crore in first week of November, out of which Rs. 10.7 crore were booked as advance against future sale.

• Instances were detected where bills of large amount of sale were been split in multiple bills of less than 2 lakhs each.

• The names of customers on these bills were found to be partial and incomplete.

• The sequence of bill and the time of sale did not match in a coherent way. For example bill number 1001 was issued prior to bill number 1000 pointing to deliberate backdating.

The jewellers admitted undisclosed income of more than Rs.15 crore.

Case 3: Patiala based Jeweller
Survey was undertaken in this case on the basis of information on cash deposits of Rs. 11 crore made by the group on 11th November 2016 in their bank account.

Prima facie, it appeared that the books had been manipulated by the group to engage in cash sales in SBNs post 8 November, 2016. Forensic Imaging of the digital data was done that resulted in recovery of certain deleted/modified files which revealed that assesse had manipulated his sales invoices by back dating the bills for the period between 01/10/2016 to 08/11/2016. It was found that bills issued between the above period were actually generated in the system after 8/11/2016.

Unexplained cash deposits by Petrol pumps

Investigation in petrol pump cases shows unaccounted cash was deposited by petrol pumps as fictitious sale.

Case 4: Rajkot Based Petrol Pumps
Analysis of cash deposits data during demonetisation period revealed that there were more than 110 petrol pumps under Rajkot charge which had deposited cash of Rs 190 crore during demonetisation. On an average, it was found that one-fifth is the excess cash deposited in the pumps over and above the sales made in the corresponding period.

Demonetisation data was compared with average monthly sale of last year. The bank statements were also gone through for further analysis like periodicity and magnitude of cash receipts and payments. Cases, where deviations were observed beyond 25%, were selected for survey, as the government had allowed petrol pumps to accept SBN notes against sale during demonetisation. The exercise led to detection of discrepancies of more than Rs. 10 crore in 9 surveys.

Unexplained cash deposits by Traders

Several actions on traders were conducted post the announcement of the demonetisation scheme by the Government. These actions revealed that the unaccounted cash found in their possession was mostly part of their unaccounted incomes, which they were forced to deposit in bank accounts or were seized by various agencies during the demonetisation period. These were sought to be passed off as cash sales.

Case 5: Delhi Based Bitumen Trader
In case of a bitumen and jewellery trader, cash of Rs. 150 crore was deposited in the bank accounts post 8th November, 2016. These deposits were sought to be explained as cash sales by making backdated entries in Tally software, with all entries of local cash sales of exactly the same amount of Rs. 1,99,500/-. He also accepted cash in SBNs and facilitated purchase of gold post 8 November. Two major parties, to which gold was shown to be sold, were in Jaipur. A commission was sent to Jaipur, for spot verification, but no entity was found at the given addresses. The total sale to these parties was around Rs. 135 crore as per the searched person’s books of accounts. When confronted evidence from Jaipur, major partner of the firm, revised his statement and admitted that he had accepted that cash in SBNs from various parties, which he had deposited in his accounts and had in turn supplied gold bars to them in lieu of cash. He also provided names and mobile numbers of the parties to whom he had sold gold. He admitted that he made daily entries of cash received and gold bars given on paper slips, which were destroyed the same day. The names and mobile numbers were verified from the contacts of the mobile of the searched person. During the search proceedings, the person admitted Rs. 18 crore as his undisclosed income.

Case 6: Patna Based Traders
Cash was recovered from two individuals by the police. Investigations were initiated by the department post the police action. In one case, the seizure was of Rs. 31.5 lakhs from the proprietor of a business entity, as he failed to explain the source of the cash in his possession. In the second case, the individual was found to be a wholesaler of sarees. He admitted that the cash found in his possession was his undisclosed income. He was found to have not maintained any books of accounts of his business. Rs. 1.05 crore was seized from the wholesaler.

Unexplained cash deposits by Contractors and Real Estate Developers

In the case of contractors and real estate developers, cash was deposited in accounts and either shown as advances from customers or sales. In several cases, the cash was offered as undisclosed incomes, without any explanation regarding its source.

Case 7: Bangalore Based Contractors
Two major civil contractors of Bangalore who undertake state government civil contract works from irrigation and other departments, were alleged to have engaged in massive inflation of expenses and investment of unaccounted income in purchase of immovable properties. Discreet enquiries also revealed that they were helping in conversion of unaccounted cash in SBNs held by other persons post 8 November, 2016.

Search revealed that money was transferred to related entities through the banking system and subsequently received back in cash. In one premise, bank passbooks of 34 persons were found. The Managing Director of the group company accepted that these accounts were used to generate cash and the account holders were mere name-lenders. He also accepted that several bank accounts were opened in the names of subcontractors, many of whom were relatives or friends of the Directors. These bank accounts were used to withdraw cash for inadmissible and non-business expenses. A sum of Rs. 1.96 crore in SBNs, belonging to the Group, was also seized from the residential premise of a close friend of the MD of the Group.

The group also paid nearly Rs.1.3 crore in SBN to their labour on 8th November, 2016 and booked it as labour expenses. The search led to seizure of Rs. 4 crore in cash and valuables and admission of Rs. 167 crore as undisclosed income.

Unexplained cash deposits by Professionals

During investigations, several cases of deposit of unexplained cash by professionals were detected.

Case 8: Hyderabad Based Doctor
The doctor was found to have deposited more than Rs 11 crore in SBNs after 8thNovember, 2016 in three bank accounts. During questioning, the individual could not provide any document to substantiate the source of the deposits, which was later admitted as undisclosed income. Prohibitory orders were initially placed on the bank accounts, which were later lifted and a sum of Rs.7.50 Crores were seized.

Unexplained cash deposits by Government Employee

Demonetisation also forced Government employees to deposit unaccounted cash in the bank accounts

Case 9: Government Employee in Bhubaneswar
Government employee was searched on the basis of information on unexplained cash deposits into the bank accounts maintained with various banks in own name as well as in the name of his family members. Investigations also revealed that his wife, a homemaker with no ascertainable sources of income, had purchased land in Bhubaneswar by making cash payment of Rs. 53 lakhs, the sources of which could not be explained. A total cash of Rs 2.28 crores has been seized in this case. The matter has also been referred to the State Vigilance Department.

Irregularities in cooperative banks and societies

Several instances of cooperative banks and credit societies allowing its financial infrastructure for laundering of unaccounted cash were found by the Income-tax Department.

Case 10: Cooperative Bank at Alwar
Survey was conducted in the case based on a reference by the police on seizure of cash of more than Rs 1.3 crore from a vehicle carrying 3 directors of the bank. On investigations, it was found that the bank was used for conversion of personal unaccounted cash of Rs. 2 crore by the Chairman and his family. New currency notes were brought from the chest of SBI and SBBJ in the name of the cooperative bank and replaced illegally.

It was also found that the directors had cheated the Bank of crore of rupees by fraudulently obtaining loans in the names of around 90 persons, whose identities are doubtful. Discrepancies in the cash book were also found. The Registrar of Cooperatives is also conducting investigations into the transactions of the bank for financial fraud based on the reference made by the Department

Case 11: Cooperative Bank at Delhi
Search was conducted on the head office and branches of a Cooperative Bank at Delhi. The bank used demonetisation as an opportunity to earn illegal commissions for handling unexplained cash. The Chairman and his associates systematically opened benami and fraudulent accounts to launder cash for beneficiaries. More than 1200 new accounts were opened and 600 dormant accounts were made active post 8 November, 2016 in the name of third persons or name lenders or on the basis of fake IDs without KYC documents.

A total of more than Rs.120 crore was deposited in the Bank by 26 December, most of which were routed back to the beneficiaries. Preliminary verification in more than 2500 accounts with cash deposits above Rs. 1 lakh and available balance above Rs. 1 lakh has been done. Eleven Benami accounts have been identified for action under Benami Transactions (Prohibition) Act, 1988 (as amended by Benami Transactions (Prohibition) Amendment Act, 2016. Details of the case have also been shared with the CBI, the ED and the Registrar of Societies.

Unexplained cash deposits in name of employees

Various instances were found where unexplained cash was deposited in the accounts of employees to avoid detection and reporting.

Case 12: Amritsar based Company
During survey, it was found that the entity had deposited Rs. 2.5 cr. in about 700 accounts of his employees. The AGM Finance of the company admitted under oath to have deposited Rs. 2.1 crore of old currency in 780 bank accounts of the workers of the Factory without their consent or knowledge. The cash so deposited was later withdrawn from the bank using the withdrawal slips already in custody of HR staff of the company. The actual bank account holders were not aware that their accounts were being used for deposit of the cash of the company. The case has been referred to the Enforcement Directorate and the Initiating officer under the Benami Act.

Case 13: Chennai based Trust
Search operation was conducted on two trusts in Chennai based on intelligence that Chairman of the Trusts had been distributing unaccounted money in SBNs to their employees for purpose of conversion to new currency. Investigations revealed that the Trusts had planned to convert Rs. 8.18 crore of unaccounted income held in cash through its 650 employees by depositing cash in the employees’ bank accounts in sums less than Rs. 50,000/-. During interrogation, the Chairman admitted that the unaccounted cash belonging to the Trusts was kept in the lockers, which was distributed to the employees after the announcement banning the old Rs. 500 and Rs. 1000 notes was made, in order to convert them into new currencies. The money represented unaccounted anonymous donations to the Trust.

Cash deposits through Shell companies

Shell companies and associated entry operators came into sharp focus due to their actions in helping entities with unaccounted cash to convert into legal tenders.

Case 14: Kolkata based Entry Operator
The case was identified for search action on the basis of data on entry Operators. Search revealed that post 8th November, 2016 the entry operator had provided entries of Rs. 103 crore to more than 120 beneficiaries, most of which were Delhi based. Entries were provided through 198 bank accounts linked to shell companies through RTGS and cheques. The Department has prepared the cash trail of Rs. 103 crore for further action.

Case 15: Shell Company at Delhi
Investigations were initiated on the basis of information from the police following interception of a vehicle carrying cash of Rs. 3.7 crore in old currency. The carrier confessed to have deposited nearly 35 crore of cash in old denomination note in the bank since 11.11.2016. The bank accounts were opened in the name of paper companies. Cash was collected from various parties, deposited in Bank account of one such fake company, then transferred through RIGS from one company to another company’s bank account and after three- four layering, were finally deposited in the account of original owner. All these accounts were operated by a single person. This was done with active involvement of the Branch Manager and the Operation Manager in lieu of commission at the rate of 1% on the sums deposited. In this case deposits were made in the names of 3 paper companies.

The bulk cash deposit was accepted by the bank based on declarations on respective letter heads of the Proprietorship Firms, conveying that the respective cash deposits were out of the cash sales. Several anomalies were found in such declarations including declarations of separate concerns written on common letter heads in similar font, style, type of paper. The signatures appeared to have been put by same person. The declarations did not contain reference numbers or PAN details. The deposits were made on one particular day after 6:30 pm i.e. after closure of business hours. These bank accounts had no cash deposits before 8th November, 2016. The Enforcement Directorate and the CBI are also taking action in this case on a reference made by the Income-tax Department.

Abuse of Exemptions provided for North Eastern states

The tribals of five north-eastern states – Tripura, Manipur, Mizoram, Nagaland and Arunachal Pradesh are exempted from tax under Section 10 (26) of the Income Tax Act, 1961. Instances were found where the exemption was abused to deposit unaccounted cash.

Case 16: Dimapur case
Information regarding transport of large quantity of cash in a private plane to Dimapur airport was received by the department. The cash was dropped at Dimapur and the parties flew back by the aircraft to Delhi, where they were intercepted by the Air Intelligence Unit, Delhi. During subsequent questioning, the person belonging to Nagaland stated on oath that after the announcement of demonetisation on 08.11.2016, he had an arrangement with his friend to transport cash from Delhi to Dimapur. The understanding reached was that he would receive the cash in Dimapur, deposit the same in his bank account in Dimapur and return it via RTGS or in cash at a later date. The beneficiary, in this case, has admitted that Rs. 8.5 crore was transported from Hisar to Dimapur on two occasions. He has admitted it to be his undisclosed income.

Download ITD Status Report of May 2017 on Operation Clean Money Click Here >>

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