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Sundar Narayanan: Designing due diligence for India’s post-demonetization era

Prime Minister Narendra Modi demonetized all existing Indian currency notes of rupee 500 and 1,000 denominations in November last year, triggering a cash crunch, factory shut downs, unpaid wages, unrecovered debts, and never ending lines at ATMs.

But the government has at least partially met its goal of cracking down on a black-money economy that authorities said had reached a level of $10 billion.

During the first 150 days after the demonetization, the government said it uncovered $837 million of undisclosed income and seized $94 million in cash and gold.

There were 1,100 raids and 5,100 notices for high-value deposits, the government said.

The final effect of demonetization on India’s black money problem will take longer to assess. For now, however, and despite the inconveniences of demonetization, the public is mostly behind it. The governing BJP party has won big gains in recent state polls, and the stock market has been rallying.

As businesses adapt to demonetization, compliance professionals should also make adjustments.

India is still predominantly a cash driven economy and only 1 percent of Indians pay any taxes. So multinational companies need to determine if Indian partners or other third parties are subject to currency or tax related enforcement notices or inquiries, or whether they operate under the radar for undeclared income or unreported cash flows.

Due diligence by MNCs on partners and other third parties in India should always aim to identify not only their litigation history but also ongoing enforcement efforts they may be involved in.

For example, what exactly does the third-party questionnaire cover? Do questions and responses adequately deal with enforcement notices and inquiries about taxes and cash management received from regulators?

Does the due diligence cover published media searches related to the demonetization? The press sometimes mentions people and businesses that have voluntarily declared under income disclosure schemes.

Is the due diligence limited to searches of criminal enforcement actions and litigation, or does it also include tax-related litigation and currency-handling enforcement searches? These latter categories have deepened since demonitization and need to be adequately reflected by the scope of due diligence.

And finally, will the due diligence be refreshed periodically over the next year or so, to make sure new and fast-moving enforcement developments triggered by the demonetization will be fully reflected?


Sundar Narayanan is a forensic accountant from India. He currently leads the forensic services of SKP Business Consulting LLP. He can be reached at [email protected].

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