Money De-laundering

A few months back I got my kitchen remodelled. It set me back by a couple of lakhs, and the guy who did the work for me insisted that I pay him fully in cash. I, who has had all cash inflows so far via bank transfers, was thus forced to withdraw (in several iterations) from the ATM perfectly white money and then hand it over to this guy and permanently convert it to black. Now that I think about it, I overpaid.

The key fact here is that people pay to get their money laundered. If you have Rs. 100 of unaccounted money in wads of cash, you are willing to give it to someone who puts Rs. 80 in your bank (the spread has been pulled out of thin air. Don’t go after me for that) and also some documentation to prove that you legally earned the Rs. 80.

So you have this bunch of people who want their money laundered. And then there are bank-only guys like me who sometimes have to produce wads of hard cash. Why isn’t there an exchange (illegal, of course, but who’s talking legality here? I’m only talking money) where money can be laundered and people with excess bank balances (and little hard cash) can be paid for it? For example, instead of paying Rs. 200000 in hard cash to my carpenter, I would have paid (say) Rs. 160000 to someone by cheque and got a receipt for it, and that person would have paid Rs. 200000 cash to my carpenter.

What does it say about the black economy that no such exchange exists? Does it mean that the market is skewed in a way that the demand for money laundering is much larger than its supply, because of which people who would otherwise have been intermediaries doing one side of the deal themselves? Or does an exchange like this actually exist but I’m not aware of it partly because it’s underground (for obvious legal reasons) and partly I’m seen as too small a fry to be accosted by the exchanges?

Next time I pay wads of hard cash, though, I’m going to try and see if I can get a discount.

Fixed Price

The problem with a lot of touristy places is that there are no fixed prices. While this means that vendors can practice effective revenue management, it also means that it is easier for them to cartelize and take the tourists for a collective ride.

I realized this during my recent trip to Sri Lanka where you need to find someone you trust to get “access” to some place. But then it is most likely that any possible intermediary is more loyal to the service provider (due to regular contact etc) than to the tourist. So the tourist ends up being screwed no matter what.

Later that night we were to figure that even the bargained prices that we paid at the wood factory were heavily inflated, and things were available for a fourth of that price (!!) at the souvenir shop attached to our hotel in Nuwara Eliya. Where else in the world do you see prices in hotel souvenir shops being significantly lower than close to the source?

So this agent business continued through the trip. We wanted to go river rafting, so we (once again) trusted our driver to find us a nice service provider. The following day we wanted to go on a boat ride up the Bentota river, and we had the (unenviable) choice of our hotel and the driver (yet again) to serve as intermediary.

What makes matters worse is that if you go without an intermediary prices are likely to be even higher. It’s as illiquid a market as you can find. But whichever intermediary you choose you are likely to end up paying much above market values. It’s not often that you find (supposedly) altruistic intermediaries such as the Gift Shop at the Grand Hotel in Nuwara Eliya.

So I wonder what drives a market from this kind of state to one where prices are fixed, and there are menus (interestingly in Sri Lanka you don’t find menus in many places. you are charged an arbitrary sum). It is unlikely to be regulation, since smart players are always a step ahead of the regulators. It has to be some market characteristic that tips the market in favour of transparency and efficiency. I’m trying to figure out what it is.

(this suddenly reminds me of a recent attempt by an investment bank to try create a private market for shares in a private technology company. Clearly the market in shares has “tipped” in favour of transparency, for the attempt hasn’t been as successful as initially imagined)