Black Money: Political Will Missing

[This is the third article in the series on black money by the author. The other two articles, first published in The Tribune and The Hindu respectively, were reproduced in this journal’s July 30, 2011 issue (“Tacking Black Economy: SC Takes Control from Government”) and October 15, 2011 issue (“The Cost of the Black Economy”) with due acknowledgement.]

The government’s intention of tackling either the problem of black economy or bringing back money stashed abroad is suspect. The money stashed abroad by the corrupt businessmen, politicians and others could be a staggering few trillion dollars. If retrieved, it could transform the country. The public has understood this and is agitated about it.

It is hard to estimate the sums lying abroad since there are 77 tax havens where the corrupt keep their money. While Switzerland is the best known and possibly the biggest of them, it is very likely that a lot of money from there has been moved to other tax havens of more recent origin due to the pressure being brought on it by the advanced nations.

If the figure of $ 1.4 trillion dollars in Swiss accounts is correct, then the total in all tax havens would certainly be a multiple of that. However, this figure is not to be found in the source (Swiss Banker’s Association report) that is often quoted. Further, much of the money is kept in false names (benami) or via shell companies so that the real owner is hard to trace. Finally, if one is in danger of being caught one can turn into an NRI to escape the clutches.

In November last, the Global Financial Integrity Report estimated that India has lost $ 462 billion dollars since Independence due to illicit flows.

Global Fight Against Tax Evasion

WORLD leaders have pledged to take action, including sanctions, against non-cooperative jurisdictions, including tax havens, using information from the OECD.

The following are details on concessions some countries with strict laws protecting bank privacy have made amid pressure from the developed nations.

Agreed to relax its strict bank secrecy rules and cooperate more on tax evasion. It would embrace standards for tax cooperation and exchange of information set by OECD, meaning more information on suspected tax evaders will be shared with other countries.

• Will not drop bank secrecy altogether and will only pass on information following detailed requests on individual cases from other countries. The government said it was seeking a fair transition for its bank clients to the new regime and was seeking a possible tax amnesty for existing clients.

• It has also signed bilateral agreements with other states that will give them access to Swiss bank accounts in specific instances where it has found clear evidence of tax fraud.

• Switzerland is the world’s largest offshore financial centre and manages an estimated $2.2 trillion or roughly one third of the world’s offshore wealth.

The island at the southern tip of Malaysia agreed to OECD standards at the beginning of March and said it would amend tax laws in the middle of the year to bring them into line with proposed OECD measures.

Like Switzerland, Singapore is not classified as a “tax haven” by the OECD, but has been named on the OECD “grey list”.

Says it will start tax talks with Britain on more cooperation to fight tax cheats and encourage voluntary disclosure of its bank clients’ untaxed money.

• It has also agreed to relax its strict bank secrecy law by committing to OECD standards on tax transparency and data exchange. It does not plan to move to automatic exchange of information and will retain bank secrecy but be more co-operative with other tax authorities when requested.

• It has agreed to cooperate on tax evasion with the United States.

• Until recently banking laws permitted banks to issue numbered accounts, but new regulations require them to know who all account holders are.
Says it will lift banking secrecy in cases when required to do so by accords on interchange of tax data and will pass a law.

• The move was in accordance with the government’s policy instituted in 2005 to be removed from the OECD’s list of tax havens. Austria has offered to relax bank secrecy in some tax evasion cases and said it would abide by OECD rules by cooperating on sharing information on foreign savers with other countries on a case-by-case basis, but not automatically.

• The country’s Constitution allows strict banking secrecy, though Austrian banks require the identification of anyone depositing over $ 50,000. Access to information on accounts is provided on request to a government producing evidence that the account holder is involved in a criminal investigation. —Reuters

First, this figure is a gross under-estimate since it leaves out many of the forms of drain of savings from the economy like hawala. Secondly, it is the “opportunity cost” to the economy and not the actual sum lying abroad. It includes the interest income that potentially would have been earned on the savings but that may not be the case since these sums may have been partly consumed or moved to other forms of investments. Thus, one can only guess how much Indian savings are lying abroad in banks.

Bofors got Buried

CAN these savings be identified and brought back? Take the case of Bofors where illegal payments were moved through shell companies. Such money is moved through six layers so that the actual beneficiary cannot be traced unless one of the intermediaries is caught and the beans are spilled. The trail disappeared after the second layer.

In the Bofors case if Win Chaddha or Quattrocchi had squealed, the final beneficiaries could have been traced. But due to the involvement of the top leadership, roadblocks to investigations were put up. For instance, Union Cabinet Minister Solanki chose to resign rather than reveal on whose behalf he had passed on a chit to the Swiss Minister to stall the case.

The government conveniently claims that it does not have specific information pertaining to individuals. It also pleads that foreign governments ask for such information to reveal the details of bank accounts of individuals. The governments of tax havens depend on such opacity to carry on with their highly profitable business of being bankers of illicit funds.

Some of the advanced countries have tax havens in their jurisdiction like Britain has Jersey Island. Further, some of the biggest global banks provide conduits for the “high net worth individuals” to transfer their illicit funds via their subsidiaries in tax havens whose task is it to facilitate these movements.

Three factors prevent the cleaning up of this corrupt global financial system. First, the clout of the rich countries hosting tax havens. Secondly, the clout of the financial system which can threaten to move funds out of a country that goes against its interest. And lastly, the reluctance of the leaders of governments (especially the developing world) who use these banks for siphoning out their illegal funds abroad.

The impasse can be broken if the problem is turned on its head. The black savings taken abroad are generated in India from the black economy which is now 50 per cent of the GDP (at current levels Rs 38 lakh crores generated per annum). Of this, a part is consumed (say, 50 per cent) and possibly 10 per cent (about Rs 3.8 lakh crores) is siphoned abroad. It is this sum that has been accumulating abroad. A part of this is being round-tripped back to India through the Mauritius route and foreign institutional investors (FIIs) and as FDI in the last 15 years. The facility of round-tripping was deliberately provided by the government (like an amnesty scheme) and has encouraged more black income generation in the country.

Be that as it may, most of the black savings are circulating in the country and not abroad. The former must be five times more than the latter. Not that we should not try to recover the wealth lying abroad, but why not tap the illegal wealth lying in India itself? In a sense, while the issue of black wealth held abroad is emotive, it is also a diversionary one—focussing attention away from the main issue.

If black income generation is tackled in the country, then its outflow will decline. Further, if those generating black incomes are caught in India, they could be forced to reveal what they hold abroad. Even if they have been clever and the government is not able to lay its hand on full information, it would have caught the bulk of the money escaping national development.

Further, it would be easier to pressurize Indian nationals to get information than forcing sovereign governments to yield information they are reluctant to reveal. It could obviate the need to investigate abroad or frame complicated new laws.

Government Not Clueless

IS the government totally clueless about black income generation in the country? Not so. Intelligence agencies have a lot of information through their sources and by tapping phones. If lobbyist Niira Radia’s tapes are anything to go by, there is a lot of information there.

But, presently, the information is not acted upon since the entire elite class will get implicated and the system could collapse if the full facts come out. In brief, information exists in the system but it is treated as private information used for blackmail and not used as public information to clean up the system.

The Apex Court is then correct in distrusting the government’s intentions with regard to tackling the black economy. For instance, the Hasan Ali and Liechtenstein disc cases started in 2007 but little was done until the public pressure mounted in 2010.

In the US, prosecutions in the Madoff case ($ 50 billion) or the Rajaratnam case were completed within a few months. In contrast, in the Satyam case against Raju, the courts are yet to act. The Indian courts have often taken the prosecuting agencies to task for spoiling the cases, but with little effect. The courts are also partly responsible for the situation. Not only are corruption cases coming up against the judiciary, justice is delayed, emboldening the wrong doers.

The creation of one SIT by the Supreme Court will not solve the problem of black economy or bring back the black savings held abroad but it could increase deterrence. The composition of the SIT is such that it could force the intelligence agencies to use the data lying with them to act against black income generators.

Most of the ruling elite could be implicated if the black economy is effectively tackled. The problem is then one of generating political will to act but courts cannot help in that.

(Courtesy: The Hindu)

The author is the Chairperson, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is the author of the book, The Black Economy in India.