Government agencies have to be proactive in ferreting out the names of those who may hold bank accounts abroad.
Statements by top government functionaries are usually expected to lead to clarity. However, the statement by the Central Bureau of Investigation Director on illegal money stashed abroad by Indians at the inauguration of the first Interpol Global Programme on Anti-Corruption and Asset Recovery last month has added confusion to a politically sensitive subject.
The Director made three points. First, Indians hold an estimated $500 billion of illegal money abroad. Second, Indians are the largest depositors in banks abroad. Lastly, shell companies are set up, and layered transfers made from one account to another. Funds may be transferred within hours from Singapore to Switzerland to Cayman Islands in a matter of hours as there are no boundaries in banking transactions. The Swiss have reacted to the last point by asking for evidence but there has been no official response to this query.
Tax havens
It is unclear whether the CBI or any other government agency has recently estimated the amount of funds held abroad by Indians. It is a difficult task for anyone to carry out since data are hard to come by. New theoretical advances are required to estimate this sum. The difficulty is there are 77 tax havens in the world, according to the Tax Justice Network. Switzerland is the best known and possibly the biggest but it is only one among many. We do not have an estimate of how much is held in Switzerland or in any of the other tax havens.
Stories supposedly quoting the Swiss Bankers' Association Report 2006 suggest that $1.4 trillion of Indian money is in Swiss banks and that Indians hold more funds in these banks than people of all other nationalities combined. The official Swiss agencies have denied this. Further, this writer could not find any such data in any of the Swiss Bankers' Reports from 2005 to 2008. Finally, given that the nationals of other countries have also been stashing funds abroad for a long time, it is unlikely that Indians would have more black funds in Swiss banks than all others.
The estimate of $500 billion is quite close to the figure of $462 billion disclosed by Global Financial Integrity (GFI) in November 2010 for the amount of capital that has illegally gone out of India since independence. One only need to add the flow for 2010 and 2011 to get a figure of $500 billion. If this is how the CBI has calculated the figure, it is in for trouble.
GFI has admitted that its figure is a gross underestimate of the magnitude of funds leaving the country since it does not take into account the outflow due to hawala, drug trafficking and other such activities. It only considers the mis-pricing in official trade and uses the IMF data for a limited number of countries. A new global study was commissioned in January 2012 by the Norwegian government to estimate the capital flows to tax havens. It may come up with more accurate figures on the flight of capital from India and other countries, the impact of these flows on development, and the increase in illegal activities across the world.
GFI methodology
However, this is not the only difficulty if the CBI is using the figure given by GFI. The GFI methodology does not take into account the black money that may have returned to the country. Hence, its figure is not the same as the amount of black money held abroad by Indians. It is well known that in the last 15 years, there has been round tripping by Indian businessmen who have brought back some of the black funds they had spirited abroad. The flow of capital to India through Mauritius belongs to this category, especially the money coming through the Participatory Note (PN) route.
This is not all. GFI has added to the outflow of capital from India a certain amount of interest that the money held abroad might have earned over the last 60 years. It has used the U.S. Treasury bill rate to make this calculation. This method has several problems associated with it. First, the rate of return is very low compared to what is usually earned in businesses. Thus there would be a tendency to underestimate the amount of funds held abroad. However, if some funds have come back to the country, they would not be earning a return abroad and this would overestimate the funds held there. Finally, when illegal funds are taken abroad by Indians, they use them for various purposes and do not just invest them. They may be used to finance children's education, for medical purposes, on vacations and so on.
In brief, the GFI estimate is an opportunity cost of the funds taken out of the country, not the actual figure of funds presently held abroad by Indians. The figure may give a very conservative idea of what the capital outflow has cost the country in terms of development foregone. But this is not the same as the funds held abroad that can somehow be retrieved by the government.
The CBI Director has not given any hint on how the funds held abroad may be retrieved — what methodology may be used for the purpose. Bank secrecy and the laws of tax havens come in the way of getting hard information on the black money held abroad by not only Indians but people of any nationality. Recently, the United States prosecuted the largest Swiss bank, UBS, for helping its citizens escape taxation. It fined the bank $750 million and also obtained 4,500 names of U.S. citizens with accounts in UBS.
The German government in 2007 bought a disc for €4 million from a disgruntled LGT banker, containing data on foreigners having accounts in that bank. The data are being used by the U.S., Britain, France and Germany to prosecute their citizens with accounts in LGT bank. The Indian government refused to take the data when offered but took them later under the pressure of the judiciary and the public. The French bought a disc of secret data from a former HSBC banker. The data have been offered to the Indian government as well and, apparently, prosecution has been initiated on their basis. Julian Assange has also claimed that he has been given data by a former Swiss banker, Rudolf Elmer, on bank accounts held abroad by Indians. But he has stated that presently he is not in a position to reveal the data since the Swiss government has threatened Mr. Elmer with prosecution.
The lesson is that government agencies have to be proactive in ferreting out the names of those who may hold bank accounts abroad. Further, many foreign banks are a party to the flow of funds to tax havens but data on them will not be revealed by the governments of tax havens. Only stolen data can be used to prosecute individuals. In the name of investment, foreign banks help their high net worth depositors to move funds to various jurisdictions. When the failing Fortis bank of Netherlands was taken over by the government in 2008, it was found to have 700 subsidiaries in tax havens. This is not unusual and most MNC banks in India also offer their services to their clients. Thus, tackling banking secrecy is crucial for stopping the outflow of black funds.
Two aspects
There are two aspects of the black wealth held abroad. First, the continued siphoning out of the funds from the country needs to be stopped. Secondly, what has been taken out in the past needs to be traced and brought back. For the former to happen, black income generation in the country needs to be curbed. For the latter, Indians in India who have taken their wealth out need to be brought to book. It may be argued that as those who stash their wealth abroad do so secretly and illegally, the government will not get to know the facts and, therefore, cannot act. For the same reason, the Double Taxation Avoidance Agreement (DTAA) will also not help.
While the government does not officially know how black incomes are generated and spirited out of the country, in their personal capacity, government functionaries — politicians, bureaucrats and police — know what is going on. Hawala operators and their place of operations are known to many who use their services. Does the CBI not have this information? If it does not, it is not doing its job. If it does, why has it not acted to stop hawala in the country? A real conundrum.
(The writer is Chairperson of the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.)
arunkumar1000@hotmail.com
Keywords: illegal money abroad, black money, Tax Justice Network, Indian money abroad, black wealth, Double Taxation Avoidance Agreement, Hawala, Global Financial Integrity
Aren't we crying over spilled milk here? One is sick and tired of hearing about "bringing our money back from abroad" which is evidently an impossible task.What one would like to know is what the government is doing to prevent black money generation in India. Everyone knows that one cannot sell or buy real estate without payment in cash as part of the money transaction involved. There must also be other ways of black money generation.
The US and other countries have already acted and have taken strong measures, including amending the tax code, to stop this practice. They have taken strong measures to force the Swiss Banks to give them an ongoing LIST of depositors from their country, to deal with them. As part of this settlement, The Swiss Banks have agreed to provide the list to any country that asks them. India is among a very few countries (like Namibia) who have NOT EVEN ASKED FOR THIS LIST OF THEIR depositors. Our Govt does not want to see this list, because they know who will be at the top!!.
The present Government is incapable of taking any effective steps to prosecute
those involved in the slushing out of black money and bringing the same back to the country as many bigwigs are involved in the scam. When asked to disclose the names of those persons which are already with the Government, the able Finance Minister takes shelter under the Double Taxation Agreement which prevents them from doing so. Ultimately nothing tangible will come out of half-hearted measures meant purely to hoodwink the general public. They are now fully aware of the near bankruptcy of the present Government which survives only on borrowed crutches provided by opportunistic allies whose sole aim is to promote their own interests. Eventually it is the common man, an honest tax-payer,who has to bear the brunt in the present difficult situation for no fault of his.
Excellent article. The Indian government is clearly unwilling to take a proactive position on this. We all know why. However, intense public pressure must be placed on the government to prosecute those who have transferred money illegally out of the country. It is important that at least some of the really big players are found and receive exemplary punishment. Only intense pressure on our elected representatives from the general public could change the current position where millions are getting away with crime against the nation.
Are you trying to ruin the time of ours by writting such articles? because there is no end to this political drama.we the people are main cause for this corrupted India.People of India are getting crooked by polticians since the Independence has occured.Even we are not getting galvanized by these situations and nothing revolution has came.Whenever a revolution comes from the people then only the problem gets solved.No CBI can do nothing.If CBI can tackle this situation why $500billion has been transferred from our country? Im entreating the people to woke up and think of the catastrophe and save our India before the condition gets worsen.
No Indian Government will be serious in getting back Black money stashed abroad and punishing the account holders. The only practical solution in Indian context is to encourage the account holders in bringing back the black money by voluntary disclosure tax schemes and innovative tax proposals.
Why are we so naive? Why do we bury our heads in the sand, like
ostriches? I do not mean to undermine the author's laudable effort to
spread the truth. That being said, I think it is neither rocket science
nor brain surgery - The government has no intention of bringing about
change. After all this is a society that is corrupt at the very root, &
the politicians who rule us, have stashed billions abroad. What then,
is the incentive for the government to trace, or bring back the
billions of dollars in Swiss banks?
Let us face it - no one wants to upset the apple cart & change has to
come from within. I wish I had a magic wand or a silver bullet to solve
the cancer of corruption. It might sound Utopian, but some day, who
knows? - India might wake up, there may be a giant revolution,
dishonesty in public life will vanish, and we can hold our heads high,
knowing that we are no longer one of the most corrupt countries on the
planet.
Many readers are asking the black money to be brought home since it
rightfully "ours".and to disclose the account holders name.
How can money accumulated by an individuals effort(you may not
subscribe to the means)suddenly become "ours" without any effort by
the others
That money brought back will finally end up indirectly into today's
politicians pocket or political part in due course.
Disclosing the name serves a potential source for blackmailing and no
other useful purpose except the IT.
My suggestion is why not provide sufficient incentives for voluntary
disclosure, for example allow them to deposit half of it as as Tax and
the rest to be invested in national savings scheme on his or family
members name.
why not have the best of their brains work for our finance ministry to
generate funds for our country.
I don't think this report is going to make anymore changes in the black market scenario.This is going to continue on till any serious 'actions' are taken.So who can kick start this cleansing? - the elected members.If these people themselves are involved in the dirty business,who can any one do the ferreting,not even the CBI...!
There are many ways to look at this problem. India is a corrupt country because some corrupt, dishonest, criminals here rob money and stash it away in Swiss and other banks. But how is Switzerland which is making its living out of this criminal money a clean country? That should be regarded equally corrupt, and much more so because it is institutionalized there!! There should be a sincere and complete crackdown. It is like the terror training camps, as long as they are are there, there will continue to be recruits. You have to stop recruitment as well as demolish the camps to end terrorism. Silimarly, we have to catch and punish back money hoarders, and also punish countries which are living on this evil money. Then only will this problem end.
I believe Only If International organizations puts pressure on the banks,the money can bought back. Because, given any country and any ruling party, they would hesitate to get into solid action in this issue because that would burn their own feet. Only If a third party organization puts pressure in this issue it can sorted out.
If govt. really want to get all the money in foreign banks, they
can always go with the legal processing to get the list of the
Indian accounts and catch each. But that seems a no
option for these politicians and bureaucrats.
Well thought article. The problem is that, we will never know how money is there in
these safe havens. For some reason people of India are foolish to believe that
someday someone some government will bring back the black money. That is not
going to happen. I bet with so much media focus on this issue, people who have
stationed money in Swiss banks would already have their money moved to some
other safe haven which will take another 60 years for us to learn about the haven
and act.
The feasible solution to bring back the money is to ask people to do a anonymous
tax filing and make sure no action is taken against people who bring back the
black money. This should be a good incentive for people to bring back their
money, because it would make business sense for people to invest the black
money in India and get a better ROI than park all their money in some bank which
pays them peanuts.
Indian Government has not demonstrated its sincerity in its efforts to get details of black money hoarded abroad.On the other hand it had only given enough time for the culprits to make alternate arrangements to take it elsewhere.It really pains honest tax payers
If government is sincere they could easily identify the elite,business community,politicians and bureaucrats keeping money in foreign banks.We have seen immediately after independence that many politicians and bureaucrats have kept money in foreign banks.If Hindu is sincere they could easily get information from foreign agency and from the media about the Indians holding accounts in foreign banks including the names of the relatives & children of politicians & bureaucrats.
"Extrapolation predicated on assumptions and pre-emptions rather than
on facts and figures is certain to produce results more often than not
misleading if not outright dustbin worthy". This is what I can say
about GFI so called calculations( miscalculation). But it doesn't hide
the ill efforts of Idian government to hide the names of those who have
stashed their money in Swiss banks or any tax heavens either. Recent
articles in The Hindu has revealed how pathetically our railway is
exposed for the want of wherewithal. Maintaining their sense of secrecy
I'd like to extend a secret suggestion to our leaders "If they can stop
secret outflow of money to tax heavens and work out a secret formula to
retrieve the secret money stashed in secret account they will offer
something not only to railways but will be able to prevent many PSUs
secretly endangered to be also-runs". But I'm sure they won't listen to secret advice of an Indian because secrecy of secret account holders is
more important!
Good exposure by Prof Arun Kumar.However nothing shall deliver results
without People`s Pressure. So what goes wrong in a business of Hell-Haven divide? There is nothing wrong in collective hard work, national spirit and intentions of MAJORITY to grow. Fault lies with the deliberate design and a disconnect between the wheel of production and the consumption
controlled by that RULERS.Unlike BPL the standard in India which helps
to measure poverty there is no line to regulate, limit and count the
unlimited wealth of the filthy rich.So on what basis shall CBI work ?
For more details read my article via internet title :Tax Heaven-Why
must we accept them?
Let's cut to the chase. Call a spade a spade. The thieves are the ones with the power - and there are just a few hundreds (or thousands) for the whole country of a billion and over, and honest folks do not have the means to put the thieves in jail. That is what the whole Lokayukta Movement led by the most reverent Anna Hazare - is all about. All the pious hand wringing is for nought because the robbers hold all the aces and are laughing at the feeble protests by the proletariat. The striggle of the press, of the protests by activists, and of the down trodden honest folks is on one side of the balance it is outweighed by the crores of crores controlled by thieves who are in charge of vital democratic systems. Only time will tell how the evildoers will be toppled, but all History says evildoers fall - in every single instance, and always.
I wish that Professor Kumar had discussed a little more about what the Indian laws say with respect to foreign holdings and disclosures and what India can do with Indians. For example, the US had given its taxpayers a 2011 Offshore Voluntary Disclosure Initiative and many people had disclosed their foreign holdings. Each year when they file their annual income taxes, US taxpayers have to declare if they have accounts, stocks, and other ownership interests abroad. Do Indian laws require such annual disclosures? Under the reported black money in overseas banks situation, India should jack up the penalties. Perhaps, there is need for a law that requires a summary declaration by politicians, private business people, and government officials when they apply for passports, licenses, nominations for election, and so on. Penalty for false declaration should be the confiscation of all their property and a long jail term. This suggestion may sound draconian but $1 trillion is not chicken feed!
Isn't it immaterial to spend energies, writing, debating and analyzing
that which requires robust, concentrated attention? We do not merely
need to delve deep in the nitty-gritties for arugments' sake. Can the
government even comprehend the urgency of gross negligence on their
behalf in procrastinating efforts of bringing back that which is
rightfully ours?
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