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

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