Taking the lid off illicit financial flows

The Pandora Papers have only highlighted the need for concerted steps to alter the global financial architecture

October 13, 2021 12:02 am | Updated 07:38 am IST

International black currency units on dappled background

International black currency units on dappled background

The Pandora Papers , published on October 3, once again expose the illegal activities of the rich and the mighty across the world. The Pandora Papers investigation is “the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries”. The International Consortium of Investigative Journalists (ICIJ) has researched and analysed the approximately 12 million documents in order to unravel the functioning of the global financial architecture which helps illicit financial flows, in turn enabling the rich to throw a cloak over their incomes and activities.

Given the complexity of the tax laws and the loopholes available, some of the deft moves may be strictly legal, but not necessarily morally justified. The ICIJ says that while some of the files date to the 1970s, most of those it reviewed were created between 1996 and 2020. The ICIJ has also said that the “data trove covers more than 330 politicians and 130 Forbes billionaires, as well as celebrities... drug dealers, royal family members and leaders of religious groups around the world”.


History of leaked data

Since at least 2008, files indicating the manipulations by the rich have been stolen from financial institutions. In 2017, the Paradise Papers were leaked out mostly from the more than 100-year-old offshore law firm, Appleby, which operates globally. In 2016, the Panama Papers were obtained by hacking the server of the Panamanian financial firm, Mossack Fonseca. In these exposés, the British Virgin Island (BVI) figured prominently. The leaked documents from Luxembourg, the “ Luxembourg Leaks ”, appeared in 2014.

In 2008, a former employee of the LGT Bank of Liechtenstein offered information to tax authorities. There were Indian names also but the Indian government accepted the data only under pressure from the Supreme Court. The same year, Hervé Falciani obtained confidential data on HSBC bank accounts from remote servers and gave the data to then French Finance Minister Christine Lagarde (she later became chief of the International Monetary Fund to then move on as President of the European Central Bank) who passed it on to the various governments, including India.

In the United States, in the mid-2000s, UBS Bank and Bradley Birkenfeld, who was acting as a private banker on its behalf, were prosecuted for enabling U.S. citizens to spirit away their income and wealth.


A large extent of the illicit financial flows have a link to New York City and London, the biggest financial centres in the world that allow financial institutions such as big banks to operate with ease. The leaked data show that these entities move the funds of the rich and the powerful via tax havens; Delaware in the U.S. is a tax haven. The big financial entities operating from these cities have been prosecuted for committing illegalities. In 2012, an investigation into the London Interbank Offered Rate or LIBOR — crucial in calculating interest rates — led to the fining of leading banks such as Barclays, UBS, Rabobank and the Royal Bank of Scotland for manipulation. These banks also operate a large number of subsidiaries in tax havens to help illicit financial flows.

The modus operandi

The leaked papers now and even earlier have exposed the international financial architecture and illicit financial flows. For instance, Panama Papers highlighted the template used in other tax havens. The Pandora Papers once again confirm this pattern.

Tax havens enable the rich to hide the true ownership of assets by using: trusts, shell companies and the process of ‘layering’. Financial firms offer their services to work this out for the rich. They provide ready-made shell companies with directors, create trusts and ‘layer’ the movement of funds. Only the moneyed can afford these services.


The process of layering involves moving funds from one shell-company in one tax haven to another in another tax haven and liquidating the previous company. This way, money is moved through several tax havens to the ultimate destination. Since the trail is erased at each step, it becomes difficult for authorities to track the flow of funds.

It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned. The Panama Papers revealed the names globally of current and former leaders, politicians and public officials, billionaires, celebrities, sports stars, small and big businesses and professionals.

Is it that the rich move their funds to tax havens because of high tax rates? Not really. Even citizens of countries with low tax rates use tax havens. Over the three decades, tax havens have enabled capital to become highly mobile, forcing nations to lower tax rates to attract capital. This has led to the ‘race to the bottom’, resulting in a shortage of resources with governments to provide public goods, etc., in turn adversely impacting the poor.

The specificity of the Papers

The Pandora Papers, unlike the previous cases mentioned above, are not from any one tax haven; they are leaked records from 14 offshore services firms. The data pertains to an estimated 29,000 beneficiaries. The 2.94 terabytes of data have exposed the financial secrets of over 330 politicians and public officials, from more than 90 countries and territories. These include 35 current and former country leaders. Singer Shakira and former Indian cricket captain Sachin Tendulkar are among the celebrities and sport stars named in the investigation. Others include the King of Jordan, the Presidents of Ukraine, Kenya and Ecuador, the Prime Minister of the Czech Republic, former British Prime Minister Tony Blair and Russian President Vladimir Putin. Surprisingly there are few names from the United States, even though it has the largest number of billionaires.


The very powerful who need to be onboard to curb illicit financial flows (as the Organisation for Economic Co-operation and Development, or the OECD is trying) are the beneficiaries of the system and would not want a foolproof system to be put in place to check it. With the current global financial architecture, black income generation cannot be checked.

Revelations suggest that funds are moved out of national jurisdiction to spirit them away from the reach of creditors and not just governments. Many fraudsters are in jail but have not paid their creditors even though they have funds abroad.

Strictly speaking, not all the activity being exposed by the Pandora Papers may be illegal due to tax evasion or the hiding of proceeds of crime. The authorities will have to prove if the law of the land has been violated. Each country will have to conduct its investigations and prove what part of the activity broke any of their laws. In the United Kingdom, the laws regarding financial dealings are very favourable to the rich and their manipulations. It is no wonder, in the recent past, that several Indian fraudsters have thus fled to London to escape the Indian law. A large number of rich Indians have bought property in the U.K. Thousands of foreigners buy or rent property in the U.K. because no questions are asked about the sources of funds; this has enriched the U.K. by $100 billion.

India’s investigations

Many Indians have become non-resident Indians or have made some relative into an NRI who can operate shell companies and trusts outside the purview of Indian tax authorities. That is why prosecution has been difficult in the earlier cases of data leakage from tax havens. The Supreme Court of India-monitored Special Investigation Team (SIT) set up in 2014 has not been able to make a dent. The Government’s focus on the unorganised sector as the source of black income generation is also misplaced since data indicate that it is the organised sector that has been the real culprit and also spirits out a part of its black incomes.

An interesting recent development (October 8) has been the agreement among almost 140 countries to levy a 15% minimum tax rate on corporates. Though it is a long shot, this may dent the international financial architecture. Other steps needed to tackle the curse of illicit financial flows are ending banking secrecy and a Tobin tax on transactions; neither of which the OECD countries are likely to agree to.

Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences and the author of The Black Economy in India

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